03/06/2023 Market Strategy
It’s the End of the World as We Know It (and I Feel Fine)
Sometimes change is a good thing, if not so easily digested
Key Takeaways
- With 496, or 99%, of the firms in the S&P 500 index having reported, earnings are off 3% from a year ago on revenue growth of 5.6%.
- Results have been mixed with three sectors showing double-digit earnings growth from a year earlier, one showing single digit growth and seven showing declines.
- Inflation risks weighed less on equity market sentiment igniting a rally that boosted stocks broadly higher last week.
- Bond markets saw yields rise and prices fall last week on expectations the Fed will need to raise rates for longer to curb inflation.
- A full calendar of economic data culminating with the monthly jobs number this week is likely to capture investor attention as Q4 earnings season winds down with just four stocks in the S&P 500 left to report.
- Last week’s economic data reiterated a resilience that persists in the US economy even as the Fed continues to be vigilant against inflation.
As the S&P 500 Q4 earnings season draws to a close with just four member companies left to report, economic reports are likely to take center stage this week in a data-filled week that culminates with the monthly jobs number, unemployment and hourly wages data scheduled for release on Friday.
Last week’s gains across major US equity indices—even as economic resilience stateside suggested that the Federal Reserve will likely raise interest rates for longer than many investors expected—could signal that market participants are beginning to get the idea that resilience at the economic and corporate level could help offset at least some of the effects of tighter monetary policy enough for the economy to “break on through to the other side” and avoid a hard landing.
Experience over the course of four decades in the markets suggests to us that while we are yet not “out of the woods” the efforts of the Federal Reserve and day to day economic activity driven by business and the consumer have placed the US economy on a path toward an economic recovery less encumbered by extreme leverage sourced in “free money” that resulted in 40-year highs of inflation and a number of speculative bubbles that included some segments of housing, the crypto currencies and meme stocks among others.
With eight rate hikes by the Fed in the rear view mirror some slowing in inflation as well as a stickiness of inflation recorded in a recent tranche of economic data appear to have registered with investors a sense that a “progress not perfection” process of exiting a crisis often comes haltingly at first followed by a two steps forward one step back period with levels of risk mixed with opportunity from day to day.
The process of the recent stock market rallies over the summer (mid-June through mid-August) and the more recent rally (from October 12 through last week) as well as the interim corrections to these rallies remind us of the importance of the deployment of diversification within and among asset classes in navigating volatility that can often surface even as things start getting better.
In the current cycle we have found it useful to “barbell” dividend paying stocks that represent “growthier” value (to avoid value traps) and “garpier” growth (in positioning to avoid overvalued and lower quality stocks). Dividends historically add to a portfolio an element of “getting paid while you wait” for the potential of capital appreciation via stock ownership.
Sector diversification (which in our view of the markets continues to favor cyclical sectors over defensive sectors) can help position for an economic recovery and add broader exposure to a portfolio position made up of individual stocks. Sector ETFs can also serve as “placeholders” while individual stock selections are made in constructing portfolios as well as in portfolio rebalancing and repositioning.
With bond issuers paying up for the privilege of borrowing as a result of higher interest rates, buyers are finding more attractive yields than we’ve seen in more than a decade. In our view the shorter end of the yield curve currently proffers some attractive yields. Further out on the maturity time line opportunities exist for laddering bond maturities to add further to the process of portfolio diversification. Diversifying positions across market capitalizations (small, mid and large cap stocks) can add exposure that can help navigate market rotation, a process leading to sustainable economic recovery as well as opportunity to invest in segments of the market that may not be as widely followed as large cap stocks.
The end of the world as we’ve known it is always at hand as risks and opportunities evolve and the world turns. Never in our experience have we heard an “all clear signal” sounded over the markets. Uncertainty naturally comes with life and the markets. The challenge is how one faces and manages the uncertainty.
Wherever opportunity lies so does risk and vice versa. Carpe diem.
Strategist Certification - The author certifies that this investment strategy report accurately states his/her personal views about the subject securities, which are reflected in the substance of this investment report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this investment strategy report.
The strategy provided in this report is provided by Oppenheimer Asset Management Inc., (“OAM”) a registered investment adviser affiliate of Oppenheimer & Co. Inc. (“OPCO”). It reflects analysis of fundamental, macroeconomic and quantitative data to provide investment analysis with respect to U.S. securities markets. The overview in this report is provided for informational purposes and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security or investment advisory services. The report is not intended to provide personal investment advice. The investments discussed in this report may not be suitable for all investors. Investors should use the analysis provided by this report as one input into formulating an investment opinion and should consult with their Financial Advisor. Additional inputs should include, but are not limited to, the review of other strategy reports generated by OAM, its affiliates, and looking at alternate analyses. Securities and other financial instruments that may be discussed in this report or recommended or sold by OPCO or OAM are not insured by the Federal Deposit Insurance Corporation and are not deposits or obligations of any insured depository institution. Investments involve numerous risks including market risk, counterparty default risk and liquidity risk. Securities and other financial investments at times may be difficult to value or sell. The value of financial instruments may fluctuate, and investors may lose their entire principal investment.
Strategist Certification - The author certifies that this strategy report accurately states his/her personal views about the subject matter reflected in the substance of this report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this strategy report.
Potential Conflicts of Interest: Strategic analysts employed by OAM are compensated from revenues generated by the firm. The strategists authoring this piece also contribute to an OAM managed portfolio product that relies on and trades on the information contained herein. The managed portfolio strategy trades frequently, both ahead of and after the publication of this report. OAM generally prohibits any analyst and any member of his or her household from executing trades in the securities of a company that such analyst covers. Additionally, OAM generally prohibits any analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% (or more) ownership positions in covered companies that are required to be specifically disclosed in this report, OPCO may have a long positon of less than 1% or a short position or deals as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon and makes a market in the securities discussed herein. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.
Third Party Research Disclosure OAM has a research sharing agreement with OPCO pursuant to which OPCO provides OAM Strategy thought pieces to its institutional and retail customers. OPCO does not guarantee that the information in OAM Strategy reports is accurate, complete or timely, nor does OPCO make any warranties with regard to the strategy product or the results obtained from its use. OPCO has no control over or input with respect to opinions found in OAM strategy pieces. OAM is a registered investment adviser affiliate of OPCO.
This report is issued and approved by Oppenheimer & Co. Inc., a member of all Principal Exchanges, and SIPC. This report is distributed by Oppenheimer & Co. Inc., for informational purposes only, to its institutional and retail investor clients. This report does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The strategist writing this report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security discussed in this report, the recipient should consider whether such investment is appropriate given the recipient's particular investment needs, objectives and financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal.
Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information contained in this report. All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. All estimates and opinions expressed herein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation.
Investment Strategy should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser.
This report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. The S&P 500 Index is an unmanaged value-weighted index of 500 common stocks that is generally considered representative of the U.S. stock market. The S&P 500 index figures do not reflect any fees, expenses or taxes. This research is distributed in the UK and elsewhere throughout Europe, as third party research by Oppenheimer Europe Ltd, which is authorized and regulated by the Financial Conduct Authority (FCA). This research is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This report is for distribution only to persons who are eligible counterparties or professional clients and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the UK only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) High Net Worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. In particular, this material is not for distribution to, and should not be relied upon by, retail clients, as defined under the rules of the FCA. Neither the FCA’s protection rules nor compensation scheme may be applied. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright © Oppenheimer & Co. Inc. 2022.