03/06/2023 Market Strategy
- March 6, 2023
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
- 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.
In our view the shorter end of the yield curve currently proffers some attractive yields.
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.
Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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