03/20/2023 Market Strategy
Riders on the Storm
The collateral damage from a Fed rate hike cycle isn’t always easy to spot or handle
Key Takeaways
- All eyes on the Fed early this week until the FOMC decision on Wednesday. We expect the Fed will raise its benchmark rate by 25 bp.
- Equity markets traded mixed last week as mid-cap and small-cap benchmarks suffered declines on the current unfolding situation among regional banks.
- Growth stocks led by names in information technology and communication services drove the Nasdaq Composite higher last week on prospects that the US economy is slowing.
- Last week’s inflation data showed improvement on a year-over-year basis, but the monthly changes point to inflation’s persistence well above the Fed’s 2% target.
Stocks were jostled between gains and losses last week as traders and investors parsed economic data as well as the latest news items on the banking crisis that forced a consortium comprised of the Federal Reserve, the Treasury and the FDIC into action to stem the tide and avoid a worsening situation midst the regional banks from getting a lot worse.
Not unlike prior crises it should come as no surprise that at the source of the regional bank tumult was a group of the “smartest folks in the room” and even possibly regulators who missed signs that something was amiss that perhaps could have averted the disruption that the economy and the markets are now forced to navigate.
At least for now, from what has thus far been revealed, it appears that a lesson in bond buyers 101 class (freshman year stuff) was not applied in positioning at least one bank’s Treasury portfolio to take account of the risk inherent in a Fed rate hike cycle that began in 2022 and has proven longer in tenure that many expected.
From Here to Eternity? Likely not.
News over the weekend that a Switzerland based household and industry wide name in global banking was bought by another Swiss bank in a rescue effort to avert systemic risk appeared to ease some tension ahead of global market openings today.
Actions taken so far by the US Fed, Treasury and FDIC as well as the 30 bank consortium that took action last week suggest to us—that while inevitably “other shoes may fall” before the current disruption is stemmed—we are well on the way to resolving the latest debacle.
Now it’s “all eyes on the Fed” (a near ubiquitous headline) until the conclusion of the Fed’s FOMC meeting this Wednesday when their latest rate decision is revealed.
Will they hike the benchmark rate by 25 bps, 50 bps or perhaps pause their tightening policy at current levels? The direction that the markets will take in the near term will likely depend on their decision this week.
In our view, prospects for a 25 basis point hike on Wednesday appear most likely. Last week’s inflation dated was skewed toward the sticky nature of inflation coming from the service economy’s end of things even as commodities (particularly oil) moved lower on projections of slower growth tied to projections of what damage will likely be felt in the economy near and midterm should the costs of borrowing rise and stick higher as a result of what likely will be increased regulation over the regional banks.
Don’t Keep Me Wonderin’
Last week’s action in the stock market had something for both bears and bulls as stock prices were jostled to the beat of the latest news item and the latest projections given by authoritative sounding voices were offered. We’d expect that in hindsight to the current state of affairs their dark projections could likely be proven once again along the time line of market history as having been too negative for too long.
The Dow Jones Industrial Average, the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small caps), the Russel 2000 (small caps) and the NASDAQ Composite (some 40% weighted in tech and tech related names) produced mixed performance results last week with the small and mid-caps’ exposure to regional banks dragging their respective performances lower. On the week the S&P 400, the S&P 600 and the Russell 2000 shed: 3.19%, 3.28% and 2.64%. The Dow Jones Industrials was flat with a negative bias off 0.15%. Last week the S&P 500 advanced 1.43% aided by the tech sector and the communications sector (with growth-stock exposure in both) while the NASDAQ surged 4.41%
We’d avoid getting mesmerized waiting for the “next shoe to drop” and focus on the Federal Reserve this week.
In our experience it’s not so much about what takes the market down as it is about how quick the authorities are in responding to the problem. While the disclaimer “past performance is no guarantee of future results” always applies—the US has established historical precedence in the ability to “get into trouble” but has also been quick at addressing the problem whether stemming from financial, geopolitical or health crises.
While the title of The Doors’ classic rock tune “Riders on the Storm” would seem appropriate for where investors find themselves at the start of this week the lyrics to another Doors tune, which advise, “..when the music’s over turn out the lights...” in our view does not apply.
The Fed may have removed the proverbial punch bowl of “free money” but has thus far in the process shown its ability and commitment to keeping to its dual mandate of maximizing employment and staying vigilant against inflation.
Beware of darkness.
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.