03/27/2023 Market Strategy

John Stoltzfus March 27, 2023

There’s No Free Lunch

No matter how prudent a Fed fund hike cycle, it’s never an easy process for markets to digest

Key Takeaways

  • Equity markets stateside last week showed resilience even as the Fed raised its benchmark rate for a ninth time since the start of Q2:2022 and issues around several troubled US regional banks remained in flux.
  • The Nasdaq Composite index delivered the best performance among US equity indexes last week as technology and tech-related stocks led the broad market higher on expectations that possible slower economic growth will continue to attract investors to growth segments among stocks.
  • Bonds rallied last week on expectations that the Fed might pause its rate hike regime in light of the likely economic drag caused by the crisis of confidence experienced among the regional banks.
  • Existing home sales rose 14% to a 4.58 million annualized rate in February 2023 from the prior month, but were 22.6% below the sales levels a year earlier.
the fed

Stocks bounced between gains and losses last week as the Federal Reserve raised its benchmark rate for a ninth time since the start of the second quarter of 2022. Bank-specific issues stateside and in Europe throughout the week added levels of angst to the market landscape as traders considered the risks and opportunities that surfaced.

The Dow Jones Industrial average, the S&P 500, the S&P 400 (Midcaps), the S&P 600 (small Caps), the Russell 2000 (small caps) and the NASDAQ Composite (some 40% weighted in tech and tech related stocks) ended the week respectively higher up 1.2%, 1.39%, 1.25%, 0.56%, 0.52% and 1.66%.

The NASDAQ delivered the best performance as investors bid growth stocks higher on expectations of economic slowing while the mid cap and small cap indices relatively underperformed the large caps. The mid and small cap indexes’ exposures to regional banks and the smaller companies that borrow from them curbed much enthusiasm for those spaces.

In our view the Federal Reserve is unlikely to pause or pivot as soon as some market participants and commentators would like to see.

For a large part of the week investors were reminded that when it comes to Fed funds hike cycles “the medicine” never goes down easy. More than a decade of easy money and a period of “free money” add angst and risk as well as opportunity to the mix this cycle for traders and investors to parse.

From March 8, the day before the crisis of confidence in banks captured the newswires, five of the aforementioned indices are off: 1.71%, 0.53%, 7.05%, 7.4% and 7.7%. Of the six indices only the NASDAQ Composite was higher in the period (up 2.14%) as expectations of slower growth and lower interest rates indicated by rising bond market prices sparked investor appetite for technology and other growth stocks.

“Shoes” that already have dropped in the form of regional banks that have failed and caused the regulators to step in are considered to be likely catalysts for increased regulation as well as curtailed lending by banks that could help slow inflation near term giving the Fed some space in how much and for how long it will need to keep raising its benchmark rate. The concern is that any sluggishness to hit the economy as collateral damage from the banks’ crisis of confidence could also cause the Fed to slow its hiking process or even pause too soon.

Such action could end the battle against inflation too early—reigniting speculation and risk a resurgence of inflation. The effect could be something akin to a camper not taking care to extinguish the embers of their fire before leaving a camp that was covered in dry leaves and kindling wood.

Look for the Signal—Not the Noise

Last week reminded us of the age old admonishment in times like these to “separate the signal from the noise” in order to avoid missing the forest for the trees.

We expect this week to find traders and investors keeping close tabs on any developments around the banking crisis of confidence as well as keeping an eye on a sizeable brace of key stateside economic data that will be released this week.

In our view the Federal Reserve is unlikely to pause or pivot as soon as some market participants and commentators would like to see. The Federal Reserve appears to us rightfully adamant about remaining focused on its efforts to get inflation in check.

That said we persist in believing that the Fed will work to maintain a level of sensitivity in its efforts to curb untoward levels of inflation to avoid a hard landing for the US economy. So far the resilience evidenced in US economic data suggests the Fed’s efforts against sticky inflation have not been too heavy handed as inflation (while stubbornly sticky) has begun to show signs of moving lower.

Disciplines of portfolio diversification and the practice of patience by investors are required in our view to navigate the current set of challenges effectively.

John Stoltzfus headshot
Name:

John Stoltzfus

Title:

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.

Hide Bio

DISCLOSURES

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.