Asset Management
06/12/2023 Market Strategy
June 12, 2023
Back in Love Again
Looks like a new bull market has begun
Key Takeaways
- Key focus this week is the outcome of the Fed’s FOMC meeting and rate decision on Wednesday along with the CPI and PPI inflation reports.
- The details of inflation reports will be closely analyzed to determine the Fed’s progress against sticky inflation and the potential path of monetary policy ahead.
- Renewed expectations of a pause by the Fed at the conclusion of its meeting on June 14 do not, in our view, end prospects for further rate hikes if needed.
- Last week saw the price of oil continue to move lower even in the face of production cuts suggesting that global oil supplies are ample.
It should come as no surprise to bulls, who sensed opportunity in the resilience of economic data and the relative strength in major equity benchmarks and sectors since last October, that the financial press celebrated the arrival of a new bull market over the weekend after a confluence of positive recent developments pushed stocks higher and led a host of long time bears to capitulate.
In our view, the declaration of a new bull market from members of the financial press and others should not be taken by investors or traders as an “all clear signal” (which in our experience over four decades seems never to happen), but rather as notice that indeed things may actually be getting better to justify such a declaration even as challenges and uncertainty remain on the landscape.
The successful negotiations that led to the raising of the debt ceiling, a better than expected Q1 earnings season for the S&P 500; enough progress by the Fed in addressing inflation for it to consider a “skip” in the rate hike cycle when the FOMC meeting takes place this week; along with some market technical factors that have put a “wrench in the spokes” of the negative projection that has held the market hostage over much of the last fifteen months.
As of the start of June the upward trajectory of small cap and mid cap stocks has added to the case for a bull market that can broaden in scope across sectors (cyclicals and defensives), market capitalizations and style.
The effective response by the Fed, the Treasury and the FDIC to the regional bank crisis of confidence ironically increased the likelihood that the economy would slow some due to the drag from tighter credit conditions. In our view this gives the Fed some additional leeway in managing its current rate hike cycle.
The serendipitous emergence in March of a new level of artificial intelligence none too soon after the crisis of confidence in the regional banking space had surfaced added to the number of positives that so far have overwhelmed the negatives and challenges that clearly remain on the landscape.
As of the start of June the upward trajectory of small cap and mid cap stocks has added to the case for a bull market that can broaden in scope across sectors (cyclicals and defensives), market capitalizations and style.
It’s not so much that things that raise concern among business entities and consumers have been resolved, but rather that they have or are being addressed to the extent that the validity of the negativity and bearishness that has gripped the denizens of Wall Street, Main Street for too long has been put into question. Indeed perhaps the projections of the worst outcomes we’ve heard too often over the course of the last fifteen months were not just “priced into the markets” but were way overdone.
The direction that trillions of dollars in “dry powder” sitting in short duration fixed income securities along with sour sentiment and skepticism that remains among some investors as to how things can ever be resolved offer contrarians more than just hope that the new bull market indeed has legs (to borrow from the editors of Barron’s this week).
Where to from here?
A glance at the performance charts in this report that track the S&P 500’s progress from the low on October 12 of last year as well as from the start of this year through last Friday certainly illustrate that technology and technology-related stocks in a few sectors have been the biggest drivers of benchmark performance while other sectors have lagged.
In our view at least some of this relative performance/underperformance can be attributed to the fact that tech and tech related companies (both established as well as newbies) had been brutally oversold in 2022 and were primed to rally from mid fourth quarter 2022.
In the weeks and months ahead the potential for a broadening of the equity rally is in our view likely.
The Week Ahead
This week’s CPI and PPI numbers ahead of the Fed’s rate announcement on Wednesday should serve as focal points for the direction markets will take this week.
In the weeks ahead a mix of economic data, corporate news and guidance, geopolitical and domestic political items will influence the markets progress or lack thereof through the summer months.
For portfolio managers and private investors the importance of knowing what they own, why they own it while maintaining right-sized expectations when gauging performance remains key in our view for achieving success in a period that remains transitional and highly prone to rebalancing and rotation as the path to the “next new normal” unfolds.
We persist with the thought that “end of free money” (the result of central bank accommodation along with overly stimulative fiscal policy to counter the economic effects of the pandemic) is a good thing with prospects for a return to an environment where bond issuers pay for the privilege of borrowing money and bond buyers get something in return from a bond coupon (stated interest rate) that can deliver an income stream that provides at least some protection from inflation and other risks associated with bond ownership.
For intermediate and long term investors in stocks higher margin costs for highly leveraged bets made by aggressive investors could elevate the importance of fundamentals and quality investments in the markets.
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.
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