Asset Management
06/20/2023 Market Strategy
June 20, 2023
The Times They Are A-Changin’ – Again
Resilience and innovation remain key to a new bull market in stocks
Key Takeaways
- In the equity market run up last week our year-end target price for the S&P 500 of 4,400 which we initiated last December was exceeded at the close on two consecutive days.
- We recognize a broadening of the rally within the equity space had begun to take place over the course of the last month but has yet to show sustainability outside of the large caps and growth stocks.
- The Federal Reserve Board’s decision to “pause” or “skip” hiking rates last week points to a level of success the Fed has achieved related to the headline CPI inflation rates.
- The Fed’s reiteration that it may further hike rates in July or later this year points to the difficulty it’s had to rein in inflation at the CPI core level.
Trillions of dollars reported by the press to have been sidelined into short-term fixed income and cash as a result of last year’s bear market are now coming up against not so much fear and greed but investors’ practical objectives and needs to spark what appears to be a new bull market with legs underpinned by improving fundamentals.
The beginning of the unwinding of what we have viewed for some time as extreme bearishness that gripped the markets in 2022 has seen over the course of the past few months a stream of mega bears’ capitulations across the financial news media prime time shows that began with a trickle and has developed into a broader flow back into stocks that has seen major equity indices (particularly of the larger cap variety) rise substantially from last year’s bear market lows in October and from the start of this year.
It’s no secret that a relative handful of large cap stocks in the technology sector have led and been at the core of the rally that has driven equity indexes higher.
We remain constructive on equities based on improving fundamentals even as uncertainties on the economic and political landscape remain to be addressed.
Over the course of the past week we saw our 2023 year-end target price for the S&P 500 of 4,400 (which we initiated last December) exceeded at the broad market’s session close on two days last week (Thursday and Friday). The market closed on those days respectively at 4,425 and 4,409.
Our practice in setting annual S&P 500 target prices as market strategists calls for us to consider whether or not to adjust our target price as a result of it having been exceeded at a market close—or in this case two sequential closes above our target price.
Resilience remains the operative word
For all the equity markets’ upside that has developed from last year’s lows and from the start of this year enough bears and skeptics remain entrenched in their opinions to suggest to a contrarian view that more upside is likely to come from here to the end of this year so long as: the Federal Reserve’s policy continues to show success in reducing the pace of inflation; revenue and earnings growth continue to show resilience (if not robust) in a challenging transitional environment; job growth remains resilient even as it comes off the boil and the consumer persists in spending (if at a somewhat slower pace) with inflation sticky and higher interest rates.
In addition to the aforementioned items we’d expect that a broadening of the recent rally in equities would be important to adding a level of sustainability to the process of moving stock prices higher.
For all the headline-capturing outsized gains achieved thus far in tech and tech-related names other sectors have indeed moved higher year to date if not dramatically so. When it comes to investment style the internal battle between growth and value has seen growth outperform value this year (in contrast to last year) across equity market capitalizations of the major Russell Indices. That said value categories have managed to move higher this year if not dramatically so. (See page 5 of this report)
In our experience in the markets over the past four decades we have found it to be not uncommon on a year to year basis (particularly after bear market plunges) for performance to see a shift in the year that follows that often moves what was the first to last and what was last to first. The effect is likely at least in part that things get oversold to large extent in bear markets forcing a sharp reversal of sentiment and direction in the year that follows that often begins with temerity and results in outsized market strength.
In terms of recent historic years we think of the change in S&P 500 year over year performance from 1994 compared to 1995; 2008 to 2009; 2018 to 2019.
Of course past performance is no guarantee of future performance. That said, the adage attributed to Mark Twain “History may not repeat itself but it often rhymes” is something we do give consideration to at times like these.
A recent revival of investor interest in small caps and mid cap stocks which has seen these categories outperform large caps since the end of May through last Friday suggests more broadening of equity performance may stand “in the wings” notwithstanding last week’s outperformance by large caps.
More will be revealed via economic data, earnings results, and the degree of success the Fed can show against inflation in the months ahead.
So what about adjusting our target price?
For now we maintain our S&P 500 year end 4,400 price target while an adjustment of our target price is “certainly under consideration.”
We remain constructive on equities based on improving fundamentals even as uncertainties on the economic and political landscape remain to be addressed.
Near-term valuation of the S&P 500 at a forward PE of around 19x (per FactSet) as well as valuations in specific sectors that are above their respective five-year forward averages may become a near-term issue that broadens investor appetite for relatively cheaper equity sectors as well as stocks and other major benchmarks tied to diverse capitalizations, style as well as increased cyclical exposure to sectors other than those that have led the bull market rally thus far.
We expect the equity markets to remain prone to rotation and rebalancing with opportunities for investors to find “babies that get thrown out with the bath water” a part of the process of a bull market that appears to have legs to climb the proverbial “Wall of Worry”.
We maintain a view that the end of free money brought about by the Federal Reserve’s current monetary policy is a good thing for investors and the economy if not all that easy to digest as it takes place.
An environment in which bond issuers pay for the privilege of borrowing money and bond buyers get something in return from improved coupons (interest rates) is healthy in our view for the economy, the markets and investors and offers opportunity for diversification that we believe is key to successful investing.
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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