Asset Management
06/26/2023 Market Strategy
June 26, 2023
Back to the Future
A detour does not a journey end -- sometimes it brings a pause that refreshes.
Key Takeaways
- Stocks gave back some of their recent gains last week as investors became concerned about the global growth outlook in light of potentially even tighter monetary policy due to persistence of inflationary pressures around the world.
- Bond prices rose last week (sending yields lower) in response to the aforementioned economic worries.
- Results of the Federal Reserve’s “stress tests” of US banks could have varying impact on bank stocks as well as the market.
- This week’s economic data and bank test results could provide greater clarity as to how digestible two more rate hikes might be for markets and the economy.
The last week of the second quarter brings a truckload of key US economic data that should provide insights on manufacturing, services, housing, consumer confidence, wholesale prices, the trade balance, inventories, GDP, personal income, spending, inflation, employment and unemployment.
Several widely followed names in sectors as diverse as consumer discretionary, consumer staples, industrials and technology will report earnings results this week providing an early view of Q2 earnings season well ahead of July 14 when earnings season gets underway with results from the big banks.
This Wednesday the Federal Reserve will release results of its annual stress tests of the largest banks in the US. Investors will be particularly focused on the results of these tests in light of the problems that developed earlier this year among the regional banks. Banks with $100 billion to $250 billion in assets are required to participate in the tests every other year. Banks with assets larger than that are required to take the stress tests every year.
Last week saw bond prices edge higher while stock prices moved lower on concerns that resurfaced about the potential impact of monetary policy on economic growth and corporate profits.
Last week’s modest trim to the prices of the three major indices suggests to us that a haircut rather than a correction may be likely near term…
Earlier expectations this year held by some investors that the Fed would pause or even possibly cut rates by the end of this year have been pretty much dashed by recent stateside inflation data that has shown core inflation (ex-food and energy) to be stickier than expected.
Public comments by Federal Reserve officials in presentations across the country and in media interviews as well as in the recently released minutes from the latest FOMC meeting indicate the probability that the Fed may have to raise its benchmark rate one or two more times this year.
While bearish sentiment remains shy of levels achieved earlier this year the recent jump in bullish sentiment that has helped drive the powerful rally in stocks from the lows of October last year has come under some question by skeptics and bears. These doubters are concerned that the rally may have run too hard, too fast and may have been concentrated in too few names.
Last week’s modest trim to the prices of the three major indices suggests to us that a haircut rather than a correction may be likely near term as traders and investors assess the landscape and consider how digestible two more hikes by the Fed this year might be to the economy and the markets.
So far so good. This week will likely provide some clarity as to where we are and where we most likely are headed via economic data, the Fed’s stress test results on the big banks, and news on the corporate front.
From our perspective on the market radar screen the strength of the jobs market (reflected in the unemployment numbers and the JOLTS index), the resilience of the consumer reflected in the relative strength in services and the persistent capability of many companies to navigate a highly transitional environment towards “the next new normal” suggests we continue making progress heading “out of the woods” with “the light at the end of the tunnel” is “sunlight” rather than “an oncoming locomotive.”
As to our year-end target price for the S&P 500 of 4,400 you ask? For now we will maintain our target of 4,400 while assessing economic conditions, the effectiveness of Fed policy versus sticky inflation and consideration of the outlook for revenue and earnings growth to drive a broader equity rally from here to the end of the year.
Our goal is beyond
We remain constructive on stocks favoring cyclicals over defensives and diversification among equities across style (growth vs value) and market capitalizations. With yields higher than where they were over the last decade fixed income is attractive for diversification purposes with current interest rates in our view complimentary to stocks if not terribly competitive in light of innovations that will likely drive all 11 equity sectors toward increased efficiencies and productivity.
The diversification of the global supply chain already in progress is likely to drive opportunities stateside and across the globe that will further highlight the attractiveness of equities over other assets
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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