Asset Management
07/17/2023 Market Strategy
July 17, 2023
Meme, mine and yours
The potential for a broadening participation in the stock market rally reminds us to emphasize the importance of prudent diversification and quality assets in times of economic and policy transition.
Key Takeaways
- This week a diverse array of widely followed companies in the S&P 500 could carry the direction of the markets along with a relatively light calendar of economic data.
- Better than expected inflation numbers drove stock and bond prices higher last week.
- While the markets have priced in a rate hike in July, a second hike in the remainder of the year may not be as likely should inflation continue to improve.
- Valuations appear attractive in a number of US sectors and market capitalizations, offering the potential for a broadening of the rally.
In our view the CPI and PPI numbers released last week pointed to the Federal Reserve’s having made significant progress in stemming the pace of inflation—and without pushing the US economy into recession—at least thus far. Of course the lag effect of the rate hike cycle is still to be seen but “so far so good.”
Resilience shown over the course of this year by labor, the consumer, and business has also contributed to improved sentiment in the stock market with signs or “green shoots” that the rally that emanated from the lows last year on October 12 is beginning to broaden into more than participation by just a few stocks (those coined by some as “the magnificent seven”). A glance at the broader participation among stocks across sectors, market capitalizations and style suggests that both stock pickers and index investors are likely to have more to work with as the year progresses.
We suggest that investors consider (when appropriate to their experience, needs and objectives) utilizing an Alpha/Beta approach taking advantage of singular opportunities in specific securities as well as of the potential offered to the broader exposure an investor can capture with passive or active index exposure via ETFs.
Better than expected inflation data, a sense that the Federal Reserve’s efforts at curbing inflation have made significant progress along with better than expected results from companies thus far reporting in the S&P 500’s Q2 earnings season gave support to the upward move in stocks last week.
We are now seeing the end of “free money” (historically low interest rates) to a more normal environment in which bond issuers pay for the privilege of borrowing money and bond buyers get something in return for lending their money to bond issuers in the form of interest rates at levels higher than have been prevalent over most of the past 15 years. A more normalized environment looks to be a good thing to us notwithstanding the levels of uncertainty any change brings.
While highly leveraged players in the market are feeling the pinch of higher rates on their market bets, irrational exuberance and “fear and greed” trading could be curtailed somewhat going forward to the benefit of fundamental investing. Time will tell.
Fixed income for investors with intermediate and longer-term goals continues to appear to us as highly complementary rather than competitive versus stocks with the ownership interest of businesses represented by stocks potentially providing in our experience a broader opportunity set for gains over the longer term.
The rally in bond prices last week should serve as a reminder that interest rates paid by bonds and other instruments (such as CDs) can rise and fall in terms of what’s available to choose from without much notice.
Fixed income maturity dates and call risk (in corporate debt and municipal debt for example) can represent a challenge on maturity and reinvestment when rates begin to move lower.
In the week ahead 60 S&P 500 companies are scheduled to report results for the second quarter. So far, results have been better than expected though with just 28 firms having thus far reported it’s way too early to tell the outcome for the season. (See page 8 of this report for our earnings score card and comments.)
Last week three of the largest banks in the US reported results that surprised to the upside likely capturing investor focus for this week when other widely held major US banks report results along with a diverse array of widely followed companies in other sectors that will step up to the plate to report results as well.
We remain highly constructive on equities on expectations that economic fundamentals are likely to remain resilient if not robust in this period of significant transition tied to monetary policy, stateside and global markets, domestic and geopolitical risks and the demographic, cyclical and secular trends that drive them.
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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