10/23/2023 Market Strategy
- October 23, 2023
Going Through Them Changes
Since the end of July markets have brought a feeling of “nowhere to run, nowhere to hide”
Key Takeaways
- With 86 or 17% of the firms in the S&P 500 index having reported third-quarter results so far, the data show earnings up 2.2% from a year ago on back of revenue gains of 5.8%. This week another 169 firms are scheduled to report, with 159 the week following.
- Markets will have a full spate of economic data to parse and digest this week as well.
- The 10-Year Treasury yield last week skirted the 5% level on Fed Chair Powell’s comments, which raised concerns within the markets that the Fed could keep rates higher for longer.
- Last week’s retail sales figures for September showed surprising strength, with results for the prior two months of the quarter also revised higher. The sales data suggest a sharp increase in consumption demand is likely in Q3 GDP figures to be reported later this month.
This week traders and investors will have a hefty tranche of economic data and Q3 corporate earnings to parse and digest. Among the key economic data points scheduled for release this week are a number that could provide clues of where the economy and the markets are likely headed over the course of the fourth quarter of this year.
Among the key economic gauges scheduled for release this week are regional Federal Reserve bank reports on manufacturing and services activity from across the country, purchasing manager manufacturing and services indices from S&P, housing, employment, GDP, personal income personal spending and consumer sentiment from a number of government agencies and other data sources.
Geopolitical risk remains elevated in the Middle East, Ukraine and in Asia with the recent attack on Israel by Hamas terrorists and the increase in hostilities that has followed at the epicenter of global risk and uncertainty.
We persist in viewing the Fed as being near if not at the end of the current rate hike cycle with the potential of one more 0.25% hike before the end of the year if warranted by inflation...
Earnings Season Gathers Momentum This Week
Stateside Q3 S&P 500 earnings season continues this week as 169 companies report results including major components of the information technology sector and the communications services sector (some 60% in technology or tech-related companies), along with widely followed names in the consumer discretionary sector (two of the “big three” US auto makers) and the energy sector (the two biggest US integrated oil companies).
Market participants will be listening closely to these earnings calls particularly for any guidance from managements as to their assessment of current conditions and what may lie ahead.
Thus far this earnings season positive surprises have offset disappointment though traders have been stingy in rewarding good performance even sending some stocks lower after reporting solid results. We find such activity less worrisome than one might think as such behavior has been a hallmark of post-reporting action for some time (considered often by observers and market participants as a “buy the rumor, sell the fact” reaction by traders).
With only 86 or 17% of the firms in the S&P 500 index having reported third-quarter earnings so far, it’s too early to tell the outcome yet. That said, the bottoms-up consensus estimate for Q3 earnings (as reported by The Wall Street Journal) is for just a 0.5% YoY decline. That would be an improvement from the prior two quarters’ year-on-year growth results. It’s important to remember that results last year (2022) were boosted by the post-pandemic rebound demand, meaning that earnings this year (2023) face “tough comps” (comparison with the prior year).
The 86 companies that have reported Q3 results thus far have shown earnings growth up 2.2% on back of revenue gains of 5.8%. With nearly half the companies in the financial sector having reported their profits are up 4.5% on the back of a 7.6% rise in revenues.
Bond Yields Rose to 17-year Highs Last Week
Last week saw the yield on the 10 year-Treasury intraday skirt the 5% level on back of Fed chair Powell’s presentation at an event hosted by the Economic Club of New York on concerns that the Fed could keep rates higher for longer.
We were not as surprised by the Fed Chair’s comments as much as by the equity market’s reaction to his words considering that from our view on the market radar screen the Fed’s stance on inflation and its 2% target has been stated and reiterated many times since the start of the current rate hike cycle in March of 2022. The good news in our view was that the Fed chairman clearly noted the degree of success the central bank has had in bringing the pace of inflation down and his view that the recent bond market’s pricing of the longer end of the interest rate curve may provide the Fed with enough assistance in curbing inflation (via higher yields) to offset the Fed’s need to keep hiking its benchmark rate.
We persist in viewing the Fed as being near if not at the end of the current rate hike cycle with the potential of one more 0.25% hike before the end of the year if warranted by inflation followed by probability of a long pause in the first half of next year with one hike again if warranted by sticky inflation followed by a potential rate cut near the end of 2024 should the Fed deem it necessary.
Our expectations are not as much for “higher for longer” but “relatively high” (compared to the prior period of ultra-low rates) until the Fed finds inflation suitably contained and at a level which will not impede the potential for economic growth at a sustainable pace.
Beware of Darkness
In periods of transition dogged by uncertainty and higher than normal risk, we have found in our experience that patience and diversification remain keys to success in positioning portfolios. While past performance is no guarantee of future results we consider keeping things in context of market history useful along with the adage attributed to the great American author Mark Twain, “History may not repeat itself but it often rhymes”.
In that light we’ll suggest our readers turn to page 13 of this report, which illustrates the performance of the S&P 500 during a period of high inflation (1971-1989) and Fed policy that failed during the tenure of Fed Chair Arthur Burns but succeeded mightily under the leadership and perseverance of his successor the late Paul Volcker and his successor Alan Greenspan.
A perusal of these tables suggests to us that history has shown that stocks can indeed rise in periods of high interest rates and tight monetary policy.
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.
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. 2023.