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11/06/2023 Market Strategy

  • John Stoltzfus
  • November 6, 2023

A Mix of No Surprises and a Big Surprise

Less robust economic data was to be expected given the Fed’s tight policy

Key Takeaways

  • With 406, or 81%, of the firms in the S&P 500 index having reported third-quarter results, the data show earnings up 2.9% from a year ago on the back of revenue gains of 2.1%. This week, 51 firms are scheduled to report, with 14 the week following.
  • The 10-year Treasury yield fell 26 basis points last week as bonds rallied in price. Data released last week pointed to economic slowing while still showing relative resilience this late in a Fed hike cycle.
  • Last week’s turbocharged stock market took most by surprise regaining a little more than half the ground lost in a near three-month sell-off.
  • We’ve updated our maximum drawdowns table to reflect the new max of -10.28% reached between July 31 and Oct. 27 this year. This is a deeper decline than the -7.75% drawdown earlier this year (from Feb. 2 to March 13).
abstract financials

Last Friday’s non-farm payroll gain came as no surprise to us with jobs added in October lower than a survey consensus had expected. Neither were we shocked to see the two prior jobs numbers revised lower this late in the current Fed rate hike cycle with 11 hikes and three skips already having taken place.

That the unemployment rate rose a tenth shouldn’t surprise in our view considering the length of the hike cycle thus far. In addition, the effects of a process of normalization in hiring by corporations have morphed from “panic hiring” and “warehousing employees” to an emphasis on cost containment and greater selection in hiring in anticipation of slower economic growth.

The big surprise last week in our view was the stock market rally that managed to recover a little more than half of the losses the S&P 500 had sustained since the start of August through late October.

Quotation from Aenean Pretium

Bond market traders’ expectations that the Fed has seen its last hike this cycle appear to us a bit too rosy…

In the week prior to last week we had revised our S&P 500 year-end target (taking it from 4,900 to 4,400) to reflect the stock market sell off, soured investor sentiment, and because the calendar was fast moving towards year-end making it not so likely in our view that our 4,900 target could be achieved in such a short period of time.

Our 4,400 target when reinstated a week ago this Monday appeared rightsized to us with prospects for a 6-7% recovery from the October lows through year-end based on what appeared to be a market that once again had been oversold.

We don’t expect to return to our former 4,900 target too quickly. After all the 4,400 target we initiated last December for year-end 2023 had worked well for us and was indeed arrived at by late June of this year. That said, we may need to consider in the next few weeks if an upward tweak will be called for.

Bond market traders’ expectations that the Fed has seen its last hike this cycle appear to us a bit too rosy along with stock market traders who appear to have been covering short positions last week as valuations and stock prices pointed to a market once again “way” oversold.

We view economic fundamentals, Fed policy and corporate earnings remaining at the center of the markets’ direction day to day to year-end and into next year. Elevated geopolitical risk and domestic political dysfunction remain issues for the markets to navigate as well.

We remain positive on equities and continue to see “the end of free money” as a good thing for Main Street and Wall Street. Bond issuers now pay for the privilege of borrowing and bond buyers get something in return in coupon yield when they buy bonds. That proffers normalization and in our view as the potential for a sustainable economic expansion ahead picks up steam.

The “new paradigm” in yield and a renewed vigilance against inflation by the Fed look to us as positives for investors to practice prudent portfolio diversification.

Stocks in our view remain attractive with bonds complementary to equities if not quite competitive with their potential for capital appreciation driven by innovation both from secular and cyclical perspectives with companies across the eleven sectors potentially to benefit from greater efficiencies and scale.

Our favorite sectors remain: Information technology, consumer discretionary and industrials. Energy remains attractive with increased M&A/consolidation trending and what appears to be a favorable time line that demands a bridge over the transition from dependence on fossil fuels to a world that relies on alternative energy accessible at practical scale.

We continue to favor portfolio design comprised of cyclical sectors over defensive sectors, with “growthier” value and “GARP-ier” growth stocks that ideally pay dividends.

We suggest investors rightsize their expectations and seek “babies that are thrown out with the bathwater” in market downdrafts. Dollar cost averaging, and tax loss harvesting could help improve returns for some investors this year.

Resilience remains the operative word for the US economy, labor, business and the consumer even as the Fed keeps the Fed funds rate hike cycle in place with a potential for an even longer “skip” or pause into next year should inflation become less sticky.

In our view. the hallmark of this Fed Funds hike cycle has been the Bernanke legacy of transparency and communication practiced by the Fed led by Jerome Powell. The Fed has in our view shown thus far a high level of sensitivity in deploying its mandate to curb untoward levels of inflation with less disruption to the economy than might have been otherwise sustained.

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John Stoltzfus


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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