11/06/2023 Market Strategy
- 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).
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.
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.
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.