Asset Management
01/16/2024 Market Strategy
January 16, 2024
It Ain’t Over ‘til it’s Over
Yogi Berra’s quote comes to mind as market expectations of rate hikes and those of the Fed remain near-term hurdle
Key Takeaways
- Earnings season kicked off last week as the big banks began reporting results. While it’s too early to make much of trends, bottom-up analyst estimates are for earnings to grow 1.3% in Q4 from a year earlier.
- Our expectations are for the Fed to cut rates fewer times than the market has currently priced in. In our view the market is likely to get over any near-term indigestion as resilience in the economy counters expectation of recession.
- A heavy tranche of economic data includes manufacturing, mortgages, retail sales, industrial production, consumer sentiment and the housing market.
- Last week’s inflation data showed prices remaining stickier than many expected, suggesting that further progress is needed on reducing price pressures before the Fed can pivot to a softer stance.
Markets stateside open to a Martin Luther King holiday abridged week with 23 S&P 500 companies scheduled to report earnings results over the four day week; A brace of economic data (particularly heavy on Wednesday) offers a cross section of information that should provide some clarity as to the resilience in key areas of the economy as the Fed remains in rate hike cycle but has continued to pause for a fifth consecutive FOMC decision; And a jump in hostilities in the Middle East around the Red Sea and the Suez Canal raises concerns about the global supply chain and the price of oil.
The price action in the equity market last week in our view was not so much in response to a few things but rather to a broad range of items of which market participants have been concerned about or working through for some time including:
- Somewhat mixed results in the first tranche of the current S&P 500 earnings season results including those from US big banks last week;
- Mixed Q4 earnings results among companies in other sectors that reported last week;
- A further uptick in the aforementioned hostilities around the Red Sea and Suez Canal;
- And key US economic data last week that showed inflation likely remains too sticky for the Fed to cut rates in 2024 by as much as the five or six cuts suggested by trader bets in interest rate futures contracts.
In our view the Fed’s rate regime this cycle has been much less disruptive to the economy than most have expected.
It’s not a take the money and run from the markets moment in our view, but rather a time for intermediate- to longer-term investors to stay the course, maintain the courage of one’s convictions and seek out babies that get tossed out with the bathwater as some other investors tie their focus to quarterly results in what remains an uncertain world driven by a mix of the good, the bad and the ugly.
Irony abounds
Ironically China’s economy is suffering from deflation tied to failures in both fiscal policy and domestic economic policy while in most of the rest of the world inflation remains sticky in part on overstimulation by fiscal policy even as efforts of more than a few central banks have experienced some degrees of success in slowing the pace of “sticky” inflation enough to suggest the current global central bank rate hike cycle may be mostly behind us while still some distance from achieving closure.
Short-term investors and impatient investors— particularly those who use considerable leverage when investing—have and are suffering from higher costs to borrow in ways some of them hadn’t experienced in their lifetimes until now and others haven’t experienced in decades. The same goes for business and consumers outside of the investment world who are highly leveraged.
That said we believe that this Fed’s bite has so far not been as bad as its bark in curbing the untoward levels of inflation that dogged the US economy in 2022 as the economy still persists in showing resilience at the levels of business, the consumer and the workforce while the Fed’s ultimate target of 2% inflation remains still more than a percentage point away.
With the Fed’s bark at least thus far worse than its bite the rate hike cycle that began in March of 2022 hasn’t been so benign as to have no effect on inflation nor has it been so mild not to cause some levels of “indigestion” from Wall Street to Main Street and beyond.
In our view the Fed’s rate regime this cycle has been much less disruptive to the economy than most have expected even as the Fed raised its benchmark interest rate 11 times and paused five times (instead of hiking further) over the course of nearly two years and 16 FOMC meetings.
Sometimes it’s not so much what one does as how one does it.
In our experience over 40 years in the markets with numerous interest rate Fed cycles with rates moving up and down in US monetary policy since 1983 (when we first reported to work on Wall Street) the Fed has never been as sensitive to the effect of applying its mandate on an overheated or over stimulated economy as it has been in the current hike cycle.
It’s not that the Fed is infallible (we recall their “falling behind the curve” early in the inflation cycle) but rather that it has thus far grasped the importance of having a sense of just how powerful the effects of practicing its mandate can be on the US economy.
“It ain’t over ‘til it’s over”—Yogi Berra
The lagged effect of the Fed’s policy stance so far has been remarkably effective in curbing the pace of inflation while not throwing the economy under the bus. Perhaps it’s that actions speak louder than words this Fed cycle.
We remain of the view that the Fed will not cut rates as much as traders have currently priced into the yield curve (Bloomberg puts this at five to six times) but rather that the Fed will more likely cut its bench mark rate as little as twice this year and that it will happen more likely sometime in the second half of the year and then toward the end of the fourth quarter.
We also expect that the Fed will not cut rates because the economy is stumbling into recession but rather that it will feel that it’s close enough to its 2% target to begin tapering the rate cycle down—in effect taking advantage of an “enough is enough” decision from an FOMC meeting sometime in the not too distant future but not soon enough to avoid some near-term indigestion in the markets.
We remain constructive on equities, believing that fixed income is complimentary to equities in providing investors useful choices for portfolio and income diversification.
We suggest investors consider seeking out babies that get tossed out with the bathwater in market downdrafts rather than blindly buying dips. Quality and prudent diversification always matters in our view and particularly in times when uncertainty is elevated in a multi-level transitioning process.
Second Quarter of Positive Earnings Growth?
The Wall Street Journal reported on Saturday that analyst estimates hold hope for a possible second consecutive quarter of positive earnings growth. The newspaper cited figures from FactSet that point to a 1.3% YoY earnings growth figure in Q4 expected from bottoms-up estimates.
In our view the progress the Fed has made thus far in bringing down the pace of inflation, along with the resilience shown by businesses, consumers and labor have thus far pointed in the current Fed funds hike cycle to a continuation of enough positive developments to offset the uncertainties and known risks that remain on the proverbial landscape.
So far this cycle, the size and diversity of the US economy has proven capable of traversing hurdles that include transitioning away from economic crisis, health crisis, political dysfunction and untoward levels of inflation at home and abroad and other setbacks along the way.
While past performance is no guarantee of future results we garner support for the words attributed to the great American author Mark Twain who is oft quoted as having said, “History may not repeat itself but it often rhymes.”
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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