Trend Analysis

Market Strategy Radar Screen Weekly July 17, 2017


In this article:

  • With U.S. stocks at or near record highs corporate earnings and interest rates remain key to market progress

RELATED ARTICLES:

One Way Out

By John Stoltzfus,
Chief Investment Strategist

As The World Turns

By John Stoltzfus,
Chief Investment Strategist



 Markets Seek Their Muse

With U.S. stocks at or near record highs corporate earnings and interest rates remain key to market progress


Key Takeaways

 

  • Stocks rose sharply last week around the world.
  • Softness in economic indicators suggests that central bankers may have opportunity to extend rate normalization, likely producing a less disruptive effect on equities.
  • In our view, risks near term appear greater in bonds than in stocks.
   

A combination of mixed economic data, an overall good start to Q2 earnings season, historically low market volatility, along with monetary policy by the Federal Reserve that persists more thoughtful and measured than disruptive to the markets has resulted in positive returns for stocks stateside and abroad in the first two weeks of July.

 

Two weeks into the month as of last Friday the S&P 500, the S&P 400 (mid-caps), the Russell 2000 (small-caps) stood respectively 1.5%, 1.1% and 0.95% higher than where they started the quarter.

 

In the same period major international equity benchmarks moved higher with MSCI EAFE (Developed Markets ex-US and Canada), MSCI Emerging Markets and MSCI Frontier Markets advancing 1.9%. 3.6% and 0.98%, respectively.

 

With the dollar down year to date through last Friday against all of the G10 currencies and broadly lower against 19 of 24 emerging market currencies, prospects remain good for US multinationals’ earnings on the visible horizon.

 

Both US and international stocks have benefited from a moderate process of rate normalization stateside and expectations for rate normalizations abroad to tack similarly when they occur.

 

Stateside the 10-year Treasury yield (at 2.33% last Friday) stood lower than from where it started the year (at 2.45%) and off from its recent high of just under 2.4% reached in the first week of July.

 

When Fed Chair Janet Yellen reported to members of congress last week her message reflected the Federal Reserve’s outlook for inflation to rise gradually and for the Fed to remain committed to a policy of interest rate normalization.

 

June Consumer Price Index data released last Friday (the day after Fed Chair Yellen completed her testimony to the Senate’s Banking committee) showed that US consumer prices had slowed to a 1.6% rate of growth in the 12 months ending June, down from 1.9% in May. The core CPI, which excludes food and energy, was unchanged at 1.7%.

 

The softening in the non-core number caused some investors and commentators to temper their expectations for further rate hikes this year.


“A combination of accommodative monetary policy along with trends cyclical and secular tied to technology and globalization have in our view created an economic expansion that is prone to deliver sluggish rather than robust growth.”

The CPI figures showed continued weakness in pricing power across a range of goods and services for a fourth straight month. The softness in the latest numbers appeared to be fairly broad and occurring in cyclical segments of the economy including autos, which have felt the impact of a large number of vehicles coming off leases this year as well as the effects of rising prices while wage growth remains stalled.

 

Fed Funds futures showed investors’ expectations for rate hikes in September and December had declined as of last Friday to 10.1% and 43.4%, respectively, from 16.1% and 51.9% the prior Friday.

 

We continue to anticipate at least one more rate hike before the end of this year based on our expectations for continued positive (though modest) economic growth.

 

Volatility in economic data near term can be caused by numerous factors including technicalities in reporting as well as the effects of seasonality. Data often is adjusted in the periods that follow their initial release.

 

It is our view that the latest CPI number is not indicative of a broad-based longer-term deceleration of economic reflation but rather more likely illustrative of yet another of many “mid-cycle slowdowns” that the economy has experienced over the course of a protracted process of economic recovery that has transitioned into the current economic expansion.

 

A combination of accommodative monetary policy over the past eight and a half years along with trends cyclical and secular (longer term) tied to technology and globalization have in our view created an economic expansion that is prone to deliver sluggish rather than robust growth.

 

We suggest that in such an environment investors remain committed to their goals and objectives, right size their expectations, practice patience and avoid being whipsawed by near-term upticks in volatility. Near-term retracements and pullbacks that could develop from catalysts likely to appear from time to time should be used to identify risks and opportunities and for investors to act accordingly.

 

We continue to believe that near-term risks appear broadly greater in bonds than among stocks as prospects for revenue and earnings growth look favorable driven by economic fundamentals at the same time that the Federal Reserve remains committed to the normalization of interest rates and considers reducing the size of its balance sheet.

 

 

 

 

 

 

 

 

 

 

 

For the complete report, please contact your Oppenheimer Financial Advisor.

 


Other Disclosures

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. 2015.


About John Stolzfus

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 channel and other notable networks.

Full Profile