Market Strategy Radar Screen Weekly - April 18, 2016

Keep Your Eyes on the Road and Your Hands upon the Wheel

Patience, commitment and focus likely will continue to be rewarded

Ironically over the last few days concerns had begun to rise that a whiff of inflation might arrive on the economic landscape after the price of oil and other commodities had jumped respectively from lows in February. (Indeed, the March CPI data, however, tell a different story – see pages 6-7.)

A glance at the performance of the CRB Commodities index, which tracks prices of a basket of 19 diverse commodities, advanced as much as 14.6% from a low on February 11^th through March 17^th and as of last Friday was some 12.02% above its low in February.

From our perspective on the radar screen, the recent respective rallies of 17 of the 19 commodities represented in the CRB index reflect more of just how oversold the commodity complex had become by February 11^th, rather than an indication that inflation might near term become an issue of concern for central bankers.

In our view, the recent rally within the commodity complex appears to be a combination of factors that includes the effect of the US dollar’s recent decline (against a broad array of G-10 and emerging market currencies) on dollar-priced commodities; some stockpiling by foreign purchasers of dollar-priced commodities as a result; as well as continuing evidence of the sustainability of the US economic expansion as well as signs that economic recovery abroad continues, albeit aided by foreign central bank efforts.

We believe that as a process of economic normalization supported by central banks vigilant against deflationary trends gains traction, investors will need to avoid mistaking reflation for worrisome inflation.

In what we expect for the foreseeable future to remain a low inflation, low interest rate, and modest economic growth environment, equities remain our favored asset class. We expect investors will opt for barbell strategies that utilize a mix of some growth stocks and value stocks.

As a low interest rate environment moves toward an eight-year anniversary, we expect dividend-paying stocks to increasingly gain favor with investors. We suggest a mix of cyclical as well as defensive dividend-paying stocks with an emphasis on cyclicals in an environment where central bank efforts remain committed to providing support for economic growth and wary of disinflationary trends stateside and deflationary risk outside of the US.

(See pages 3 and 11 for more detail on our recommended investment stance and suggested allocations.)

Earnings Season: Too early to tell overall but we’d say, “so far so good”

FactSet shows that with 7% of companies in the S&P 500 having reported results through last week for Q1 2016, 71% have reported earnings that beat the mean estimate and 60% have reported sales that were better than the mean estimate.

For Q1 2016, the blended earnings decline stands at -9.3%. The blended sales decline for the S&P 500 for Q3 2015 is -1.3%. The blended results include the actual results thus far reported and average analyst estimates for companies yet to report.

If the index reports a decline in earnings for Q1, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since the Great Recession (Q4 2008 through Q3 2009).

While the US dollar has declined against a number of developed and emerging market currencies year to date, the arrival of that trend so far appears too late to have had a positive impact on first- quarter results.

FactSet data also show that of the 26 companies in the S&P 500 that had reported results for Q1 through last Wednesday, 19 cited some negative effect on earnings or sales (revenues) in the first quarter (or for the remainder of the year) due to the strength of the dollar, which persisted through most of the period.

For companies that generate more than 50% of sales inside the US, FactSet shows the blended earnings decline at -3.5%. For companies that generate less than 50% of their sales inside the US, the blended earnings decline is -18.9%.

For companies that generate more than 50% of salesinside the US, the blended sales growth rate is +3.0%. For companies that generate less than 50% of sales inside the US, the blended sales decline is -11.5%.

For Q1, the Energy sector is expected to be the largest contributor to the year-over-year declines in both earnings and revenues for the S&P 500.

The blended earnings decline for the S&P 500 (ex-Energy) for Q1 2016 is -4.2%. The blended sales growth rate for the S&P 500 (ex-Energy) for Q1 2016 is +1.6%.

Seven sectors for Q1 are expected to report a year-over-year decline in earnings, led by the Energy and Materials sectors.

Three sectors are expected to report year-over-year earnings growth, including the Telecom Services, Consumer Discretionary and Healthcare.

Five sectors are projected to report year-over-year growth in revenues, led by the Telecom services and Health Care sectors. Five sectors are predicted to report a year-over-year decline in revenues, led by the Energy and Materials sectors.

We expect that for yet another quarter, analyst cuts to expectations ahead of earnings season will provide opportunity for upside surprises throughout the season.

The weaker dollar should contribute positively to US multinational revenues and earnings in the quarters ahead. The market as a discount mechanism appears to us to already sense better things ahead.

Stay tuned.

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

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