Cyclicals, Large Caps to Pace Equities Leadership

We’re pleased to share the first issue of Multi-Asset Strategy Viewpoints, a quarterly publication that highlights our current market observations, the opportunities and risks in various asset classes and actionable investing ideas for investors.

Market Observations

Since the U.S. presidential election on Nov. 8, 2016, there have been numerous references to “animal spirits,” the reflation trade and the “Trump trade.” What do they mean and how do they impact your investments? President Trump was elected largely on the platform of replacing the Affordable Care Act, personal and corporate tax reform, infrastructure spending and reduced regulation. The ensuing market rally was driven largely by proposed tax reform and infrastructure spending, which are expected to “reflate” the economy. The reflation trade has benefited certain sectors over others, especially through the end of February. Whether it’s animal spirits, reflation or the Trump trade, they all pretty much describe the same phenomenon.

Small-cap stocks—in sectors such as financials, industrials and materials—were the biggest beneficiaries. In fixed income, high-yield bonds also rallied on the post-election optimism. Generally, small-cap stocks have less multinational exposure, which gives them an edge over their large-cap peers. Financials saw their share prices rise due to the potential reduction in regulations. Meanwhile, industrials and materials rallied on the potential for increased spending on infrastructure. High-yield credit benefited because below-investment-grade companies would get tailwind of fiscal stimulus. Additionally, due to the reflation trade, the 10-year Treasury yield rallied 0.75% from just before the election to its peak on March 13, 2017.

Five months into the new year, optimism seems to have waned, changes to health- care reform haven’t been successful, and investors may have concerns that tax reform and infrastructure spending might be watered down. Trade reform may prove to be more moderate than anticipated and enthusiasm over financial industry regulatory overhaul has calmed. The result? The market is dialing back expectations.  More recently, U.S. large-cap stocks outperformed small-cap stocks, technology and health care became the top-performing sectors, emerging-market equities outperformed U.S. equities, and Treasury yields settled back down.

As we near the end of first quarter earnings season, a strong showing has supported the lofty valuations in the U.S. equity market.  As the market hovers around record highs, the market is priced to perfection, in our opinion.  As long as upcoming economic data continues to satisfy, a meaningful pullback could be averted as the Fed continues its path to normalization.

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Disclaimer

The opinions expressed herein are subject to change without notice. The information and statistical data contained herein has been obtained from sources we believe to be reliable. Past performance is not a guarantee of future results. The above discussion is for illustrative purposes only and mention of any security should not be construed as a recommendation to buy or sell and may not represent all investment managers or mutual funds bought, sold, or recommended for client’s accounts. There is no guarantee that the above-mentioned investments will be held for a client’s account, nor should it be assumed that they were or will be profitable. The Consulting Group is a division of Oppenheimer Asset Management Inc. (OAM). OAM is an indirect, wholly owned subsidiary of Oppenheimer Holdings Inc., which also indirectly wholly owns Oppenheimer & Co. Inc. (Oppenheimer), a registered broker dealer and investment adviser. Securities are offered through Oppenheimer. OAM053117CM2

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Risk Factors
The success of an investment program may be affected by general economic and market conditions, such as interest rates, the availability of credit, inflation rates, economic uncertainty, changes in laws and national and international political circumstances. These factors may affect the level and volatility of securities prices and the liquidity of a portfolio’s investments. Unexpected volatility or illiquidity could result in losses. 

Investing in securities is speculative and entails risk. There can be no assurance that the investment objectives will be achieved or that an investment strategy will be successful. 

Special Risks of Foreign Securities
Investments in foreign securities are affected by risk factors generally not thought to be present in the US. The factors include, but are not limited to, the following: less public information about issuers of foreign securities and less governmental regulation and supervision over the issuance and trading of securities. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.

Special Risks of Small and Mid Capitalization Companies
Investments in companies with smaller market capitalization are generally riskier than investments in larger, well established companies. Smaller companies often are more recently formed than larger companies and may have limited product lines, distribution channels and financial and managerial resources. These companies may not be well known to the investing public, may not have significant institutional ownership and may have cyclical, static or moderate growth prospects. There is often less publicly available information about these companies than there is for larger, more established issuers, making it more difficult for the Investment Manager to analyze that value of the company. The equity securities of small and mid capitalization companies are often traded over-the-counter or on regional exchanges and may not be traded in the volume typical for securities that are traded on a national securities exchange. Consequently, the Investment Manager may be required to sell these securities over a longer period of time (and potentially at less favorable prices) than would be the case for securities of larger companies. In addition, the prices of the securities of small and mid capitalization companies may be more volatile than those of larger companies.

Special Risks of Fixed Income Securities
For fixed income securities, there is a risk that the price of these securities will go down as interest rates rise. Another risk of fixed income securities is credit risk, which is the risk that an issuer of a bond will not be able to make principal and interest payments on time.

Special Risks of Master Limited Partnerships
Master limited partnerships (MLPs) are publicly listed securities that trade much like a stock, but they are taxed as partnerships. MLPs are typically concentrated investments in assets such as oil, timber, gold and real estate. The risks of MLPs include concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy and market risk. MLPs are not suitable for all investors.