Trend Analysis

Market Strategy Radar Screen Weekly February 12, 2018


In this article:

  • The age-old adage applies as investors sort out the last 10 trading sessions and look ahead

RELATED ARTICLES:

When Good News Isn’t Enough

By John Stoltzfus,
Chief Investment Strategist

You Can’t Always Get What You Want

By John Stoltzfus,
Chief Investment Strategist



Be Careful What You Wish For

The age-old adage applies as investors sort out the last 10 trading sessions and look ahead


Key Takeaways

 

     
  • Markets, roiled by deficit, valuation, and inflation concerns, lost ground for most of last week, before rallying on Friday.
  • Central banks continue a thoughtful process of interest rate normalization even as investors fret about inflation risks.
  • Corporate earnings stateside for Q4 continue to signal a sixth consecutive (and strongest) quarter of positive earnings growth.
  • Volatility likely to persist as investors ponder risks. That notwithstanding, we are prone to look for opportunities (“babies thrown out with the bathwater”).

 

Amidst last week’s ruckus in the markets, a good friend reminded us of the old saw, “The stock market is the only market where shoppers don’t shop when things go on sale.”

 

For quite some time now and right through the market’s run-up in the fourth quarter and up until just a week or so ago, it seemed to us that there was no shortage of long term market skeptics who were on the sidelines saying that they were “waiting for a correction to step in and buy stocks.” Now that a correction has occurred with stocks having fallen a little over 10% from a January 26 peak through the market close last Thursday, we are waiting to see if those skeptics indeed will step up to the plate.

 

After stocks had risen in fourteen of the first eighteen trading sessions this year, the ten trading sessions that followed saw stocks decline on seven of those days. You almost could hear a collective sigh of relief on Friday when the market closed higher on the day—and ahead of a weekend at that.

 

The Dow Jones Industrials, the S&P 500, the S&P 400 (mid-caps), the Russell 2000 (small caps) and the NASDAQ Composite (some 40% weighted in technology-related stocks) as of now stand respectively lower from the start of the year as follows: 2.14%, 2.02%, 4.2%, 3.8% and 0.42%. Their respective declines from the market’s peak on January 26th are: 9.1%, 8.82%, 8.74%, 8.10% and 8.41%.

 

We’ve been asked over the weekend if it appears to us that the sell-off is over.

 

While we believe that the majority of the sell-off may be over for now, there is likely to be a continuation of recurring volatility as speculative positions are unwound by some investors and as still others ponder some of the worry-items that helped cause the market stumble.

 

High on the list of concerns remaining near term is the substantial increase in the deficit likely to come from the recently enacted tax reform package, the cost of the pending infrastructure program (as yet undefined—though the President is scheduled to speak on it later today), and the effect on the budget and deficit of significantly increased spending on defense necessitated by geopolitical risks.

 

We see these deficit concerns as legitimate and not likely to go away or be addressed suitably in the near term as a result of the need for action in areas that require investment, costly changes, and major upgrades for the military, infrastructure as well as lower taxes for corporations.

 


“Valuations aren’t cheap though we’d suggest that they aren’t terribly rich considering six quarters of consecutive earnings growth as well as the relative valuations of stocks and bonds…”

 

Another risk overhanging the markets is a perception by some investors that worrisome levels of inflation could appear near term as a result of increases in employment and rising wages. We believe that wage growth so far remains modest even as the headline unemployment rate stands at or near a seventeen-year low. Wage increases thus far appear to us offset near and intermediate term by secular forces driving technology (algorithms in the offices, robotics on the factory floor) and globalization (lower barriers of entry for competition in a myriad of businesses worldwide from mom and pop shops to multinational corporations).

 

Don’t Blame the Fed

 

While the market has shown some concern over the transition in leadership at the Federal Reserve and the risk that monetary policy makers could make a mistake that would cost the markets dearly, so far there is no evidence that it will happen. For now, the Federal Reserve has shown it remains committed to a policy of interest rate normalization at a pace sensitive and suitable to economic growth.

 

The markets worldwide have their eyes trained on policy makers of the major central banks. The attention of the markets is so focused on these institutions that it appears to us that the markets are more likely prone to making a mistake in judging monetary policy makers’ decisions than are the policy makers apt to stumble. So far, the collective experience of the world’s major central banks has been remarkably positive for economic recovery and growth over the last nearly ten years since the world was enveloped in the Great Financial Crisis.

 

Corporate Earnings Are Strong

 

From a perspective of the fundamentals that traditionally drive stock prices higher, things are decidedly encouraging. Economic data persists to signal steady but moderate growth. Corporate fundamentals continue to improve stateside and around the world. Q4 results for companies in the S&P 500 with some 341 of 500 companies thus far reported show earnings growth of 15.74% in the quarter on back of an 8.34% increase in revenues. Seven of the benchmark’s 11 sectors have thus far reported double digit earnings growth for Q4. (See p. 6 of this report for details.)

 

On a valuation basis, concerns remain. Valuations aren’t cheap though we’d suggest that they aren’t terribly rich considering six quarters of consecutive earnings growth as well as the relative valuations of stocks and bonds against prospects we see for reflation versus worrisome inflation.

 

The trailing-12-month price/earnings multiple of the S&P 500 which had stood as high as 23.2 times at the market peak on January 26th eased to a level of 21.1 times on Friday.

 

While the current level of the TTM P/E multiple remains high from a historical perspective compared to the average 12 month P/E multiple of 16.7x all the way back to the end of 1965, the current multiple of 21.1x against the U.S. 10-year Treasury’s yield of 2.8% on Friday last appears relatively modest if we consider that the average yield of the ten year Treasury all the way back to the end of 1965 is 6.4%.

 

For now, we suggest that investors check their shopping lists of stocks, equity benchmarks, sectors and thematic ideas that a few weeks ago appeared to “have gotten away.” At this juncture we won’t suggest “backing up the truck” but rather selective shopping for quality securities including “babies that may have been thrown out with the bathwater,” which appears appropriate in our view.

 

 

 

 

 

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