Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
Keep on Keepin’ On
Once again markets have shown resilience in the face of adversity
As of last week’s close the S&P 500 and the Dow Jones Industrial average had recouped more than half of the ground they’d lost during the market’s swoon from January 26 through February 8. Factors that have contributed to their respective rebound include economic and corporate fundamentals that persist and point to further strength stateside and globally.
Last week the Dow Jones Industrials, the S&P 500, the S&P 400 (midcaps), the Russell 2000 (small caps) and the Nasdaq composite (some 40% comprised of technology related stocks) respectively gained 0.4%, 0.6%, 0.4%, 0.8% and 1.1%. On a year to date basis their respective gains are: 2.4%, 2.8%, 0.2%, 0.9% and 6.3%. Large caps’ performance continues to dominate that of small- and mid-capitalizations from the start of the year.
Reality versus Perception
It might seem counterintuitive based on the news flow of late but the S&P 500 has closed higher in six out of the first eight weeks of this year through last Friday. As markets settle some from their recent levels of volatility investors could begin to seek broader diversification, consider market capitalization and style diversity as well as greater industry exposure across the sectors.
Foreign Markets
Among the major international benchmarks the emerging markets and the frontier markets in particular have continued to attract investors’ favor. Last week through Friday’s close MSCI EAFE (developed markets ex-US and Canada), MSCI Emerging Markets and MSCI Frontier Markets respectively advanced 0.3%, 1.2% and 0.8%. Year to date these three benchmarks respectively have added 0.7%, 5% and 3.8%.
Thus far this year the developed international markets have lagged as investors weigh central bank transitioning in the processes of interest rate normalization.
Foreign currency strength as well serves as an overhang of concern for country stock markets with significant reliance on export growth. Political concerns in Europe including Brexit remain issues that have acted as a governor on the engine that drives stock prices even as investor interest remains broadly positive on the region for diversification purposes.
“With the Fed midst interest rate normalization and the 10-year Treasury yield near its highest levels in several years each and every word of Mr. Powell’s appearances is likely to be parsed and each and every facial movement analyzed.”
Fed transition begins in earnest with Humphrey-Hawkins
In the week ahead investors will likely focus attention to Fed Chair Jerome Powell’s first semi-annual monetary policy report to the House Financial Services Committee on Tuesday. Investors then will get another chance to assess Mr. Powell on Thursday when he testifies before the Senate Banking Committee on Tuesday. With the Fed midst interest rate normalization and the 10-year Treasury yield near its highest levels in several years each and every word is likely to be parsed and each and every facial movement analyzed.
A Tale of Two Asset Classes
As of last Friday the price of oil (West Texas Intermediate) stood at $63.55 bbl., just 3.9% below its peak for this year. The price of oil is up over 49% from its low on June 21 of last year. A combination of factors including an increase in global demand, a weaker dollar as well as disciplined production levels maintained by OPEC, OPEC allies and US producers has kept the price of oil strong.
Energy stocks rallied some 26.8% from a low on August 17, 2017 to a peak on January 22 of this year as the price of oil advanced. However, as of Friday’s market close the energy sector stood 12.3% below its January peak as equity investors appeared to question just how long global producers of oil can maintain their production discipline as demand and oil prices remain strong.
Rising rates less worrisome when taken in historical context
Last week we recalled that during the last Fed Funds tightening cycle stocks didn’t begin to run into trouble until a few months after the 10-year Treasury crossed 5.3% in June of 2007.
Stocks had moved higher through two years of rate hikes even as the Fed had raised its benchmark rate 17 times (25 bps at a time) taking the rate from 1% at the end of June 2004 to 5.25% by the end of June 2006.
The 10-year Treasury yield didn’t catch up to the Fed’s rate until almost a year later when it reached 5.25% on June 12, 2007.
In the current cycle the Fed has so far raised its benchmark rate just five times since December 16, 2015 with each hike also at a rate of 25bps. As of last Friday the band in which the benchmark rate stands is 1.25-1.5% or in a band just 125 to 150 basis points higher from where the Fed funds rate stood on December 2015.
The 10-year Treasury yield as of last Friday’s closed at 2.87%, down from a 2018 high of 2.95% on Wednesday.
In our view interest rates could continue to move higher on the path to rate normalization for some time before they cause the economy or the stock market serious trouble (notwithstanding interim volatility along the way). The pace and degree at which the Fed adjusts its benchmark rate will be the key factor as to the outcome of this cycle.
The VIX remains elevated even as it has declined some 55.8% from the level to which it had spiked on February 5. It remains 40% above its average level over the past 12 months. Further episodes of volatility should be expected as the transition of Fed leadership and process of interest rate normalization moves forward.
Economic signposts this week
Elsewhere on the calendar there’ll be plenty to watch as economic data crosses the transom with US Census January new home sales, and the Dallas Fed’s manufacturing gauge today.
Tuesday brings Durable Goods numbers, Conference Board consumer confidence, and the December Case-Shiller home price index.
Wednesday the BEA (US Bureau of Economic Analysis) releases its second estimate for 2017 Q4 GDP. A survey of economists looks for the number to drop to 2.5%.
On Thursday the BEA releases the personal income number for January; the February ISM manufacturing index is released and Ward’s auto sales numbers are also due.
The week closes with the University of Michigan consumer confidence number.
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.