Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
Well My Mind Is Goin’ Through Them Changes…
We recall drummer Buddy Mile’s words as the President shuffles his cabinet and staff
Markets are in a process of digesting a number of changes implemented by the administration in Washington in the current quarter that we believe will require time to tell whether their respective effect on the economic landscape stateside and internationally will be positive, negative or even without much effect.
These include the tax reform package passed last December, a transition of leadership at the Federal Reserve announced late last year and just in the past few weeks dramatic actions on tariff regimes and changes among high ranking cabinet members.
Since the start of the year the market as illustrated by the S&P 500 has moved from exhibiting high excitement as stocks moved up (often to new record highs) on 14 of the first 18 trading sessions of the year only to fall in seven of the next nine trading sessions on fears that the economy was moving at a fast enough pace to push the Fed into a more aggressive regime of interest rate hikes.
The sell-off was brought on by a mix of economic data tied to wage gains and input costs along with what was initially perceived as a more hawkish than expected tone coming from the new Fed Chairman and other Fed officials that caused a spell of market weakness.
In the 12 days that followed from the second week of February through the end of that month the market moved higher on nine days and lower on four during which time the market regained much of the ground it had lost from its late January/early February swoon.
So far March has been good to stocks with the S&P 500 up 1.4% with six of its eleven sectors outperforming the underlying benchmark.
“Pundits, traders and investors will likely be glued to the tube to catch, dissect and parse every word of the new Fed Chair’s news conference for clues as to what lies ahead and any change of tenor.”
Real estate and utilities (sectors considered “bond proxies” by many investors and the two worst performing sectors in the market’s big upswing at the start of the year) have led the S&P 500 sectors higher in the first two weeks of March as the yield on the 10- year US Treasury stabilized as the pace of economic data moderated.
As Earnings Season Winds Down, Market Focus Shifts
A broad array of stocks have found support from a stellar fourth quarter earnings season for the S&P 500 that saw earnings up 14.4% on the back of 7.8% revenue growth. It was the sixth consecutive quarter of positive earnings growth for the benchmark.
With the fourth quarter earnings season behind us, it’s the economic data, day to day corporate news items, and developments in Washington, DC (and in capitols around the world) that will likely hold investors’ focus.
A revolving door at the White House has subtracted and added numerous personalities and cabinet members through last week adding to the transitions the market and investors will have to ponder over the course of the next few months. There never seems to be a dull moment these days.
For now at least fundamentals remain good from an economic perspective and bode well for many corporates even as they navigate changes in the tax law and tougher tariff regimes.
Much is likely to be revealed over the next few months and quarters as the changes in the tax law and their effects on corporations moves from “projected impact” to “reality.”
Whether the first round of tariffs launched last week leads to more trade restrictions and a start of retaliatory actions by foreign nations or they lead to progress in updating longstanding trade agreements that may have become anachronisms in a digitalized world driven by technological innovation and globalization is yet to been seen.
Stay Focused on the Fundamentals
For now we’ll consider the risks but remain focused on the fundamentals stateside and abroad which look from our perspective at the present time strong enough to sustain the price discovery process and potential increase in volatility that can come with change.
We remain positive on the outlook for equities stateside and abroad. We continue to expect cyclical stocks driven by economic growth to outperform defensive stocks in the near to intermediate term.
Fixed income broadly appears to us likely to experience a modest rally near term as the calming effect of recent economic data that points towards modest rather than faster growth continues to cross the transom (note the retail sales data discussed on page 5).
Longer term the process of interest rate normalization that the Fed and Central Banks around the world continue to embrace remains a challenge to bond market performance.
We Update our Sector Recommendations
This week we made some adjustments to our global asset allocation model as well as to our weightings and ratings of the S&P 500’s eleven sectors. The changes are more strategic and tactically opportunistic rather than dramatic in design (see pages 3, and 8 through 10 of this report for details).
In the week ahead “FOMC Wednesday” looms large with the Federal Reserve expected to announce its first rate hike in 2018 and as the newly appointed Fed Chairman Jerome Powell holds his first news conference afterwards.
Pundits, traders and investors will likely be glued to the tube to catch, dissect and parse every word of the new Fed Chair’s news conference for clues as to what lies ahead and any change of tenor.
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.