Market Strategy Radar Screen Weekly May 29, 2018

Take it Easy – Don’t Let the Sound of Your Own Wheels Drive You Crazy

Patience likely to be proven a virtue for investors when we look back to this period in time

Investors and traders stateside returning to work to a holiday-abridged four session week will have plenty of things to keep an eye on as geopolitics, domestic politics, regional and international trade negotiations get mixed in with a heavy dose of economic data and results from a number of companies scheduled to help close out Q1 earnings season.

Leading up to this Friday’s non-farm payrolls, unemployment, and hourly wage growth numbers for May will be a host of data crossing the transom including home prices, consumer sentiment, manufacturing, economic growth (US GDP), consumer prices, retail inventories along with the Federal Reserve’s Beige book, which serves as a gauge of economic conditions in the Federal Reserve’s 12 regions across the US.

With some 97% of the companies in the S&P 500 having reported first-quarter earnings and with just a few more than a dozen yet to report earnings, results have been exceptionally good if not always well received by the market. For Q1 S&P 500, earnings thus far reported are up 23% on the back of a little more than 8% revenue growth. Ten of the benchmark’s 11 sectors have reported double digit earnings growth in the period with the lagging sector (real estate) having posted not too shabby earnings growth of 8% on the back of over 12% revenue growth (see page 4 of this report for greater detail).

For the S&P 400 (midcaps), which are much less mentioned in musings by most market observers, some 377 of 398 member companies in the index show earnings up 8.6% on the back of 4.4% revenue growth.

The Russell 2000 (small caps) with some 1,814 of 1,938 member companies reported has posted earnings growth in Q1 of 41.4% on the back of 9.95% revenue growth. Nine of that benchmark’s 11 sectors have posted double digit earnings growth with just two (health care and telecommunications) showing negative earnings growth in the same period.

Looking Ahead

With earnings season pretty much behind us, traders and investors will likely focus on economic data, monetary policy, political risk (domestic and international), company specific, industry and sector news until Q2 earnings season begins in several weeks.

Investors will look this week to see whether or not last week’s decline in the price of oil will persist ahead of OPEC’s upcoming meeting in June. Indications are that Russia and Iran would like to see a loosening of the collective discipline that has successfully limited oil production and bolstered the price of oil over 32% the past 12 months including a 12% jump since the start of 2018.

Last week the price of oil dropped 4.8% over the course of the week (including a 4% drop last Friday) as investors expressed concerns ahead of OPEC’s June meeting as well as on prospects of further declines in Venezuelan oil production tied to problems in that country which appear to worsening. Also weighing on oil prices is the expected impact of further sanctions on Iran by the US.

A softening in recent economic data stateside (see page 3 of this report) along with the drop in the price of oil and an ebbing in the yield on the 10-year Treasury which has declined from a high of 3.11% (on May 17) to 2.93% last Friday has some investors beginning to worry about growth slowing. For now, we’ll stick to our expectations for economic growth this year in a range of 2% to 2.5% with upside risk from the effects of tax reform (including lower tax rates for many individuals and corporations and the repatriation potential for US multinational earnings currently held outside of the US) as well as prospects for some progress in finding resolution to trade issues that have roiled the markets over the course of the past few months.

For all the talk about increased market volatility it’s worth noting that a read of the VIX (the widely followed gauge of volatility for the S&P 500) showed a level of 13.22 at last Friday’s close. That’s a drop of over 64% from when it spiked in February to a level of 37.3.

Indications are that investors are now less worried about near-term prospects for the market than they were in late January and early February even as uncertainties over the chance for a US/North Korea summit and the risks of a trade war with China and our NAFTA neighbors remain “on the table” if not at elevated levels.

We’ll suggest investors keep their expectations right-sized and their eyes on the fundamentals and stay open to the possibilities for positive outcomes to some of the worries that have held the bull market’s progress hostage for a large part of the first half of this year.

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

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