Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
Let’s Make a Deal
With Friday’s “New NAFTA” deadline missed, the pressure is on for a deal this week
As investors, traders and market observers return from the holiday weekend and with a stellar second-quarter earnings season receding into the distance of the market’s rearview mirror, there will be no lack of things to check and ponder during this abridged week.
Beyond issues of trade uncertainty (particularly around Canada remaining in the “New Nafta” and the potential of yet another round of tariffs on China’s imports with likely further retaliation), there’s a full palette of economic data scheduled to cross the transom this week including Friday’s non-farm payroll change (with a widely followed economist survey looking for 193,000 jobs to have been added in August), the headline unemployment rate (economist survey expectations calling for 3.8%), and the average hourly wage growth from a year earlier (with the same economist survey expectations pointing for an increase of 2.7%).
Ahead of “Jobs Friday” there’ll be economic data earlier in the week pertaining to US manufacturing, US vehicle sales (Tuesday), mortgages, (Wednesday), the ADP jobs number, the initial jobless claims, ISM non-manufacturing index, factory orders and durable goods (on Thursday).
Throughout the week there will be a tranche of Fedspeak with opportunity for investors to look for clues as to which way the wind will likely blow at the end of the month when the Fed makes its interest rate decision.
As we go to press the gauge linked to the likelihood of a Fed rate hike on September 26 signaled a 95.2% chance that the Fed will raise its benchmark rate higher by 25 bps (to a range of 2.00% to 2.25% from 1.75% to 2.00%).
“Our view from earlier this year remains that the international markets are highly likely to benefit and rally from resolutions of the current trade issues not so much if as when they occur.”
The Market has Largely Priced in a Fed Hike
It’s worth noting that even as US fundamentals appear not to shown signs of deterioration the likelihood of a September 26 hike as gauged by the futures markets has slipped somewhat from a higher level of expectation of such a hike earlier this year (see figure below).
Economic growth concerns tied to trade war risks along with political and geopolitical risks appear to have caused earlier market participant confidence that a rate hike would occur in September to ease some even as the chances of a hike in December have recently edged higher (to 98.4%). We have been of the opinion for some time that the likelihood of a Fed hike was greater in December than in September.
Our call remains for the Fed likely to stay on hold until the end of the year maintaining the current levels of liquidity afforded by where the Fed Funds rate is now through the midterm elections. A rate hike in December (whether the Fed hikes in September or not) is most likely to be used as a healthy reminder to Main Street and Wall Street that the Fed is committed to interest rate normalization and that it believes the US economy is plenty healthy enough to digest a year-end increase.
Trade Tensions Remain a Focus
The market’s sensitivity to trade risk was illustrated last week as stocks moved higher with several major US equity benchmarks hitting new record highs on expectations that a resolution to issues with Canada would be arrived at before last Friday’s deadline. As chances for that to happen faded the major equity indices slipped off their latest rounds of new record highs but still managed to close higher on the week.
The major US indices advanced last week with the Dow Jones Industrials, the S&P 500, the S&P 400 (mid-caps), the Russell 2000 (small-caps) and the NASDAQ Composite respectively gained 0.7%, 0.9%, 0.5%, 0.9% and 2.1%. The same indices on a year-to-date basis have gained respectively 5.04%, 8.5%, 7.6%, 13.4% and 17.5% through last Friday’s close.
Last week the foreign equity markets as represented by the MSCI EAFE (developed markets index), the MSCI Emerging Markets, the MSCI Frontier Markets and the MSCI World Ex-US Index traded mixed with MSCI EAFE and MSCI Emerging markets respectively gaining on the week 0.3% and 0.6%. The MSCI Frontier Markets index and the MSCI World Ex-US indices respectively shed 1.8% and 0.9%.
Losses experienced in foreign equities have been derived in large part from trade skirmish concerns particularly in countries dependent on growth derived from exports to the US the effects of a strong US dollar on foreign debt issued in dollars and the negative effect of a strong dollar on foreign equity returns held in US dollar based portfolios.
The effect of the dollar’s strength has likely also triggered a “fair weather friend” effect as momentumdriven investors who are less committed to the cyclical and secular trends that support the case for foreign market exposure seek shorter-term action and upside opportunities stateside.
Our view from earlier this year remains that the international markets are highly likely to benefit and rally from resolution of the current trade issues not so much if as when they occur. We are reminded that patience is a virtue for investors as progress in trade talks remains halting much of the time and at best exhibits progress not perfection.
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.