You Got to Know When to Hold ‘Em
By John Stoltzfus,
Chief Investment Strategist
Keep Your Eyes on the Road, Your Hands Upon the Wheel
We revisit the words of Jim Morrison in this period of uncertainty
Major indices stateside closed the week higher ahead of the Labor Day Holiday as investors kept their eyes on a brace of economic data and corporate announcements that in our view signaled that the economic environment would likely continue supportive of equities for the foreseeable future.
A positive expression in the markets prevailed last week even as geopolitical risk mounted with North Korea’s test of a purported hydrogen bomb, the effects of the worst storm in recent history were assayed, and the turn of the calendar page spiked concerns about the debt ceiling and the risk of a potential government shutdown.
Key equity benchmarks made solid gains last week as the S&P 500 advanced 1.4%, while the Dow Jones Industrials rose 0.8%, and the Nasdaq Composite, powered by product news and M&A from within the Biotech sub-sector, surged 2.7%.
It wasn’t an “all’s well that ends well” or an “all clear signal” that empowered stocks last week as much as a sense that even as some things and situations have worsened others have actually improved.
The non-farm payroll number for August came in shy of expectations (at 156,000 versus a consensus average call for a gain of 180,000). Somewhat unsettling other than the miss for the month of August was a downward revision of 41,000 jobs for the two months prior and an upward tick on the headline unemployment rate to 4.4% from 4.3%.
While investors appeared to discount the payroll number miss and revision, they seemed to focus instead on the good news contained in the employment report that showed growth in manufacturing jobs, and the ISM (Institute of Supply Management) manufacturing data that showed factory activity rose to a six-year high.
Hourly wage growth on a year over year basis though not robust showed a gain of 2.5% in the period, indicating that wage inflation remains modest enough for the Fed to remain committed to interest rate normalization at a pace that is unlikely to rattle the equity market or cause a massive shake-up near term in the bond market.
“In the weeks ahead we expect the market to continue to seek out day to day catalysts on which to move while likely longer term remaining intent on continuing its climb of the proverbial wall of worry.”
2Q Earnings Were Rich in Vitamin E
As second quarter earnings season neared a close (with 496 companies in the S&P 500 having reported as of the end of last week), results for the quarter have broadly surprised to the upside with earnings up 9.6% on the back of 5.3% revenue growth. A decline in the dollar since the start of the year has contributed positively to multi-nationals’ earnings this year. Cost containment, continued buybacks (though at a slower pace so far than last year), along with improved economic growth at home and abroad appear to be providing the much needed “vitamin E” (earnings growth) that stocks need to justify valuations that perhaps while not cheap may just not be as rich or even overvalued as bull market skeptics and market bears might say.
Bonds gave back some of their recent gains last week as the case for a continued economic expansion stateside got a boost from an upward revision of Q2 GDP to 3% from an earlier reported level of 2.6%. The 10-year Treasury yield edged higher last Friday rising to 2.2% but still lower from where it began the month of August.
A combination of modest economic growth and geopolitical risk among other factors have kept the 10-year yield from rising this year even as the Fed remains committed to its process of interest rate normalization via upward tweaks to its Fed funds rate and prospects for a reduction of the debt on its balance sheet.
In the weeks ahead we expect the market to continue to seek out day to day catalysts on which to move while likely longer term remaining intent on continuing its climb of the proverbial wall of worry.
Resolution of issues tied to the debt ceiling and avoidance of a government shutdown are expected to be near-term keys to progress for equities.
Ebbs and flows tied to geopolitical tensions will likely continue to dog the markets for now along with other irksome factors of uncertainty linked to agenda items including tax reform and infrastructure spending. While any positive developments among these factors will likely provide the equity market with reason for further gains, their mere existence for now would seem to keep animal spirits or irrational exuberance in check. We see this as akin to making lemonade from lemons.
We believe that ultimately it’s the economy, revenues and earnings along with innovation that will drive the markets.
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
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.