Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
Change Partners and Dance
Leadership in equities and other asset classes changing going into Q4
With markets still prone to risk on/risk off adjustments, rotation, and rebalancing stateside and across the globe, stocks shined in the quarter just ended.
A number of performance laggards from the first half of the year took the lead as the quarter unfolded.
A mix of continuing economic improvement in both the United States and around the world along with better than expected results at the corporate level and progress in hiring (if not in wage growth) in the workplace, along with modest inflation managed to overcome negative forces (real and perceived). These offset concerns raised by acts of terrorism in Europe and the UK, gridlock in Washington, threats of a nuclear missile attack from North Korea and the devastating effects of a quartet of hurricanes that struck Texas, Florida, Puerto Rico, the Virgin Islands and several island nations in the Caribbean.
As the quarter came to a close last week US stocks rallied to see the S&P 500, the S&P 400 (mid-caps) the S&P 600 (small caps), the Russell 2000 (a broader gauge of small caps) and the NASDAQ composite close at respective record highs last Friday. The Dow Jones Industrials which posted its latest record high on September 20 closed just points below that record level on Friday.
Small cap stocks have now outperformed large caps for the latest six-month, three-month and latest month periods as improvements in the domestic economy and prospects for tax reform (or perhaps just a tax cut) from Washington look more likely.
The major stock indices each got a boost at least in part from the administration’s Tax Reform proposal after it was released last week. Some announcement showing progress in that area was expected by the markets for some time.
That said, we don’t believe that the market forces that drove stocks higher on the news of the Tax Reform package are so naïve to expect that the administration’s proposal won’t be challenged on multiple levels by a myriad of differences of opinion representing diverse interests and constituencies of congress—each with their own view of what tax reform should be and whom it should serve. Investors more than likely recognize that an arduous process of argument and debate is just about to begin in D.C.
“The midterm election next year that hangs over the heads of politicians of all persuasions could well serve to break the political ice and bring about at very least a tax cut amenable to most if not all sides”
We think markets rallied last week not just on the tax reform proposal but on any number of things including the aforementioned positive offsets to negative developments that have helped the bull market once again climb the proverbial “wall of worry”.
Last week’s activity in the markets should be a reminder to us all that market moves can be driven not just by improving fundamentals and sentiment but by incremental signs of progress that might—further down the road—cause fundamentals to shine even brighter.
While tax reform in our view is nearly as contentious an item for Congress to agree on as was health care reform, the midterm election that hangs over the heads of politicians of all persuasions next year could well serve to break the political ice and bring about at very least a tax cut amenable to most if not all sides.
Such an outcome would likely have a greater effect on corporate taxes than it would on individual tax rates but could serve to provide further support to economic growth, US corporate competitiveness, and progress in the workplace as improved profitability could encourage businesses to hire and perhaps even increase wages.
Data Not Just Politics Likely to Drive Markets
With earnings season some two weeks ahead, investors will likely be focused this week on developments around last week’s tax reform proposal as well as on the economic data crossing the transom.
The ISM manufacturing index for September is due today along with auto sales figures for the month just ended to be released on Tuesday. These should serve to shed light not only on progress in the manufacturing and consumer sectors but also provide further clues as to the Fed’s action on rates in December.
As of last Friday Fed funds futures were showing a 70% probability of a 25 bps rate hike in December. That’s up from a level of 25.5% as recently as August 11 (see figure below).
With the US economy showing signs that GDP growth of 2% to 2.5% annualized is sustainable without stimulus agenda, the market is likely to readily digest increased expectations of a rate hike in December barring a “bolt from the blue” or systemic disruption. We do not expect political debate in Washington to produce much more than speed bumps for the markets near term.
As the week moves ahead look for the ADP payroll number on Wednesday to garner investors’ attention before Friday brings the week’s main event—the BLS’ (Bureau of Labor Statistics) release of the non-farm payroll report, the unemployment rate, as well as year over year hourly wage growth. Each of these should shed further light on the Fed’s prospective path to interest rate normalization.
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.