Market Strategy Radar Screen Weekly December 10, 2018

Riders on the Storm Continued

Bears seek to deliver lumps of coal instead of a Santa Claus rally

Stock prices remain under pressure. Concerns about whether or not the US and China can find a trade resolution and about economic and corporate growth prospects, along with algorithmic opportunism, challenge conviction and sap appetites for buying stocks. So far, each and every rally since US major equity benchmarks reached record highs in September has faded, making this fourth quarter particularly tough on stocks at a time of year when stocks historically tend to deliver relatively good performance.

Ironically, the bear grip that has held stock performance hostage at intervals this year has occurred at a time when the economy and corporate earnings stateside are doing well (see pp. 4 and 7 of this report). Unemployment is near a five decade low; jobs are plentiful; wages are rising at a modest pace; inflation remains relatively tame; economic growth persists (if a bit sluggish in historical context); Fed monetary policy continues at a pace so far digestible to the economy; and the latest reported quarter of earnings growth continues to surprise to the upside (with the Q3 season showing earnings growth of 26% on the back of 8% revenue growth).

A combination of momentum trading that favors the downside and a tendency for traders and investors at least for now to seemingly turn a blind eye toward any good news or positive developments and focus on negative projections for any uncertain outcome the economy and market might be facing has been the order of the day. And it has been so for enough days for equity market performance to have turned negative on a year-to-date basis for both the Dow Jones Industrials and the S&P 500 as of last Friday’s close.

Our experience over more than three decades in the market suggests that for all the noise and clamor around the drop in stock prices this quarter, cooler heads should ultimately prevail and that a steady hand on the tiller is best practice when the waters turn choppy on the seas of investment management.

China Trade Talks Remain a Key Focus

For now, we expect that recent choppiness in the markets will continue until some material progress is made in the trade dispute with China. A rally last Monday that had ensued on back of somewhat uneven good news from President Trump and members of his administration about progress in talks between the US and China at the G20 meeting in Buenos Aires reversed. That resulted in a giveback of gains and more over the balance of the week as worry about an initial lack of comment from Chinese officials fueled skeptics’ doubts of any progress made. Then news broke a day or so later that Chinese officials acknowledged some progress at the G20 dinner, providing markets some relief until news of the arrest of a high-ranking executive of a Chinese company in Canada (at the request of US officials) sent the market into yet another tizzy.

By the end of the week, the S&P 500 had fallen 4.6%, giving back its gains from a rally in the week prior. Such is life in times of uncertainty, until things are resolved (or at least substantial progress is had) and the worries de jour fade into the rearview mirror of time.

Meanwhile, Recession Fears Simmer . . .

An inversion in the yield curve between the two-year US Treasury and the five-year last week added to market jitters as projections of a recession garnered attention on the markets’ radar screen. With fundamentals lacking any signs of serious deterioration, the inversion looks to us at this juncture to reflect the bond market’s traditional acknowledgement on the short end of the curve that the Fed remains committed to interest rate normalization (in our view at a pace that continues both sensitive to strengths as well as vulnerabilities in the US economy and global economy) while at the same time reflecting interim slowing in the US economy that suggests inflation is not likely to turn worrisome or justify much higher yields further out on the yield curve.

We’d also consider that demand for yield globally— particularly appetite tied to fixed income instruments to which some ascribe a safe haven status—continues to attract buyers to US Treasuries of longer duration. The dollar’s strength versus many foreign currencies adds to that appeal.

Fundamentals at this juncture do not lead us to believe that a recession is imminent or signaled by last week’s yield inversion.

The Week Ahead

We expect investors will stay focused on any signs of developments negative or positive towards a resolution of the US/China trade war. Also likely to garner attention are any clues from economic data as to whether or not the Fed is likely or not to raise in December. We continue to expect the Fed will raise its benchmark rate by 0.25% at the FOMC meeting that concludes on December 19th. The economy in our view shows enough strength to digest a hike in December.

We remain positive in our outlook for the US economy and equity markets. In our view ,the difficulties at arriving at a resolution to the trade fracas between the US and China are well worth productive efforts by both sides considering the potential benefits from a resolution for their respective economies and their constituencies—as well as for the global economy.

The speed of the turning pages on the calendar in light of a presidential election stateside in 2020 and China’s objectives in its “Made in China 2025” policies in our view dictate an outcome to the dispute sooner rather than later.

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.