Market Strategy 3/02/2020
A Detour Does Not a Journey End
Let’s not miss the forest for the trees
Key Takeaways
- Last week’s equity market decline pushed the forward earnings multiple of the S&P 500 to 16.6, less than the 5-year average of 16.9 and 18.2, where it began the year.
- With the US 10-year Treasury yield closing at 1.149% on Friday and having moved lower earlier today to 1.062%, Treasuries appear overbought in our view—suggesting that a reappraisal of Treasury and equity prices stateside may be near at hand.
- We look at historical performance of the S&P 500 through forty years of various epidemics and provide perspective on the coronavirus.
- Last week’s consumer confidence figures showed continued resilience in the American consumer’s outlook.
As we went to press with this week’s market strategy publication news crossed the tape of the first confirmed case of the coronavirus in New York State (Albany). Shortly after that the New York Times reported the existence of another case having been confirmed in New York City (Manhattan). According to Bloomberg News the virus has now spread to 65 countries across the globe including Asia, Europe, North America and Latin America.
The momentum of news flow on the novel coronavirus (COVID-19) jumped exponentially last week even as the number of new confirmed cases of the illness in China began to slow (suggesting that the illness may have begun to peak there) just as news broke of a ramp up in new cases outside of China including Italy, Spain, Iran, South Korea, Singapore, and other countries around the world including the first two deaths attributed to the illness in the US.
The stock market moved sharply lower last week reacting to the news as some investors extrapolated and projected worst case scenarios for the outcome of this most unfortunate health issue.
By the market’s close last Friday the S&P 500, the Dow Jones Industrials and the Nasdaq Composite had relatively shed 11.49%, 13.6% and 10.54% in five sessions. It was no small irony that in the prior week the S&P 500 and the NASDAQ Composite had hit respective new record highs mid-week while the Dow Jones Industrials had hit a record high two weeks prior. On a year-to-date basis the three major averages are relatively off 8.56%, 10.96% and 4.52% as of February 28.
It’s not as if there’s nothing to worry about. COVID-19 has been shown over the past few months to pose significant health risks and even death (in a relatively small number of cases) to those unfortunate enough to have contracted it.
The sociological disruptions it causes in the communities where it surfaces can have a negative economic impact on business, labor and government.
An intricately woven global supply chain that had grown increasingly China-centric over the past four decades now poses near-term risk to global growth that according to some sources could erase earnings growth for 2020 and even push some economies into recession.
While we recognize the increased risks that the COVID-19 virus poses, experience suggests to us that the dire consequences some fear still have good chance of being averted so long as the response to the virus continues to gather momentum among governmental and business leaders and their constituencies.
While we are not medical professionals, we recognize parallels among the many types of challenges humans face in life and business. What we have observed from historical perspective is that quick responses to destructive and threatening disruptions—whether health related or otherwise—more often than not prove effective and often bear improvements along with resolution to the problem.
Looking Forward
In the week ahead investors will have plenty on their plates to consider from the next series of developments that occur around the virus to a slew of economic data (including the non-farm payroll number on Friday) along with Q4 earnings results from the S&P 500 companies that are scheduled to report this week.
With the yield on the 10-year Treasury having closed on Friday at 1.149% and having fallen further to 1.062% as went to press stateside on Sunday night, US Treasuries look overbought to us. With the forward multiple of the S&P 500 having fallen from 18.2 at the beginning of the year to 16.6 as of last Friday’s close a reappraisal of Treasury and equity prices stateside may be near at hand.
Last week we were asked repeatedly by clients, professional investors and the press as to what we’d be buying. We persist in favoring equities over bonds and within equities cyclical sectors over defensive sectors stateside. Among the S&P 500 sectors we find information technology, consumer discretionary, industrials and financials to be particularly attractive. At present time we favor and overweight US equities over international equities while maintaining meaningful exposure to both developed and emerging market international equities.
The current uncertainty as to what it will take and how long it will take to stem the spread of the virus calls for building shopping lists of “babies thrown out with the bath water” in last week’s sell-off.
A “back up the truck” moment is not at hand yet in our view but some dollar cost averaging could well be appropriate for longer-term experienced investors with a tolerance for risk that signals the existence of opportunity.
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. 2019.