Market Strategy 3/02/2020
- March 2, 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.
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.
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.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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