07/15/2024 Market Strategy
- July 15, 2024
As the World Turns
Shocking Events Tend Not to Deter Investors, Who We Expect Will Remain Focused on Economic and Earnings Results
Key Takeaways
- We were shocked by the attempt on former President Trump’s life but suspect that markets will digest the news quickly and with little fanfare.
- We continue to expect the Fed to wait until the fourth quarter before cutting rates. The futures market, however, has priced in a 90% probability of a 25-basis point cut in September.
- Earnings season kicked off last week with 26 companies of the S&P 500 reporting. While it’s still too early to make much of the initial results, the four large banks that reported showed little income growth despite double-digit revenue gains.
- This week 45 more firms in the S&P 500 issue results. Economic data on tap includes retail sales, housing starts, building permits, and the Leading Indicator.
As market strategists, we were asked by several members of the financial press on Sunday what effect the heinous attack on former President Trump on Saturday (which wounded him, killed one supporter, and critically injured two others attending the rally in Butler, Pennsylvania) would have on the markets as they opened this week.
Our extemporaneous response was that we thought regardless of the humanitarian shock the event had on individuals attending the Republican rally, others across the country and around the world in digesting the news it would likely have little effect on markets stateside and around the world.
The hotter than expected producer price report looked to us to provide the Fed an opportunity to keep to its pause mode on rates until November...
Why is that? In our view markets today are accustomed to digesting and discounting horrific occurrences driven by terrorist actions, the actions of despots as well as natural disasters in a digitalized world in which both good news and bad news travels instantaneously and are quickly contemplated and then discounted by market participants as to their effect on day to day life, supply and demand, inflation, the economy and on asset prices.
Such a view of the markets is not saying that investors are heartless but rather that they are practical in digesting what occurs in a world that has always been uncertain and is likely to remain at times chaotic.
In our view the markets’ approach in judging events such as assassinations, foiled assassinations, declarations of war, illegal military incursions and terrorist driven events begins with elevated concern and concludes with the premise that bad things happen as well as good things.
That said, market response to events that occur outside of hours when trading is underway in our experience is ultimately tied to what effect an event (good or bad) will likely have on prospects for revenue and earnings growth and subsequently on the valuations ascribed to multiple asset classes by market participants.
As we prepared to go to press this Sunday markets around the globe appeared relatively calm if not sanguine in contrast to how upsetting the news of the attack and the effect of the attack itself emotionally on the citizens of the US regardless of where they sit politically.
Where Are We Now?
Last week saw the current stock market rally broaden further on a belief that a better than expected CPI number (released last Thursday) suggested the Federal Reserve might be able to begin to cut interest rates as soon as September. The probability for a September cut by the Fed measured by futures markets jumped as high as 90% last week from an earlier probability of 70%.
The producer price figures released the next day however, came in higher than expected and seemed to us to suggest that the Fed might well remain on pause until after the election. The hotter than expected producer price report looked to us to provide the Fed an opportunity to keep to its pause mode on rates until November providing less risk of an inflation resurgence as well as less opportunity for Fed critics to question the central bank’s independence should it cut rates before the presidential election.
The Shape of Things to Come
With current levels of resilience exhibited by business, the consumer, and job postings in data released recently as well as the level of stickiness that remains apparent in some economic data, we persist with a view that the Fed will extend its pause mode through September and be more likely to cut rates in November and then again in December as a “down payment” to Main Street and Wall Street on the shape of things to come.
In this week we look for the markets to focus on economic data scheduled for release along with Q2 S&P 500 earnings results and developments at the Republican National Convention, which begins today in Milwaukee, Wisconsin.
We remain positive on equities and continue to see fixed income securities as complimentary to stocks in providing portfolio diversification.
Some near term profit-taking in the day to day action of the market particularly in segments of the market that have had exceptional run-ups since last year into this year should be expected and continues to appear to us quite normal.
Such activity combined with a process of rebalancing and rotation into other segments of the stock market, in our view, can be healthy and should contribute to the broadening of the markets’ progress that began last year and become more evident in the second half of this year.
Economic and market transitions require patience and conviction of investors during periods when markets can churn from day to day as short term traders move in and out of positions and asset classes seeking short term gains.
Near term volatility could in our view continue to present opportunity for investors to “catch babies that get thrown out with the bath water” in periods of market down drafts as the market digests levels of uncertainty that are not uncommon to times of transition in monetary policy like these and in periods of elevated geopolitical risk.
In our view last week’s stellar performance by small cap and mid cap stocks could be challenged and come into question should the Fed not cut in September postponing a more sustainable rally in small and mid-cap stocks until later this year post election day.
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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