08/05/2024 Market Strategy
Déjà Vu All Over Again
Last week’s equity market downdraft on back of the jobs data in our view likely provides opportunity for another rally
Key Takeaways
- We discuss last week’s sell-off based on a disappointing jobs number, which led to some concern about a “hard landing.” In our view such sell-offs can offer an opportunity to “catch babies tossed out with the bath water.”
- With 377 or 75% of the firms in the S&P 500 index having reported, earnings are up 11.1% from Q2:2023 on revenue growth of 5%.
- Seven of the 11 sectors show positive earnings growth, with six at double-digit rates. Three sectors show earnings declining from a year earlier, while the real estate sector is flat.
- This week brings the ISM survey of services firms and the earnings reports of another 78 firms in the S&P 500.
Last week’s bond and stock market action--and much of the negative commentary on broadcast interviews throughout the day-- appeared to us somewhat overdone and flawed.
From our perch on the market radar screen it looked to us that the selling was in no small part based on a shaky premise that the July payrolls gain released last Friday decidedly pointed away from a soft landing and ostensibly for a greater chance of a recession for the US economy.
Soured sentiment on the back of the disappointment with the employment gain (114,000 jobs added versus the consensus estimate for 175,000) managed to push bond prices and major US equity benchmarks into what are in our view respectively over-bought and over-sold conditions.
The Federal Reserve’s message since the end of last year has been that it is looking to cut rates this year as it gains confidence that it can do so without igniting a resurgent bout of inflation. That message apparently and not surprisingly fell on deaf ears among its detractors and doubters.
The sell-off that took place looked to us like the actions of a mix of bears—many of whom ironically had capitulated in droves throughout the first half of this year, nervous investors, and short-term traders who found catalyst as well in the reaction to the jobs number to take some profits without FOMO (fear of missing out).
A number of individual stocks that had been among the best performers in the market this year were among those that faced the brunt of the selling pressure.
The major indices while affected in the sell-off were not so hard hit due to their diversified structure across sectors and style (growth and value) than were individual stocks that had been “high fliers” in the first six months of the year. (See our charts on pages 8 and 9 for benchmark performances).
We note the irony in last week’s market drama as some folks had grown critical this year of the discipline of diversification versus holding heavily concentrated positions in just a few high flying stocks.
The downdraft also looked like a renewed effort by critics of the Fed—some of whom have a preference for high leverage—to try and push the Fed toward a policy pivot (rate cut) sooner than later. Previous efforts by these players to push the Fed to act has appeared to have had some success looking back to Q4 2018 and in the first quarter of 2022.
It’s often said that market memory can appear to be short, flawed and even non-existent particularly in times of transition like these. Based on the inherent volatility that the monthly jobs number has displayed in past revisions— sometimes better and sometimes worse—we would think it best for now not to jump to conclusions.
On Friday it was noted by a number of market participants that factors such as the recent hurricane in Houston, the release of the jobs number so early in the month along with other factors tied to data collection may have contributed to a messy period of data gathering in providing the first read for the month of July. Time and revisions will likely provide greater clarity.
Market expectations for a Fed rate cut in September as reflected in the futures market remain high. We expect this could add to volatility in the approach to the September FOMC meeting.
We note that with the Fed funds rate at 5.25– 5.50% monetary policy officials have ample dry powder to manage “the landing” in progress notwithstanding the criticism of its detractors.
It is our longstanding view that periods of transition like these can benefit not only short-term traders, options players, short sellers and other impatient money segments of the market but in the fracas that can ensue from near-term volatility generates unexpected opportunities for intermediate- and long-term investors with an eye for “babies that get tossed out with the bathwater,” a discipline to dollar cost average and a belief in the importance of prudent diversification.
Strategist Certification - The author certifies that this investment strategy report accurately states his/her personal views about the subject securities, which are reflected in the substance of this investment report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this investment strategy report.
The strategy provided in this report is provided by Oppenheimer Asset Management Inc., (“OAM”) a registered investment adviser affiliate of Oppenheimer & Co. Inc. (“OPCO”). It reflects analysis of fundamental, macroeconomic and quantitative data to provide investment analysis with respect to U.S. securities markets. The overview in this report is provided for informational purposes and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security or investment advisory services. The report is not intended to provide personal investment advice. The investments discussed in this report may not be suitable for all investors. Investors should use the analysis provided by this report as one input into formulating an investment opinion and should consult with their Financial Advisor. Additional inputs should include, but are not limited to, the review of other strategy reports generated by OAM, its affiliates, and looking at alternate analyses. Securities and other financial instruments that may be discussed in this report or recommended or sold by OPCO or OAM are not insured by the Federal Deposit Insurance Corporation and are not deposits or obligations of any insured depository institution. Investments involve numerous risks including market risk, counterparty default risk and liquidity risk. Securities and other financial investments at times may be difficult to value or sell. The value of financial instruments may fluctuate, and investors may lose their entire principal investment.
Strategist Certification - The author certifies that this strategy report accurately states his/her personal views about the subject matter reflected in the substance of this report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this strategy report.
Potential Conflicts of Interest: Strategic analysts employed by OAM are compensated from revenues generated by the firm. The strategists authoring this piece also contribute to an OAM managed portfolio product that relies on and trades on the information contained herein. The managed portfolio strategy trades frequently, both ahead of and after the publication of this report. OAM generally prohibits any analyst and any member of his or her household from executing trades in the securities of a company that such analyst covers. Additionally, OAM generally prohibits any analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% (or more) ownership positions in covered companies that are required to be specifically disclosed in this report, OPCO may have a long positon of less than 1% or a short position or deals as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon and makes a market in the securities discussed herein. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.
Third Party Research Disclosure OAM has a research sharing agreement with OPCO pursuant to which OPCO provides OAM Strategy thought pieces to its institutional and retail customers. OPCO does not guarantee that the information in OAM Strategy reports is accurate, complete or timely, nor does OPCO make any warranties with regard to the strategy product or the results obtained from its use. OPCO has no control over or input with respect to opinions found in OAM strategy pieces. OAM is a registered investment adviser affiliate of OPCO.
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. 2024.