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08/12/2024 Market Strategy

  • John Stoltzfus
  • August 12, 2024

Easier Said than Done

Moving to an End of a Period of Tight Monetary Policy Isn’t Always a Smooth Journey

Key Takeaways

  • We’ve updated our maximum annual drawdowns page to show the 2024 sell off, which sent the S&P 500 down 8.49% from July 16 to Aug. 5. The downdraft is smaller than the maximum annual declines of 2022 and 2023 (of 25.43% and 10.28% respectively).
  • With 455 or 91% of the firms in the S&P 500 index having reported, earnings are up 9.3% from Q2:2023 on revenue growth of 5%.
  • Eight of the 11 sectors show positive earnings growth with five at double-digit rates. Three sectors show earnings declining from a year earlier.
  • This week brings the first indications of July inflationary pressures in the PPI and CPI reports as well as the first reading on July consumer demand with the retail sales report. Earnings season is winding down with just nine firms in the S&P 500 due to report this week. 

The recent volatility seen in the equity markets reminds us that emotion, sentiment, and day to day shifts in views have as much if not more of a key role in the direction the prices of asset classes take than does the math that market participants labor over.

At times the differences in opinions between bulls and bears seems to us as wide as those of the political views that exist in the political realm stateside and elsewhere around the world with similar degrees of passions.

Quotation from Aenean Pretium

The prior two earnings season results, like the current one, surprised to the upside with positive earnings growth countering bearish predictions of an earnings recession.

This week brings economic data tied to inflation, employment, unemployment, wages, housing and business conditions reported for several of the Fed’s regional banks, along with a few more Q2 earnings results. All this information in aggregate should provide increased clarity as to the when and by how much the Fed might to cut rates.

The futures market has priced in a high level of probability for a 25 basis point cut in the benchmark rate at its September 18 meeting. This has been accompanied by an improvement in market sentiment towards equities, helping the S&P 500 regain some of the ground it gave back from its most recent all-time high on July 16. As of Friday, Aug. 9, the S&P was off 5.7% from the mid-July high.

Bonds have seen yields rise and prices fall as the market appears to recognize that a dramatic cut of 50 basis points is unlikely and perhaps not needed as recently thought given the uptick in last week’s ISM services indexes.

Earnings Growth Has Been Supportive for Stocks

The prior two earnings season results (Q4:23 and Q1:24), like the current one, surprised to the upside with positive earnings growth countering bearish predictions of an earnings recession. Current results in the Q2 S&P 500 earnings season have added additional positive offset to the bearish viewpoint with earnings up some 9.3% with some 91% of companies having thus far reported.

As the second quarter earnings season winds down we look for the market to grow increasingly focused on economic data, comments from officials at the Fed, geopolitical tensions and domestic policy talk, which is to be expected as the calendar moves closer to the US Presidential election.

We remain positive on equities with expectations for a continued broadening of the rally that emerged from the lows last October.

We persist overweight US equities while maintaining some meaningful exposure to international developed and emerging markets as the US central bank moves towards easier policy on greater confidence that its efforts to put untoward levels of inflation in check have been or are near being met. Volatility is to be expected as the economy and the markets navigate economic and monetary policy transition and move towards greater normalization.

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Name:

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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