09/09/2024 Market Strategy
- September 9, 2024
Beware of Darkness
We Suggest Investors Avoid Jumping to Negative Conclusions During Times of Transition
Key Takeaways
- With earnings season all but wrapped up, investors will turn their attention to the first indicators of inflation pressures in August with the CPI and PPI reports due this week.
- With 99% (or all but two) of the firms in the S&P 500 index having reported, earnings are up a robust 11.6% from Q2:2023 on revenue growth of 5.3%.
- Nine of the 11 sectors showed positive earnings growth with five at double-digit rates. Just two sectors showed earnings declining from a year earlier.
- We discuss the likely size of the rate cuts at the September 18 FOMC meeting and argue that the conditions don’t warrant a dramatic move of 50 basis points. We expect the Fed will cut by 25 bps.
Looking for drastic changes in policy in terms of cutting rates at this juncture appears to us to be uncalled for.
A second month of US job growth that disappointed the market last week along with downward revisions to prior months sent stocks lower and raised angst near term as to the Fed’s rate decision later this month.
A strong rally in stocks from August 5 through the end of August met head on with bears, nervous investors, and skeptics once again finding a near-term catalyst to sell stocks and take some profits without FOMO (fear of missing out)--in what in our view is and will be in hindsight--a bull market that has surfed a wave of considerable success thus far as a result of the Fed’s success in curbing the pace of inflation and better than expected revenue and earnings growth among the sectors of the S&P 500 in the most recent and two prior earnings seasons.
Our bullishness is not deterred by near-term disappointments in economic data tied to job growth and manufacturing activity. Positive growth in services and resilience reflected in consumer and business data suggest the transitional process to normalization of interest rates continues to reflect the Fed’s sensitivity in managing its dual mandate with considerable success.
The dynamics of change in monetary policy are seldom easy to digest for the markets and their participants. It’s not unusual for the Fed’s detractors to predict policy failure.
Spikes in volatility in stocks after relatively long periods of low volatility are not uncommon if one considers what lies in the rearview mirror over the last 5, 10, 20, 30 and more years of market history. (See our maximum drawdown tables on pages 11 to 12 in this report).
Then there’s the US election growing closer by the day with long lists of questions about policy and election year promises yet to be addressed.
Prospects of what is likely to follow any change in life or the markets are seldom welcome without some degree of worry and negative projection.
Consider the Great Financial Crisis, the Covid19 pandemic, the supply chain challenges and the recovery process of each upheaval during which many could not envision the economic or market recoveries that came to pass.
In times of greater than usual uncertainty we have found it important for professional and private investors to right size expectations, consider opportunities for dollar cost averaging and look for “babies that get tossed out with the bath water” (quality stocks that get caught in market downdrafts). Diversification among and within asset classes can help navigate turbulence and position to keep on course.
Investors in our view always need to know their perspectives: are they short term investors? Intermediate to long term investors? Or a combination of two or all three types contained in a broadly diversified portfolio with consideration of their experience and tolerance to risk.
In our view the probability of a 25 bps cut on September 18 is more likely after last week’s data. The economy in our view does not appear to be slowing at such a pace to suggest that a recession is at hand or lies around the corner. The number of posted jobs to be filled (the JOLTS index), the number of jobs added in August along with the unemployment rate in our view point to moderate cuts in interest rates as the Fed begins the process of “easing up on the brakes” of tighter monetary policy that it has deployed since March of 2022.
Looking for drastic changes in policy in terms of cutting rates at this juncture appears to us to be uncalled for.
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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