11/04/2024 Market Strategy
- November 4, 2024
Right Sized vs. Great Expectations
We Think It’s Wise to Wait Out the Election Results than Place Bets Before the Outcome Is Known
Key Takeaways
- With 352 or 70% of the firms in the S&P 500 index having reported earnings thus far, results are showing a robust third quarter. Profits in Q3 overall were up 8.3% from a year earlier on 5.1% revenue growth.
- Eight of the 11 sectors have positive earnings growth, with four at double-digit rates. Three sectors are showing declining earnings, with two falling at double-digit rates.
- Last week brought a mix of economic data as the nonfarm payrolls report showed a gain of just 12,000 amid strikes and storms. The GDP report however, showed growth of 2.8% annualized in Q3 with the “core” GDP deflator showing inflation falling to just 2.2%.
- This week the election on Tuesday and the Fed’s FOMC meeting on Thursday are likely to be key focuses. Also in the mix are the ISM survey of services firms and the University of Michigan’s preliminary reading of consumer sentiment for November.
Expectations for drama in the markets on Tuesday night reported in the press as Election Day bears down upon us all are more likely in our view to risk investor disappointment and wrong way portfolio positioning --once the actual outcome is known.
We suggest investors with intermediate to long term goals consider practicing discipline, right-size their expectations of how the market will react to the outcome of the Presidential election and leave the drama of the moment for the fast money players and day traders.
While the talk among much of the Wall Street crowd seemed to suggest the market was pricing in a “Trump victory” over much of last week, every other opinion in the non-financial world seemed to be calling for a “photo finish” result to the Presidential election.
We remain of the view that the market ultimately cares about checks and balances created when election results have no one party controlling both the Senate and the House.
We remain of the view that the market ultimately cares about checks and balances created when election results have no one party controlling both the Senate and the House. Checks and balances as a result of differences of opinion at the Congressional level (sometimes dramatically termed “gridlock”) often have served in the past to serve to protect what investors care most about—a healthy economy for consumers and for revenue and profit growth for business.
A week to ponder if there ever was one
This week offers plenty for investors to ponder with Election Day on Tuesday, the Fed’s FOMC meeting interest rate decision on Thursday and a brace of economic data throughout the week that includes factory orders, balance of trade, ISM services, non-farm productivity, initial jobless claims and continuing claims along with Q3 earnings results for 101 S&P 500 companies.
Based on the non-farm payroll number for October reported last week our expectations are for the Fed to cut its benchmark rate by 25 basis points on Wednesday. The effects of the severe storms that hit the southeastern US last month appear to us likely to influence the Fed’s decision when it meets this week.
So far in Q3 earnings season for the S&P 500 352 of 500 companies have reported results. As of last Friday’s close eight of the eleven sectors showed positive earnings results with 4 sectors posting double-digit earnings growth (communications services +23.1%, consumer discretionary +21.7%, health care +12.7% and information technology +10.3%).
Three sectors showed negative earnings growth in the period (energy -20.2%, industrials -4.6% and materials -2.13%). (See page 10 of this report for details in our Earnings Scorecard).
We remain of the view that the market is likely to register a “sigh of relief” once the outcomes of the Presidential and Congressional elections are known. Following that, we think we could see a “honeymoon” rally through much of 2025 while the new Administration formulates its policy agenda.
The great election unknown and beyond
With early voting already having taken place in a number of states and with election-day here we summarize for investors what we expect could happen regardless of which party proves victorious in the election taking place.
In our view:
- As the political polls and pundits are saying this year’s contest is a dead heat to the finish we’d expect market reaction to an official outcome to be first and foremost a sigh of relief rally once the election results are known.
- Very important to both sides beyond who will be President of course will be which party controls either or both houses of congress.
- As a result some near term volatility could be expected post-election results as some investors ponder the immediate outcome and tweak and re-position portfolios.
- The year after the Presidential inauguration (2026) is when any material change in political and fiscal policy will likely begin to be felt and have real effect on the markets and Main Street.
- We recall the Trump inauguration year saw the S&P 500 rise 19.4% in 2017 as the markets pondered potential for less regulation and lower taxes. The maximum draw (decline from the S&P 500’s high point to a low that year) was 2.6%.
- In 2018 the S&P 500 shed 6.2% for the full year after the market had become concerned with a Fed tightening cycle that had begun in December 2015 and that ran until late December 2018 when the Fed pivoted policy. Worth noting the maximum drawdown that year was 19.8% experienced in the fourth quarter.
- Similarly in 2021 the Biden Presidential inauguration year was positive for equities with the S&P 500 gaining 26.9% on a substantial boost in fiscal policy that raised prospects for economic growth. Worth noting the maximum drawdown that year was 5.21%.
- In 2022 markets became concerned with inflation that reached 40-year highs and Fed policy that suggested monetary was “behind the curve.” The S&P 500 fell 19.4% in 2022 on recession risk as the Fed began to raise its benchmark rates. The maximum drawdown that year was 25.43%
- Longer-term statistics suggest that market performance during Republican and Democratic administrations is subject to a host of factors that have little to do with election year promises and more to do with the effects of what occurs and how those occurrences are responded on many levels some of which have very little and some times more to fiscal policy or other political drivers. Ultimately markets are driven by revenue growth, earnings growth, and innovation.
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.
DISCLOSURES
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.