1 The Market Strategy Radar Screen August 21, 2017 John Stoltzfus Chief Investment Strategist Oppenheimer Asset Management Jim Johnson Director Joseph Orsini Associate Director Key Takeaways President Trump’s comments last week raised concerns for future of agenda items. Market shed its gains from its earlier rally to close lower for the week. Haven assets and defensives post gains. Equity markets exhibit resilience as percentage of decline signals market’s ability to navigate volatility. Q2 earnings rose 9.2%, beating the consensus estimate of 6% ahead of the earnings season. The stock market stateside once again proved resilient in the face of challenges on the political and geopolitical fronts last week. After having navigated its way through North Korea’s threat of an attack on Guam the prior week, and then having recovered all of the ground it had lost and even moving higher, a third set of comments by President Trump on Thursday related to the tragedy in Virginia in the prior week triggered adverse reaction from the President’s opponents as well as from many of his supporters. An increased level of concern about what was said and how it was said reverberated quickly through the media, Main Street America, social media, and the markets stateside and abroad. Then a series of horrific terrorist attacks in Catalan, Spain last week further shook the world and the markets. In turn, the VIX spiked, stocks sold lower and risk-off assets, including bonds, gold, and defensive stocks, advanced. From Thursday through the weekend, proponents of the bear case for the equity markets predicted the end of the bull market, citing dysfunction in Washington, late cycle market indicators, valuations, and anecdotal references of signposts which have served (in market hindsight) as precursors of past declines in earlier bull markets. One bearish commentator called investors’ attention to the fact that the Dow Jones Industrial Average saw its biggest one-day drop in three months (a slide of 274 points) on last Thursday. Another source said that last week’s decline in the markets had “overwhelmed bullishness.” From our perspective on the Market Strategy Radar Screen, a decline of 274 points in the Dow last Thursday needs to be taken in context of what it is—a decline of 1.24% with the benchmark closing that day at a level of 21,750.73. The percentage of that decline tells us that the market essentially acknowledged what was happening but was quick to discount and digest the bad news. Commentary and prognostication that key administration personnel might be considering resigning their posts, along with concerns that the President’s style of leadership and management might endlessly delay enactment of key agenda items (such as tax reform, repatriation of profits held abroad by US corporations and infrastructure spending) that might have found support from both sides of the aisle ahead of midterm elections next year, all added to the uncertainty through the second half of last week and through the weekend. “From our perspective as investment strategists, we were impressed with the market’s resilience in light of the strong reaction to the week’s events.” Ain’t No Cure for the Summertime Blues Political drama and terrorist attacks raise concerns but don’t take the market hostage
Transcript
1
The Market Strategy Radar Screen August 21, 2017
John Stoltzfus Chief Investment Strategist Oppenheimer Asset Management Jim Johnson Director Joseph Orsini Associate Director
Key Takeaways President Trump’s comments last week raised concerns for future of agenda
items.
Market shed its gains from its earlier rally to close lower for the week. Haven assets and defensives post gains.
Equity markets exhibit resilience as percentage of decline signals market’s ability to navigate volatility.
Q2 earnings rose 9.2%, beating the consensus estimate of 6% ahead of the earnings season.
The stock market stateside once again proved resilient in the face of challenges on the political and geopolitical fronts last week. After having navigated its way through North Korea’s threat of an attack on Guam the prior week, and then having recovered all of the ground it had lost and even moving higher, a third set of comments by President Trump on Thursday related to the tragedy in Virginia in the prior week triggered adverse reaction from the President’s opponents as well as from many of his supporters.
An increased level of concern about what was said and how it was said reverberated quickly through the media, Main Street America, social media, and the markets stateside and abroad. Then a series of horrific terrorist attacks in Catalan, Spain last week further shook the world and the markets. In turn, the VIX spiked, stocks sold lower and risk-off assets, including bonds, gold, and defensive stocks, advanced.
From Thursday through the weekend, proponents of the bear case for the equity markets predicted the end of the bull market, citing dysfunction in Washington, late cycle market indicators, valuations, and anecdotal references of signposts which have served (in market hindsight) as precursors of past declines in earlier bull markets. One bearish commentator called investors’ attention to the fact that the Dow Jones Industrial Average saw its biggest one-day drop in three months (a slide of 274 points) on last Thursday. Another source said that last week’s decline in the markets had “overwhelmed bullishness.”
From our perspective on the Market Strategy Radar Screen, a decline of 274 points in the Dow last Thursday needs to be taken in context of what it is—a decline of 1.24% with the benchmark closing that day at a level of 21,750.73. The percentage of that decline tells us that the market essentially acknowledged what was happening but was quick to discount and digest the bad news.
Commentary and prognostication that key administration personnel might be considering
resigning their posts, along with concerns that the President’s style of leadership and
management might endlessly delay enactment of key agenda items (such as tax reform,
repatriation of profits held abroad by US corporations and infrastructure spending) that
might have found support from both sides of the aisle ahead of midterm elections next
year, all added to the uncertainty through the second half of last week and through the
weekend.
“From our perspective as investment strategists, we were impressed with the market’s resilience in light of the strong reaction to the week’s events.”
Ain’t No Cure for the Summertime Blues Political drama and terrorist attacks raise concerns but don’t take the market hostage
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Radar Screen
From our perspective as investment strategists, we were
impressed with the market’s resilience in light of the strong
reaction—including the numerous resignations by business
leaders from the President’s business councils as a result of
his remarks last Thursday.
With all the drama in last week’s news (and much of it quite
legitimate in our opinion), the S&P 500 closed off just 0.65%
on the week. In the latest 12-month period and in the year to
date, the S&P 500 has advanced respectively through last
Friday’s close 10.91% and 8.34%.
As we went to press late Sunday, global futures were
modestly but broadly lower.
In the week ahead, we expect the market will likely further
digest the political and geopolitical issues at hand near term
but find its more meaningful catalysts for its next substantive
moves in the weeks and months ahead from monetary policy,
economic data, and revenue and earnings results.
Stay tuned.
Expectations for a Fed rate hike in December rebound
Probability of Rate Hike at the Dec. 13 FOMC Meeting
Source: Bloomberg, OAM Research. Bloomberg’s WIRP calculates the implied probability of a rate hike using differentials in the forward yield curves.
The strong retail sales figures for July helped boost forward expectations for a rate hike by the Federal Reserve at its December meeting. As of Friday, Bloomberg calculated that a 35.7% probability was priced into the forward yield curve, up from a low of just 25.5% for the month on August 11.
The week ahead
This week, investors will be focused on a number of key items on the economic calendar even as the summer holiday prevails for many.
Monday:
The Chicago Fed National Activity Index. Wednesday:
July new home sales;
Dallas Fed President Robert Kaplan participates on a panel.
Thursday
Existing home sales;
Initial jobless claims. Friday
Durable Goods Orders for July;
Fed Chair Janet Yellen will headline the Kansas City Fed’s annual Economic Policy Symposium in Jackson Hole, WY, speaking on “Financial Stability.”
ECB President Mario Draghi is scheduled to speak in the afternoon meeting at Jackson Hole.
94.1%
92.0%
97.3%
86.6% 87.6%
94.2%
51.6%
38.7%
25.5%
35.7%
0%
20%
40%
60%
80%
100%
120%
Aug 11
Aug 18
Market Suggested
Sector Weight Allocation Rating*
Information Technology 23.2% 20.5% O
Financials 14.5% 14.9% P
Health Care 14.3% 14.0% O
Consumer Discretionary 12.1% 13.6% O
Industrials 10.1% 11.5% O
Consumer Staples 8.8% 9.5% P
Energy 5.7% 6.0% U
Utilities 3.3% 2.0% U
Real Estate 3.0% 2.5% P
Materials 2.9% 3.5% O
Telecommunications 2.2% 2.0% U
O=Outperform; P=Perform; U=Underperform
S&P 500 Sector Weightings
*Ratings based on our expectation of the performance of the sector relative to the overall
index (S&P 500)
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Radar Screen
Key Economic Indicators Released Last Week
Retail Sales (Advanced Estimate)
Source: U.S. Census Bureau, Oppenheimer Asset Management Research and Bloomberg LP.
Housing Starts
Source: U.S. Census Bureau, Oppenheimer Asset Management Research and Bloomberg LP.
-4%
-2%
0%
2%
4%
6%
8%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
Jul-
15
Aug-1
5
Sep-1
5
Oct-
15
Nov-
15
Dec-
15
Jan
-16
Feb-1
6
Mar-
16
Apr-
16
May-1
6
Jun
-16
Jul-
16
Aug-1
6
Sep-1
6
Oct-
16
Nov-
16
Dec-
16
Jan
-17
Feb-1
7
Mar-
17
Apr-
17
May-1
7
Jun
-17
Jul-
17
MoM (Left Axis)
YoY (Right)
400
500
600
700
800
900
1000
1100
1200
1300
1400
Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
Data on retail sales suggest a strong start for third-quarter economic growth. Sales in July grew 0.6% from June’s, twice the gain of the consensus estimate. In addition, data for the prior two months was revised upward. The July gain brought the YoY growth rate to 4.2%, a significant jump from the 3.4% rate of the prior month. With consumer price inflation decelerating in recent months, these gains should translate into stronger real GDP gains. Given steady jobs growth and high levels of consumer confidence (both in surveys and evident from a decline in the savings rate), these data suggest that the third quarter may mark a reacceleration in US economic activity.
Housing starts fell 4.8% on a seasonally-adjusted basis in July from the prior month’s, a much weaker result than the 0.4% gain expected in Bloomberg’s consensus survey. Building permits’ issuance (a leading indicator of future housing starts), moreover, fell 4.1% over the same period, a deeper drop than the 2.0% decline expected by the consensus average.
This decline is disappointing and puzzling, given other indicators that point to a tightening housing market with the supply of existing homes for sale at quite low levels and prices rising strongly in many key metro areas. Amid reports of worker shortages in the construction sector, we remain of the view that starts will rise in the coming months.
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Radar Screen
Second-Quarter 2017 Earnings Scorecard
Exhibit 1
Source: Oppenheimer Asset Management Research and Bloomberg LP.
Exhibit 2
Source: Oppenheimer Asset Management Research and Bloomberg LP.
Earnings Scorecard
Source: Oppenheimer Asset Management Research and Bloomberg LP
-20%
-10%
0%
10%
20%
30%
40%
50%
Earnings Growth Y/Y
2Q17 1Q17
-5%
0%
5%
10%
15%
Sales Growth Y/Y
2Q17 1Q17
Reported Total % Reported Positive Negative Positive Negative
All Securities 473 500 95% 373 95 344 116
Energy 32 32 100% 28 3 23 8
Materials 26 26 100% 19 7 18 7
Industrials 68 68 100% 58 9 49 18
Consumer Discret. 69 80 86% 48 21 42 25
Consumer Staples 29 35 83% 19 10 21 8
Health Care 58 61 95% 48 10 43 13
Financials 66 66 100% 56 9 60 6
Information Tech. 60 67 90% 48 11 46 13
Telecoms 4 4 100% 2 2 3 1
Utilities 28 28 100% 23 5 16 10
Real Estate 32 32 100% 24 8 23 7
Sales Growth Earnings Growth
With just under 95% of the companies in the S&P
500 index having reported 2Q earnings, Bloomberg
data shows corporate earnings rising 9.3% overall
on 5.3% growth in revenues.
Energy sector earnings thus far in the quarter are
one of the largest contributors to overall results.
With all 32 firms in the Energy sector having
reported, their earnings were up 210% (from very
low year-ago figures) on a 15.8% rise in revenues.
Excluding the energy sector, earnings for the
remaining 467 companies in the S&P 500 would be
up 7.3% on revenue growth of 4.4%.
After energy, information technology is the next-
strongest sector for earnings growth. The 60 firms
(of a total of 67) that have reported have recorded
an increase of 14.8% in earnings on a revenue
gain of 8.7%.
Of the 11 sectors, only telecom has recorded an
earnings decline from a year earlier. Price
competition remains fierce in the sector.
Around 78% of firms that have reported have
posted positive earnings surprises.
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Radar Screen
The S&P 500 and Sector Performance S&P 500 GICS Sector Returns: Aug. 11th to 18th, 2017
Source: Oppenheimer Asset Management Research and Bloomberg LP. Note: Results cannot and should not be
viewed as an indicator of future performance. Return calculations exclude applicable costs. Defensive sectors, which
are less sensitive to economic growth cycles, include Consumer Staples, Utilities, Health Care and Telecoms.
S&P 500 GICS Sector Returns: Year to Date
Source: Oppenheimer Asset Management Research and Bloomberg LP. Note: Results cannot and should not be
viewed as an indicator of future performance. Return calculations exclude applicable costs.
Domestic and International Index Performance: Aug. 11 to 18th, 2017
Source: Oppenheimer Asset Management Research and Bloomberg LP. Note: Results cannot and should
not be viewed as an indicator of future performance. Return calculations exclude applicable costs.
Domestic and International Index Performance: Year to Date
Source: Oppenheimer Asset Management Research and Bloomberg LP. Note: Results cannot and should
not be viewed as an indicator of future performance. Return calculations exclude applicable costs.
-0.6%
-1.1%-1.2%
-0.6%
0.4%
0.0%
1.6%1.4%
-2%
-1%
0%
1%
2%
S&P 500 S&P 400Midcap
Russell 2000 NASDAQComposite
Index
MSCI AllCountry
Except US
MSCI EAFEDeveloped
Markets
MSCIEmerging
Markets
MSCIFrontier
Markets
8.3%
1.9%
0.0%
15.5% 15.2%13.8%
22.9%
16.9%
-5%
0%
5%
10%
15%
20%
25%
S&P 500 S&P 400Midcap
Russell 2000 NASDAQComposite
Index
MSCI AllCountry
Except US
MSCI EAFEDeveloped
Markets
MSCIEmerging
Markets
MSCIFrontier
Markets
US investors remained in “risk off” mode,
selling the small-and mid-caps more
heavily than the bellwether S&P 500
stocks.
Foreign markets fared better. Foreign
developed markets, as represented by the
MSCI EAFE index, were flat but with a
positive bias. The MSCI Emerging Markets
index (priced in US dollars) rose 1.6% while
the MSCI Frontier Markets index added
1.4%.
International markets have posted
double-digit gains from the start of the
year. The MSCI Emerging Markets Index
has outperformed both international and
stateside peers. A substantial portion of
foreign market gains has come from
currency when results are translated into
US dollar terms. The dollar has declined
year-to-date through last Friday against
all G-10 currencies and 21 of 24 major
emerging market currencies.
Among US market segments, large-caps,
which have greater exposure to
international markets, have
outperformed mid-caps and small-caps
partly on the weakness of the dollar,
which adds to the competitiveness of US
multinationals.
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Radar Screen
Where We Stand: August 2017
We increased our price target for the S&P 500 in 2017 to $2,650 on July 31 from $2,450 previously. We place a P/E multiple of 20.5x on our upwardly revised 2017 EPS estimate of $129 to derive that target.
We look for the dollar’s strength (which has hurt US multinationals’ competitiveness abroad and trimmed revenue and earnings growth) to continue to moderate this year as Brexit worries and inflation fears tied to future stimulus ease.
As worries surrounding China’s economy ease and as its official response to currency and growth issues becomes better defined, we look for international emerging markets to garner further favorable attention from investors.
Secular trends are likely to support emerging markets beyond current market worries over trade treaty prospects.
We continue to broadly favor cyclical over defensive sectors in the near and intermediate term.
We continue to favor an alpha (active investment approach to investment) over a beta (passive index investment) approach.
We suggest investors consider a core-satellite approach that uses individual securities and actively managed portfolios as satellites around a core of ETFs/or index funds, strategically allocated and tactically weighted, thus hedging alpha picks with beta selections.
We remain market cap-agnostic, favoring exposure distributed among large-, mid- and small-cap stocks in making stock-specific and sector index-specific allocations.
We suggest selective exposure to small- and mid-cap stocks or their respective indices as larger companies continue to show preference for growth via acquisition over organic growth and as M&A persists as a market thematic.
Our favorite sectors to overweight versus the benchmark remain Consumer Discretionary, Industrials, Materials and Health Care. While we expect Information Technology to outperform, we suggest an equal weight to
the benchmark as it represents the largest weighting in the index.
We maintain a market weight versus the benchmark on Financials and Consumer Staples; we remain underweight Utilities, Telecoms and the Energy sector.
We expect the ECB’s deployment of QE in the EMU ultimately to prove successful in returning the region to growth. Signs of improvement continue to surface in economic data, earnings and gauges of sentiment in the region even as challenges persist.
We expect bond yields to continue a process of normalization that began in 2013, taking yields by year end modestly higher as economic growth reasserts itself and increasingly shows sustainability.
We expect inflation to be kept in check as the economy reflates with the potential for at least some fiscal stimulus, oil prices staying relatively low, wage growth remaining restrained by globalization, algorithms and robotics pressuring wage growth, and as corporations stay focused on cost containment in a competitive environment.
We believe lower oil prices will prove a longer term as well as near-term boon to energy import-dependent developed, emerging and frontier economies.
Initiatives to reduce government fuel subsidies to fund infrastructure and promote economic diversification and fiscal reform have already begun to produce positive results in some emerging economies.
In contrast, drastically lower oil prices have led to the destabilization of governments in some nations dependent on energy exportation, particularly the Middle East and in Africa.
Secular trends are likely to continue to support emerging markets and frontier markets.
John Stoltzfus
Chief Investment Strategist
Oppenheimer Asset Management
August 21, 2017
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Radar Screen
The MSRS Global Asset Allocation
Source: Oppenheimer Asset Management Research.
Equities
US: For 2017, we look for the S&P 500 to generate earnings of around $129 per share, on which we place a P/E multiple
of 20.5x to arrive at a price target of $2,650 for the benchmark in 2017. We base our target on our expectations for a
combination of earnings growth and multiple expansion as interest rates normalize moderately and as investors pay
more for each dollar of earnings growth. We believe that US equities can remain in bull market mode as
fundamentals tied to the domestic economy continue to improve. We reiterate an overweight exposure to US equities
and expect sustainable growth stateside to lead regions outside the US in recovery even as currency devaluations
and geopolitical tensions remain risks.
EAFE: As an improving economic outlook in Europe re-emerges along with some progress in Japan via “Abe economics,”
we expect developed markets outside the US to regain popularity among investors. Lower forward valuations in
Europe and Japan offer attractive potential upside as the global economy recovers, in our view.
EM/FM: We remain positive toward emerging markets and frontier markets as the global economic recovery moves ahead.
We believes improvements in emerging economies coupled with secular consumer trends warrant a weight equal to
that of developed market counterparts.
Fixed Income
US: We recommend that investors keep durations “in” (short- to mid-term) as interest rate normalization is under way
though at a modest pace. Normalization is a process of price discovery by the markets in conjunction with monetary
policy; it tends not to move in a straight line as much as it ratchets its way higher.
EAFE: With ECB QE a little more than a year under way, European bonds are traveling along their own path of price
discovery and are currently affected by a number of negative interest rate situations, increasing the likelihood of
volatility at some point in the future when Europe is able to normalize.
EM/FM: Emerging market interest rates have recently regained the attention of global investors hungry for yield. We remain
underweight emerging market debt as a result. We also currently avoid exposure to frontier market debt, as to us, the
capture of higher yields is not commensurate with the added risk (higher volatility).
Stocks, 68%
Bonds, 20%
Global Commodities, 0%
Alternatives, 5%Real
Estate, 5%
Cash & Cash Equivalents, 2%
Asset Class Total
Percent
of
Portfolio
S&P 500 33%
S&P 400 33%
S&P 600 33%
EAFE 55% 13%
EM 38% 9%
Frontier 9% 2%
Intermed. Munis 45% 9%
U.S. Convertibles 30% 6%
IG Floating Rate Notes 10% 2%
Senior Loans 15% 3%
Commodities 0% 0%
Alternatives 5% Global 100% Timber 100% 5%
Real Estate 5% Global 100% REITs 100% 5%
Cash 2%2%
Regional Market
Bonds 20% US 100%
Stocks 68%
US 65%
Asset by
Region
Int'l 35%
44%
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Radar Screen
Global Commodities
Although demand for commodities should improve as global growth recovers, improvements in extraction technology and ample supplies continue to broadly weigh on prices and have indeed caused prices of many commodities to drop precipitously. We prefer and would continue to gain exposure to commodities via “proxy” with equities in the Materials
sector.
Alternative Investments
Alternative investments come in a wide variety of offerings that include timber, farmland, derivatives, structured
products, venture capital, private equity and hedge funds. The degree to which they are deployed depends on an
investor’s or entity’s needs, objectives and tolerances. The amount assigned to alternatives can be increased by
reducing exposure to another asset class. Often alternatives can serve as proxies for another asset class depending
on structure and/or correlation.
Real Estate
For US investors, we’d maintain selective US and international exposure to real estate. Those with significant
exposure via direct purchases (e.g., second homes, rental properties) could forgo REITs in favor of additional
exposure to equity sectors.
Cash
We recommend investors maintain a small allocation to cash (“dry powder”) for opportunistic buying on dips and for
rebalancing.
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Radar Screen
Positions on the Radar Screen
US Treasuries Yields 8/18/2017 8/11/2017 BPs Chg BPs Chg YTD
US 2-Year 1.31% 1.30% 1 bps 26 bps
US 5-Year 1.76% 1.74% 2 bps 0 bps
US 10-Year 2.20% 2.19% 0 bps -8 bps
US 30-Year 2.78% 2.79% -1 bps -24 bps
Major Indices 8/18/2017 % Chg Wkly % Chg YTD
Dow Jones Industrial Average 21,674.51 -0.84% 9.67%
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