Ain’t No Cure for the Summertime Blues
By John Stoltzfus,
Chief Investment Strategist
What Are the Markets Telling Us?
Relative asset class performance last week signals rotation remains in progress among equities.
International equity performance picked up again to broadly beat US stocks by a fairly wide margin last week even as US markets managed to edge higher.
From our perch on the market radar screen it looked to us that an increase in political noise around the administration’s tax reform proposal had introduced questions on the likelihood of the proposal getting to see the light of day anytime soon—if ever.
By week’s end the dollar was weaker (against all ten of the G-10 currencies and 18 of 24 emerging market currencies), the 10-year Treasury yield had slipped (to 2.27% last Friday from 2.36% the prior Friday) and the S&P 500 was outperforming the Russell 2000 and the S&P 600 (small caps) for the week and from the start of the fourth quarter.
A relatively strong headline CPI number (up 2.2% in September from a year earlier) showed food and energy provided a boost to consumer price inflation, while the core figures (excluding food and energy) remained subdued at 1.7% YoY, the same as in August. With food and energy prices boosted by storm-related shortages and distribution disruptions tied to the hurricanes (a near-term effect expected to ease in time), the core CPI signaled reflation remained modest.
Retail numbers looked strong but similarly were taken to reflect the effects of storms and thus boosted by replacement shopping by home owners and businesses.
A positive offset to the effects of the storms came from the University of Michigan’s preliminary consumer sentiment index for October which jumped to 101.1—its highest level since the beginning of 2004. Sentiment for October exceeded consensus expectations for a flat reading from the prior month (95.0). The read on sentiment likely helped provide some relief even as growth remained modest and tax reform appeared further in the distance than it had in a while.
We suggest investors remain patient while politicians negotiate the issues surrounding tax reform. We see 2018 mid-term elections as potential catalysts for politicians from both sides of the aisle to find enough points to agree on to deliver at least a tax cut for corporations and a smaller tax cut for individuals. The electorate has spoken via their votes to all parties akin to the adage, “Don’t just stand there—do something!” Gridlock will likely subside to the extent that some action on taxes will be taken.
“We believe last week’s decline in the financials had less to do with disappointing results in any one particular name and more likely was related to reduced expectations for reflation in the economy”
In the meantime Q4 earnings season has gotten under way and stocks look poised to deliver enough surprises to warrant equities’ further upside in the weeks ahead.
Earnings season got under way last week as several of the major banks reported results that were mixed—reflecting the differences among the companies reporting. The financial sector’s performance was the second worst performing of the underlying benchmark’s eleven sectors last week—declining just under 1%. We believe last week’s decline in the financials had less to do with disappointing results in any one particular name and more likely was related to reduced expectations for reflation in the economy. Banks had rallied ahead of Q3 earnings season on prospects that banks and finance firms would be among the biggest beneficiaries of tax reform with their businesses predominantly based in the US and having fewer ways of reducing taxes than other sectors have.
A 30th Anniversary on October 19th
This week investors will likely be reminded repeatedly of the 30th anniversary of the stock market crash of October 19, 1987. Having experienced that day as an investment professional we will never forget the day the Dow Jones Industrial Average dropped more than 22% in one day. At the time we worked for another firm on the Street a few blocks west of the NYSE (New York Stock Exchange).
We can recall thinking, “this isn’t supposed to happen… wasn’t the Glass-Stegall Act of 1933 supposed to prevent something like this?” But it did happen. At the center of the crash of 1987 was a confluence of factors that included monetary policy, market interest rates, the dollar, commodities, stocks and bonds. US GDP in 1987 was a little over $8 trillion compared to over $18.5 trillion today. The world was in an earlier stage of globalization—yet to be turbo charged and refined by modern technology.
We also recall that in an office of over 50 investment professionals at 5 World Trade Center there were only two television sets. We remember that in 1987 while there were weekly and even daily financial news shows on television, there were no dedicated financial news channels as there are today. Real time financial news was hard to come by back then.
We also recall many other details from that day but suffice it to say technological developments in business and in the consumer space have changed so dramatically since then that one might say comparing today’s access to news and specifically market information and data to that time is akin in our opinion to comparing an early Model T-Ford to a 2017 Chevy Corvette.
From a cyclical low of 776.92 on August 12th 1982 the Dow Jones Industrial Average had risen to a then record level of 2,722.42 on August 25th of 1987.
From that level the benchmark had moved lower over the proceeding months into October.
The yield on the US 10-year Treasury moved from 7.22% on December 31, 1986 to a high of 10.23% on October 15, 1987 (an increase in yield of over 40%).
On the 19th of that month the index fell 508 points (22.6%) to close at 1738.74. A recovery process began thereafter that led to the market exceeding its prior cyclical high of 2,722.42 from August of 1987 in late August of 1989.
The Dow Jones Industrial Average has since that era enjoyed better times and weathered what we would consider even more severe times.
Last Friday the Dow Jones Industrial Average closed at 22,871.72 and the 10-year Treasury yield stood at 2.27% slightly under where it started the year at around 2.45%.
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
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. 2015.