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14, 2020
Key Takeaways
The dispersion among sector performance and across market capitalizations
suggests opportunities have begun to surface from the latest stock pullback.
We reintroduce our Global Asset Allocation model in this issue. We’ve
tweaked exposure within and among asset classes.
Current expectations that technology stocks will remain under pressure for
some time seem exaggerated to us.
Data released last week on consumer price inflation showed an uptick in the
core rate to 1.7% in August from a year earlier.
John Stoltzfus Commodity prices are still off 69% from their July 2008 peak.
Chief Investment Strategist,
Managing Director
Oppenheimer Asset
This week investors will train their focus increasingly on issues tied to the election and
Management
economic data, as well as developments toward stemming the spread and resurgences of
the Coronavirus.
Jim Johnson
Director September has thus far seen equities as represented by the S&P 500 experience varying
degrees of selling on what appears thus far to be increased sensitivity to the rescue
program stalemate in Washington, election outcome worries, market valuations as well as
an opportunity for some profit taking without fear of missing out (FOMO) after the stock
market’s powerful run-up from oversold conditions reached on March 23 through the start
of this month (see page 6 in this report for illustrative chart).
Since September 2nd when the S&P 500 posted its most recent record high through last
Friday’s market close, the benchmark has shed 6.7% as its 11 sectors have declined as much
as 11.15% (information technology) to as little as 1.85% (materials sector stocks).
The S&P 400 (mid-caps) index has declined 5.67% in the same period with the greatest
sector decline in that index at 11.35% (information technology). The consumer staples and
consumer discretionary sectors have relatively outperformed the other sectors in the mid-
cap index, with each declining just 3.17% in the period.
The S&P 600 (small caps) index has fallen 6.33% since September 2 through last Friday with
information technology again the worst performer, shedding 10.4% among that
benchmark’s sectors. The best relative performing sector among the small caps has been
consumer staples, which is off just 3.57% in the period.
In our view, the dispersion among the three indices and within the sectors suggests
opportunities may exist on a selective basis across the sectors.
1
Radar Screen
In our view the decline in the stateside equity markets Our favorite sectors remain: information technology,
appears relatively contained and orderly at this time consumer discretionary, industrials with our contrarian
presenting some opportunity for longer-term investors pick, financials (see below for our ratings across the 11
to seek out “babies that got thrown out with the sectors of the S&P 500).
bathwater.” There are also opportunities surfacing for
From a global perspective we remain overweight US
some dollar cost averaging and rebalancing among
equities while maintaining meaningful exposure to both
sectors and to buy stocks too often overlooked by
developed and emerging markets on expectations that
investors who at times seemed singularly focused on
an economic recovery stateside coming out of the
the tech run-up. Stocks in sectors such as industrials,
Covid-19 shutdown will help boost economic growth
materials, and financials could garner increased focus.
around the world and lead to a global economic
For nervous investors the recent downdraft has expansion (similar to the one the world was
presented opportunity to take some profits without experiencing just prior to the trade war between the US
FOMO (fear of missing out). and China).
With only 50 days until the Presidential election We believe stocks at current levels remain vulnerable to
headline risk is likely to contribute to volatility in the catalysts that might surface near term which could
markets through November 3 and perhaps beyond that enable short-term and nervous investors, as well as
if there is a contested outcome. Time will tell soon traders to take some profits without FOMO (fear of
enough. missing out). Pull backs of around 4% to 6% can take
place when such a catalyst or confluences of catalysts
Current expectations that technology stocks will remain
appear. Investors are often reminded that stocks tend
under pressure for some time seem exaggerated to us.
not to move in a straight line higher unchallenged for
While some technology stocks had gotten overvalued
long. However, such pullbacks (depending on the
(the high flying names—particularly relatively new
catalyst for profit taking) could likely present
companies that soared to prices and multiples that
opportunities to buy “babies that get thrown out with
seemed lofty) the core of technology stocks did not
the bathwater”.
appear terribly rich in price considering that
developments in technology and innovation have yet to Our 2020 target price of 3,500 for the S&P 500 (initiated
show signs of plateauing in the current cycle. If anything last December) remains in suspension (suspended the
technology has served to keep many segments of the morning of March 23rd) at this time while we await
economy not just alive but vibrant during an greater visibility in the earnings outlook.
unprecedented shutdown of large segments of the US
and world economies.
Our expectations are for technology to lead in serving
companies in the other ten sectors once the spread of
Covid-19 is stemmed and the domestic and
international economies move toward global expansion.
We also expect technology to continue to benefit from
a virtuous upgrade cycle from consumers.
Where We Stand
In our view diversification, patience, self-knowledge,
right-sized expectations and keeping things in context
remain key for investors in positioning their portfolios
and navigating market conditions, particularly during
these times.
We remain diversified in our investment portfolios;
maintain an overweight in equities versus fixed income;
and favor cyclical sectors over defensive sectors.
2
Radar Screen
Economic Data scheduled for release this week S&P 500 Sector Weightings
Market Suggested
Tuesday Sector Weight Allocation Rating*
Empire Manufacturing (NY Fed) Information Technology 27.5% 26.0% O
Import Prices Health Care 14.1% 15.3% P
Industrial Production Consumer Discretionary 11.4% 11.0% O
Capacity Utilization Communications Serv 11.0% 10.0% P
Wednesday Financials 9.9% 11.0% O
MBA Mortgage Applications
Industrials 8.3% 9.5% O
Retail Sales Advance Release (August)
Consumer Staples 7.1% 7.0% P
NAHB Housing Market Index
Utilities 3.0% 3.2% U
Federal Reserve FOMC Meeting decision
Real Estate 2.7% 2.0% U
Thursday
Building Permits (August)
Materials 2.7% 3.0% P
Housing Starts (August) Energy 2.2% 2.0% U
Philly Fed Business Outlook O=Outperform; P=Perform; U=Underperform
Initial Jobless Claims *Ratings based on our expectation of the performance of the sector relative to the overall
Continuing Claims index (S&P 500)
Friday
Current Account Balance
Leading Economic Indicator Index Distribution of Known COVID-19 Cases
University of Michigan Consumer Sentiment 30
Rest of World
25
Brazil
Oil Prices Stable Around $40 USA
20
Millions
$40 5
USD/barrel
$20 0
3/16/2020
3/23/2020
4/20/2020
4/27/2020
5/25/2020
6/15/2020
7/13/2020
7/20/2020
7/27/2020
8/17/2020
8/24/2020
8/31/2020
3/30/2020
4/13/2020
5/11/2020
5/18/2020
6/22/2020
6/29/2020
8/10/2020
3/9/2020
5/4/2020
6/1/2020
6/8/2020
7/6/2020
9/7/2020
4/6/2020
8/3/2020
$0
-$20
Source: Bloomberg News, OAM Research calculations
-$40
The number of known COVID-19 cases globally stood at
nearly 28.3 million on September 11 (according to data
compiled by Bloomberg News). The number of new cases
Source: Bloomberg LP, and Oppenheimer Asset Management. identified on September 11 alone totaled 192,605 (down
from 301,463 on the Friday prior). As of September 11, the
number of deaths officially attributed to the novel
On Friday, September 11 the price of crude oil closed at coronavirus globally totaled 910,891.
$39.83. In recent weeks oil has traded in a relatively tight
range between $37 and $43 as production curbs negotiated
among OPEC nations have brought stability.
The price has weakened two weeks straight since the start of
September on concerns about economic risk related to the
stalemate in Congress over the latest pending economic rescue
package.
3
Radar Screen
S&P 500 Sectors from March 23, 2020 Low September 2. Value stocks have lagged all year and are off
Price change from 3/23/2020 to 9/11/2020 12.7% through September 11.
Materials 68.9%
Source: Bloomberg LP, and Oppenheimer Asset Management. These results cannot
50
and should not be viewed as an indicator of future performance.
30
4
Radar Screen
Key Economic Indicators Released Last Week
Initial Claims for State Unemployment Benefits
8
The number of new claims for state
unemployment benefits filed on the week of
7 September 4 totaled 884,000—the same figure
6 as the week prior. The stall in the decline in new
claims (evident in the figure at left) comes as
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Congress has failed to pass additional rescue
Millions
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Radar Screen
Financials -2.4%
Energy -6.4%
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.
Industrials -4.9%
Utilities -9.4%
Financials -20.0%
Energy -46.6%
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.
6
Radar Screen
US and Other Developed and Emerging Markets
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.
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Radar Screen
S&P 500 Valuation Still Near 5-Year High
Forward Price-to-Earnings Ratios
The S&P 500 forward earnings multiple
ended the week trading at 21.9 times
next 12 month earnings estimates,
down off of its recent five year high of
23.6x.
Forward multiples had increased earlier
this year as equity prices moved higher
while analyst estimates for 2020
declined.
In recent weeks the forward P/E
multiple has stretched toward its highs
for the year even as analysts increased
their projections as results in the
second quarter earnings season
surprised to the upside of expectations.
According to FactSet, bottom-up
estimates call for earnings to total
$130.7 in this year 2020, down from
estimates of $177 at the start of the
year. The most recent estimate
represents an 18.8% decline from $161
in calendar year 2019 earnings.
Source: Oppenheimer Asset Management, FactSet. ACWX, EEM, and EFA ETFs used as proxies for We continue to monitor developments
MSCI ACWI ex-US, MSCI Emerging Markets, and MSCI EAFE Indices. in earnings in relation to the
*Bottom -up estimates for the S&P 500 Energy sector in 2020 aggregate to negative EPS, resulting in a non-meaningful Coronavirus pandemic.
(and negative) forward earnings multiple.
Source: Oppenheimer Asset Management, FactSet. Historical valuation ranges are unadjusted for recent GICS reclassifications.
*Bottom -up estimates for the S&P 500 Energy sector in 2020 aggregate to negative EPS, resulting in a non-meaningful
(and negative) forward earnings multiple..
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Radar Screen
Maximum Drawdowns Since 1998
Maximum Drawdown Start Drawdown End Drawdown Annual Price Average Fed Avg. 10-Year
Year
Drawdown Date Date Recovery Date Return Funds Rate Treas. Yield
Source: Bloomberg, OAM Research calculations. Note: Averages do not include 2020 data. Interest rates are average for the period from the drawdown start date until its end date.
These results cannot and should not be used as an indicator of future performance. Returns data excludes applicable costs including commissions and interest .
With markets recently experiencing wild swings We also include the average of two key interest
including dramatic downward moves along with rates over the drawdown period to illustrate the
some powerfully strong rallies, we highlight the relative sensitivity of the S&P 500 to monetary
maximum drawdowns in the S&P 500 index that policy as well as to the yield on market-priced
have occurred since 1998. The table also describes Treasury securities.
the respective year’s annual price return (excluding
applicable costs).
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Radar Screen
The MSRS Global Asset Allocation
Real Estate Cash & Percent
Alternatives, 2% Equivalents Asset by
Asset Class Total Regional Market of
2% 4% Region
Global Portfolio
Commodities,
2% S&P 500 41% 41%
US 71% S&P 400 29% 29%
S&P 600 30% 30%
Stocks 70% EAFE 15% 3%
Bonds, 20% EAFE Small-Cap 16% 3%
Int'l 29%
EM 61% 12%
Stocks, 70% Frontier 8% 1%
Intermed. Munis 17% 3%
Fixed Income 20% US 100% U.S. Convertibles 58% 12%
Senior Loans 25% 5%
Commodities 2% Global 100% Gold 2%
Alternatives 2% Global 100% Timber 2%
Real Estate 2% Global 100% REITs 2%
Cash 4% Cash 4%
Equities
Global: Our 2020 target price of 3,500 for the S&P 500 (initiated last December) remains in suspension at this time (we paused our
forecast the morning of March 23rd). We base our price target forecast as a multiple on year-ahead earnings and with the
profit outlook opaque at this time, we’re forgoing a prediction. That said, the market’s persistent strength and resilience,
(notwithstanding the challenges that remain in place or interim fluctuations), suggest to us that the record closing high of
3,580.4 reached on September 2 could possibly be exceeded this year before earnings growth projections might justify the
move on traditional and historical price-to-earnings metrics.
We remain overweight US equities while maintaining meaningful exposure to both developed and emerging markets on
expectations that an economic recovery stateside coming out of the COVID-19 shutdown will help boost economic growth
around the world and lead to a global economic expansion.
Fixed Income
US: Fixed income securities remain an important part of asset allocation and are key to the diversification of a global portfolio.
That said, with yields at or near historically low levels around the world (and in some cases yields are negative), we have
tactically allocated our fixed income exposure only to certain segments of the US fixed income market where the risk/reward
opportunities are found in other global fixed income instruments.
We maintain exposure to favor convertible securities, which in our view offer attractive current yields and the potential for
participation in equity upside; to senior corporate loans, which have relatively short duration; and to tax-free municipals, which
offer the potential for improved credit ratings as the domestic economy moves toward a recovery.
Global Commodities
We have a nominal exposure to gold to acknowledge the likely pressure on the US dollar as domestic monetary policy remains
highly accommodative.
Alternatives
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 risk tolerances.
Real Estate
We maintain exposure to a diversified basket of global real estate investment trusts and operating companies.
Cash & Cash Equivalents
We recommend investors maintain cash and cash equivalents to offset equity portfolio risk, keeping some “dry powder” on
hand for opportunity to add to positions on pullbacks.
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Radar Screen
Positions on the Radar Screen
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Radar Screen
International Indices 9/11/2020 % Chg Wkly % Chg YTD
MSCI EAFE (Dev Nations ex. US & Canada) 1,896.99 1.43% -6.87%
MSCI Emerging Markets 1,091.79 -0.70% -2.05%
MSCI Frontier Markets 512.54 -0.17% -12.53%
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INVESTMENT STRATEGY
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INVESTMENT STRATEGY
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