‘If you look under the hood, the rally that started March 23 is starting to broaden’: Strategist

As market’s begin the rebound, many believe the recent selloff was only a temporary market rout. Oppenheimer Asset Management John Stoltzfus joins The Final Round to break down his thoughts on the tech sector and market sentiment.

Video Transcript

MYLES UDLAND: Your outline for the market right now, as we sit here, you know, a couple weeks to go in the third quarter, a couple of weeks before earnings season really gets underway-- we've seen a little bit of a rough patch in the market here but the S&P still only 5% away from a record high. How do you kind of see the current setup right now?

JOHN STOLTZFUS: Well, I've got to say, we think we're in a healing process off that stumble we saw the market have, if we consider that, you know, right now, from the-- from September 2 through the 8th, the market declined about 4.62%, OK? Or from-- from that point. If you look at it, right? Or rather, I'm sorry, from September 2 through today, the S&P is off about 4.6%, but the gains that have been made are interesting to watch.

The market's up 1.8%, but materials is up 4.86% in just a few days. Industrials is up 3%. Infotech, 2.75% and real estate, 2.7%-- and I'm just going to take us to the top five-- and health care up 1.87%. Everything else is positive except for energy, which is negative 3.22%. So that shows healing and also evidence of rotation.

Infotech third to materials and industrials with consumer discretionary in sixth position-- this is not a horse race, OK? But when you looked at it, you're saying that we've got-- actually, underneath all of this, if you look under the hood, the rally that started for March 23 of this year, which is where we hit that bottom, is beginning to broaden, and it looks like it's beginning to look for an economic recovery. When you see materials start leading in industrials, you've got prospects for a recovery here stateside. Plus, you have-- beyond that, you would have a global recovery priced in because we're the people of buy all the stuff that everybody outside of the US makes. So it looks pretty positive, from what we can tell.

MYLES UDLAND: And speaking of that recovery, you know, you've had in your note for the last few months now, you know, a suspension of that year-end price target on the basis of not quite enough earnings visibility. But the second quarter, we saw, you know, I think a record number of companies reporting better than-- I would say better-than-feared results right now. But is the third quarter maybe a time where you might get enough clarity from corporates to maybe back up this recovery that you're outlining here that sector action is at least suggesting investors are betting on it?

JOHN STOLTZFUS: Yep, Myles, you said it. And in the third quarter earnings season is when we expect we're going to get enough clarity to likely reinstate-- not only reinstate our target, but probably re-initiate or initiate a new target for-- at least for this year and then start looking forward towards putting the target for next year. The problem was that initially, when you started getting these shutdowns in economies around the world and then when is it the US, you were, in effect-- when you were making assumptions on the target price, how are you-- how were you going to price in your earnings?

Essentially, consensus analytics, which everybody usually benchmarks their targets off-- or works their targets off, not benchmark-- what happened is analysts were flying without instruments, or strategists was flying without instruments. So we felt more comfortable suspending the target, even though we maintained our recommendation to be long cyclicals and technology and overweight cyclicals and technology over defensives. We thought, you wanted to be diversified, own some defensives. But the place to overweight was the place that got hit hardest, which was in your cyclicals and in your tech.

MYLES UDLAND: And then speaking of those earnings and just kind of how valuations are functioning in this environment, given where interest rates are, where we expect interest rates to be, as you think through what, you know, maybe reasonable value for the market might look like, does it seem that historical, you know, benchmarks may not be as helpful as we kind of move into the next decade in what we expect to be a fairly decent economic recovery but with monetary policy still, you know, historically accommodative?

JOHN STOLTZFUS: You know, I think the important thing is to consider that the accommodation in monetary policy is reflective off an environment of very low growth, which may have less to do with COVID and may just have to do with the fact that growth today is not centralized in any particular region. It's diffused across the globe. We have a lot of competition in business, which makes companies hesitant to raise prices, even when their input costs go up. We have global labor, which creates competition within the labor pool. Plus, you have the challenges of algorithms and robotics, which make the situation tougher for labor. And lastly, you have, in the space of commodities because of technology, you have, in most cases, an abundance of commodities.

Remember, oil was at negative $37 just a few months ago when there was too much oil at the end of a call that came-- there wasn't enough place to store the oil that came due when the futures contracts were ready to deliver the oil. And oil fell into a negative because we've got an abundance of commodities today. And so it's a low-inflationary environment. It implies a much-- a stronger multiple on equities, as equities become-- from a fundamental perspective, would appear to be a better place for investors who have intermediate to longer-term goals. The problem with fixed income is the coupons are simply low-- too low-- to generate any kind of return for goal-oriented investors.

MYLES UDLAND: And of course, there is, indeed, no alternative, it would seem, once again, for investors after a decade of dealing with that trend. All right, John Stoltzfus, chief investment strategist at Oppenheimer Asset Management. John, always great to get your thoughts. Thanks so much for joining the show today.

JOHN STOLTZFUS: Thanks for having me, Myles.