Stocks lost ground this week as investors contemplated the dynamic of weak corporate earnings expectations and a Fed that is ready to step in with support. Perhaps not surprisingly, in such an environment, it is Gold that is shining. Since early May, Gold is up about 13% versus 3% for the S&P 500. We view Gold as a form of portfolio protection. It is not that Gold, by itself, is a “safe” asset… we reserve that moniker for cash and short-term, high-quality bonds. Instead, Gold has historically proven to be uncorrelated to stocks (i.e., when stocks go up, gold goes down), which, in the context of a portfolio can reduce risk! We would expect Gold to do well in a falling rate environment, as well as in times of geopolitical uncertainty, and that appears to be precisely where we are headed.
Headlines This Week
- After record highs last week, U.S. stocks could not maintain their momentum, with the S&P 500 finishing slightly down. Gold was the best performer in our portfolios, followed by Emerging Markets. Small-cap stocks continued to lag this week.
- Corporate earnings season is underway, and expectations are low. While sales are expected to be up 4% year-on-year, earnings are expected to fall 2%, with Tech and Materials the biggest culprits. The last time earnings fell a similar amount was 2016. Perhaps the door is open for positive surprises?
- The Fed reiterated this week their intention to get ahead of any potential economic weakness with rate cuts. Fed governor Williams made the case that quick action is necessary when rates are already low. The market responded quickly, pushing up the probability of a 0.50% rate cut later this month to over 50%.
The Week Ahead
A huge earnings week is coming with more than 15 of Strategic’s individual stock holdings due to report.
- We expect Facebook (FB) and Alphabet (GOOG, GOOGL) will garner a lot of eyeballs because of fines and privacy and data management investigations.
- Also on the calendar are a pair of high profile releases with big headline potential, namely United Technologies (UTX), who is attempting to make a big acquisition and Boeing (BA) who is dealing with the 737 Max grounding.
The European Central bank has a rate decision next week.
- A rate decision may be the wrong term. The decision will be on what other actions the bank will take to stimulate the Eurozone economy, as interest rates are already near or at negative levels.
Preliminary 2nd Quarter GDP will be unveiled next week.
- The annualized growth rate is expected to come in at 1.9% as opposed to the 3.1% reported in the first quarter.
The debt ceiling will again appear in the news, leading to the sort of uncertainty that financial markets tend to dislike.
- The Secretary of the Treasury is warning that the U.S. needs to raise the debt ceiling so that the nation can continue honoring its financial obligations. The decision is required next week as Congress goes on break on Friday until September 9th.
- If nothing is done next week, Congress will face both a debt ceiling and budget negotiation when it returns to session.
Stock Highlights from Max
Pioneering in Africa
Communication Services was the worst sector this week as investigations into anti-trust concerns for big tech have dragged Alphabet (GOOG, GOOGL) and Facebook (FB) down. Also, subscriber figure softness from a streaming giant pulled media companies down. The Utilities sector was our top sector, but that is based on a single holding, so we would give this week to Consume Staples instead. Speaking of staples…
- PepsiCo, Inc. (PEP) took a big swing on the continent of Africa this week by shelling out $1.7 Billion for South Africa’s Pioneer Food Group Ltd. (PNRRY). Pepsi is betting that the Continent will be a key market for future growth for the beverage and snack giant. The brands Pepsi acquires in the deal will help the company execute on its goal of becoming more locally-focused and drive expansion in sub-Sahara Africa.
- With earnings coming in fast and heavy this week, Banks were the big focus, with M&T Bancorp (MTB) and US Bancorp (USB) finding themselves on opposite sides of investor delight. M&T Bank reported a weak quarter with lower interest rates dragging down the stock and non-interest income not making up for it. US Bancorp, on the other hand, reported stronger loan and deposit growth to make up for lower interest rates. JP Morgan & Co. (JPM) beat expectations, but strong consumer banking results were not enough to overcome weak results in trading and investment banking.
- Outside of banks, Honeywell International Inc. (HON) continues to report excellent results. The company topped expectations and boosted guidance. Sales growth in its Aerospace unit of 11% was the standout. Also, Union Pacific Corp. (UNP) was able to report a better than expected quarter, by offsetting volume declines with price hikes. UNP’s results were a welcome relief from a crummy peer report the previous day.
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