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Strategic Insights

Volume 7, Edition 29 | August 20 - August 24, 2018

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A “Hole” Lot of Nothing

Doug_Walters Doug Walters | Articles

Read Time: 4:30 min

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U.S. equities had a rather uneventful week with the Fed providing no surprises at the annual retreat for economic wonks in Jackson Hole…

Market Review

Contributed by Doug Walters

Fed governors and economists met in Jackson Hole this week at the annual Economic Symposium. Fed Chairman Powell spoke on Friday with Fed-watchers wondering if his speech would be influenced by recent pressure from Washington.

Sticking to the Script

Powell’s speech on Friday stuck to the well-established script that the Fed has followed over the past year. He called for a continued steady, but slow, increase in the Fed Funds Rate until normalization is reached. The message was received well by U.S. equities which finished the week strong but was unlikely to have been received as well by the U.S. President.

Earlier in the week, in reference to Chairman Powell, Trump told Reuters, “I’m not thrilled with his raising of interest rates, no. I’m not thrilled.” The President would like the Fed to keep rates low to further boost an already strong economy. One motivation of the President is presumably to keep economic sentiment high going into the midterm and 2020 elections, but he also sees economic strength as enabling him to be more aggressive in trade and tariff discussions. Trump nominated Powell for his chairmanship, however, the Fed is meant to be an independent entity and signaled that they believe additional rate increases are the best path for the long-term health of the economy.

 

Spotlight: Balancing Act

Ever wonder why the Fed would raise rates (also called tightening) to slow down the economy? It is a complicated balancing act that the Fed performs every day. Congress has directed them to use monetary policy to maximum sustainable employment, stable prices, and moderate long-term interest rates. Rates too high in a weak economy could lead to recession, rising unemployment, and weak prices. Rates too low in a robust environment could overheat the economy and lead to inflation. The latter is closer to where we are now. We have a buoyant economy, yet rates are still at a level that is acting to stimulate growth. The Fed is trying to gradually reduce this stimulus to ensure inflation does not get out of hand, while at the same time not putting the brakes on economic expansion. So far so good.

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Strategy Update

Contributed by Max Berkovich , Aleksey Marchenko

STRATEGIC ASSET ALLOCATION

Highs and Lows

U.S. equity and bond markets finished the week on a positive note. Small-cap stocks continue to march to new highs. Meanwhile, emerging markets (EM) had their best week in months.  While EM may have had a good week, it is still hovering near its 52-week low.  Speaking of highs and lows…

  • International bonds are down over 8% year-to-date. As the U.S. Central Bank continues to push rates higher, the European Central Bank remains on hold. Naturally, the capital shifted towards the higher rates offered in the U.S.
  • While the U.S. economy is strong, the flattening of the yield curve is noticed by everyone. The inverted curve is what everyone fears. In the past, the inverted yield curve proved to be a reliable signal for predicting recessions.
  • Emerging markets (EM) was the hottest asset last year, ending the year up over 30%. Things changed fast for EM thanks to U.S. Dollar strength. Some EM countries like Argentina and Turkey did not properly prepare for a stronger Dollar which resulted in their currency collapse. We wrote about trouble in Turkey in “Turkish Bath” in our last edition of insights.
  • On the positive side, the Russell 1000 growth touched its all-time high and is up over 14% year-to-date. More than half of the index’s performance though is driven by four companies, Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Netflix (NFLX).
  • Small capitalization stocks are also at their all-time high levels as they are experiencing solid growth, with companies showing better sales and profitability. A strong U.S. economy continues to fuel a favorable environment for these stocks.
  • The S&P 500 is also hit its all-time high levels with over 8% return year-to-date.

STRATEGIC GROWTH

A Little More SaaSs

The lone holding in the Energy sector had a hot week. The Industrial sector, on the hand, was cool to the touch. In other strategy news…

  • Cognizant Technologies Corp. (CTSH) a global consulting and outsourcing company announced an acquisition of SaasFocus, a privately held consulting firm that specializes in digital transformation consulting. The terms of the deal were undisclosed. Cognizant will add over 350 consultants to its bench of experts. SaasFocus is one of the largest independent Salesforce platinum consultants in the Asia-Pacific region. The deal is expected to close by the 4th quarter.

STRATEGIC EQUITY INCOME

Barn Burner

Interest rate sensitive sectors were bunched together at the bottom, with a slight edge for worst performer going to Consumer Staples. The Consumer Discretionary sector, on the other hand, had an unbelievably good week thanks to…

  • William-Sonoma Inc. (WSM) reported a very strong quarter, topping expectations. Most importantly, the company had comparable sales growth of 4.6%, with expansion in all its units, including a 9.5% pop in their West Elm brand. The company reported that nearly 54% of its sales now come online. The company also boosted guidance and improved its margins.
  • Also, TJX Companies, Inc. (TJX) beat expectations and dazzled investors with strong comparable sale growth of 6% for the quarter. Like William-Sonoma, TJX was able to improve margin at the same time as increasing sales.

The Week Ahead

Contributed by Aleksey Marchenko

The Market is RIPE for Further Summer Fun

Retail earnings from Dollar Tree (DLTR) and ULTA (ULTA), in our Strategic Growth strategy, will be released on Thursday.

  • The retail sector is showing strength. It feels like high consumer confidence is finally translating into strong sales.

Inflation data such as Personal Consumption Expenditures (PCE) in the U.S. and the Consumer Price Index (CPI) in the European Union will be reported on Thursday.

  • Central bankers have been vocal about tying rate decisions to inflation numbers.

Purchasing Managers Index (PMI), which gauges overall business activity, and the University Michigan Consumer Sentiment survey will be released on Friday.

  • Both indexes are expected to indicate continued confidence in the economy for spending by both businesses and consumer.

Economic data of note next week include Gross Domestic Product (GDP), Case-Shiller Home Price Index, Personal Spending & Income, Pending Home Sales and the Chicago Fed National Activity Index.

Indices & Price ReturnsWeek (%)Year (%)
S&P 5000.97.5
S&P 400 (Mid Cap)1.37.1
Russell 2000 (Small Cap)212.4
MSCI EAFE (Developed International)1-5
MSCI Emerging Markets2.5-9.5
S&P GSCI (Commodities)1.73.8
Gold1.7-7.7
MSCI U.S. REIT Index-0.71.6
Barclays Int Govt Credit0.1-1.6
Barclays US TIPS0.5-1.4

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