Contributed by Doug Walters
The second half of the year has started well for equities with the S&P 500 notching higher in both of the first two weeks of July. As we discussed in our quarterly perspective report (A Political Strategy), we expect geopolitics to be a market driver for the balance of the year. We already see this playing out with the President’s supreme court nominee making waves.
With a tense NATO summit and contention surrounding the President’s upcoming Russia visit, there was no shortage of fodder for market jitters this week. However, equities shrugged off these political tensions and instead focused more on the President’s nominee for the Supreme Court, Brett Kavanaugh. It is expected that the addition of Kavanaugh will make the court more business-friendly. The nominee has expressed support for limiting regulatory oversight of business by federal agencies. In addition, an article by Bloomberg this week makes the point that large Technology companies may benefit from Kavanaugh’s nomination. They discuss how his decision to side with the internet service providers in a 2017 net-neutrality ruling might have positive implications for large technology-driven stocks like Amazon (AMZN), Alphabet (GOOGL), and Facebook (FB) that are facing increasing pressures regarding their size and influence. The Technology sector outperformed the broader U.S. equity market this week following the announcement of Kavanaugh.
We wrap up our World Cup commentary this weekend as soccer fans sit down to watch an unlikely final between France and Croatia. Our prediction had been for Brazil to raise the coveted trophy, but that was not to be. Recall that we were attracted to the team’s diversification. While we did not pick the winner, the message of diversification is still relevant. Who would have thought Croatia would be in the finals? If these teams were investments, we would have been foolish to put all of our money into Brazil, even if they were a favorite. Some diversification into riskier, uncorrelated teams like Croatia might have been prudent.
Contributed by Max Berkovich ,
STRATEGIC ASSET ALLOCATION
Equities, in general, had a positive week, with large capitalization stocks leading the way. The week was uneventful for fixed income, but the yield curve did flatten some more. Dispersion in returns among asset classes should create some opportunities for active asset allocation as the year progresses. Speaking of active versus passive…
- For the first half of 2018, the passive fund inflows are down nearly 44% versus the previous year. This is the largest drop in cash inflows to passive funds since 2009 when investors began allocating trillions of dollars to Exchange Traded Funds (ETFs) and Index tracking mutual funds. However, actively managed funds are struggling as well, especially in beating indices.
- The competition for assets under management between passive funds is driving ETF fees down. While investors are cheering the lower prices, there might be unintended consequences for those that focus only on fees and not on the substance of the product they are buying.
- Since 2015, over $500 billion of cash left actively managed funds.
- The two largest passive investment firms hold over $11.4 trillion in AUM (BlackRock $6.3 trillion and Vanguard $5.1 trillion), but not all of the assets are passively managed as increasingly ETFs are coming in non-passive varieties.
The Energy and Materials sectors were the laggards on the week. Financials was the leader, but that was mostly due to Visa Inc. (V), which arguably is a technology stock. Speaking of technology…
- Dell Technologies, technically a private company, unveiled its plan to acquire Dell Technologies Inc. (DVMT) a tracking stock for the company’s ownership of VMware (VMW) which was created when Dell acquired EMC Corp. in 2016. Dell’s offer is 1.3665 shares of the new, and public again, Dell Corp. or cash of about $109 for each share of DVMT, subject to shareholder election and cash vs. stock limitations of $9 Billion cash. Dell will continue to hold 81% ownership of VMware, and the new Dell’s implied equity market value is roughly $61-70 Billion.
STRATEGIC EQUITY INCOME
The Utilities and Consumer Discretionary sectors were both laggards, but for different reasons; Utilities as interest rates moved a higher and Consumer Discretionary thanks to tariffs on China, impacting the cost of goods they sell. The Industrial sector was the runaway leader thanks to an earnings report from…
- Fastenal Company (FAST) the industrial equipment and supplies distributor reported a consensus topping quarter. The company grew revenue by 10% year over year, bought back 800,000 shares of its stock and raised its quarterly dividend by 8.1% to $0.40 per share, roughly equating to 3.2% dividend yield. On the business side, the company grew net income by 42% from last year, non-fastener products now represent 64.6% of sales. The company also reported it installed 5,537 vending devices during the year bringing the total to 76,069.
The Week Ahead
A BET on Earnings
Banks earnings will be a key focus for investors next week.
- Strategic’s Equity Income strategy holdings BB&T Corporation (BBT), M&T Bank (MTB), U.S. Bancorp (USB), and Bank of New York Mellon (BK) are all due to report.
- In our Strategic Growth strategy, Health Care will be the focus with insurer UnitedHealth Group (UNH) and Johnson & Johnson (JNJ) on the docket.
Economics data will help investors reassess the health of the economy. The major data we are looking at is:
- China’s second-quarter Gross Domestic Product (GDP) growth which is estimated to decline to 6.7% from 6.8% for the same period last year,
- The Federal Reserve’s Beige Book release on Wednesday at 2:00 PM and report about economic conditions from the twelve Fed districts,
- Housing starts and building permits growth which is expected to remain nearly flat, and
- Retail sales growth which is expected to retreat slightly though remain in positive growth territory.
Trump-Putin meeting will take place in Helsinki, Finland where the two leaders will likely discuss the conflict in Syria, de-nuclearization, North Korea, election meddling, and trade. But there is no official agenda, and the summit will start with a private one-on-one meeting, so who knows…
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