Contributed by Doug Walters
Thursday marked the official start of summer as we reached the summer solstice – when days are their longest, and the sun is at its furthest point north. This week also was the official beginning of summer vacation for my kids, but they were not the only ones taking a break. U.S. equities also appeared to have checked out, with the S&P 500 slipping modestly.
It was a quiet week, giving investors little to focus on beyond the escalating U.S. trade dispute with the rest of the world. We could once again delve into trade talk, but it is officially summer, and I’m sure our readers need a break from this seemingly perpetual topic. So this week we rise above the headline noise, and refocus on what is most important, the long-term.
The summer solstice has been celebrated for millennia. Stonehenge, for example, has been around for over 5,000 years and was built such that the heel stone is aligned with the point where the sun rises on the longest day. The investor in me admires the patience and precision of those that built this enduring monument. They saw a pattern in the behavior of the sun and erected a structure to harness it. The stones we see today are the result of several thousand years of building, with some stages of construction lasting many decades. Now that is long-term thinking!
As investors, our goal should be to harness the long-term patterns of the market. We cannot control what the market does in the near-term, but historically bonds and equities have offered investors positive long-term returns. Our job is to build a robust structure that provides enduring access to the market returns in an efficient an intelligent way.
Standing in front of Stonehenge with my niece in the summer of 2000, it was hard not to be amazed by this primitive structure that has stood the test of time. Investors can learn a thing or two about the value of long-term thinking from the ancient architects that conceived this mysterious monument.
STRATEGIC ASSET ALLOCATION
U.S. equity markets attempted to keep their head above water but ultimately had a slightly negative week. The bond market benefited as investors shifted capital from equities to bonds. However, short-term interest rates are expected to continue to rise as Fed President Powell floated his intent to increase the overnight lending rate four times in 2018. Speaking of floating …
Investors will generally benefit from floating rate bonds when interest rates are on the rise. Historically bank loans had this feature, but credit quality was always a concern. Recently more creditworthy companies are issuing floating rate debt.
- On that note, Strategic added exposure to this area by initiating a position in the SPDR® Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN).
- The Floating Rate investment carries minimal duration risk (interest rate risk), as it adjusts its coupon to market interest rates.
- The yield is currently 2.68% and climbing.
- We see this as a good time to add fixed income exposure that will benefit from the Federal Reserve raising rates as an offset to the rest of the fixed income exposure that is negatively impacted by higher rates.
Head in the Cloud
Trade wars continue to weigh on the Industrial sector, due to its dependence on foreign markets. Consumer Staples, on the other hand, seemed to overcome trade-related fears and be the leading sector. In other news…
- Oracle Corp. (ORCL) reported its 4th quarter results, which topped expectations, but soft guidance on the conference call spooked investors. Despite a 3% year-over-year revenue increase and an 8% increase in cloud revenue, the company guided to 1-3% growth in revenue for next quarter. The drive to the cloud has not yielded overly ambitions results, at least not yet.
- As foreshadowed in last week’s insights, The Beautiful Game, The Walt Disney Co. (DIS) countered a rival bid for Fox (FOX, FOXA) with a $38 per share stock and cash bid, which is $10 higher than the first offer and amounts to $71 Billion.
STRATEGIC EQUITY INCOME
Utilities roared back from recent weakness to finish the week as the leading sector. Industrials were the clear laggard. In other strategy news…
- The CEO of Intel Corp. (INTC), Brian Krzanich, unexpectedly resigned on Thursday. The resignation came due to a violation of the company’s non-fraternization policy. Krzanich had a consensual relationship with an employee. The COO Robert Swan will be the interim CEO. The company also pre-announced 2nd quarter results to calm investors. The company reported $16.9 Billion revenue and $0.99 per share of earnings, both numbers well ahead of consensus expectations.
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||-0.1||4.7|
|Russell 2000 (Small Cap)||0.1||9.8|
|MSCI EAFE (Developed International)||-1.0||-3.4|
|MSCI Emerging Markets||-2.3||-6.1|
|S&P GSCI (Commodities)||1.7||6.6|
|MSCI U.S. REIT Index||2.5||-1.3|
|Barclays Int Govt Credit||0.0||-2.1|
|Barclays US TIPS||0.3||-1.5|
The Week Ahead
Contributed by Aleksey Marchenko
Will Economic and Trade Data MESH?
McCormick (MCK) earnings release is scheduled for Thursday morning.
- McCormick’s huge acquisition of French’s and other brands from Reckitt-Benckiser will continue to dominate the earnings call.
- The addition of French’s ketchup and mustard and Stubb’s BBQ sauce to the spice company’s portfolio should receive a nice boost from the grilling season.
Economics data such as the final read of the 1st quarter Gross Domestic Product (GDP), Personal Consumption Expenditures (PCE), and University of Michigan consumer sentiment will hit the newswire on Thursday and Friday.
- No surprises are expected from GDP numbers. GDP is expected to remain at the growth pace of 2.8% year-over-year.
- Personal consumption is expected to remain in the healthy expansion territory while The University of Michigan consumer sentiment is expected to remain near all-time highs.
Surveys from Chicago, Dallas, Richmond, and Kansas Federal Reserve Banks will provide an overview of economic health in these regions while speeches from the Federal Open Market Committee (FOMC) members will reinforce the Fed’s view on monetary policy and economic outlook.
Housing data such as the Pending Home Sales Index, New Home Sales, and Case-Shiller Home Price Index will be reviewed for any indication that rising interest rates are cooling the hot housing market.
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