Contributed by Doug Walters
There was enough drama in the real world this week to make me question my need for a Netflix subscription. The S&P 500 fell 6% as we took further steps toward a trade war. Uncertainty was compounded by another high-profile exit from the White House, a Fed rate increase, and turmoil at one of Silicon Valley’s crown jewels.
Tit for Tat
Trade talks dominated market sentiment again this week, despite an important rate decision from the Fed. Plans by the Trump administration to impose up to $60 Billion in tariffs on China were not received well by investors who fear a trade war could put an end to the current global economic expansion that U.S. companies are enjoying. China responded on Friday with a seemingly modest $3 Billion tariff rebuttal. But do not be fooled; this response was aimed at the previous steel and aluminum tariffs, not the $60 Billion. The passage of a $1.3 Trillion budget on Friday did little to temper trade concerns.
Down the street, the Federal Reserve was busy announcing their sixth rate increase since they began normalization efforts back in 2015. The Fed funds rate now stands at 1.75%, up from 0.25% where it sat for seven years following the financial crisis. While the move was expected, commentary from the new Fed Chairman Powell indicated that the economy was stronger than previously estimated. While this may seem like good news, the implication is that the Fed may have to raise rates faster than previously expected, which is a headwind for equities.
Not helping market sentiment was news stories about Cambridge Analytica’s improper use of Facebook’s user data. Stocks of dominant technology platforms like Facebook, Amazon, and Google have been an important engine powering the market forward. These businesses rely on their ability to convert their customer’s data and behaviors into revenues. Consumer backlash or government regulation could deflate investor expectations for these high-flyers. We have had valuation concerns with many of these stocks for some time and have watched from the sidelines as some of these stocks have soared. This week’s developments may help the valuation story, but perhaps at the expense of quality.
Spotlight: Your Own Worst Enemy
Behavioral finance teaches us that losses and gains are processed differently in our brains. A 6.0% loss, like the one stocks experienced this week, creates a more significant negative feeling than the positive feeling that comes from a 6.0% gain. As a result, in the face of this week’s decline, investors might be tempted to exit the stock market just as stocks get cheaper. As investment managers, it is our job to build a process that helps us avoid these pitfalls. Market fluctuations, even of this magnitude are normal. To participate in the upside that equities have to offer, investors have to accept that at times there will be unavoidable downside. Let us do the worrying, while you continue the pursuit of your ideal life!
STRATEGIC ASSET ALLOCATION
Black and Yellow
Equities across the globe received another unwelcomed punch of volatility. Bonds had a solid week despite the Federal Reserve bumping short interest rates higher by 0.25%. Gold also benefited this week, both as a safe haven trade and from what looks like a more patient Federal Reserve. OPEC’s continued commitment to lower oil production output helped crude oil climb back towards its 52-week high. Speaking of gold and oil…
- Gold and oil (sometimes called black gold) are viewed as a way to hedge against inflation.
- Higher oil prices tend to support inflation because transportation is a cost included in most goods.
- Historically, gold prices closely correlate to crude oil.
- At year-end 2017, an ounce of gold was worth the same as about 22 barrels of oil.
Energy and Materials bested the other sectors this past week, but that doesn’t say much. Technology was easily the biggest laggard thanks to Facebook’s woes which spread across the sector like fake news, and a displeasing earnings release from…
- Oracle Corp. (ORCL) topped earnings expectations when it reported its 3rd quarter, but it was the guidance that rained on the software company’s parade. The company’s 32% cloud revenue growth year-over-year was not enough to overcome flat-to-negative growth expected in the 4th quarter. Also, 17-21% forecast growth in cloud revenue was light versus consensus at 23%. One analyst stated that the company will be in a “state of transition in coming years.” We, as long-term investors, see a much sunnier future.
STRATEGIC EQUITY INCOME
Utilities led the way this week as interest rates retracted. Industrials joined Financials at the back of the pack. In other strategy news…
- Pfizer Inc. (PFE) has been shopping its consumer health unit. This unit includes Chapstick, Centrum, ThermaCare and Robitussin brands. The rumored price tag was $20 billion, roughly 20 times earnings for the unit. In January, Strategic Growth holding Johnson & Johnson (JNJ) jumped out of the bidding. This week two heavyweights also removed themselves from bidding. The first was Reckitt Benckiser (RBGPF, RBGLY), and the second was GlaxoSmithKline (GSK). It’s unclear who the remaining suiters are if anyone at all.
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||-5.0||-3.2|
|Russell 2000 (Small Cap)||-4.8||-1.7|
|MSCI EAFE (Developed International)||-1.4||-1.7|
|MSCI Emerging Markets||-1.4||3.3|
|S&P GSCI (Commodities)||1.3||1.8|
|MSCI U.S. REIT Index||-4.4||-12.4|
|Barclays Int Govt Credit||0.2||-1.6|
|Barclays US TIPS||0.3||-1.3|
The Week Ahead
Contributed by Aleksey Marchenko
Markets in Wait and SEE Mode Regarding Tariffs
Speeches from the Federal Reserve Bank officials will be delivered throughout the week, with the New York Fed’s President William Dudley, and FOMC Members from Cleveland, Atlanta, and Philadelphia on the docket.
- The FOMC Members will give a brief overview of their district’s economic condition.
- Markets will be taking notes on each speaker’s view on the path of rates.
Economic data for the week will be brief. Highlights include 4th quarter GDP, University of Michigan Consumer Sentiment Survey and Personal Consumption Expenditures (PCE).
- Annual GDP growth is expected to remain at 2.5% after the latest adjustment to 4th quarter results.
- Consumer Sentiment is expected to remain strong through March, while Consumer Spending is expected to grow at a slow and steady pace.
Earnings focus will be on Strategic Growth holding McCormick (MKC), the spice and flavor alchemist, and financial data provider FactSet (FDS).
- FactSet has two large competitors, Bloomberg LP and Reuters. FactSet has been steadily gaining market share from the other two according to consulting firm Burton-Taylor International.
- McCormick has been a serial acquirer and an aggressive cost-cutter, but growth is tied to the company’s ability to innovate.
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.3 billion.Overview
Strategic Financial Services, Inc. is a SEC-registered investment advisor. The term “registered” does not imply a certain level of skill or training. “Registered” means the company has filed the necessary documentation to maintain registration as an investment advisor with the Securities and Exchange Commission.
The information contained on this site is for informational purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Every client situation is different. Strategic manages customized portfolios that seek to properly reflect the particular risk and return objectives of each individual client. The discussion of any investments is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. Any representative investments discussed were selected based on a number of factors including recent company news or earnings release. The reader should not assume that an investment identified was or will be profitable. All investments contain risk and may lose value. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.
Some of the material presented is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Strategic Financial Services believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
No content on this website is intended to provide tax or legal advice. You are advised to seek advice on these matters from separately retained professionals.
All index returns, unless otherwise noted, are presented as price returns and have been obtained from Bloomberg. Indices are unmanaged and cannot be purchased directly by investors.