Contributed by Doug Walters
A man in a pinstripe suit sits on Santa Claus’ lap, clutching his stock portfolio and asks for “a nice Santa Clause rally” (see our December 22nd edition “Why We Are Buying; Reprise”). Well, he got his wish. Since Christmas Eve, the S&P 500 has rallied over 10%.
Reason for Optimism
U.S. equities posted their third straight weekly gain this week. Investors are encouraged by positive developments in the China trade dispute and unperturbed by the prolonged government shutdown. But has anything substantively changed since Christmas? Not in our opinion. That is not to say the rally was not justified. As we laid out on our December 22nd report, despite the fairly severe pullback in equities at the end of 2018, there was, and still is, plenty of reason to be optimistic.
Better to Be Good Than Lucky
When we wrote “Why We Are Buying; Reprise,” we did not predict that two trading days later, the market would begin to rally. The timing was fortuitous, but regular readers know that we do not believe in or promote ourselves as market timers. Our intention was merely to ensure that investors, 1) did not run in the face of market weakness, and 2) considered adding to equities to bring portfolios back in line with long-term targets. Of course, the market may suffer declines again in the near future. For now, we will take credit for helping to keep investors in the market, with the knowledge that the precision of the timing involved luck. We will not complain when luck comes our way, but we would rather be good than lucky any day.
Since Christmas Eve, the S&P 500 has rallied over 10%
STRATEGIC ASSET ALLOCATION
Global equity markets staged an encouraging start to the year, with U.S. Small-Cap stocks and Developed International leading the pack higher. Even bond yields moved lower to start the year (bond prices go up as yields decline). Value is seemingly the driver of equity’s comeback, not momentum. Large-Cap value is leading so far, along with other undervalued assets like Small-Cap and International equities. The turn of the calendar has flipped what worked in 2018 upside down, for example…
- U.S. Small-Cap stocks had a rough finish in 2018, despite the improvements in their valuations throughout the year. According to FactSet, Small-Cap earnings are expected to grow on average by roughly 20 percent annually for the next two years. This outlook is propelling the asset class to a hot start to 2019.
- The big laggards last year, Developed International and Emerging Markets, caught the eye of investors, drawn in by attractive valuations. Drivers that are helping both asset classes are the weakness in the U.S. Dollar against major currencies, an accommodative U.S. Fed, and fruitful trade talks with China.
- Long-dated bonds seem to be in vogue in the early part of the new year as long rates continue to compress. Last year staying short worked best.
- While long-dated bonds and equities are rising as risk appetite comes back to the table, gold has failed to shine so far this year.
Train Kept A-Rollin’
Despite a strong start from Biotechnology, the Health Care sector is the laggard so far this year. For the week, Financials are trailing thanks to the flattening of the yield curve. While the leading sector in 2019 is Energy, this week the Industrials topped the leaderboard thanks to…
- Union Pacific Corp. (UNP) received a surprisingly big boost when it announced Jim Vena as the new Chief Operating Officer. Vena was brought out of retirement. He last worked at Canadian National Railway (CNI) and was mentored by railroad legend E. Hunter Harrison. The hire will help Union Pacific execute on its precision scheduled railroading (PSR) initiative.
- The excitement of the hire can easily be linked to the fact the Harrison (the mentor), and his process, was able to top the broader market by 15% a year and other North American rail companies by 10% during a 3-decade run. Vena is credited with producing the best operating ratio in North American rail and the best safety incident ratio in company history when he was COO at Canadian National.
- The good news train did not end there. The company reported an operational update a day later that sited better carloadings in December than anticipated. Also, the company expects its operating ratio to improve, which is an about-face from November guidance. The company claims that higher revenue was coupled with lower diesel fuel prices to produce the upside surprise. The company will report 4th quarter earnings on January 24th.
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