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Strategic Insights

Volume 8, Edition 32 | September 16 - September 20, 2019

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An Economic Tug-of-War

Doug_Walters Doug Walters | Articles

Read Time: 4:00 min

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Central banks are in a tug-of-war with sluggish economies around the world, but investors should not try to predict a victor. A robust portfolio designed to perform throughout the cycle is a better approach.

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko , Mackenzie Evans

Considering all of the headlines investors had to absorb this week, U.S. stocks were remarkably sanguine, finishing flat on the week. The Saudi oil attack, a Fed rate cut, and surprise Repo rate spike all failed to spook markets. Yet it is notable as you read our headlines from this week that they are notably downtrodden. There are two takeaways: 1) the economic cycle is maturing, and growth is harder to come by, and 2) governments and central banks are willing to do what it takes to keep growth positive. We do not subscribe to market timing and would caution investors against trying to guess who will win the battle between a slowing economy and accommodative central banks. Instead, for some portfolios, we are choosing to increase exposure to Minimum Volatility equities, which would tend to hold their value in decline better, yet should participate in the upside should central banks prevail. Advancements in investing technology now allow investors to access factor exposures like Minimum Volatility directly through exchange-traded funds (ETFs) rather than through individual stock portfolios.

Headlines This Week

The attack on Saudi oil facilities last Saturday shocked the oil markets. Worries over oil supply initially sent prices higher by over 10%.

  • Thankfully, the Saudis were able to calm the markets by announcing they will repair their oil facilities sooner than initially expected. Also, President Trump called for releasing crude from the Strategic Petroleum Reserve.
  • Despite volatility, oil prices finish the week higher by roughly 7%.

The overnight lending rate (also known as Repo rate) had a rocky week. This rate is primarily used by the Fed to control short-term liquidity.

  • The Fed had to inject cash into the Repo market multiple time this week to get things under control.
  • While there have been multiple opinions on the issue, the Fed committed to providing liquidity as needed and announced a longer date Repo operation to clear up any problems.

The U.S. Fed cut the overnight lending rate by 0.25% from 2.25% to 2.00% as expected.

  • While the rate cut was as expected, there is a division amongst the Federal Open Market Committee (FOMC) members.
  • Some see the U.S. economy strong with no cut needed. Others see a decline in manufacturing output, lack of long-term investments, and uncertainty surrounding trade policy warranting more stimulus. One member also called for a 0.50% rate cut.

The Bank of Japan, Swiss National Bank, and Bank of England held their rates steady.

  • Japan and Switzerland’s rates are already negative.
  • All three central banks have signaled more stimulus might be coming to combat a global growth slowdown and stubbornly low inflation.

India’s government is planning to cut taxes by $20 billion to stimulate its economy.

  • This cut will trim their corporate tax rate to one of the lowest in Asia.
  • India is hoping the tax cut will help to boost private investment, attract foreign companies, and increase job growth in the country.
0.25%

The Fed cut rates another 0.25% to 2.0% as expected

The Week Ahead

The U.S. will release its third revision for Q2 Gross Domestic Product (GDP) numbers next Thursday.

  • The GDP shows the value of all the goods and services purchased during the given time period.
  • Early indicators point to no change from the 2% previously reported.
  • A high reading is generally seen as a good sign for the U.S. Dollar.

Next Friday, the U.S. will also release its Nondefense Capital Goods Orders (excluding Aircraft) for August.

  • This figure measures the cost of orders received by manufacturers for capital goods (goods expected to last for 3+ years).
  • Analysts expect a 1% increase from the last release.
  • Since these types of goods involve larger investments, they are sensitive to the U.S. economic situation.

A fairly light week for central banks, with New Zealand rounding out the list of recent Interest Rate decisions, with their announcement coming next Wednesday.

  • Most experts believe they will hold their rates at 1.00% following the surprise cut of 0.50% at their last meeting.
  • While rate decisions are limited, there will be many central bankers out facing the public and releasing minutes from their recent meetings.

Stock Highlights From Max

The Payback

This week’s action was skewed in favor of dividend-paying sectors, as central banks across the globe joined the Fed in driving interest rates lower. Outside of the yield sectors, REITs and Utilities, Energy sector was the standout. The attack on Saudi oil production spiked crude prices significantly. Industrials, Communication Services, and Financials were the laggards. Strategy related news this week include…

Qualcomm

  • Qualcomm Inc. (QCOM) claimed it achieved a significant milestone in 5G strategy this week when it completed the purchase of the remaining interest it had in RF360 Holdings. The Singapore-based joint venture with TDK corporation (TTDKY) produces front-end filters which enable Qualcomm to deliver complete 4G/5G RFFE solutions. The cost was $3.6 Billion, which is less than the company’s estimated revenue for this quarter ($4.7 Billion).

Cisco

  • Cisco Systems Inc. (CSCO), on the other hand, was in the news because of a deal they did not make. On the day of DataDog’s (DDOG) IPO, news came out that Cisco was willing to buy the company for more than the $7 Billion valuation the company was seeking for its IPO. But the platform for cloud applications decided to pass. The 1st day pop in stock price of 49% justified the rejection for now.

MicrosoftJPM logo

  • Two big bellwethers announced dividend boosts this week. JP Morgan Chase & Co. (JPM) increased its quarterly dividend by 12.5% to $0.90. The annual dividend of $3.60 is roughly a 3% dividend yield. Investors would have to go to the 2027 maturity on the company’s bonds to get that kind of yield. Microsoft Corp. (MSFT) also moved to return its cash hoard to investors. The software giant bumped its quarterly dividend by 11% to $0.51. That was not the only move for the company. It also announced a $40 Billion share buyback plan. The company will buy back 4% of its stock, but there is no expiration to this authorization so it may take a while. So far, the company has spent over $100 Billion on share buybacks since 2010. This trend should add significant fodder to politicians call to ban buybacks!

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