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Strategic Insights

Volume 8, Edition 35 | October 14 - October 18, 2019

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Beating the News Cycle

Doug_Walters Doug Walters | Articles

Read Time: 4:00 min

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Despite a steady flow of challenging political and geopolitical news, the S&P 500 closed up on the week. What should investors do when headlines become volatile?

Contributed by Doug Walters , Max Berkovich , Mackenzie Evans

U.S stocks ended the week higher thanks to a one percent gain on Tuesday. There was no single driver for equities, rather it was a compilation of mild positives, including improved sentiment about Brexit and China trade talks, as well as a decent start to the corporate earnings season. In the past few weeks, there has been a flood of volatile political and geopolitical headlines.

In times like this, we are often asked, “what are you doing about it.” In short, nothing and everything. If one concedes that they cannot predict the future, then the best you can do is prepare for it. Our philosophy is to build diversified portfolios, consistent with your unique willingness and ability to take on risk, with attractive factors (like Quality, Value, and Momentum) at the core. That is true in both volatile and quiet times; news volatility is irrelevant. Patient investors ignore the noise and wait for the market to offer up genuine opportunities.

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Headlines This Week

Middle Kingdom

6% Gross Domestic Product (GDP) growth would be celebrated with a stock market rally if reported in the developed world. But in China, this is the weakest growth in three decades.

  • Weak economic growth in the Middle Kingdom may help push expediency in the trade deal with the U.S.

United Kingdom

The 3 ½ year Brexit drama may finally be coming to an end. The Brexit deadline is at the end of this month, and it looks like Prime Minister Boris Johnson has agreed to a deal with the European Union (E.U.). Now both the U.K. and E.U. parliaments must approve.

  • The messy divorce has done its damage to the U.K. economy, and now the actual event may be within sight.

Ancient Kingdom

Tension within the ancient kingdom of Syria may temporarily ease as Turkey agreed to a cease-fire. This agreement could give time for Kurdish forces to retreat to a designated safe zone, and hopefully minimize bloodshed.

  • The Kurds have not signed on to the agreement, and Turkey is not obligated in the deal to remove its troops from Syrian land.

Earnings Are the True Royalty

Over 70 S&P 500 companies reported earnings, and so far, 81% have posted better than expected results according to FactSet.

  • Expectations were low coming into the quarterly results, but it does bode well for the market when those muted expectations are exceeded.
  • That picture will become much clearer in the next few weeks with a heavy dose of reports on the docket, especially from technology companies.

The Week Ahead

The earnings keep coming with 16 of our portfolio companies at-bat.

Procter & Gamble (PG) leads the way on Tuesday, with Anthem (ANTM), The Boeing Co. (BA), and Microsoft (MSFT) all reporting on Wednesday.  Intel (INTC), Visa (V), and Verizon Communications (VZ) come in towards the end of the week.

  • P&G will be our first look at the consumer.
  • Microsoft has seen its fair share of growth thanks to its booming cloud computing business, which is second only to Amazon’s Web Services.
  • Given Visa’s presence in the global payments industry, a strong quarter could lend evidence to buoyant consumer sentiment.

Brexit continues to dominate international headlines as Parliament is scheduled to vote on the latest agreement this Saturday.

  • Early reports seem to indicate that this latest edition has little chance of being approved.
  • The EU has stated they will not grant another extension. However, experts say it is almost certain they will offer one should this bill not pass.

The People’s Bank of China and the European Central Bank are set to announce their latest policy decisions next week.

  • The consensus is that the ECB will leave rates unchanged at -0.5%.
  • This will be ECB President Mario Draghi’s last policy meeting before incoming President Christine Lagarde takes the reins on November 1st.

Tuesday will be the first game of the World Series.

  • The Washington Nationals have secured their spot with a sweep of the St. Louis Cardinals. The Houston Astros lead in the American League Championship vs. the New York Yankees. Come Monday Yankee fans may be longing for the good old days…

20 Years Ago this Month |1999 World Series – Game 4

 

Stock Highlights From Max

The Premium

The Technology sector was the laggard this week. Health Care, on the other hand, was the undisputed leader, thanks to an opioid-related settlement and great earnings results from…

UnitedHealhcare

  • UnitedHealth Group (UNH) topped expectations and raised guidance. The health care insurance and service provider grew revenue by 6.7% year-over-year, which was better than the 6.2% growth in insurance premiums, which means services and investment income boosted growth. The service unit Optum grew revenue by more than 13%. The medical cost ratio, a measure of insurance premium divided by total revenue of 82.3% in the quarter, was a healthy development. Traditionally a ratio of around 85% was considered desirable. The company also increased its full-year guidance for earnings per share from $13.95 – $14.15 to $14.15 – $14.25 and an equally impressive boost in revenue guidance.

McKesson

  • UNH results helped boost the whole health care insurance and services space, one of those that was helped was McKesson Corp. (MCK). The medical supply distributor was increased even more dramatically by news of an $18 Billion, 18-year settlement agreement with over 2,000 lawsuits from local and state governments with the several health care supply distributors. The settlement assigned a number to a previously unknown liability to help clear up uncertainty.

JPM logo

  • Back to earnings… JP Morgan, Chase & Co (JPM), and BlackRock Inc. reported premium results as well. BlackRock, which now manages $6.96 Trillion in assets, reported net inflows of $84 Billion in the quarter. Even better news, despite fee compression in the industry, the company was able to improve profitability.  JP Morgan exceeded expectations with strong fee income and interest income coupled with good expense management. Not all banks did as well as JP Morgan. Several missed expectations due to lower interest income, thus justifying the premium JP Morgan carries over peers.

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