Contributed by Doug Walters
Market jitters returned this week courtesy of trade concerns and an inverted yield curve (sort of). Investors replaced the joys of holiday shopping, which buoyed stocks last week, with fears that the current economic expansion is coming to an end.
A Trade Standoff
The U.S. economy is in the tenth year of economic expansion, and some are wondering if the current cycle is running out of steam. There is little evidence to support an end to growth in our view. Corporate earnings are expanding, GDP is steadily rising, and unemployment is low. However, a prolonged trade war with China could impact the strength of the economy in the short run, and the market is clearly on edge as trade negotiations between China and the U.S. progress. Both countries are incentivized to reach an amicable agreement, so we expect any impact on the market will be short-lived.
Spotlight: Heartbeat of America
In times of market unease, I always like to take a step back and put market volatility in perspective. If the price moves over the past eight weeks indicate anything, it is that the heartbeat of the market is beating strong. While we have had some difficult weeks of trading (like this week), we have also had some impressive gains. The net result is that stocks are little changed over the past two months.
Over the past eight weeks, the S&P 500 has been rising and falling with a steady rhythm
Volatility is a normal part of a healthy market, and not necessarily indicative of an impending recession. We have seen this story several times during the expansion of the past ten years. While our crystal ball is no clearer than anyone else’s, we see no reason at the moment why economic strength cannot continue.
STRATEGIC ASSET ALLOCATION
Aversion to Inversion
U.S. equity markets had a rough week, with small cap and value stocks lagging the most. International stocks are down as well, with emerging markets outperforming developed. Gold and bonds played their role well in diversified portfolios, stepping up this week to soften the blow…
- The 2-year U.S. Treasury bond was yielding slightly more than a 5-year U.S. Treasury bond this week, creating a partially inverted yield curve. The highly watched 2-year to 10-year spread has narrowed to mid-teens but has not inverted.
- Inverted yield curves occur when shorter-term bond yields are higher than those of longer-term bonds. Short-term bonds, like the 2-year U.S. Treasury, are very sensitive to the overnight lending rates which are determined by the U.S. Federal Reserve. Longer-term bonds like the 10-year U.S. Treasury are determined by the markets.
- Historically, bond yield curve inversions have been used to predict economic recessions. However, this partial inversion may be a transient supply/demand issue which could be remedied by a more dovish Fed.
Trip to the Salon
Consumer staples held in best during the tumultuous week. Consumer Discretionary did not, some of the blame can fall on…
- Ulta Beauty Inc. (ULTA) reported a solid quarter topping earning expectations and delivering sales that matched expectations. The company grew sales 16%, and comparable sales increased almost 8% for the quarter as well. Online sales also increased by 43% over the past year, and the company increased its store count by 89 so far in 2018. While guidance was slightly below consensus, management sounded a cautiously optimistic tone heading into the holiday season.
STRATEGIC EQUITY INCOME
Utility and REIT holdings were the clear leaders as interest rates ratcheted lower this week. Conversely, the Financial sector was the biggest laggard thanks to those lower rates and a flatter yield curve. While there was not major news for the strategy, there were several tidbits worth sharing…
- Fastenal Company (FAST) reported November sales figures. The distributor of industrial goods had daily sales increase by 12% last month. National Accounts (large customers) had sales jump 18% in November.
- Deere & Co. (DE) bumped up its dividend 10%.
- Chevron Corp. (CVX) unveiled a $20 Billion capital spending plan for 2019 this week. The energy giant will spend slightly more than half of it on growing production assets. Also, $4.3 billion is allocated to “Future growth projects” at the Tenzig field in Kazakhstan.
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||-5.2||-6.3|
|Russell 2000 (Small Cap)||-5.6||-5.7|
|MSCI EAFE (Developed International)||-2.8||-14.3|
|MSCI Emerging Markets||-1.6||-15.5|
|S&P GSCI (Commodities)||0.3||-7.9|
|MSCI U.S. REIT Index||0.4||0.6|
|Barclays Int Govt Credit||0.2||-2.1|
|Barclays US TIPS||0.5||-3.7|
The Week Ahead
Contributed by Aleksey Marchenko
Serving up the BEEF Next Week
Brexit vote will be held on Tuesday, December 11th. Members of Parliament will vote to: pass the proposed Brexit deal as is, pass it with amendments, or reject the deal entirely.
- If the Brexit deal is rejected, the UK government will have 21 days to act on six options: no deal, second vote, renegotiate the Brexit deal, hold a general election, hold a referendum, or consider a vote of no confidence.
- The odds of a Brexit revote are rising.
European Central Bank (ECB) will announce its rate decision on Thursday, December 13th.
- While no hike is expected, comments around the European Union’s monetary policy can potentially bring some volatility to global currency and fixed income markets.
Earnings from Cisco Systems (CSCO) will be announced this Thursday.
- Analysts expect 4% growth in sales and 14% growth in earnings.
Fed Chairman Jerome Powell will speak this Wednesday at 3 PM.
- During his last speech, Powell stated that current rates are very close to the neutral rate which determines if monetary policy helps to expand or contract the U.S. economy.
- With a low non-farm payroll number last week, declining crude oil prices, and a trade skirmish in the headlines, we will be watching to see if Powell reveals a new path of rate hikes for 2019.
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.