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Strategic Insights

Volume 7, Edition 17 | May 14 - May 18, 2018

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Domesticate Your Portfolio

Doug_Walters Doug Walters | Articles

Read Time: 5:30 min


Small cap stocks broke all-time highs while their globalized peers struggled to hold on to last week’s gains as trade talks stall.

Market Review

Contributed by Doug Walters

The S&P 500 gave back a little ground this week, but small-cap stocks continued to rally, as major small-cap indices hit new all-time highs. Trade talk dominated market sentiment for much of the week.

A Trade-Off

Trade talks with China and our NAFTA partners kept capital markets on their toes this week, as sentiment shifted multiple times between “encouraging progress” and “a deal unlikely.” We have seen how discussions with China can directly impact our strategy holdings. As we discuss in our strategy update, NXP Semiconductors (NXPI), has seesawed double-digit percentage points as China has used the pending acquisition by Qualcomm as negotiating leverage. But the trade talks have had a broader impact at the asset class level as well with the diverging performance of large and small-cap stocks.

As we discuss in our asset allocation section, U.S. small-cap stock indices have reached an all-time high in a week where large-caps struggled to find footing. Year-to-date, the resilience of small-cap has resulted in a four-percentage-point performance advantage of small-cap versus the S&P 500. Some of this gap is likely due to trade talks. Smaller U.S. companies will have less international exposure than their larger peers and are thus less likely to be negatively impacted by a protracted trade war. We continue to be positive on small-cap stocks whose domestic focus are likely to make them bigger beneficiaries of lower corporate taxes and potential M&A activity driven by cash repatriation.

Spotlight: Volatility - A Stock Picker's Friend

Often volatility is spoken of negatively when it comes to investments. However, the lack of volatility would also mean a lack of investment return. The return that investors earn is compensation for the risk taken. As stock pickers, we see volatility as an opportunity. For example, as the chart below shows, this latest bout of volatility has driven Consumer Staples stocks down 12% while Tech has rallied 10%. Undoubtedly there are bargains to be found in the Consumer Staples sector.


Strategy Update

Contributed by Max Berkovich ,


Sizing Up the Market

Both U.S. equities and bonds finished slightly in the red for the week, while U.S. small-cap stocks, as measured by the Russell 2000 index, advanced over 1.5% and are up nearly 6.4% for the year. From the February lows, small-caps are up over 10%. Robust earnings growth and reduced valuation are finally being noticed by investors. Speaking of small-cap earnings growth and valuations…

  • In the last two quarters, earnings grew by nearly 41% versus a year ago.
  • Analysts expect earnings to grow by nearly 23% in 2019.
  • Unfortunately, sales growth and capital expenditures are expected to decline in 2018 and 2019.
  • The one-year forward Price-to-Earnings ratio is near five-year lows, suggesting an attractive valuation relative to large capitalization stocks, especially large-cap growth stocks.
  • We entered this year with an overweight allocation to small-cap and increased it further as the year progressed.


The Middle Kingdom

Consumer Staples had a rough week, and that was before Friday when a soup maker reported an awful quarter that dragged all food companies down. The Materials and Energy sectors, on the other hand, had a terrific week.  Speaking of a terrific week…

  • NXP Semiconductors Inc. (NXPI) has been tied up in a long and eventful merger transaction with fellow strategy holding Qualcomm Inc. (QCOM). The deal has hit many snags, the most recent being the Chinese government. Earlier this week NXP received news that China will stop slowing its review of the deal. NXP is caught in the middle of trade negotiations between the U.S. and China. The recent thumbs-up came thanks to President Trump agreeing to give a Chinese company ZTE Corp. relief from sanctions. Further good news came thanks to China allowing a Bain Capital led group to acquire Toshiba’s memory unit, which was held-up in the same trade negotiation scrimmage.


The Roll-Up

The Industrials sector was the leader, while high dividend paying sectors, Utilities and Telecoms, were laggards thanks to a 10-year high in bond yields. In other news…

  • Enbridge Inc. (ENB), an energy transportation company, announced that it would undergo a transaction to untangle its complicated structure. The short story is the company will buy back its various pipelines for $8.94 Billion. The shareholders of the pipelines will be paid in stock at no premium to the market price. Tax law changes were a major reason for the move and should help boost cash flow.
Indices & Price ReturnsWeek (%)Year (%)
S&P 500 -0.51.5
S&P 400 (Mid Cap)0.22.3
Russell 2000 (Small Cap)1.25.9
MSCI EAFE (Developed International)-0.6-0.2
MSCI Emerging Markets-2.3-1.8
S&P GSCI (Commodities)1.010.6
MSCI U.S. REIT Index-3.5-8.7
Barclays Int Govt Credit-0.2-2.4
Barclays US TIPS-0.6-2.4

The Week Ahead

Contributed by

Investing HEFT

Housing Data such as building permits, new and existing home sales, as well as home price index data will be reported on Wednesday and Thursday. With interest rates on the rise, housing data will be watched for signs of cooling.

  • New and existing home sales are expected to remain unchanged.
  • Building permit growth is estimated to remain flat despite a tight housing market.
  • Home prices have been on a steady climb. Higher commodity prices especially lumber which is up over 40% this year may be the culprit.

Eurogroup meeting, a gathering of the Finance Ministers of each Member State of the Eurozone, will commence on Thursday.

  • During their last meeting, the group focused on Greece, after the country showed better than expected GDP growth as well as a budget surplus. The heavy debt load of the country will probably be a major topic again.

FOMC meeting minutes will be released on Wednesday. Also, Chairman Powell will speak at the Financial Stability and Central Bank Transparency panel in Sweden on Friday. Other FOMC members will be out on the speech circuit this week as well.

TJX Companies (TJX), William Sonoma (WSM), and Medtronic (MDT) from our Equity Income Strategy and McKesson (MCK) from our Strategic Growth strategy are scheduled to report earnings next week.


About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $1.8 billion.