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Strategic Insights

Volume 6, Edition 47 | December 18 - December 22, 2017

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Doomed to Repeat

Doug_Walters Doug Walters | Articles

Read Time: 4:30 min

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Stocks traded sideways in a slow news week as Republicans put the finishing touches on their tax bill. Meanwhile, as housing continues to recover from the financial crisis collapse, we see the telltale signs of bubble behavior elsewhere.

Market Review

Contributed by Doug Walters

The S&P 500 managed to squeak out a positive week as the market absorbed the final details of the Republican tax bill signed into law on Friday. There were multiple positive data points from the housing market, which now looks to be quite healthy. In contrast, we are increasingly seeing unhealthy behavior in another market.

Naughty or Nice

Republicans made good on their promise to sign into law changes to the tax code before year end. The headline changes are the reduction in the corporate tax rate from 35% to 21%, and the lower rates and higher bracket thresholds for individuals. In the near-term, most individuals will see less tax coming out of paychecks in 2018, but some will be worse off next April courtesy of the more restrictive deductibility of mortgage interest and state and local taxes. Ultimately, success will depend on whether or not the bill encourages companies to invest in capital, hire, and raise wages, thus expanding economic activity. If companies merely pocket the extra profit or return it to shareholders, the bill could disproportionately benefit those that need it the least.

Tis the Season

Was the dot-com bubble that long ago? I suppose 17 years is a decent stretch of time, but those who forget what 2000 was like are doomed to repeat past mistakes. Back then, any company that added “.com” to its corporate name or description instantly saw its share price rise. The same phenomenon is happening today, as we officially enter the silly season of the blockchain revolution. The latest example: an unprofitable iced tea company, Long Island Iced Tea Corp (LTEA), changed its name to Long Blockchain, and claims it wants to partner with or invest in blockchain developers. The shares were up nearly 300% on the news.

The advent of the internet did produce some real winners, and perhaps blockchain will as well. However, just slapping a magic word on a failing or unproven company should not be viewed as a green light for investors. At Strategic, we stick to investing and never advocate speculation. Caveat emptor.

Indices & Price ReturnsWeek (%)Year (%)
S&P 500 0.319.9
S&P 400 (Mid Cap)0.914.7
Russell 2000 (Small Cap)0.813.7
MSCI EAFE (Developed International)1.320.8
MSCI Emerging Markets1.431.6
S&P GSCI (Commodities)1.97.4
Gold1.510.3
MSCI U.S. REIT Index-2.4-0.1
Barclays Int Govt Credit-0.5-0.4
Barclays US TIPS-0.60.0

Economic Commentary

Contributed by Doug Walters

More Chimneys

The November housing data is out, and Santa will have his work cut out for him this Monday, as new home sales rose 17.5%. We typically do not put too much emphasis on monthly growth figures, which are highly volatile, but this is a notable number and indicative of a broader positive trend in housing. The last time new home sales grew over 17.5% was 1992!

17.5%

If You Build It…

A 17.5% increase in new home sales in November is further evidence that housing has recovered from the financial crisis.

What is more important though, is the bigger picture. Sales of new homes bottomed from the financial crisis in 2011 at an annual rate of 270,000. Since then, sales have been steadily increasing towards November’s figure of 733,000. While this latest print is still well below the 2005 peak of 1,389,000, it is above the longer-term average of about 650,000. Combine this with positive data on existing home sales, and we would argue the housing market in aggregate is officially healthy again.

In 2018, we will see if the new tax law, which puts additional restrictions on the deductibility of mortgage interest, creates a headwind for further housing improvement.

Week Ahead

Contributed by Aleksey Marchenko

The END of the Year is Near!

Economic data will be light next week with a focus on the Consumer Confidence Index and Pending Home Sales.

  • The Consumer Confidence Index remains near the 10-year high.
  • Pending Home Sales activity will be watched closely following the positive data we discussed in the Economics section.

No trading on Monday.

  • Markets will be closed on Monday, December 25th and will reopen on December 26th.
  • Some international markets will also be closed on Tuesday the 26th for Boxing Day.

Dallas and Richmond Federal Reserve indexes will be released on Tuesday, providing more insight into the manufacturing outlook in the U.S. as we enter the new year.

Strategy Updates

Contributed by Max Berkovich , Aleksey Marchenko

STRATEGIC ASSET ALLOCATION

Less Flat

The difference between the 2-Year and 10-Year U.S. Treasury deviated from recent trend and steepened this week. It was not because the 2-Year was reversing course, but rather because the stubborn 10-Year finally moved higher.

  • The run-up in yield (yield goes up as the price of bonds goes down) by the 10-Year from 2.35% to 2.48% boosted the 10-Year Treasury above the 2.44% level at which it started the year.
  • The spread (or difference) between the 2 and 10-year Treasury at 0.59% is a far cry from where it was at the start of the year (1.22%).
  • Also of note, the 30-Year Treasury at 2.83% is below the 3.10% yield at which it started the year.

STRATEGIC GROWTH

Fact Check

The Industrial sector was the leader this week thanks to the new tax law. The Financial sector was the laggard. Speaking of Financials…

  • Financial information provider FactSet Research Systems, Inc. (FDS) reported a mixed quarter. While the company beat estimates for earnings, revenue came in a bit light with a year-over-year growth of 5.8%. The company offered a little upside with its guidance but announced it would no longer provide short-term guidance, only fiscal year guidance. Disclosure: Strategic uses FactSet as one of our financial data providers.  

STRATEGIC Equity income

Aerial Assault

An impressive week from the Energy sector was a nice boost, while Utilities got their wings clipped by higher interest rates this week. Speaking of wings…

  • The Boeing Company (BA) is rumored to be in talks to acquire a competing aerospace company from Brazil, Embraer (ERJ). The talks were reported to be on hold pending input from the Brazilian government. The latest word from Brazil’s President Temer was that he “would not allow” a Boeing takeover, but would welcome new foreign investment in the company. Brazil wields a “golden share” in Embraer which effectively gives them a veto over a change in control for the company.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1 billion.

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