Emerging Leaders
Doug Walters
Nearly a month into 2019 and we are seeing a rotation in market leadership, providing a good opportunity to revisit the merits of portfolio diversification…
Contributed by Doug Walters , Max Berkovich ,
U.S. stocks took off their rally caps this week, taking the first pause since Christmas. The S&P 500 ended the week flat while Emerging Markets outperformed. Following a challenging year for Emerging Markets in 2018, they have come back strong as one of the best performing asset classes this year. In a well-diversified portfolio, it is easy to point to the worst performing asset in any given year and question why you own it. Yet, jettisoning Emerging Markets after last year would have resulted in missing one of the best performing assets so far this year.
Headlines this week (Jan 21-25, 2019)
- U.S. stocks broke a four-week win streak with a flat performance.
- No visible progress made on trade talks with China.
- U.S. Small-Cap stocks continue to outperform.
- Emerging markets, Foreign bonds, and Gold are up on U.S. dollar weakness.
- Half of the S&P 500 Financials have reported Q4 results, with an average of 18% earnings growth.
The Week Ahead (Jan 28-Feb 1, 2019)
- Earnings reports from Apple (AAPL), Microsoft (MSFT), Facebook (FB), and Visa (V)
- 1/30: The Federal Reserve Rate Decision (no change expected)
- 2/1: Non-Farm Payrolls Report (consensus is 168,000)
Spotlight Asset Allocation: Biotech
The Small-Cap Biotech sector is emerging strong this year, with the SPDR Biotech ETF (XBI), up 14.7%. Large pharmaceuticals are ready to buy these companies to generate growth by leveraging their massive balance sheets, distribution channels, and expertise. We believe Biotech (particularly small cap) is a sector with a long-term secular growth tailwind and we see it as a useful addition to enhance a portfolio’s overall small-cap exposure.
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Semi-Sweet Results
Earnings reports are in full swing this week with results mostly positive. Consumer Staples and Energy sectors were the laggards. The leading sector this week was Technology thanks to earnings results from…
- Lam Research Corp. (LRCX) the microchip equipment maker reported a surprisingly strong quarter. The company topped earnings expectations and served up a $5 Billion share repurchase program. The actual results, while weak (2% year-over-year revenue decline), were better than feared and the buyback is about 20% of current market capitalization. The better-than-feared quarter gave a nod to our microchip equipment maker holdings KLA-Tencor Corp. (KLAC) who will report their earnings on Tuesday and microchip maker NXP Semiconductors NV (NXPI).
- The Lam news was interpreted as the long-feared micro-chip cycle may not have slowed. Not all our microchip related holdings had a sweet week though. Investors received Intel Corp.’s (INTC) earnings with reservations. Even though, the company reported a 9% year-over-year revenue jump, the soft guidance and a miss on results from the Data Center unit rained on the microchip parade. The company is expected to name a new CEO in the next month and may be setting the bar low for a new leader. Another chipmaker having a sour week was Qualcomm Inc. (QCOM). The mobile phone chip giant lost a court battle in Germany over copyright violations by a phone maker. This was a small skirmish in the bigger global legal battle over how much the company is charging for its patents.
Price Returns
| Indices & Price Returns | Week (%) | Year (%) |
|---|---|---|
| S&P 500 | -0.2 | 6.3 |
| S&P 400 (Mid Cap) | 0.1 | 9.4 |
| Russell 2000 (Small Cap) | 0.0 | 10.0 |
| MSCI EAFE (Developed International) | 0.5 | 5.5 |
| MSCI Emerging Markets | 1.4 | 6.9 |
| S&P GSCI (Commodities) | -0.8 | 9.4 |
| Gold | 1.5 | 1.3 |
| MSCI U.S. REIT Index | 1.1 | 7.6 |
| Barclays Int Govt Credit | 0.2 | 0.2 |
| Barclays US TIPS | -0.1 | 0.2 |
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