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Strategic Insights

Volume 9, Edition 4 | January 27 - January 31, 2020

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Fighting Fear

Doug_Walters Doug Walters | Articles

Read Time: 4:00 min

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Brexit officially happened, and the President impeachment trial reached a fever pitch, yet it was fear of a virus epidemic that appeared to be the biggest drag on U.S. equities this week.

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko ,

Significant declines on Monday and Friday outweighed gains for the rest of the week as the market continued to contemplate the economic impact of the coronavirus outbreak. The timing could not have been worse for China, as they are in the throws of their New Year celebrations with hundreds of millions traveling. The response from the Chinese has been swift and open, in contrast with the past, where China often opted to underplay concerns and resist outside help. While the virus has caused massive disruptions for many in China and will be a near-term economic drag, history would suggest this effect will be temporary and will have no lasting impact on the U.S. economy. Investors need not worry, in our opinion. With low interest rates supporting a stable U.S. economy and the Fed ready to act, we expect history to repeat itself.

Headlines This Week

Still viral

  • The U.S. steps up its warning on China travel as the number of coronavirus cases approaches 10,000.
  • The U.S. is advising Americans not to travel to China.
  • The death toll hit 213 on Friday.
  • The World Health Organization (W.H.O.) declared the coronavirus outbreak a “public health emergency of international concern.” The organization is worried that countries with weak healthcare systems are not equipped to prevent the spread of the virus.

Eurozone

  • Eurozone preliminary 4th quarter GDP growth was flat.
  • The inflation data in the region also came in weaker than expected. The European Central Bank (ECB) has noted in the past that they are data dependent and are focused on bringing inflation up to their target of 2%.
  • The rates in the region are already negative, leaving the ECB toolkit very light to curb stagnant growth and low inflation.

In the U.K.

  • The United Kingdom leaves the European Union on Friday evening, after years of political and trade deliberations.
  • The exit process will last until the end of the year.
  • The Bank of England (BoE) kept rates unchanged, noting that there is no substantial data to move rates one-way or the other.

Fed and Treasury Yields

  • The U.S. Fed kept rates steady on Wednesday, noting the strength of the U.S. consumer.
  • Fed’s Chairman Jerome Powell said Wednesday that the Fed is doing what it can to bring the inflation to their 2% target.
  • U.S. Treasuries are moving lower as investors shift assets to safety over concerns that the Wuhan coronavirus will become a pandemic.

The Week Ahead

Earnings season rolls on as a number of our portfolio companies report results next week:

Alphabet (GOOGL), McKesson Corp (MCK), NXP Semiconductors (NXPI), Hexcel (HXL), Disney (DIS), KLA Corp (KLAC), Merck (MRK), Prudential (PRU), QUALCOMM (QCOM), and Cognizant Technology Solutions (CTSH).

  • Investors may be eager to hear from Disney on the potential near-term effects that the coronavirus may play at their theme-parks.
  • NXP, KLA, and Qualcomm could also provide some insight into the potential impacts on the semiconductor business due to disruptions in the Chinese market.
  • Hexcel recently announced a merger with Woodward, Inc.  The deal is expected to close in Q3 2020.

The first Friday of the new month sees the Nonfarm Payroll figures released.

  • Current projections expect 156,000 jobs added in January.
  • This slight improvement over December’s figure is consistent with a tightening job market.
  • The other noteworthy reports coming from the U.S. next week include the ISM Manufacturing PMI and Non-Manufacturing PMI.

The only major player next week to release their interest rate decision will be the Reserve Bank of Australia.

  • Most experts expect rates to remain the same.

Stock Highlights from Max

Sweet and Soft

Coronavirus continues to spook markets. The Energy sector continued its streak of weeks as the worst sector. Even earnings did not help soothe the sector. The Health Care sector was next in line, dragged down by health insurers. Our lone utility holding was a source of safe haven, but it was the Consumer Staples sector that took the lead. Staples not only benefited from being a defensive sector, but also from great earnings from….

Mondelez Logo

  • Mondelez Intl. Corp. (MDLZ) beat expectations and recorded organic growth of 4.1% in the quarter, blowing away the 2.5% analysts penciled in. The growth came from both volume gains and price increases. Another treat served up was guidance, high single-digit earnings growth, and +3% sales growth. The same trend was demonstrated by…

Church & Dwight Logo

  • Church & Dwight Co., Inc. (CHD) reported in-line results but notched organic sales growth of 4.4% in the quarter. More impressive was that international sales grew 10.5% and stated that it was able to raise prices. The owner of the Arm & Hammer brand will introduce a new Arm & Hammer detergent in the current quarter. Less impressive results came from…

Facebook Logo

  • Facebook Inc. (FB), which beat estimates, and grew revenue by 25%, but served up guidance for decelerating growth. The decelerating guidance took away from the positives like a $10 Billion stock buyback and 34 Million new daily users. The Wall Street Journal’s Heard on the Street column was quoted, “In this day and age that means finding 34 million people who have either never heard of the company’s numerous privacy missteps or simply don’t care.” Another tech company to report…

Microsoft

  • Microsoft Corp. (MSFT) topped expectations and was able to notch yet another strong growth quarter from Azur its cloud computing unit, up 62% year-over-year. The Technology sector was not done, offering treats such as…

LOGO

  • Lam Research Corp. (LRCX), a manufacturer of semiconductor equipment, topped estimates and guided for strong results for next quarter. The results confirmed an already strong trend in the chip cycle. Last but not least…

Boeing Logo

  • Boeing Co. (BA) surprised no one with the first annual loss in over two decades, leaving the new CEO David Colhoun asking for patience when he said: “We recognize we have a lot of work to do.”

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Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.3 billion.

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