Forward Progress
Doug Walters
As NFL teams prepare to take the field this weekend, it was developments far afield that helped drive positive sentiment in stocks this week…
Contributed by Doug Walters , Max Berkovich , ,
Stocks made a comeback this week, driven primarily by developments overseas. Brexit appears set for further delay. PM Johnson will need a Hail Mary to avoid sending negotiations into yet another overtime. Trade negotiations with China are back on the table. International stocks, which have lagged this year, made up some ground. We also saw signs of life in Value stocks. Value is what we would call a “rewarded factor,” meaning that over time, value (i.e. cheap) stocks have tended to outperform the broader stock market. For much of the past decade, rewards have been hard to come by for Value investors. Cheap stocks perform best in the early stages of economic recovery. We do not believe we are there yet. However, if the economy (and stocks) contract, we would likely see more opportunity in Value.
Headlines this Week
The U.S. economy added 130,000 payrolls in August while the unemployment rate remained unchanged at 3.7 percent. The job market and consumers remain robust, although the 12-month rolling average of new jobs is on a declining trend.
- Ezekiel Elliot’s $90 Million deal with the Dallas Cowboys is not in these numbers since the agreement was signed in September.
U.S. and China officials committed to hold another round of trade talks in October, raising hopes for an eventual trade deal.
- This deal may be in more advanced stages than the negotiations with Melvin Gordon III and the L.A. Chargers.
Brexit dominated headlines after the UK’s Prime Minister Boris Johnson attempted several political maneuvers to prevent extending the Brexit deadline, and push for a “no-deal Brexit.” Parliament acted swiftly to block a “no-deal Brexit,” passing legislation with the help of some members in Johnson’s party. The PM tried to call for new elections to allow voters to decide, but he failed to rally the two-thirds of Parliament needed.
- Antonio Brown and the Oakland Raiders drama seems minor compared to the Brexit showdown, but both Brown and Johnson may be out of jobs soon.
The Fed Chair Jerome Powell said they don’t see any signs of a recession on the horizon and they are committed to defending the 2% inflation target. He also mentioned that companies around the world are holding back their investments while the U.S. and China are engaged in a trade war.
- Despite continued attacks from the President, the Chairman’s job may be safer than Eli Manning’s.
U.S. Unemployment Rate
Source: Bureau of Labor Statistics
The Week Ahead
The Brexit drama continues next week with the UK Parliament’s second chance to vote on whether to hold a snap election.
- The opposing Labour Party refused to support the first vote to ensure the Brexit delay bill would pass beforehand.
- There are reports that the Labour Party, or even Prime Minister Johnson himself, could invoke a vote of no-confidence.
- The opposition wants to hold the election after the current October 31st Brexit deadline. This will ensure the focus remains on finding a solution to the current gridlock. Johnson would use the no-confidence tactic to force the election to take place beforehand.
The European Central Bank is scheduled to make a rate decision.
- The focus will be what stimulus the Central Bank has up its sleeve to give a boost to the sluggish economy.
Closer to home, the U.S. will be releasing the Consumer Price Index (CPI) and Producer Price Index (PPI) numbers for August.
- Experts expect the yearly CPI rate to remain stable at 1.8% and the PPI to tick up slightly to 2.2% year-over-year.
Oracle Corp (ORCL), one of our portfolio companies, releases earnings next week.
- Oracle is continuing to build out the cloud partnership it formed with Microsoft earlier this year.
- As a global technology bellwether, Oracle should offer a good view of global data trends and enterprise spending.
The NFL kicks off the first full week of its 100th season.
- The Kansas City Chiefs appear to be the consensus early favorite to reach the Super Bowl in February.
Stock Highlights From Max
The Kick-Off
The Technology sector began the month of September with a booming kick. Semiconductor-related stocks were superstars, leading the sector to top billing this week. Health Care, on the other hand, started the month with a fumble. Speaking of fumbles…
- The Federal Trade Commission announced it had agreed on a record fine with Alphabet, Inc. (GOOG, GOOGL). The $170 Million settlement was for allegations that the tech giant knowingly and illegally collected personal data from young children. The data was used to target ads to the children. As part of the settlement, the company will identify children’s content on its Youtube platform and remove targeted ads from that content and obtain parental consent for any data collection. The $170 Million number sounds light based on an estimated $40.2 Billion revenue Alphabet is expected to take in this quarter. The Wall Street Journal is reporting that on Monday, a group of three dozen State Attorney Generals will announce an antitrust probe into the company, kicking off even more scrutiny into the $840 Billion Tech behemoth.
- Prudential Financial Inc. (PRU) made a splash this week announcing a major pick-up from the free-agent market. The insurance company will shell out $2.35 Billion for start-up Assurance IQ, a direct to consumer health and financial wellness solutions platform. The deal is slated to be accretive to earnings in 2020. The company also boosted its 2019 stock buyback program by an additional $500 Million to $2.5 Billion.
- Lastly, the always sure-handed Costco Wholesale Corp. (COST) managed to snag a few big catches this week. First, the Company announced it will construct a 2nd store in Shanghai on the heels of an extremely well-received opening of its first store last week. The first location had to limit to 2,000 customers to manage overcrowding that shut the store down early on its first day. The company also reported same-store sales jumped 6.9% in August and online sales jumped 23.9% last month as well.
| Indices & Price Returns | Week (%) | Year (%) |
|---|---|---|
| S&P 500 | 1.8 | 18.8 |
| S&P 400 (Mid Cap) | 1.6 | 14.9 |
| Russell 2000 (Small Cap) | 0.7 | 11.6 |
| MSCI EAFE (Developed International) | 2.2 | 9.5 |
| MSCI Emerging Markets | 2.4 | 4.4 |
| S&P GSCI (Commodities) | 1.9 | 8.1 |
| Gold | -1.3 | 17.0 |
| MSCI U.S. REIT Index | 1.4 | 22.0 |
| Barclays Int Govt Credit | -0.3 | 5.0 |
| Barclays US TIPS | -0.3 | 7.1 |
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