Going the Distance
Alan Leist III
This week in Strategic Insights: There will be no wire-to-wire win for equities this year. The volatility that has characterized equities in 2015 was ever present again this week.
Economic Commentary
Stop-and-start pattern of economic growth persists as GDP numbers for Q1 were lower than expected.
Slow out of the gates
The growth in real GDP, a broad inflation-adjusted measure reflecting the goods and services produced in the U.S., came in at 0.2% for Q1. Although the GDP figure was substantially higher than the -2.1% for Q1 of 2014, it was lower than consensus expectations of +1.0%.
- Relative to last year, the low GDP growth number was driven by cuts in business investment, lower exports and a cautious consumer.
Missed the Mark
Q1’s real GDP didn’t quite hit the projected +1.0%.
The view from Millionaire’s Row
According to the Fed, investors should not read too much into the low GDP number. The Fed cited ‘transitory factors’, such as a harsh winter, as a cause for low growth.
- The impact of a harsh winter on economic readings will dissipate as we move further into the year. Questions remain however if other headwinds such as low oil prices, strong dollar and a cautious consumer will prove to be as transitory.
Odds falling
Disappointing Q1 GDP figures have become a recurring theme. Since 2010, Q1 GDP growth has averaged 0.6% relative to 2.9% for rest of the year.
- Although forecasters expect a rebound similar to the one seen last year, the extent of the rebound is not yet certain given macroeconomic headwinds such as the strong dollar. The odds of a rate hike for 2015 however has likely gone down.
Market Review
There will be no wire-to-wire win for equities this year. The volatility that has characterized equities in 2015 was ever present again this week.
Stumbled
Equities got off to a rough start this week on weak Q1 GDP figures and The Fed’s indifference.
- The Fed sees the Q1 weakness as “transitory”. It would appear the finish line for stimulus remains.
- As a result, the S&P500 ended the week in negative territory, despite an impressive run down the stretch.
I am the greatest, I said that even before I knew I was.
Muhammad Ali
The gloves are off
The media landscape is changing at an unprecedented rate thanks to rising contenders like Netflix (NFLX) and Hulu with their cord-cutting fans. The fight for relevance took an interesting turn this week.
- Media heavyweights Comcast (CMCSA) and Time Warner Cable (TWC) called off their proposed merger following regulatory scrutiny. Both will have to find other means of maintaining their competitive fitness.
- Verizon (VZ) threw a sucker-punch, offering “featherweight” bundles which carve off Disney’s (DIS) ESPN and other sports channels into standalone offerings. With Disney suing, the battle between these two Strategic holdings looks destined for court.
Looking Ahead to Next Week
The Money Team
Saturday’s highly anticipated boxing match between Floyd Mayweather and Manny Pacquiao brings with it some impressive economics:
- In addition to a $25k gold/diamond mouth guard, $2M in ad space on shorts and $1,500 nose bleed seats, the $300M-$400M est. in pay-per-view sales should benefit Strategic holding Time Warner’s (TWX) HBO network.
Stick and or Move
Friday brings the April jobs report, and the first data of this key metric in the 2nd quarter.
- Following a lackluster Q1 GDP growth number, investors are looking to see if recent weak data is more than just a pause in the domestic economic recovery.
Full Card
A slew of Strategic holdings will report Q1 earnings next week including Disney, HSBC and Prudential.
- Disney reports following this weekend’s release of the latest movie in The Avengers series; the last of which grossed $1.5B worldwide.
Investment Strategy
STRATEGIC Asset Allocation
Overseas Action
Getting up off the mat: After weathering a blistering assault from the supply side, energy markets have rebounded, helping to lift the commodity space.
Down but not out
U.S. markets took a 1-2 punch from weak macro-economic and earnings reports. However, the broad market remained on its feet due to strength in the heavyweight division (Mega-caps).
Split decision
No clear winners are apparent as the judges (Central Bankers) wait for consumers to start punching above their weight.
STRATEGIC Growth
The Baby Race
The Health Care sector was hit with an exacta of unfortunate events; a sell-off in biotech and continued drama in the Mylan NV (MYL) love tringle. In other news…
- Carters Inc. (CRI), the children’s apparel company, reported a route of a quarter, topping earnings and revenue estimates. Double-digit domestic sales growth and full year guidance of 10-14% earnings growth was also a handsome prize.
STRATEGIC Equity Income
On the ropes
A move higher for interest rates was an especially painful upper-cut for utilities and REITs this week. Speaking of taking a few punches…
- HSBC Plc (HSBC) has been playing rope-a-dope for the past few years. The bank has been receiving blows from regulators, especially in the UK. To retaliate, the bank is mulling moving their HQ out of London and spinning off its UK operations. Also, the company has put its Brazil unit up for sale this week.
| Indices & Price Returns | Week | Year |
|---|---|---|
| S&P 500 | -0.4% | 2.4% |
| S&P 400 (Mid Cap) | -1.3% | 4.2% |
| Russell 2000 (Small Cap) | -3.1% | 1.9% |
| MSCI EAFE (Developed International) | -1.0% | 7.8% |
| MSCI Emerging Markets | -1.4% | 9.4% |
| S&P GSCI (Commodities) | 1.9% | 6.1% |
| Gold | 0.0% | -0.4% |
| MSCI U.S. REIT Index | -3.1% | -1.6% |
| Barclays Int Govt Credit | -0.7% | 0.6% |
| Barclays US TIPS | -1.0% | 1.7% |
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