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Strategic Insights

Volume 5, Edition 4 | January 25 - 29, 2016

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On a High Note

Alan Leist III | Articles

Read Time: 4:30 min

highnote

Stocks rallied sharply this week to close out a tough month on a solid note. Once again, central banks drove the action with oil and corporate earnings chipping in.

Market Review

Contributed by Alan Leist, III

Stocks rallied sharply this week to close out a tough month on a high note. Once again, central banks drove the action with oil and corporate earnings chipping in.

Earnings Mid-season Report Card

At about the halfway mark of the 4th quarter corporate earnings season, the results so far have been enough to help stabilize stocks after the sell-off.

  • Expectations had been reset lower in recent months as growth is now set to be negative (~-5%) for the 3rd straight quarter led by declines in energy and material sectors.
  • The lower bar allows middling results to actually surprise to the upside and put a bid under stock prices.
  • According to Factset, 72% of companies have beaten earnings estimates and 50% are beating on revenues.
  • We have long argued that time and economic growth is needed to bring corporate fundamentals in line with stock prices 6 years into a +200% stock market rally.
  • The 4th quarter results and economic data points (see Doug’s GDP comments) do not indicate that enough healing has taken place to justify the next bull market. More time and economic growth is needed.
  • Meanwhile, global central banks (ex-U.S.) remain committed to stimulus programs, a market’s best friend.
72%

of companies have beaten earnings estimates and 50% are beating on revenues.

Economic Commentary

Contributed by Doug Walters

This week’s GDP release points to a consumer that is hanging in there (barely) and government that is stepping up (sort of).

Less than exceptional

The consumer represents about 70% of total consumption in the U.S. As such, robust consumer spend is a necessary part of a healthy economy.

  • The December GDP data showed that consumer consumption increased 2.6% over the course of the year. That is below the 3.3% growth posted last June and the long-term average of 3.2%.
  • While far from exceptional, consumer spend continues to grow above inflation. We will be watching this figure closely for signs of trouble (or hopefully improvement).

Picking up the slack

While a much smaller piece of the pie, Government spend is increasing at a rate not seen in six years. This comes after years of shrinking investment (at a time when some fiscal stimulus would have been welcome).

  • Growth in government defense spend has turned positive for the first time since 2010. We are also seeing growth in infrastructure spend as well as research and development. Whether this is a deliberate attempt to support slowing economic growth, or just necessary catch up after years of underinvestment (or both) is somewhat irrelevant.

Our conclusion

U.S. growth remains anemic, but importantly, is still positive and within the range seen over the past six years. However, we need to see the recent slide in the consumer halted to ensure a robust economy.

GDP_VOL5_ED4

Looking Ahead to Next Week

Contributed by Aaron Evans

Group Think

After months of campaigning, the presidential primaries officially kickoff with the Iowa Caucuses on Monday.

  • Iowans will gather in town halls and church basements to form the 1,681 precincts across the state to determine which candidates will have the early lead heading to New Hampshire.

Pay Checks

The first Friday of the new month brings us the latest job creation and employment data from the U.S. Department of Labor.

  • Following a solid 292k jobs added during December, expectations are for slower job growth in January, with the unemployment rate continuing to hover around the 5% mark.

Earnings ABC’s

Next week is a big 4th quarter earnings week for Strategic stocks with Alphabet (Google) leading the way followed by Exxon Mobil, Yum Brands and Merck among others.

  • Google reports following mixed reviews in the technology sector as Facebook and Microsoft posted solid numbers, while Apple and Amazon came up short.

Investment Strategy Update

Contributed by David Lemire , Max Berkovich

Strategic Asset Allocation

Life Below Zero (Japan Edition)

NatGeo watchers have enjoyed Life Below Zero since 2013, how Japan’s economy reacts to their central bank’s version remains an open question. The negative rates in Japan sparked an equity market rally that went global and helped to finish a tough month with an upswing. January 20th seems to have marked a near term low for many stock markets as the late month rally served to erase many double digit losses. The staying power of this rally is another open question due to lackluster GDP growth in the U.S.

Credit Duration

U.S. bond markets had a solid month although high yield and corporate debt lagged. While credit risk was out of fashion, interest rate risk was in vogue. Government debt outperformed asset backed and investment grade bonds driven by gains in longer-term bonds.

Tipping the Balance

The gyrations in stock and bond markets have pushed equity weights below our targets, but the margins remain reasonable. However, developed international remains on our watch list with U.S. small cap also showing some promising signals for a potential add.

Strategic Growth

No Surprises

As the month comes to an end, it’s no surprise that the leading sector was consumer staples and the financial sector was the laggard. Some stock highlights…

  • Children’s clothing company Carter’s Inc. (CRI) has had a great ride so far in 2016 mostly because competitor Children’s Place (PLCE) disclosed 6-7% same store sales jump, a signal that the overall industry is healthy.
  • On the other side Expedia, Inc. (EXPE) the online booking agent has had a rough month. Fears of a global slowdown was topped by the Zika Virus fears as drags on global travel.

Strategic Equity Income

Skeptical Spectra-tor

Income producing telecom and utilities sectors finished the month in the green while banks in particular had a forgettable month.  The highlights include…

  • Energy pipeline operator Spectra Energy Corp. (SE) increased its dividend by 9.5%. That was enough to ensure investors that unlike its peers Spectra’s balance sheet is in solid shape.
  • Airplane maker Boeing Inc. (BA) topped earnings expectations this week, but a weak outlook spooked investors. Fear of lower for longer oil prices and global economic slowdown may bite into the $489 Billion backlog.
Indices & Price ReturnsWeekYear
S&P 500 1.74-5.07
S&P 400 (Mid Cap)2.32-5.78
Russell 2000 (Small Cap)1.44-8.84
MSCI EAFE (Developed International)1.47-7.27
MSCI Emerging Markets1.62-9.05
S&P GSCI (Commodities)2.08-4.93
Gold1.855.41
MSCI U.S. REIT Index0.80-3.48
Barclays Int Govt Credit0.331.18
Barclays US TIPS1.311.56

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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