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.
of companies have beaten earnings estimates and 50% are beating on revenues.
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.
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.
Looking Ahead to Next Week
Contributed by Aaron Evans
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.
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.
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
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.
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.
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
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 Returns||Week||Year|
|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 Markets||1.62||-9.05|
|S&P GSCI (Commodities)||2.08||-4.93|
|MSCI U.S. REIT Index||0.80||-3.48|
|Barclays Int Govt Credit||0.33||1.18|
|Barclays US TIPS||1.31||1.56|
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.3 billion.Overview
Strategic Financial Services, Inc. is a SEC-registered investment advisor. The term “registered” does not imply a certain level of skill or training. “Registered” means the company has filed the necessary documentation to maintain registration as an investment advisor with the Securities and Exchange Commission.
The information contained on this site is for informational purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Every client situation is different. Strategic manages customized portfolios that seek to properly reflect the particular risk and return objectives of each individual client. The discussion of any investments is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. Any representative investments discussed were selected based on a number of factors including recent company news or earnings release. The reader should not assume that an investment identified was or will be profitable. All investments contain risk and may lose value. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.
Some of the material presented is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Strategic Financial Services believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
No content on this website is intended to provide tax or legal advice. You are advised to seek advice on these matters from separately retained professionals.
All index returns, unless otherwise noted, are presented as price returns and have been obtained from Bloomberg. Indices are unmanaged and cannot be purchased directly by investors.