In a holiday-shortened week, U.S. equities could not hold on to Wednesday’s all-time highs, ending the week down modestly. In the world of fixed income, the 30-year U.S. Treasury touched an all-time low. The economic headwind of the Coronavirus was top of mind, as an increasing number of cases are popping up outside of China, particularly in South Korea and Japan. We are still of the belief that, as with past outbreaks, the ultimate market impact will be minimal. With that said, we remain vigilant about identifying opportunities within pockets of weakness.
Headlines This Week
- The U.S. dollar strengthened against a basket of major currencies, climbing to a 3-year high.
- U.S. economic outperformance versus Japan, Britain, and Germany, as well as uncertainty over the coronavirus outbreak, are driving the Greenback to fresh highs.
- While a stronger dollar can lower borrowing costs and make imports cheaper, it also makes U.S. exports more expensive for the rest of the world, which can negatively impact domestic manufacturers.
- The U.S. short and long-term Treasuries are near inversion once again; that’s when the short-term Treasuries have a higher yield than long-term Treasuries.
- A bearish narrative surrounding global growth seems to be creeping back into the equity markets and may put some breaks on the bullish sentiment markets saw at the beginning of the year.
- The 30-year U.S. Treasury is trading at the lowest yield level in history at 1.89%.
- Over 87% of S&P 500 companies have reported earnings.
- For Q4 2019, the blended year-over-year earnings growth rate for the S&P 500 is almost 1%.
News from Omaha
- Warren Buffet’s Berkshire Hathaway (BRK.A, BRK.B) revealed in its filing that they purchased some exchange-traded funds (ETFs).
- Some viewed the news as Buffet’s embrace of ETFs. Although a $25 million purchase of an S&P 500 ETF, is microscopic relative to the company’s over $120 billion cash hoard.
- For the record, the ETFs were purchased in the Company’s pension plan, not outright in the investment portfolio.
- At Strategic, we have found ETFs to be excellent tools for expressing our investment and allocation philosophies.
U.S. 30-year bond yield
The U.S. 30-year Treasury Bond yield hit 1.89% this week, setting a record intraday low. Fears of a global slowdown, sparked by the Coronavirus is a potential explanation.
The Week Ahead
Just two of our portfolio companies report earnings next week: Booking Holdings (BKNG) and The TJX Cos (TJX).
- The short-term and long-term travel effects of the coronavirus are likely to be at the forefront of investors’ minds on Booking’s earnings call.
The U.S. sees several report releases next week:
- Consumer Confidence figures release next Tuesday, and the Non-Defense Capital Goods Orders ex-Aircraft for January release on Thursday.
- Given how vital the consumer is to the U.S. economy, the sentiment out of these two reports could have a significant impact on future growth.
- Thursday also sees the second round of preliminary GDP figures for Q4 released.
On Saturday, investors will get a chance to peruse Warren Buffet’s shareholder letter.
- The legendary value investor sits on a massive pile of cash, over $120 Billion at last count.
- Buffet has been targeting an “elephant” sized acquisition but has yet to pull a trigger.
Stock Highlights from Max
Blocking and tackling
- A short week for stocks yielded a tough one for Technology sector. The Industrial sector found a way to eke out a positive week, but high dividend sectors were the leaders thanks to falling interest rates. Earnings this week were mostly positive, but it was the blocking and tackling that the companies did, not growth, that was embraced by the markets. For example…
- Healthcare real estate company Ventas, Inc. (VTR), our lone REIT holding, reported in-line earnings. Still, the owner of a diverse healthcare-related portfolio of roughly 1,200 properties announced an interesting development that jolted investor enthusiasm for an otherwise boring company. The company is launching an investment vehicle for institutional investors to invest directly in medical properties. Ventas will leverage its brand, scale, and expertise to manage the “Ventas Life Science and Healthcare Real Estate Fund.” Ventas will be the general partner and own initially 20% of the fund. Initial funding from Ventas will be in the form of five properties. Which initially, might lower earnings by a few pennies per share, but Ventas will net proceeds of $600 Million from the transaction, which will be used to pay down debt. The deleveraging and shifting of assets are a positive attempt by the company to combat recent headwinds. The company was stung in the past year with a persistent fear of overcapacity in senior care facilities, rising labor costs, and general concern of healthcare structural change from Washington D.C. Speaking of a company impacted by Washington, D.C.…
- Deere & Co., Inc. (DE) was able to surprise investors with a sizable beat. The CEO has declared there are “…early signs of stabilization in the U.S. farm sector.” This is in reaction to easing of trade tension with China. Worldwide sales for the company came in 4% higher than last year at $7.63 Billion. In addition, the company has been buying back stock, maintaining lean inventory and cutting costs, while waiting for a turnaround in its business. Also reporting earnings…
- Medtronic PLC (MDT) which beat on earnings and missed slightly on revenue. Even a slight boost in guidance didn’t attract investor attention. In a market obsessed with fast-paced growth, 4.5% organic growth doesn’t raise an eyebrow.
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