Contributed by Doug Walters
Stocks ground slowly higher much of the week, as the S&P 500 ended up by about half of one percent. The week was not without drama, as U.S. unemployment came in at an impressive 4.4% and the U.S. House of Representatives pieced together enough support to pass a revised version of the American Health Care Act. While this was a significant legislative milestone, it is still just a bill.
The passage of the American Health Care Act is just step number one in Washington’s attempt to revamp the U.S. health care system. To get it through the House, the bill took an ideological turn to the right. Expectations are that the Senate version, however, will steer much closer center. If so, that will leave a daunting task of reconciliation for the conference committee.
- Conference committees are made up of members of the House and Senate whose role it is to find common ground between their differing versions of a bill. Whatever they decide will have big implications for the future of American health care.
- The impact on stocks broadly was minimal, but we have seen strength in health care insurers and service providers, while companies selling pharmaceuticals have been left behind. With the cost of health care rising perennially, there is expected to be pressure on drug manufacturers to keep prices in check.
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||0.3||4.7|
|Russell 2000 (Small Cap)||-0.2||2.9|
|MSCI EAFE (Developed International)||1.7||10.7|
|MSCI Emerging Markets||0.0||13.5|
|S&P GSCI (Commodities)||-3.0||-6.7|
|MSCI U.S. REIT Index||-0.6||-0.6|
|Barclays Int Govt Credit||-0.3||0.5|
|Barclays US TIPS||-1.1||0.5|
U.S. Unemployment Rate – April 2017
The U.S. unemployment rate dropped to 4.4 percent in April, near a 10-year low. Source: U.S. Department of Labor
Commodities, including oil and iron ore, sold off this week on oversupply issues as well as softening demand from China. Chinese crude imports grew at an impressive 14% last year, but are expected to ease going forward as their refining permits have declined. The oil market has reversed its gains following the OPEC deal last November as:
- US producers have ramped up shale production and brought down their costs,
- Oil producing nations, Libya and Nigeria, have shown signs of solving their security issues and ability to export, and
- Oil and gasoline storage levels remain near record highs.
One key factor for the price of oil will be the robustness of summer driving. While consumer confidence has risen recently, their driving miles have not. If drivers do not show up this summer, there could be a glut of gasoline left over, putting further pressure on the price of crude.
Investors are however less pessimistic on the price of oil than they were last year when it dropped to $26. This is because the overall global economy has strengthened, which bodes well for demand. On the supply side, if the price of oil does continue to fall towards its 2016 low, U.S. shale producers will be forced to reduce their drilling and help balance the market.
Contributed by Aleksey Marchenko
- France will go to the polls one more time on May 7th. Recent polls suggest pro-E.U. Macron may have a significant lead over Le Pen. However, as we learned in the U.S., the race is not over until the results are final.
- Energy sector has been under scrutiny as oil prices remain volatile. As earnings season winds down, we will be focused on results and guidance from Strategic holdings EOG Resources (EOG) and Enbridge (ENB).
- Disney is set to report second quarter earnings with analysts expecting sales of $13.4 billion and $1.41 earnings per share. But the primary focus will remain on their ESPN business and its progress in the face of cord-cutting and cord-shaving.
- U.S. Federal Reserve has set their target inflation rate at 2%. Analysts expect core inflation in April to remain flat at 2%, but a surprise to the upside, combined with last week’s very low unemployment rate, would likely raise the probability of another Fed rate increase.
- Priceline will be reporting their earnings on Tuesday. Analysts will be looking for any insight on travel and its growth. Thus far, major hotel operators like Hyatt (H), Hilton (HLT) and Wyndham (WYN) have reported earnings above analyst’s expectations, but direct peer Expedia, Inc. (EXPE) missed the mark.
STRATEGIC ASSET ALLOCATION
Strong and Steady
US stocks have enjoyed a strong and steady march to higher levels. Year-to-date, however, large capitalization growth stocks are in the lead, and by a wide margin. The Technology sector is the main contributor for the outperformance. While growth stocks have produced outstanding performance, that can change. A look at history shows that growth and value have been running neck and neck over the past five years.
- The combined market capitalization of the infamous FANGs (Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google/Alphabet (GOOG, GOOGL)) make up a significant portion of the Large Cap Technology sector at $1.2 Trillion.
- These four stocks represent 11% of the market cap of the Russell 1000 Growth index. To put this in perspective, if FANG stocks go up by 25% while the remaining 600+ stocks in the index remain unchanged, the growth index will go up by nearly 3%.
- On average, FANGs are up nearly 24% year-to-date.
Arm & Hammer
Technology continues to charge ahead, finishing the week as the leading sector. Energy, on the other hand, was the laggard as crude prices are flirting with a one-year low. In other strategy news…
- Church & Dwight Co., Inc. (CHD), manufacturer and distributor of household items such as Arm & Hammer baking soda, OxiClean, and Orajel, reported a strong quarter. The company beat expectations and reported organic sales growth of 2.3% and volume growth of 2.7%. The mostly domestic company continues to focus on the international growth of its brands, and success is evident with a 12.3% growth in international sales from a year ago.
STRATEGIC EQUITY INCOME
Honey, I Shrunk the Bank!
Just as in our Strategic Growth Strategy, Technology is the leading sector, while Energy is the laggard. One earnings report caught our eye…
- HSBC Holdings PLC (HSBC) reported first quarter numbers, which were mostly in-line with consensus. The bank benefited from higher interest rates, strong trading results, and a weaker dollar. The British company was the 6th largest bank in the world by revenue in 2016, with strong roots in Hong Kong. HSBC has exited over 100 businesses and 18 countries in the past few years. After the earnings release, bank analysts have focused on their continued strong capital position and balance sheet and are expecting more stock buybacks in the future.
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.2 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.
Advisory Services offered through Strategic Financial Services, Inc. Strategic Financial Services, Inc. and Cadaret, Grant & Co., Inc. are not affiliated.