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Strategic Insights

Volume 6, Edition 17 | May 1 - May 5, 2017

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I’m Just a Bill

Doug_Walters Doug Walters | Articles

Read Time: 5:00 min

050617_Main

U.S. equities continued to rise this week, albeit at a very measured pace. The steady progress was in contrast to the tumultuous path taken by the American Health Care Act on route to passage in the House.

Market Review

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.

Civics 101

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.

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  • 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 ReturnsWeek (%)Year (%)
S&P 500 0.67.2
S&P 400 (Mid Cap)0.34.7
Russell 2000 (Small Cap)-0.22.9
MSCI EAFE (Developed International)1.710.7
MSCI Emerging Markets0.013.5
S&P GSCI (Commodities)-3.0-6.7
Gold-3.16.8
MSCI U.S. REIT Index-0.6-0.6
Barclays Int Govt Credit-0.30.5
Barclays US TIPS-1.10.5
4.4%

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

Economic Commentary

Contributed by Mark Abdalla

Crude Reality

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.

050817_Chart

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.

Week Ahead

Contributed by Aleksey Marchenko

FED-UP

  • 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.

Strategy Updates

Contributed by Max Berkovich , Aleksey Marchenko

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.

STRATEGIC GROWTH

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.

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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