Love Your Portfolio
Doug Walters
International in the red, investors are blue. Thank goodness for bonds, and low vol too…
Contributed by Doug Walters , Max Berkovich ,
Valentine’s Day is around the corner, but no love letters were being exchanged between the U.S. and China, or between lawmakers trying to avoid another government shutdown. These headwinds, combined with weak international economic data, kept returns muted for equity investors. International stocks were particularly weak. Bonds and low volatility, dividend-paying equities held up well, providing a reminder of the importance of diversification and risk management in constructing a portfolio you can love.
Headlines this Week (Feb 4 – Feb 8, 2019)
- U.S. equities were flat this week. Energy and Materials were a drag, while high dividend payers like Utilities and Real Estate outperformed.
- The lack of progress on a Chinese trade deal was a headwind. The White House announced they would most likely not reach an agreement before round two of tariffs go into effect (March 2nd).
- Negotiators on Capitol Hill appear confident they will reach a deal to fund the government beyond February 15th, though the President’s signature is still in question.
- The European Commission reduced Europe’s economic outlook, sighting a slowdown in Germany and Italy. International equities pulled back, while U.S. bond markets rallied in a flight to safety.
- India bucked negative sentiment thanks to an unexpected cut in the repo rate and a change in stance from “calibrated tightening” to “neutral”. In December India overtook Germany to become the world’s 7th largest stock market.
- Over 65% of companies in the S&P 500 index have reported results, with aggregate earnings up by over 13%.
- The Energy sector is the biggest contributor, showing growth of over 98% year-over-year and contributing around 25% of the S&P 500 earning’s growth.
The Week Ahead
- 2/13: Cisco Systems (CSCO), the internet infrastructure giant, reports results
- 2/13: U.S. Consumer Price Index release (a barometer of the cost of consumer goods)
- 2/14: U.S. Producer Price Index release (measuring the price received by U.S. producers)
- 2/14: Japan and European preliminary GDP (along with a “sampan-load” of data from China throughout the week)
- 2/15: University of Michigan Consumer Sentiment Survey (makes for great headlines but of little predictive use)
- 2/15: Government funding expires unless a new spending bill is signed.
- Valentine’s Day – Do not forget your flowers and chocolates!
Spotlight: Valentine’s Wish List
According to the National Retail Federation (NRF), Americans will spend a record $21 billion on Valentine’s Day in 2019. While spending is expected to be up 6%, those planning to participate is anticipated to fall from 55% to 51% (and down from 63% ten years ago). So those still celebrating are spending quite a bit more! We have seen a trend in general with consumers away from physical goods and towards “experiences,” and according to the NRF, there is a giving gap on this front. While 25% plan to gift experiences (trips, events, spa visits), 40% list experiences on their wish list. Perhaps gift givers should spend more time on Expedia’s (EXPE) websites (see Max’s stock highlight below).
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Whistled for Traveling
The Materials and Energy sectors were laggards, the latter thanks to a dip in crude prices. The Utilities sector was the top player this week, but since we only hold one holding in the sector, we will give a nod to Consumer Discretionary. Discretionary’s performance can be credited almost entirely to one player…
- Expedia Inc. (EXPE) surpassed consensus earnings expectations when it reported its latest quarterly results. The travel booking agency that owns websites Orbitz, Hotwire, trivago, Travelocity, CheapTickets, Expedia, and Hotels.com reported that gross bookings were up 11% in the quarter and room night booking had similarly impressive growth. The company also booked a reservation for 10-15% EBITDA growth for the full year 2019. On another front, Expedia was also in the news thanks to a stock swap offer from Liberty Expedia Holding (LEXEA, LEXEB), which is a holding company that owns an interest in Expedia. If the two parties can come up with an agreeable exchange price, Expedia may be able to shake a quality hit the stock has been plagued by thanks to Liberty Media’s complicated ownership scheme. The glowing report from Expedia, sets us up for what we hope is an equally great report from another strategy name Booking Holding (BKNG) later in the month.
- Speaking of earnings and traveling, The Walt Disney Corp. (DIS) reported this week. The results were good, but the market wasn’t impressed. The solid results from Media Networks and Parks, Experience, and Consumer Products, were overshadowed by lackluster Studio and Entertainment unit results. A lot of focus will be on direct-to-consumer content this year… so stay tuned.
| Indices & Price Returns | Week (%) | Year (%) |
|---|---|---|
| S&P 500 | 0.0 | 8.0 |
| S&P 400 (Mid Cap) | 0.6 | 11.4 |
| Russell 2000 (Small Cap) | 0.3 | 11.7 |
| MSCI EAFE (Developed International) | -1.4 | 4.9 |
| MSCI Emerging Markets | -1.3 | 7.3 |
| S&P GSCI (Commodities) | -1.3 | 9.0 |
| Gold | -0.2 | 2.4 |
| MSCI U.S. REIT Index | 1.9 | 12.9 |
| Barclays Int Govt Credit | 0.3 | 0.7 |
| Barclays US TIPS | 0.1 | 1.1 |
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