Making Dad Smile
Doug Walters
The stock market has given dad much to smile about this year and added a bit more joy this week. Now if it would only stop raining in Upstate NY so dad can get out on the golf course…
Contributed by Doug Walters , Max Berkovich
Father’s Day is this Sunday. In addition to adding a new tie to his wardrobe, the economy has given dad a lot for which to be thankful. Unemployment is low, and wages are rising faster than inflation (finally). The stock market has been rewarding investors with little interruption for much of the last decade and added a smidge to those returns this week with Small Cap and Value leading the way. Now if it would only stop raining in Upstate NY…
Headlines This Week
Stocks held on to last week’s gains as economic data was good enough, but not so good that it dashed investor hopes of a 2019 rate cut.
- The Mexico tariff threats have diminished for now in an apparent agreement on managing the migrant flow. There was no notable progress on China tariffs as hundreds of companies and trade associations sent a letter to the administration urging a deal.
- The Consumer Price Index (CPI) came in a bit soft but is still near 2% (an important level) for the Fed, and below wage inflation (3.4%) meaning salaries are rising faster than the price of goods. The data unlikely moved the needle on the expectation that the Fed will provide the economy a boost with a rate cut sometime this year.
- Oil declined on the week despite a bump when two tankers were attacked in the Persian Gulf. While the impact on oil was minimal, the rising tensions between the U.S. and Iran are a net negative for risk assets like equities.
- Big Tech firms, like Apple, Alphabet, Amazon, and Facebook, are under scrutiny by the FTC, Justice Department and Senate for wielding too much power, with some calling for them to be broken up. Their shares brushed off this pressure this week, putting in a positive performance.
The Week Ahead
Central banks will be on full display as The Federal Reserve (Fed), Bank of England and Bank of Japan face a rate decision.
- The big three will take all the headlines, but several central banks in Asia also have rate decisions (Taiwan, Philippines, and Indonesia)
- While expectations for a rate cut from the Fed are on the rise, the market is implying a low probability it occurs at this meeting, with July being the more likely decision point.
On the individual company front, Oracle Corp. (ORCL) will release earnings. Expectations are for year-over-year growth in earnings but on lower revenue.
Trade relations will focus on the visit from Prime Minister Trudeau of Canada visiting President Trump in Washington.
- Talks will center on ratification of the United States-Mexica-Canada Agreement (USMCA) as a replacement for the North American Free Trade Agreement (NAFTA).
- Also, Canada will look to enlist Presidents Trump’s aid in dealing with the detention of two prominent Canadians by the Chinese, allegedly in response to the detention of the Huawei CFO Meng Wanzhou in December.
With the St. Louis Blues winning the Stanley Cup and the Toronto Raptors wrestling he NBA title from Golden State Warriors, the sports world will shift its focus to FIFA Women’s World Cup of Soccer and the Baseball season, but this weekend the focus will be the U.S. Open in Pebble Beach.
Happy Father’s Day!
Stock Highlights from Max
Getting Hitched
Consumer Discretionary was the top sector this week, thanks to upgrades from analyst of several of our holdings, but also due to a strong retail sales report and news that retailers are raising prices (successfully) to make up for cost pressures due to tariffs. The biggest laggard was the the Energy sector, but not without a run from Industrials. Speaking of the Industrials sector…
- Sunday, news broke that United Technologies Corp. (UTX) was merging with Aerospace and Defense company Raytheon Co. (RTN). After spinning-off both the Otis Elevator segment and Carrier air-conditioning next year, UTX’s remaining Aerospace business would combine with Raytheon to form a giant company with $74 Billion in sales. The merger of equals will lead to UTX holders owning 57% of the new company. The initial reaction was positive for both stocks as the deal would create $ Billion of synergies and help UTX manage the debt they took on to acquire Collins. The enthusiasm waned as fears formed about approval as President Trump voiced his concerns. Also, several high-profile hedge funds raised opposition to the deal, including Bill Ackman of Pershing Square and Dan Loeb of Third Point.
- A more under the radar deal was Merck & Co.’s (MRK) acquisition of privately held Tilos Therapeutics for $773 Million (some of it up front and the rest in milestone payments). Merck is adding to its cancer treatment arsenal. Also, Intel Corp. (INTC) purchased startup Barefoot Networks for an undisclosed amount. Barefoot’s specialty is silicon that is programmable for public cloud deployment and ethernet chips.
- Lastly, BB&T Bancorp (BBT) announced a name for the new entity it will create once its merger with SunTrust (STI) is complete. The new bank holding company will be Truist Financial and will be the largest bank combination since 2008.
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