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Strategic Insights

Volume 7, Edition 16 | May 7 - May 11, 2018

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Mother Knows Best

Doug_Walters Doug Walters | Articles

Read Time: 5:30 min

Vol5_ED16_2016

The S&P 500 continued the rally that began last Thursday as a strong earnings season winds down. For anyone struggling to figure out how to navigate this volatile market, research suggests you should ask mom…

Market Review

Contributed by Doug Walters

U.S. stocks gained over 2% this week, with pundits struggling to put their finger on exactly why. Washington provided a lot for investors to think about, but perhaps it was simply a focus on higher earnings.

Much Ado About Nothing

Sometimes the market drivers are obvious and other times more elusive. This week we had the latter. Earnings season is largely wrapped up, leaving most of the headline limelight to Washington. Investors are processing a lot on the political front: pulling out of the Iran deal, progressing trade talks with China, NAFTA negotiations, and details released regarding the upcoming North Korea talks. Each of these events involves significant unknowns, which investors tend to shun. Yet stocks were up.

With the Q1 earnings season slowing down, perhaps investors are re-evaluating valuations. As we reported last week in our Asset Allocation section, with over 90% of stocks having reported, earnings are up about 25% compared to Q1 2017.  At the start of this week, stocks were down about 7% from their January peak. A decline in stocks combined with a 25% rise in earnings is a recipe for dramatically lower (and more attractive) valuations (using a simple PE ratio).

We would love to say that we always know how the market will behave, but as this week showed, that will never be the case. Being humble as an investor is an important attribute, as overconfidence in one’s ability to call the direction of the market is a well-established behavior fault of many investors. We recommend staying invested and enjoying the full return the market has to offer. As our Spotlight section discusses, moms are particularly skilled at this.

Spotlight: Mom is an Investing Natural

On this Mother’s Day weekend we give a special investing shout out to moms. At Strategic we have built an investment process designed to protect us from the negative behavioral biases that can damage portfolio performance. Research shows that moms (or more generally women) are less prone to at least one behavioral bias: overconfidence. In the investing world overconfidence is a dangerous but natural human trait. Those who erroneously believe that they can outsmart the stock market, which, by definition, reflects the combined wisdom of the world’s investors, are doomed to failure. It turns out that men are far more prone to overconfidence than women, and this leads to excessive trading and more attempts at market timing. One study showed that households with high trading turnover saw retirement savings about 35% lower over a 30-year period than those with average trading habits. In other words, a more humble approach to investing could have turned a $2M nest egg into $3M. This Mother’s Day, give the moms in your life a big hug (and perhaps control of your investments)!

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Strategic Update

Contributed by Max Berkovich , Aleksey Marchenko

STRATEGIC ASSET ALLOCATION

Catch-22

U.S. equity markets enjoyed a nice run this week, led by small capitalization stocks. Even emerging markets stocks joined-in as the U.S. dollar weakened against a basket of major currencies. Bond markets finished slightly lower this week as 2-year U.S. Treasury yields continue to creep towards 10-year highs. Speaking of higher yields…

  • Higher U.S. Treasury yields along with stronger economic growth may help strengthen the U.S. dollar as global investors are drawn to the more attractive U.S. yields. Currently, the spread between 10-year German Bund yield and the U.S. equivalent is at an all-time high, with a yield differential of about 2.41%.
  • A stronger U.S. dollar may result in more buoyant economic growth than other developed nations, lower trade deficits (as foreign goods become cheaper), and slower Federal Reserve interest rate increases (good for equity markets).
  • A stronger dollar, unfortunately, does come at a cost. U.S. exports would generally decline as our goods and services will become more expensive for the rest of the world to purchase. Emerging markets may suffer as servicing the dollar-denominated debt will be more expensive. Global capital may also leave emerging markets as higher U.S. yields will be relatively more attractive by comparison.

STRATEGIC GROWTH

Over the Top

The Industrial, Material, and Energy sectors were bunched at the top, while Consumer Discretionary was the laggard, despite a solid earnings report from…

  • The Walt Disney Company (DIS) topped expectations on both sales and earnings. ESPN proved to be less of a drag than initially feared, but Parks (revenue up 13% year-over-year) and Film Studio (up 21% year over) were the stars. While results were impressive, analysts focused on the over-the-top (OTT) services and a new concern over the company’s ability to acquire the Fox (FOXA, FOXB) assets, as a rival submitted what sounds like a sweeter offer.

STRATEGIC EQUITY INCOME

Flip-Flop

The Financial sector edged out Energy for the leadership spot, while Consumer Staples finished at the bottom. Speaking of Consumer Staples…

  • Walmart Inc. (WMT) secured a $15B acquisition this week. The retail giant managed to acquire a majority equity stake in India’s Flipkart, an e-commerce platform. Alphabet (GOOGL, GOOG) will also take a small stake as part of the deal. Investors believe Walmart was squeezed to pay more than they should have by rival Amazon (AMZN), who attempted to secure the stake as well. The investment may be pricey, but a foothold in a fast-growing market is a critical investment for Walmart. Softbank (SFTBY) owns a 20% stake thru its Vision Fund, but the latest news has them flip-flopping on selling that stake as part of this transaction. Details are still not clear so stay tuned for clarity.
Indices & Price ReturnsWeek (%)Year (%)
S&P 500 2.42.0
S&P 400 (Mid Cap)2.22.0
Russell 2000 (Small Cap)2.64.6
MSCI EAFE (Developed International)0.6-0.3
MSCI Emerging Markets1.8-0.2
S&P GSCI (Commodities)1.610.1
Gold0.41.1
MSCI U.S. REIT Index1.2-5.4
Barclays Int Govt Credit0.0-2.2
Barclays US TIPS0.0-1.8

The Week Ahead

Contributed by Aleksey Marchenko

THE WEEK AHEAD

Europe Will Set the SCENE for Next Week

Surveys such as the Empire State Index and the Philadelphia Fed Index, along with commentary from the Federal Reserve representatives for various regions, will provide some insight into the health and growth of U.S. manufacturing.

Cisco Systems in our Equity Income strategy is scheduled to report earnings on Wednesday.

  • Analysts are estimating 4% growth in sales and 8% growth in earnings.
  • Cisco has beat earnings expectations consistently since 2006, amounting to 48 consecutive quarters.
  • We look to find out more about its recent acquisition of Accompany.

Europe’s economic data, namely GDP, Industrial Production (IP), and Consumer Price Index (CPI), may move the markets if data tops analysts’ expectations.

  • Core CPI and GDP growth is expected to remain flat while Industrial Production is expected to show modest growth.

Non-monetary ECB meeting in Europe will take place on Wednesday. During this meeting, the group will discuss issues related to the economic relations, market and payment infrastructure, and supervision of banks in the region.

Economics data in the U.S. will primarily focus on retail sales, industrial production, housing starts and building permits.

  • Retail sales growth is estimated to slow down in April.
  • Industrial production has been expanding since October and will likely continue to grow through April.
  • Housing starts and building permits are expected to remain flat, but hovering around the 30-year median.

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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