Contributed by Doug Walters
Equity markets have had a rough start to the second quarter, with the S&P 500 down over 1% on the week. Over the past few days, we have witnessed an unprecedented shift in stance from the President on some of his most high-profile campaign talking points. In general, he appears to be moving away from the populist rhetoric that helped motivate his base. While surprising, most of these shifts are likely to be viewed positively by investors. Rising geopolitical rhetoric more likely drove the declines we witnessed.
In recent days, it has been hard to keep pace with the changing stances at the White House. In general, we would argue that these revised opinions are incrementally more market-friendly. The major flip-flops include:
- Trump telling The Wall Street Journal that Fed Chairwoman Yellen is “not toast,”
- His increasingly harsh words for Russia for backing Syrian President Assad,
- The Export-Import Bank which he had previously cited as unnecessary is now “a very good thing,”
- NATO is, “no longer obsolete,” and
- The Chinese are “not currency manipulators.”
The challenge for investors will be to deal with this lack of certainty, which is likely the new normal.
War or words
Something else that has changed is President Trump’s take on what “America First” means. Initially, he promoted isolationism and nationalism, with substantial input from chief strategist Steve Bannon. However, Bannon’s sphere of influence appears to be shrinking, and the President may be recognizing that America First must include a substantial role in the world geopolitical stage.
- The use of a large MOAB bomb in Afghanistan (nicknamed the Mother of All Bombs), spooked the market. But the main concern of the market is North Korea. The U.S. is in a war of words with North Korea, who threatened nuclear retaliation following the U.S. deployment of an aircraft carrier into the region.
It is difficult, if not impossible to predict the eventual outcome of these geopolitical threats. As investment managers, we focus on managing the risks that are within our control. We seek out high-quality investments that we believe offer a reasonable margin of safety. Over the long-term, we believe that these investments have the potential to both protect and grow our client’s assets.
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||-1.5||1.2|
|Russell 2000 (Small Cap)||-1.4||-0.9|
|MSCI EAFE (Developed International)||0.0||5.7|
|MSCI Emerging Markets||0.1||11.7|
|S&P GSCI (Commodities)||1.6||0.8|
|MSCI U.S. REIT Index||0.9||1.9|
|Barclays Int Govt Credit||0.6||0.9|
|Barclays US TIPS||0.8||1.8|
A bit of a bubble
On December 4th of 2013, former Federal Reserve Chairman Alan Greenspan went on Bloomberg television and claimed that the “Bitcoin price is in a bubble.” He was right. The price of Bitcoin dropped from $1,145 that day to a low of $183 thirteen months later. The price has rallied since then as,
- Supply is limited given Bitcoin is “mined” online through complicated algorithms,
- Demand has increased as a means of making online purchases,
- There has been speculation of a Bitcoin ETF (Exchange Traded Fund),
- It is a preferred currency for the procurement of illegal products and services, and has been used for funding terrorist groups.
A Bitcoin ETF could enable the virtual coin to become a mainstream investment product as the ETF would trade on the same platforms as stocks. The Securities and Exchange Commission last month, however, rejected the application by the Winklevoss twins (also known as Winklevi, famous for Olympic rowing and creating ConnectU which they claim was stolen by Mark Zuckerberg to create Facebook). The Commission stated that because the markets where Bitcoin is traded are unregulated and they have “concerns about the potential for fraudulent or manipulative acts and practices.”
The Strategic investment team would not recommend investing in Bitcoin as it does not come close to meeting our Quality and Value mandate. We take a strong stance against owning a cryptocurrency that helps to fund global crime and terrorism. We do however believe it can provide lessons on how bubbles are created and eventually burst. Caveat emptor.
Hunt no further, here are next week’s Easter EGGS
Earnings season is set to kick-off next week with companies primarily in Healthcare (UNH, JNJ) and Financials (MTB, BLK, USB, BBT).
- With two rate hikes from the Federal Reserve in the past four months, close attention will be paid to Banks’ profitability.
Gross Domestic Product (GDP) in China is expected to grow 6.7% for the first quarter vs. previous year growth of 6.8%.
- 6.7% might be slow growth for China, but most of the developed world is growing at less than 2%.
Global trade will be reported from the European Union (EU). Any progress of EU’s trade surplus could signal a faster and stronger recovery in Europe.
- The data will also be used to try and quantify the initial impact of Brexit.
Surveys measuring overall manufacturing in the Philadelphia and New York Federal Bank regions are expected to contract a bit from their highs in February. Despite the expected contraction, manufacturing in both regions is forecast to remain robust.
- The Philadelphia Fed Index is expected to grow 25.5% in April versus 32.8% growth in March.
- The Empire State Index is expected to grow 14% in April versus 16.4% growth in March.
Contributed by Max Berkovich ,
STRATEGIC ASSET ALLOCATION
- The effects of Amazon are becoming more visible as major retailers like Macy’s (M), Sears & K-mart (SHLD), and JC Penny (JCP) continue to close stores as they become unprofitable. In the world of finance, news networks spread bold headlines like “Conventional Stores are Dead,” but our channel checks show; stores are still busy serving their customers.
- It is clear that a significant amount of shopping is still happening at stores and not online. In fact, stores like Target (TGT) and Strategic Equity Income holding Walmart (WMT) are leveraging their locations to serve online consumers faster and cheaper than dot-coms that lack a traditional storefront. Even Amazon (AMZN) has built stores of their own and has floated the idea of opening more stores in the foreseeable future. This week we even mused at a rumor that Amazon was exploring an acquisition of Whole Foods Markets (WFM). Perhaps the real work of e-commerce is to put an end to the growing glut of stores, cluttered by bad business models and poor customer service, and allow better operators to flourish.
- Despite their decline, equity markets remain surprisingly resilient despite the U.S.’s response to Syria’s use of chemical weapons and North Korean tensions. The VIX, an equity volatility index, has spiked and the 10-Year U.S. Treasury yield of 2.25% is at a 2017 low, yet the S&P 500 is less than 3% away from an all-time high.
Another chip shot
Consumer sectors were the leaders this week, while the Technology sector was the undisputed laggard thanks to the semiconductors…
- Qualcomm Corp. (QCOM) continues to get jabbed by mobile phone makers. This week BlackBerry (BBRY) received an $815 Million settlement award from Qualcomm for royalty overpayments.
- Skyworks Solutions Inc. (SWKS), though not directly involved, felt the sting of recent supplier consolidation by major customer Apple Inc. (AAPL) who is in-sourcing several microchips and cutting out some vendors.
STRATEGIC EQUITY INCOME
Getting down to the nuts & bolts
Consumer Staples were a notable standout week, while the Industrial sector was stung by an earnings report from…
- Fastenal Co. (FAST) reported a mostly in-line quarter, but it was not enough for investors eager for growth. Though sales grew 6.2% year-over-year and the vending machine units increase by 17% from last year, it was a decline in gross margins and store count that stuck out.
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