Contributed by Doug Walters
We are two weeks into the year, and equity markets are nearly a third of the way to our 15% S&P 500 prediction. Meanwhile, companies have begun to report Q4 earnings, giving us additional insight into the expected impact of tax reform.
Start Me Up
With the S&P 500 up 4.2%, 2018 has had the best two-week start to a year since 2003. We have seen a continuation of the leadership of growth over value (modestly), with traditional dividend-paying sectors, like Utilities and Telecoms lagging significantly. We still favor value this year, with the expectation for a rotation, given growth’s dominance last year. In our Spotlight this week, we discuss what this strong start could mean for the rest of the year.
Catching a Glimpse
Earnings season began this week, with Financial companies the first to report. We expect to get better insight into the eventual impact of tax reform as management provide updated guidance for the full year. J.P. Morgan (JPM) reported this week, with the CEO stating, “The enactment of tax reform in Q4 is a significant positive outcome for the country. U.S. companies will be more competitive globally, which will ultimately benefit all Americans. The cumulative effect of retained and reinvested capital in the U.S. will help grow the economy, ultimately growing jobs and wages.” Time will tell.
Spotlight: S&P 500 Year-to-Date Return
We looked at data over the past 90 years to see if a strong start to the year implies anything about the rest of the year. Sadly (and as academic theory would predict) we find zero correlation between the first 14 days and what happens the rest of the year. With that said, looking at the 10 best starts, the average return for the remainder of those years was 9.2%. Here’s hoping for average!
Contributed by Max Berkovich ,
STRATEGIC ASSET ALLOCATION
Equities continue their charge higher while bonds go the other way. The ten-year U.S Treasury flirted with a yield of 2.6%, with some pundits declaring the end of the 35-year bond bull market. The most widely followed bond indices are showing negative numbers for the year. Speaking of Indices…
- As a result of the Global Industry Classification Standard (GICS) structure revision, S&P Dow Jones and MSCI Indices will reclassify selected companies to updated sectors and sub-sectors. This will take place September 28, 2018.
- The Telecommunication Services Sector will be broadened and renamed Communication Services. This will place Google (GOOG, GOOGL), Facebook (FB), Twitter (TWTR), SnapChat (SNAP), and Netflix (NFLX) into the same sector as media companies DISH Network (DISH), Comcast (CMCSA), and Disney (DIS) and telecom giants Verizon (VZ) and AT&T (T).
- Other notable changes: The Internet & Direct Marketing Retail sub-industry of Consumer Discretionary will be updated to include all online marketplaces for consumer products and services. Also, a new sub-industry under Information Technology will be classified as Internet Services & Infrastructure, which will include data centers, cloud networking, storage infrastructure, and web hosting services.
Rise and Schein
Industrials took the lead this week, while the defensive Staples sector was the laggard. In other strategy news…
- Henry Schein, Inc. (HSIC), a distributor of dental, medical and veterinary products and services, announced the acquisition of 60% of Brazilian pet medication distributor ABASE. The transaction is expected to be accretive to earnings in 2019. ABASE had $27 million in revenue in 2017. This is the second acquisition announced in the past month, the previous being eVetPractice, a cloud-based veterinary practice management software provider.
STRATEGIC EQUITY INCOME
One Bad Break
With rates moving higher, unsurprisingly Utilities, REITs, and Staples sat out this week’s rally. Industrials continue to soar with Boeing (BA) leading the charge. Earnings season kicked off with the following…
- BlackRock Inc. (BLK) topped all expectations with revenue 20% higher year-over-year. The company reported assets under management at $6.29 Trillion, with $245 Billion of net inflows in the iShares segment for the full year 2017. The company increased its dividend by 15% as well.
- JP Morgan Chase & Co. (JPM) also topped expectations and had a notable quarter due to a rumored bad margin loan to an undisclosed client ($143 million mark-to-market loss). Bloomberg reported that that loss was attributed to a South African retailer, Steinhoff, that disclosed accounting issues in December.
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||1.5||3.4|
|Russell 2000 (Small Cap)||2.0||3.7|
|MSCI EAFE (Developed International)||0.6||3.0|
|MSCI Emerging Markets||-0.3||3.3|
|S&P GSCI (Commodities)||1.7||2.0|
|MSCI U.S. REIT Index||-3.1||-5.2|
|Barclays Int Govt Credit||-0.2||-0.3|
|Barclays US TIPS||-0.5||-0.6|
The Week Ahead
New Highs Attract Investors Like MICE to Cheese
Martin Luther King Jr. Day will be observed on Monday, January 15th.
- Stock and bond markets will be closed.
Industrial Production for December will be closely watched for any sign of acceleration in the economy.
Consumer Sentiment reading from the University of Michigan is expected to remain strong, helped by the stock market reaching new highs.
Earnings season continues with more Banks. Up next are U.S. Bancorp (USB), BB&T (BBT), Bank of New York Mellon (BK), and M&T (MTB).
- Investors will focus on the banks’ ability to make more money from lending, demand for credit, borrow quality and commentary on the economy and impact from tax cuts, especially since regional banks had very high starting rates.
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