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Strategic Insights

Volume 7, Edition 14 | April 16 - April 20, 2018

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Not Playing Defense

Doug_Walters Doug Walters | Articles

Read Time: 4:30 min

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U.S. stocks turned positive on the year, as trade squabbles took a back seat to corporate earnings. But not all sectors have participated in the rebound…

Market Review

Contributed by Doug Walters

Despite a soft ending to the week, the S&P 500 broke back into positive territory for the year. Equities have been back in “risk on” mode, with more volatile cyclical sectors outperforming, while traditional defensive sectors, like Consumer Staples, have been left behind. Higher oil prices have been a boost for Energy.

Winter in April

Despite being in the heart of corporate earnings season, news flow was relatively slow this week, with limited focus on the big-impact topics like trade wars. Investors also appeared to take comfort in the restrained approach in Syria. Cyclical sectors like Industrials, Consumer Discretionary, and Energy all took the opportunity to rally.

Energy stocks were helped by an oil price that is up over 10% in the past two weeks. OPEC met this week and appear willing to extend the production cuts which have been in place for several years. From the bottom in 2016, the price of a barrel of oil has increased by about 150%. That increase has fed directly into U.S. gasoline prices which have risen by a similar amount. As I was driving this past week in a blinding snow squall (yes, in late April), I could not help but wonder if the unusually cold spring has had any role to play in the higher oil prices. Only about 6% of oil goes towards residential and commercial use, while over 70% is used for transportation. So, unless there has been a mass exodus of those of us in the north driving south to warm up, the answer is probably no.

Spotlight: Mac 'n Cheese Moment

Investor portfolios did not benefit this week from the defensive characteristics of the Consumer Staples sector. The sector has been weak this year but remains an integral part of a diversified portfolio. Large-cap stalwarts like Proctor & Gamble (PG) and PepsiCo (PEP) fell 5-6% as investors shifted into the riskier cyclical stocks we discussed above. Tobacco stocks (which we do not own in our strategies), were particularly short of breath this week, with Philip Morris (PM) and Altria (MO) both down double-digits. Kraft Heinz (KHC) is another Staple we do not own in our strategies. The shares suffered along with the rest of the sector, yet they delivered a big win local to our Utica headquarters. Kraft announced during the NHL playoffs that Clinton, NY was the 2018 winner of the nationwide Kraft HockeyvilleTM competition. Congratulations to Clinton and thank you, Kraft!

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Strategy Update

Contributed by Max Berkovich , Aleksey Marchenko

STRATEGIC ASSET ALLOCATION

Putting Money Where Their Mouth Is

Bond markets took an unwelcomed punch this week as the Federal Reserve continues to see growth in the U.S. economy. Equity markets had a good start on Monday as investors were cheering the start of the earnings season, ultimately finishing positive for the week despite a soft finish. While most companies are beating their targets (so far), it might not be enough to convince investors to allocate more capital to equities. No worries, another buyer is on the horizon. Corporations have pledged even more capital to repurchase their stock than last year. They are not allowed to buy back their stock ahead of their earnings releases but typically can jump back in a few days after reporting. Speaking of stock buybacks…

  • Goldman Sachs estimated that S&P 500 firms will repurchase $650 billion of their stock. This suggests a 23% increase in stock buybacks from the 2017 level.
  • At year-end, the aggregate cash and equivalents on the balance sheet of S&P 500 companies were the largest in the history of the index, at nearly $1.8 trillion.
  • The market value of the S&P 500 is around $22.9 trillion. A $650 billion share repurchase is about 2.8% of S&P 500’s market value and would decrease total shares outstanding by a similar percentage.
  • According to Birinyi Associates, U.S. companies have spent $5.1 trillion over the past ten years on stock buybacks.

STRATEGIC GROWTH

Beat by a Whisker

Financials were the leading sector this past week. The small Energy contingent brought up the rear, but more notable laggards were the Technology sector, with some unwelcome news in the semiconductor space, and Consumer Staples, which also had some negative earnings reports. Speaking of Consumer Staples earnings…

  • Procter & Gamble Corp. (PG) released an earnings report that managed to top expectations by a whisker but was tripped up by a razor-thin 1% organic sales growth figure. While Beauty and Fabric & Home Care grew 5% and 3% respectively, it was a 3% decline in both the Grooming and Baby/Feminine Care/Family Planning categories that frightened investors. The company does expect to have organic growth around 2% going forward and full year 2018 revenue of $67 billion. Also, P&G confirmed it is buying the Consumer Health unit of Germany’s Merck KGaA (MKKGY) for $4.21 billion.

STRATEGIC EQUITY INCOME

A Healthy Dose of Good News

We expected the Financial sector to be the leading sector on the heels of what was setting up to be a huge earnings season for banks. But it was the Energy sector that was the big winner thanks to higher crude prices. Consumer Staples was the laggard, but it could have been worse had it not been for an excellent week for…

  • CVS Health Corp. (CVS) who received a big boost when news broke that Amazon (AMZN) has killed, at least for now, a plan to enter the pharmaceuticals distribution business. With that threat currently on hold, the company can focus on its bid to acquire health insurer Aetna (AET) for $69 billion.
Indices & Price ReturnsWeek (%)Year (%)
S&P 500 0.5-0.1
S&P 400 (Mid Cap)0.90.0
Russell 2000 (Small Cap)0.91.9
MSCI EAFE (Developed International)0.40.0
MSCI Emerging Markets-0.20.8
S&P GSCI (Commodities)1.27.1
Gold-0.62.4
MSCI U.S. REIT Index-0.8-10.8
Barclays Int Govt Credit-0.3-2.1
Barclays US TIPS-0.6-1.5

The Week Ahead

Contributed by Aleksey Marchenko

Earnings Releases Will Fly like GRIT in a Wind Storm

GDP for the first quarter will likely be the main attraction, but the University of Michigan Consumer Sentiment, Durable Goods Orders, and housing data could steal the show.

  • GDP is estimated to rise to the annual rate of 2.8% from 2.6% in the fourth quarter of 2017.
  • Michigan consumer sentiment is expected to hold steady at a 14-year high.
  • Durable goods inventory and orders growth are expected to slow down in March.
  • According to the FHFA Home Price Index, national average housing prices have risen nearly 44% since January of 2012. Despite higher pricetags, new home sales are expected to continue to grow.

Rate decision from ECB on Thursday is widely expected to maintain the status quo, but comments from ECB President Mario Draghi may capture some market attention away from earnings.

Industrial sector earnings from Strategic Growth holdings United Technologies (UTX), Caterpillar (CAT), and Union Pacific (UNP) and Equity Income constituent Boeing (BA) are all on deck for the middle of next week. Oil stocks in Equity Income, Exxon (XOM), Chevron (CVX), and Philips 66 (PSX), will wrap up the busy week Friday.

Technology sector has some heavyweights reporting as well. Strategic Growth member Alphabet (GOOG), Qualcomm (QCOM), and Visa (V), as well as Equity Income holdings Microsoft (MSFT) and Intel (INTC), are on the docket.

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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