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Strategic Insights

Volume 8, Edition 26 | July 29 - August 2, 2019

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Not so Tweet!

Max Berkovich | Articles

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Earnings, Friday’s Jobs report and a rate decision were supposed to drive the market this week. Instead, fears of global slowdown took a toll on equity markets around the globe after a tweet from the President.

Earnings, Friday’s Jobs report and a rate decision were supposed to drive the market this week. Instead, fears of global slowdown took a toll on equity markets around the globe after a tweet from the President. The market was at the time, attempting to bounce back from Federal Reserve related sell-off the previous day. As the dust settled, the S&P 500 was on track for the worst week of the year.

The White House announced intentions to 10% tariff on the remaining $300 billion of Chinese goods on Thursday. The tweet on tariffs from the President stated, “tax the hell out of China” and reassured the markets that trade negotiations are not moving towards a resolution. Once again, global markets reacted to fear of a global slowdown, with China at the epicenter.

The U.S. Federal Reserve (Fed) cut the overnight lending rate by the widely expected 0.25%. The cut was the first in over a decade. Federal Reserve Chairman Powell stated that the Fed’s decision to cut rates is not “the beginning of a lengthy cutting cycle.” However, after the tweet on Thursday, the Fed might be pressured to act more aggressively. The rate cut translated to big move down in yield for the U.S. Treasury. The 10-year at 1.85% yield was down significantly from where it started the week.

The U.S. economy added 164,000 jobs in July, matching the consensus expectations. Unemployment remains at historically low 3.7%, while wages increased 3.2% from a year ago.

More than half of S&P 500 companies reported earnings for the second quarter. Healthcare and Financials have exceeded earnings estimates, while industrials and materials have missed the mark so far.

164,000
The U.S. economy added 164,000 jobs in July, matching the consensus expectations. Unemployment remains at historically low 3.7%, while wages increased 3.2% from a year ago.

Week Ahead

Several of our portfolio holdings release earnings next week, including Walt Disney Co. (DIS) and CVS Health Corp. (CVS).

  • Disney has been helped by strong performance at the box office, earning $7.67 billion YTD
  • CVS continues to focus on its integration of recent acquisition Aetna Inc.

Japan and the United Kingdom are set to release 2nd Quarter GDP data toward the end of next week.

  • UK GDP growth is expected to be stagnant, but due to increasing Brexit concerns, experts would not be surprised by a small contraction.

Domestically, the focus will be on the July services Purchasing Managers Index (PMI), Institute for Supply Management (ISM) Non-Manufacturing Index for July and Producer Price Index for July.

  • The U.S. Services sector represents roughly 80% of GDP, and is much more sensitive to changes in the services PMI.

Stock Commentary

Tough pill to swallow

Consumer discretionary sector was the worst performer thanks to renewed China tariff news. Financial sector though, gave a strong run for last place thanks to lower interest rates and an unwelcomed earnings report from a life insurer. With interest rates falling, utility and REIT sectors shined, and health care sector managed to keep itself mostly in good graces thanks to…

mckesson

  • McKesson Corp. (MCK), the pharmaceutical distributor, reported consensus topping results and raised guidance. The company boosted its dividend slightly and announced that once an IPO of Change Healthcare Inc. is completed, McKesson’s ownership will drop from 70% to 58.5%. The process of that transaction will be used to pay down debt. Merck & Co., Inc. (MRK) also topped expectations and boosted guidance. The cancer drug franchise of Keytruda produces $2.6 Billion in sales a 58% boost from the previous quarter.

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  • A major deal was announced as Pfizer Inc.’s (PFE) Upjohn unit and Mylan N.V. (MYL) will combine. Pfizer will own 57% of the combined company. Upjohn unit is off-patent medication which includes Lipitor, Celebrex and Viagra, while Mylan is known for EpiPen and Lisinopril. The combined entity will have $19-20 Billion in expected revenue in 2020.

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  • Apple Inc.’s (AAPL) quarter also beat consensus, with record revenue from services helping rebalance the company’s sales to be less iPhone centric. The company’s cash pile ended the quarter at $102 Billion.

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  • Prudential Financial Inc. (PRU) fell short of expectations. Lower interest rates and people living longer hurt the life insurance business.

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