Contributed by Doug Walters
The S&P 500 lost yardage this week, shedding over 3% of the year’s returns. There was no single catalyst for the decline, and arguably the market was overdue for a pullback. The jobs report Friday showed positive job creation, low unemployment, and modest wage increases. We believe investors took this as a sign that the Fed may need to get more aggressive in slowing down the economy – a headwind for stocks.
A Normal Setback
It has been so long since the market has made a meaningful move down, you would be forgiven for thinking this week was unusual. However, what was more unusual was the euphoric markets of 2017. Market volatility is normal, if not healthy. Take 2014 and 2016 for example. In those years, the S&P 500 produced a total return of 14% and 12% respectively, yet over those two years, the market fell over 3% nine times. As we discuss below, this week’s declines are no cause for rash action.
What Happens in Vegas
Last year, ahead of the big game we discussed the “highly scientific” Super Bowl stock market indicator. As the legend goes, if an NFC or original NFL team wins, the stock market will be up that year (we revisit this in our Spotlight below). What was more interesting though was that we were fielding questions from clients expressing unease with elevated equity levels. Our message was, stay invested, and do not attempt to time the market. Since then we have formalized our views in a white paper, ”Market Timing: Investing or Gambling?“ With an estimated $5bn of gambling to take place on Super Bowl Sunday, we recommend you do not add to that total by gambling on your investments.
Spotlight: Expected Return if the Eagles Win
The “Super Bowl Stock Market Indicator” states that if the NFC or original NFL team wins the Super Bowl, then the stock market will be up, while it will be down if the opponent wins. Our data shows that the average total return of the S&P 500 in a year the NFC/NFL wins is about 16%, versus about 2% if they lose. Last year the Patriots bucked these statistics spectacularly, as the S&P was up 22% on an AFC win. However, the average return in the five years the Patriots won is a mere 3%. Superstitious investors should root for the Eagles.
STRATEGIC ASSET ALLOCATION
Sacked by Bonds
After a one week pause, interest rates marched higher. Rising wages were to blame as it has generally been a good preamble to a rise in inflation. Equities suffered a safety thanks to a sack from the bond market. Higher interest rates may indicate that the Federal Reserve will quarterback more than three rate hikes this year. Faster than expected rate hikes are unwelcome by the equity markets. Speaking of equities…
- Valuations of U.S. large capitalization stocks have reached a 15-year high. International markets are above average as well but may offer some relative value even factoring in their typical discount to U.S. equities.
- In the last 30 years, bonds were a great place to park capital while waiting for risk assets to become more attractive. However, today bonds are entering a rising rate environment. While we may not see a bond bear market like the one that lasted for nearly 20 years between 1960 and 1980, we expect to see bonds go down in price, with newer bonds becoming more attractive at higher interest rates. However, if bonds are held to maturity, this should not be a concern.
- Strategic has been preparing for higher rates. The playbook remains the same: play defense and score on turnovers. We are keeping bond maturities short and reinvesting into higher interest rates when they mature.
Energy and Materials were the unquestioned laggards this week, but surprisingly the Health Care sector was not far behind. Health Care is a defensive sector, but news of an Amazon, JP Morgan and Berkshire Hathaway partnership entering the space to rein in costs put a hurt on the sector. Industrials and Staples held their ground the best this week. Speaking of Staples…
- Mondelez International Inc. (MDLZ) reported an in-line quarter but sweetened its report with news of growth. Revenue grew by 2.4% in the quarter, but in emerging markets growth was a hefty 6.9%. The company was able to hike prices which added 2.1% to organic growth. Mondelez also benefited from privately held Keurig Green Mountain acquiring Dr. Pepper Snapple Group (DPS). The transaction will leave Mondelez with a roughly 13% stake in the new company.
STRATEGIC EQUITY INCOME
Failed to Produce
Interestingly, traditional safe haven sectors failed to protect due to higher interest rates. The Consumer Discretionary sector held its ground the best this week, while the Energy sector fared the worst thanks to…
- Both Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) fumbled their quarterly earnings on Friday. Exxon missed revenue expectations by $7.79 Billion. Both oil giants failed to overcome weakness in their international refining businesses, with cost cuts and meaningfully higher oil prices. Also of note, Chevron, unlike Exxon, was able to boost oil and gas production by 3.7% and take advantage of elevated prices.
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||-3.9||0.9|
|Russell 2000 (Small Cap)||-3.8||0.8|
|MSCI EAFE (Developed International)||-1.4||5.0|
|MSCI Emerging Markets||-1.9||7.8|
|S&P GSCI (Commodities)||-0.7||4.0|
|MSCI U.S. REIT Index||-3.3||-7.2|
|Barclays Int Govt Credit||-0.6||-1.3|
|Barclays US TIPS||-0.9||-1.5|
The Week Ahead
Contributed by Aleksey Marchenko
SETS and Reps
Super Bowl LII will kick off on Sunday at 6:30 p.m. ET.
- The Patriots and Eagles played in the Super Bowl in 2005, where the Patriots won 24-21.
- The Philadelphia Eagles have yet to win a Super Bowl in franchise history.
- More than 110 million people are expected to tune in to the game, with 46%, according to Forbes, only interested in the commercials.
Earnings continue next week with our focus on Strategic holdings Disney (DIS) and CVS (CVS).
- Analysts will be looking for insights into ESPN business within Disney, as well as further details about the proposed merger with 21st Century FOX.
Trade Balance is estimated to run at a deficit of around $50 billion for December.
- The good news is that exports continue to grow, closing in on the all-time high of $200 billion per month. However, imports are expected to have risen to an all-time high of $250 billion.
Speeches from Federal Reserve Bank officials from St. Louis, Chicago, Philadelphia, and Minneapolis districts.
- The speeches will overview each district’s economic condition and may provide some insight into the likelihood of rate hikes from the new Powell Fed.
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