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Strategic Insights

Volume 7, Edition 20 | June 4 - June 8, 2018

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Oracle of Omaha

Doug_Walters Doug Walters | Articles

Read Time: 5:30 min

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U.S. equities were up this week, helped by positive comments from Warren Buffett. But it was not the Oracle’s economic commentary that we focused on…

Market View

Contributed by Doug Walters

The S&P 500 was up for the second week in a row, led by Technology stocks with no obvious catalysts. If anything, the potential trade war escalation should have been discouraging for investors. However, what caught our eye were comments from the Oracle of Omaha.

The Sixth Inning

This week famed investor and Berkshire Hathaway chairman Warren Buffett along with J.P. Morgan Chase chief executive Jamie Dimon were on CNBC sharing their views on the economy and the stock market. When these two talk, people listen. Beyond the headlines, we see a very important message for investors.

Buffett, talking about the economy, stated, “Right now, there’s no question. It’s feeling strong. I mean, if we’re in the sixth inning, we have our sluggers coming to bat right now.” Dimon provided similarly positive commentary. The rosy sentiment is well-placed in our view. The economy has been making steady improvements since 2009 and looking forward, there are no obvious barriers to continued progress. While these comments made big headlines, we see more important takeaways from the interview:

  • Buffett makes the point that continued strength in the economy does not mean we will have continued strength in the stock market. The stock market is what we call a “discounting mechanism”. That is to say, it is always trying to factor expectations for the future into current valuation. It is conceivable that the economy could continue to improve, but the stock market could go down as investors anticipate that we are closer to a future slowdown.
  • In addition, with his characteristic modesty, Buffett goes on to say, “I’m no good at predicting out two or three or five years from now, although I would say this: there’s no question in my mind that America’s going to be far ahead of where we are now 10, 20 and 30 years from now.” One of the greatest investors of our time has no illusions that he can predict the near-term, and neither do we.

The important message we pull from the interview is that our job as investors is not to try and time the market’s normal fluctuations. Rather, our goal should be to stay invested for the long-term in quality investments at a reasonable valuation.

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We talk a lot about human behavioral biases that challenge us all as investors. In our Market Timing white paper we touch on a number of these, including “action bias”. Related to action bias is “overconfidence” (the phenomenon that explains why 93% of us consider ourselves above average drivers). In investing, overconfidence has been shown to lead to unnecessary excess trading, eating in to retirement funds by 35% over time. Part of Warren Buffett’s success has been his humble patience. Recognizing that he cannot predict the future, particularly in the short-term, has been a key driver of his long-term investing success.

Strategy Update

Contributed by Max Berkovich , Aleksey Marchenko

STRATEGIC ASSET ALLOCATION

Moment of Momentum

Bonds found themselves range bound this week, while U.S. equities advanced higher, led by large cap growth stocks which are up over 8% year-to-date, as measured by the Russell 1000 Growth Index. However, momentum stocks as measured by the MSCI USA Momentum Index are still in the lead, up nearly 10% on the year. Speaking of momentum…

  • After the great recession of 2008, momentum and growth emerged as the top performing factors that drive equity returns, with momentum outpacing growth by over 21% since March of 2009.
  • In the last 8 years, momentum outperformed growth in 5 out of 8 years.
  • Historically, momentum has been a positive factor in a bull market environment. U.S. stocks are in the midst of a 9 years of bull market. Only the 14-year bull market between 1987 and 2001 was longer.
  • The MSCI Momentum Index’s top 5 holdings are Amazon (AMZN), Microsoft (MSFT), Boeing (BA), Visa (V) and Mastercard (MA).

STRATEGIC GROWTH

Gaining Traction

The Industrial and Technology sectors were running neck-and-neck for the distinction of the biggest laggard. Consumer Staples, on the other hand, was a clear runaway leader for the week. Speaking of staples…

  • Procter & Gamble Co. (PG) received a nice boost this week when famed activist investor Nelson Peltz gave the consumer behemoth a pat on the back. Peltz’s Trian Holdings holds a 3.5% position in the company. Peltz claims his reorganization plan is gaining traction. In addition, the company received a nice boost from comments by Bernstein analyst Ali Dibadj who proclaimed a break-up value for the company would unlock between 30% and 40% upside for shareholders.

STRATEGIC EQUITY INCOME

Go Git-It

Utilities were the clear laggards this week with expected rate hikes in the headlines again. Consumer Discretionary was the leader as it continues its run post earnings releases from William-Sonoma (WSM) and TJX Companies (TJX) three weeks ago. In deal news…

  • Microsoft Corp. (MSFT) outbid rival tech giant Google (GOOG, GOOGL) for the right to acquire privately held GitHub for $7.5 Billion. Microsoft paid 25 times revenue for the computer code repository platform company. This acquisition is heralded as Microsoft’s embrace of opensource software. Unlike most acquisitions where the acquirer needs to sell investors on the acquisition, Microsoft instead must sell this move to the 28 million software developers who use GitHub and remember that Microsoft was at war with opensource in the past.
Indices & Price ReturnsWeek (%)Year (%)
S&P 500 1.63.9
S&P 400 (Mid Cap)2.25.3
Russell 2000 (Small Cap)1.58.9
MSCI EAFE (Developed International)0.9-2.0
MSCI Emerging Markets0.5-2.0
S&P GSCI (Commodities)-0.27.6
Gold0.4-0.5
MSCI U.S. REIT Index1.2-3.0
Barclays Int Govt Credit-0.1-2.1
Barclays US TIPS-0.1-1.9

The Week Ahead

Contributed by Aleksey Marchenko

No Need to DIG Deep For Market Moving Events

Diplomacy will take center stage this week with the G7 meeting in Canada this weekend and a historic summit between U.S. President Trump and North Korea’s Supreme Leader Kim Jong-Un in Singapore on Tuesday.

  • The G7 meeting is held by the leaders from the United States, Canada, Japan, Britain, Italy, France and Germany. It used to be called G8, but became G7 in 2014, after the group expelled Russia over its annexation of Crimea.
  • Trade policy and tariffs will be the hot topic at the G7, but President Trump is expected to leave early for Singapore.
  • The top agenda item for the President is nuclear disarmament of North Korea.

Inflation measures Consumer Price Index (CPI) and Producer Price Index (PPI) will be released on Tuesday and Wednesday.

  • Inflation data is closely watched for signs of economic strength especially with unemployment falling to 3.8% in May.
  • CPI ex-Food & Energy is expected to rise to 2.2% from 2.1% while PPI ex-Food & Energy to remain flat at 2.3%.

Global rate decisions and monetary policy views of the major economies will be announced next week from the Federal Open Market Committee (FOMC), European Central Bank (ECB), and Bank of Japan (BOJ).

  • A hike in rates is widely expected from the FOMC, but guidance for future hikes is key.
  • Some analyst predict that European Central Bank and Bank of Japan will discuss their plans to unwind their stimulus programs. This may bring renewed volatility to the global bond and currency markets.

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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