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Strategic Insights

Volume 8, Edition 23 | July 8 - July 12, 2019

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Reaching a Milestone

Doug_Walters Doug Walters | Articles

Read Time: 3:00 min

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With the S&P 500 Index breaching 3,000 investors had much to celebrate this week…

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko

Investors celebrated as equities crossed another milestone, with the S&P 500 topping 3,000. These momentous index levels are fun to cheer but are of secondary importance to the actual return investors earn. We still have much of 2019 ahead of us, and thus far returns have been spectacular. The S&P 500 is up over 20% on the year! With that said, Large Cap U.S. stocks are one of the best performing asset classes year-to-date and a properly diversified portfolio will not be seeing 20% returns as international stocks and high-quality bonds trailed. Such is the nature of diversification; there will always be a best and worst-performing asset in your portfolio. Indexes will regularly be breaching new milestones, but what is matters is that your risk allocation is correct and that over time, your portfolio is doing its part to help you reach your own milestones.

Headlines this Week

U.S. Equities advanced higher this week, with the S&P 500 notching a new high and crossing the 3,000 level for the first time. Growth and Momentum stocks led the way this week. Emerging Markets followed the U.S. higher, while Developed International and U.S. Small Cap missed most of the party.

Gold is trading above its 5-year high based on two themes, lower bond yields, and protection. Gold traders believe lower yields may incentivize some investors to allocate more capital to gold, seeking better returns while at the same time hedging their equity exposure. Over the last month, gold is up over 5% and is up over 9% year-to-date.

After two days of testimony in Congress from Federal Reserve Chairman Powell, the market accepted that while a rate cut is in the cards, it will be of the 0.25% variety and not 0.50% as some had started to hope. In response, bond yields ratcheted back up a bit. The rise in 10-year U.S. Treasury yields helped to steepen the yield curve and close some of the inversion between different points along the yield curve.

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The Week Ahead

Earnings take center stage as the 2nd quarter reporting season kicks in full force.

  • Banks will lead the way with JP Morgan (JPM), US Bancorp (USB), BB&T Corp. (BBT) and M&T Bank (MTB) out early in the week.
  • Blackrock Inc. (BLK), Microsoft Corp. (MSFT), Honeywell International Inc. (HON) and Union Pacific (UNP) report along with Health Care bellwethers Johnson & Johnson (JNJ) and United Health Group (UNH).

Economic releases include The Beige Book, June Retail Sales, Industrial Production, University of Michigan preliminary Consumer Sentiment Index for July and various housing-related reports. Internationally, China is releasing it’s 2nd quarter Gross Domestic Product (GDP) which is expected to show slowing annual growth of 6.2%, down from 6.4% in the previous quarter.

Federal Reserve officials are out speaking as well, with Bullard, Evans, and Rosengren probably receiving less fanfare than Chairman Powell who will be speaking in Paris, France at the G7 meeting. The topic is “Aspects of Monetary Policy in the Post-Crisis Era.”

JNJ Logo     Cisco

Health Scare

With interest rates on the rise, the worst sectors were the Utilities and REITs sectors as they tend to react to bond yields. Surprisingly Financials were on the bottom as well, even though they usually benefit from higher rates. The best sector this week was Energy thanks to crude oil prices topping the $60 per barrel mark as the crude inventory level fell. The most volatile sector this week was hands down Health Care, as the Trump administration reversed course on its proposal to overhaul the rebate collection by pharmaceutical selling middlemen. Insurers and pharmacy benefit managers rose on the news, while pharmaceutical companies pulled back. Speaking of Health Care…

  • As if the political tide against drug makers was not enough, Johnson & Johnson Corp. (JNJ) received another unwanted hit when the Department of Justice (DOJ) announced it is pursuing a criminal investigation against the company relating to its alleged misleading of the public about the cancer risk in talcum powder. This criminal investigation is on top of the multi-year civil litigations that number in the thousands relating to talcum powder. The company again denied any wrongdoing. The DOJ may be in the process of presenting the case to a grand jury already according to reports.
  • Earnings this week were uneventful. Fastenal Co. (FAST) reported a slight miss on top and bottom lines, despite price increases for its products. PepsiCo, Inc. (PEP) meanwhile beat expectations, maintained guidance, and reported 4.5% organic growth in the quarter.
  • Cisco Systems Inc. (CSCO) made news this week by acquiring one of its suppliers, Acacia Communications, Inc. (ACIA), for $2.6 Billion. Acacia provided optical interconnect technologies to Cisco.
Indices & Price ReturnsWeek (%)Year (%)
S&P 500 0.820.2
S&P 400 (Mid Cap)-0.317.9
Russell 2000 (Small Cap)-0.416.4
MSCI EAFE (Developed International)-0.611.6
MSCI Emerging Markets-0.59.3
S&P GSCI (Commodities)2.715.8
Gold1.110.1
MSCI U.S. REIT Index-0.118
Barclays Int Govt Credit0.03.3
Barclays US TIPS0.24.9

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