A Return to Winning Ways
Doug Walters
Olympians were not the only big winners this week. Over the past six days, U.S. stocks have clawed back more than half of their recent losses.
Market Update
Contributed by Doug Walters
The 2018 Winter Olympics are now in full motion, with the world coming together for its biennial show of unity. Some of that competitive optimism may have seeped into the U.S. stock market. The S&P 500 strung together six positive days in a row, shaking off the negative sentiment that has weighed on stocks since the start of February.
Not Too Bad (or Good)
Last week’s correction was believed to be fueled by a fear that the strengthening of an already robust economy would lead the Federal Reserve to raise rates more quickly than expected. With that in mind, the higher inflation reported this week had the potential to exasperate market concerns. It did not. We see two reasonable explanations:
- This week’s rebound was not related to economics and was more of a technical bounce.
- Other economic data this week (e.g., Industrial Production and Retail Sales), was sufficiently unimpressive to allay fears of an overheating economy.
We are proponents of the latter theory. With both Industrial Production and Retail Sales data falling below expectations, we may have moved closer to the market’s preferred Goldilocks scenario of growth in moderation.
This week Norwegian Olympic cross-country skier Simen Hegstad Krueger lay flat on his face, with a broken pole and impossibly tangled with two other skiers. The 30km skiathlon had just started, and for 40 seconds he lay helpless, watching the field of 60-plus competitors race away.
Long-term investors have experienced this helpless feeling. Think back to 2008. You are making your way towards your financial targets, and suddenly the 2008 financial crisis comes along, and achieving your financial goals seems a pipe dream.
Investors can learn a thing or two from Mr. Krueger. Not only did he get up and get himself back in the race; he won! It did not happen immediately. He fought the urge to panic, and methodically and systematically worked his way back to the front of the pack. In short, he created a plan and stuck to it.
Investing is not a sprint it is a skiathlon. Setbacks are common, but a robust investment process helps ensures long-term success.
Strategy Update
Contributed by Max Berkovich ,
STRATEGIC ASSET ALLOCATION
Shine On!
U.S. equities fired back this week, reclaiming a large chunk of January’s gains. Emerging markets and U.S. growth stocks led the pack. Bonds, on the other hand, reverted to their previous path. The 10-year U.S. Treasury’s yield came very close to 3%, and the yield curve flattened again. Speaking of bonds…
- The recent spike in volatility was mostly blamed on rising interest rates, which in turn was blamed on inflationary pressure. Investors were concerned that a sudden rise in Treasuries, will prompt the U.S. Federal Reserve to increase overnight rates faster than previously anticipated to battle the inflation boogeyman.
- This week, investor fear eased, with equities seen as a continued benefactor of a robust (but not overheated) economy.
- Just in time for the Olympics, gold helped to diversify away some of the volatility of the past two weeks.
STRATEGIC GROWTH
Well Done!
Laggards this week were the Consumer Discretionary and Health Care sectors. The Industrial sector was the second-best sector, while Energy was the runaway leader thanks to…
- EQT Corp. (EQT), an energy exploration company known for its exposure to natural gas, reported a quarter that blew away analyst expectations. Higher natural gas prices and strong sales volume benefited the driller. The company was also able to spud a total of 197 wells in 2017, 144 of which are in the Marcellus shales area. The year-end report also identified proved reserves at 21.4 Trillion cfe, 59% more than a year ago. 30% of the reserves are attributed to the acquisition of 678 wells.
STRATEGIC EQUITY INCOME
9000 Switches
The Energy sector was the biggest laggard this past week. Surprisingly, Utilities bounced back, unlike some of the other higher-yielding sectors. But the top sector this week was Technology thanks to…
- Cisco Systems Inc. (CSCO) reported a strong quarter when it unveiled its latest quarterly results. The company reported consensus topping sales and profits, but that’s not all. The technology giant also upped guidance, raised its dividend 14% and authorized a $25 Billion stock buyback program. One Wall Street analyst declared that growth is “no longer on the horizon—it has arrived.” Another referenced strong future orders driven by the Catalyst 9000 (Cat9K) switches refresh cycle. The stock hit a 17-year high on Thursday.
| Indices & Price Returns | Week (%) | Year (%) |
|---|---|---|
| S&P 500 | 4.3 | 2.2 |
| S&P 400 (Mid Cap) | 4.4 | 0.0 |
| Russell 2000 (Small Cap) | 4.4 | 0.5 |
| MSCI EAFE (Developed International) | 3.3 | 0.4 |
| MSCI Emerging Markets | 5.2 | 3.8 |
| S&P GSCI (Commodities) | 3.0 | -0.2 |
| Gold | 2.6 | 3.5 |
| MSCI U.S. REIT Index | 1.3 | -9.5 |
| Barclays Int Govt Credit | -0.2 | -1.5 |
| Barclays US TIPS | 0.3 | -2.0 |
The Week Ahead
Volatility Past its PRIME
President’s Day is on Monday, February 19th.
- The holiday always falls on the third Monday in February.
- U.S. markets are closed.
Rig Count report issued on Friday is a leading indicator of U.S. oil and gas production. The rapid increase in the oil rig count in the past few weeks brought volatility to oil prices and will remain a key indicator for investors to watch this week.
- The oil rig count nears 800 rigs, which is half of the rig count at the peak in 2014.
Inflation readings from the European Union and Great Britain will be in focus next week.
- Higher inflation readings may pressure Central Banks to tighten policy.
Minutes from Federal Reserve’s Open Market Committee on Wednesday and the European Central Bank on Thursday will likely add some volatility to the market.
Earnings season is slowly wrapping up as nearly 80% of companies in the S&P 500 have already reported.
- Earnings releases from HSBC Bancorp (HSBC), Walmart (WMT) and Henry-Schein (HSIC) are tops on our list for next week.
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