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Strategic Insights

Volume 8, Edition 10 | March 4 - March 8, 2019

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Sifting Through the Noise

Doug_Walters Doug Walters | Articles

Read Time: 2:00 min | Video: 2:56

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Stocks fell on concerns of economic weakness overseas. A surprisingly low U.S. jobs number added to the poor sentiment, but is likely just noise…

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko

It was a forgettable week for stocks, with investors having to stomach declines every day. The S&P 500 fell nearly 3%, with Small-Cap stocks off even more. Some might say that after a 12% run we were “due” for a pullback. We do not subscribe to such trivial market characterizations. What we would say is that the pullback we experienced this week is well within the range of normal variation and not surprising given signs of weakness in Europe and China. A surprisingly low jobs number did not help sentiment, but we see this as mostly noise.

 

Headlines this Week

  • The economy added about 20,000 new jobs in February. While this number was well below expectations of 180,000 new jobs, many analysts brushed off the low number as a one-off event skewed due to the government shutdown. Despite the weak number, the U.S. economy has added on average about 209,000 new jobs per month during the last year.
  • The European Central Bank’s (ECB) president Mario Draghi announced the intention to postpone plans to increase rates and rolled out some stimulus instead. This was a major reversal in the ECB’s monetary policy and a very quick response to the first signs of economic weakness in the region. The news helped the U.S. Dollar strengthen against the Euro and a basket of major global currencies.
  • China cut its economic growth target to 6-6.5%, which is slower than the 6.6% growth in 2018. China’s exports also declined more than expected in February fueling worries over a global economic slowdown. The Economic weakness in China might have pressured Beijing to speed-up trade negotiations with U.S. and add more stimulus to their economy. These worries, coupled with the sour news from Europe, helped U.S. bonds post fresh gains this week as U.S. Treasury yields declined.
3.8%

Unemployment Falls

U.S. unemployment fell to a very low rate of just 3.8% in February. Low unemployment is finally starting to meaningfully impact wage inflation. Employers are having to increase salaries to entice workers in this tight market. Average hourly earnings are now growing at about 3.5% annually, which is at the highest level since the 2008 financial crisis. Importantly, wages are now growing meaningfully faster than the price of goods (inflation is closer to 2%), meaning spending power is going up!

The Week Ahead

  • Earnings are due from Oracle (ORCL), Williams-Sonoma (WSM), and Ulta Beauty (ULTA).
  • Brexit – Parliament votes on the Brexit Plan a second time on Tuesday, if the vote fails, a second vote will take place deciding on hard exit. A hard Brexit is one that has no deal with the EU. Also, a vote on delaying the process would be taken. The biggest hold-up is around the “Irish backstop.” If this is not resolved, it would leave the U.K. bound to EU rules on its Irish border indefinitely.
  • A Bank of Japan Rate Decision is scheduled for Friday (no change expected).
  • JOLTS (Job Openings and Labor Turnover Survey) and the University of Michigan Consumer Sentiment survey wrap up the week on Friday.

Stock Highlights from Max

DollarTree   CostcoLogo

Family Ties

The Health Care sector had another sickly week. The fear of Medicare-for-All continues to spook investors. The Communication Services sector was the leader, but by a slim margin as both Consumer Staples and Consumer Discretionary were hanging tough. Speaking of the consumer…

  • Dollar Tree Inc. (DLTR) reported an in-line quarter, but investors had to read beneath the headline and shake the tree for goodies. The company expanded same-store sales by 3.2% in the DollarTree branded stores in the 4th quarter and the Family Dollar branded stores grew by a much slower rate of 1.4% but grew none the less. On the negative side, the company’s gross profit margin declined as costs of doing business went up. The company also had to write-off $2.73 Billion of Family Dollar related goodwill and lowered guidance for the next quarter and full year. All the negative news was brushed aside as the company unveiled a plan to fix the Family Dollar problem. The plan involves closing 390 stores and renovating 1,000 others. The renovated stores will expand a $1 price point section, expand its freezer/cooler section and sell alcohol. CEO Gary Philbin, expects to progress from this in the back half of 2019. Another retailer that impressed this week…
  • Costco Wholesale Corp. (COST) blew past expectations on earnings despite a slight miss on revenue. The company really impressed with a 6.7% comparable sales increase in the quarter and a 25% increase in online sales.

 

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