Contributed by Alan Leist, III
Stocks posted their best weekly advance in 7 months as commodity companies and the emerging markets bounced sharply off of multi-year lows to lead the rally.
Slick Story: The action this week was all about commodities, particularly oil (+9%), on a dovish Fed, Middle East tension and OPEC’s comments.
- While $2 gas has been welcome at the pump, the market has viewed the price weakness as a signal that global demand is weak thereby pressuring risk assets.
- We expect the volatility in commodities, and the market in general, to continue as China concerns, global growth and a Fed in transition remain overhangs.
GE Whiz: Strategic holding General Electric (GE) caught the attention of activist investor Nelson Peltz.
- Trian Fund, famous for recent moves on Pepsi and Dupont, supports CEO Immelt’s restructuring efforts.
- Not everyone liked the move. S&P lowered GE’s credit rating on fears of aggressive credit fueled buybacks.
A recent study shows that, despite claims to the contrary, consumers have indeed splurged on discretionary items fueled by ultra-low gas prices.
Where did all the gas savings go? For much of 2015, investors have hoped for resurgent consumer spending, driven by low oil prices. Indeed, retail sales (ex-gas), a key component of consumer spend, have been fairly robust thus far in 2015 (see chart).
- Yet many argue that consumers, scarred by recession, are opting to save and pay down debt rather than splurge on big ticket items.
Challenging the Consensus: Using a randomized sample, a JPMorgan Chase Institute study sifted through the spending patterns of 25.6 million card holders before and after the oil price decline.
- The study concluded that consumers did in fact splurge, spending more than 80% of gas savings on discretionary items.
Our Thought: Oil prices are well off their August lows, but at these levels, we still see a benefit to consumer spending. The tailwind will help fight off the demons of a global economy that remains under pressure.
Looking Ahead to Next Week
Contributed by Aaron Evans
Kickoff: 3rd Quarter earnings are upon us with Strategic holdings JPMorgan Chase, BlackRock, General Electric, Fastenal and Schlumberger reporting amongst others.
- Banks in particular will dominate reporting, as we see how they have navigated weak trading activity and lower interest rates over the quarter.
Ebbs and Flows: Key U.S. economic data out next week includes monthly retail sales and industrial production.
- Estimates expect a rise in September consumer activity attributed to falling crude and lower gas prices.
- Industrial Production likely declined over the month as a result of slowing global growth and a stronger dollar.
Across the Aisle: With a much smaller pool of candidates than the GOP, U.S. Democrats will hold their first presidential primary debate in Las Vegas next week.
- This first of six debates will likely be dominated by poll leaders Bernie Sanders and Hillary Clinton, with some lesser known candidates in tow.
Investment Strategy Update
STRATEGIC Asset Allocation
Short Sighted: The continuation of the recent equity rally has been attributed to everything from dovish Fed commentary to short sellers covering their bets. Irrespective of the cause, those that have followed a disciplined long-term approach to investing have had their patience rewarded.
- With small cap stocks joining the rally, we can officially say the worst performing assets of the year (commodities, emerging markets, international and small cap equities) are the recent outperformers. Those who have been methodically adding to these asset classes as they fell, can now enjoy the positive momentum and attractive valuations.
A Material Change: Industrials had a solid week, but energy and materials sectors did even better. Speaking of materials….
- After announcing a reduction in guidance, a materials holding also announced the retirement of its CEO after 7 years at the helm. The market rejoiced at a chance for a new or different direction. Strategic focused on the guidance trim and parted ways with the long time holding.
STRATEGIC Equity Income
Pep Rally: Health care and consumer discretionary sectors lagged this week, while the battered industrials, materials and energy sectors took the lead. In other strategy news…
- PepsiCo Inc. (PEP) reported 3rd quarter earnings, which topped expectations. While the strong dollar impacted revenue by 12% as revenue slipped in non-US markets, a 14% jump in revenue for North America beverages helped overcome the hurdle. Higher U.S. prices helped as well.
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