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Strategic Insights

Volume 4, Edition 41 | November 2-6, 2015

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Take a Hike

FILE_MAX_BERKOVICH_SHORT_2021 Max Berkovich | Articles

Read Time: 4:30 min

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The stock market rallied yet again to close higher for the 6th straight week. The strong results came despite economic data pointing towards a December rate hike.

Economic Commentary

It would appear we are standing at the trailhead of the first hike of the Fed Funds Rate in 9 years. Investors wonder whether the path upward will be smooth/rocky, short/long, gradual/steep. While trepidation is natural, commencement on this journey is a positive in our view.

Ants Marching: While the Fed contemplates a hike, Americans are heading back to work. Friday’s Non-Farm Payrolls print of +271K jobs was well above consensus (+182K), and appears to have solidified the market view that the Fed will begin hiking in December.

  • The last two monthly payroll prints were relatively weak, so Friday’s report was an important confidence booster for the Fed.

Out of the woods: While arguments will persist as to what the impact of rising rates will be on equities, we see normalization of rates as a positive.

  • For one, a rate rise would be an economic seal of approval from the Fed that: 1) unemployment is acceptably low, and 2) inflation is sufficiently high.
  • In addition, equities have performed well during periods of rising rates. The path could be bumpy, but history has proven the climb can be rewarding.
  • It would appear we are standing at the trailhead of the first hike of the Fed Funds Rate in 9 years. Investors wonder whether the path upward will be smooth/rocky, short/long, gradual/steep. While trepidation is natural, commencement on this journey is a positive in our view.

Ants Marching: While the Fed contemplates a hike, Americans are heading back to work. Friday’s Non-Farm Payrolls print of +271K jobs was well above consensus (+182K), and appears to have solidified the market view that the Fed will begin hiking in December.

  • The last two monthly payroll prints were relatively weak, so Friday’s report was an important confidence booster for the Fed.

Out of the woods: While arguments will persist as to what the impact of rising rates will be on equities, we see normalization of rates as a positive.

  • For one, a rate rise would be an economic seal of approval from the Fed that: 1) unemployment is acceptably low, and 2) inflation is sufficiently high.
  • In addition, equities have performed well during periods of rising rates. The path could be bumpy, but history has proven the climb can be rewarding.

Looking Ahead to Next Week

Click to Buy: Singles’ Day, or the Chinese online Black Friday, takes place next week and is expected to set the record for one day e-commerce which could mean more than $10B in sales for online merchant Alibaba (BABA).

  • Fun Fact:  This ‘holiday’ is only 25 years old, and was originally created to celebrate the life of single Chinese on what was known as ‘Anti-Valentines Day’.

Stop N’ Shop: Back home, the latest domestic retail data will be released, with October consumer activity expected to have picked up slightly vs. September.

  • In related news, Strategic consumer holdings JW Nordstrom (JWN) & Priceline (PCLN) report Q3 earnings.

Power Lunch: Israeli Prime Minister Netanyahu will make his first visit to Washington since he voiced concerns to Congress surrounding an Iran nuclear deal.

  • With the Iran deal now complete, Netanyahu and Obama will discuss next steps, likely to include increased U.S. military and financial aid for Israel.

Investment Strategy Update

STRATEGIC Asset Allocation

Hut, Hut, Hike?: As mentioned, strong job numbers, hints of stronger wage growth, and Fed testimony point to a December rate increase.

Go long: The long bond has seen strong gains the past few years as rate hike enthusiasts have been charged with multiple false starts. However, it seems that bond market has shifted into a “prevent-D” with both long and short rates moving higher.

Protect the ball: Cash could be the preferred option as the market adjusts to a new game plan. A one-and-done Fed could allow for re-investment at slightly higher yields, while a more aggressive Fed could keep cash on the sidelines for longer.

STRATEGIC Growth

Not so chipper: Financial sector took the lead, while consumer staples edged out technology for last place this week.

  • The mobile chip company Qualcomm Inc. (QCOM) reported a quarter that topped consensus on both top and bottom line, but they also announced they will no longer provide annual guidance. Lack of progress on a royalty deal in China and a 25% y/y revenue drop in its chip making division took center stage.

STRATEGIC Equity Income

Turner Off: Financial sector was boosted by Friday’s jump in interest rates, but not enough to off-set the impact on other dividend paying stocks. In other strategy news…

  • Multinational media conglomerate Time Warner Inc. (TWX) reported an eye-catching earnings report, but guidance was lowered. Currency continues to be a headwind and a 2% revenue decline in Turner Broadcasting division overshadowed the 4.8% increase from HBO and 15% spike for Warner Bros.

 

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