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Strategic Insights

Volume 7, Edition 21 | June 11 - June 15, 2018

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The Beautiful Game

Doug_Walters Doug Walters | Articles

Read Time: 5:00 min

061518_main

A busy week in the markets concluded with the excitement of the 2018 World Cup kick off. Our own David Lemire applies his investment thought process to predict this year’s winner…

Market Review

Contributed by Doug Walters

U.S. equities had a lot to digest this week, with political, trade and monetary policy all providing headwinds to an otherwise robust economic backdrop. By week’s end, the S&P 500 was not far from where it started.

Ending in a Draw

In a week where the President turned his back on G7 allies, embraced a controversial dictator, and further stoked a brewing trade war, it is no wonder equities struggled to find footing. Time will tell if these strategies pay off, but in the near term what investors see is an injection of uncertainty into an otherwise solid economic environment.

The Fed did its part as well to keep investor sentiment in check. On Wednesday the Fed raised their target interest rate by 25bps for the second time this year. The target rate range now stands at 1.75% to 2.00%. In general, the Fed uses rate increases to help keep economic growth in check and avoid runaway inflation. However, the current 2% rate is still below the “neutral rate” of 2.9%, meaning (at least in the Fed’s opinion) the rate is still low enough to be stimulating the economy rather than slowing it down. The expectation is now for four rate hikes this year (one more in each of September and December), which will bring the target rate even closer to that neutral rate. We see these moves as healthy normalization, which will allow the Fed to have more weapons in its arsenal should economic growth falter.

Spotlight_WC_061518

The 2018 World Cup began on Thursday. The tournament is big business, with FIFA expected to generate $6.1 billion in revenue. Picking a winner is a difficult task and we see all sorts of methods. In 2010, Paul the Octopus reached celebrity status, picking 11 of 13 games. This year, the Russians are putting their hopes on Achilles the cat. Strategic’s own Football aficionado, David Lemire favors Brazil over Spain in the 2018 finals. With Neymar at the core of their offense, there is clear quality in Brazil. But it is the diversification away from Neymar added in recent years that gives Lemire confidence in their team’s total portfolio. Argentina has too much concentration risk in Messi to make the finals. Finally, he reminds World Cup watchers that past performance does not guarantee future results and predicts Germany (2014 winners) will fall short in the semifinals.

Strategy Update

Contributed by Max Berkovich , Aleksey Marchenko

STRATEGIC ASSET ALLOCATION

Witches Brew

U.S. equity and bond markets took a pause this week after the U.S. Fed increased short-term interest rates and the U.S. continued its path to trade wars. While the stock market has felt very active in the past month, volatility has declined notably. Speaking of volatility…

  • Since 2012, volatility, as measured by CBOE Volatility Index (VIX), has been declining. The index had touched its lowest level in history in November of last year.
  • The “Quadruple Witching,” is a term used for when derivative products like index futures, index options, stock options, and stock futures expire on the same day, causing a spike in volatility. These events happen four times a year on the third Friday of every March, June, September, and December.
  • June 15th was the second “Quadruple Witching” this year. While the volatility did spike about 2% at the market open, the effect has lost its thunder due to structural changes in derivatives markets and the rise of exchange-traded funds (ETF).
  • Volatility jumped by nearly 200% in February, wiping all of January’s gains. Luckily, the index has been trending lower towards one-year lows.
  • The VIX is also known as the fear index.

STRATEGIC GROWTH

A Fox Hunt

Industrials and Financials were jostling for biggest laggard this week. Energy was the leading sector. In other strategy news…

  • On the heels of an approved, though unrelated, transaction in the media space, The Walt Disney Co. (DIS) had a notable week. Disney has an outstanding offer to purchase a majority of Twenty-First Century Fox, Inc. (FOXA, FOX) for $52.4 Billion, which was topped by rival Comcast Corp. (CMCSA) with an all-cash offer of $65 Billion. Disney’s offer is in cash and stock which may make the gap smaller after adjusting for a tax hit. Fox will evaluate the two proposals, but Disney is now on the clock to raise their offer. Stay tuned!

STRATEGIC EQUITY INCOME

T-Time

The Financial sector was the biggest laggard thanks to a flattening yield curve. Consumer Staples ended the week as the leading sector. In other news…

  • Time Warner Inc. (TWX) received a go-ahead from a Federal judge to sell itself to AT&T Inc. (T). The $85 Billion deal has been tied up in courts since October of 2016. The two companies did not waste much time post the court decision to seal the deal. Time Warner shareholders will get $53.75 in cash and 1.4 shares of AT&T for each of their shares. AT&T will have to come up with $42.5 Billion in cash to close the deal. The debt AT&T will incur to get this done will put it at an uncomfortable 2.9 times adjusted EBITDA, but is committed to bringing it down to 2.5 times by year-end. The deal is expected to be accretive to AT&T’s earnings in year one and create $2.5 Billion of synergies.
Indices & Price ReturnsWeek (%)Year (%)
S&P 5000.04.0
S&P 400 (Mid Cap)-0.44.8
Russell 2000 (Small Cap)0.79.6
MSCI EAFE (Developed International)0.2-1.7
MSCI Emerging Markets-0.9-2.8
S&P GSCI (Commodities)-0.47.2
Gold-1.4-1.9
MSCI U.S. REIT Index-0.8-3.7
Barclays Int Govt Credit-0.1-2.2
Barclays US TIPS0.2-1.7
$65 Billion
Comcast announced an offer on Wednesday worth $65 billion for the majority of 21st Century Fox’s businesses. The all-cash offer sets up a showdown with the Walt Disney Company for Rupert Murdoch’s media empire.

Week Ahead

Contributed by Aleksey Marchenko

Rate Hikes: Looking for SOME Clarity

Speeches from ECB President Draghi, U.S. Federal Reserve Chairman Powell, and NY Fed President William Dudley will take place this week, with other ECB and Federal Reserve members likely to take the podium as well.

  • After a rate hike from the Fed and indication of a rate hike on the horizon from the ECB this past week, investors will look for further color on what is driving the Central Banks’ policies.

Oracle (ORCL) is scheduled to report their earnings on Tuesday after market hours.

  • Rumors persist of clients balking at aggressive sales tactics and persistent competition from Microsoft (MSFT) and Amazon (AMZN), which will put extra eyeballs on guidance from the software giant.

Meetings of the Organization of the Petroleum Exporting Countries (OPEC), Eurogroup and Economic and Financial Affairs Council (EcoFin) will take place on Thursday and Friday.

  • OPEC has previously stated that they will hold production at current levels until 2019, but most recent reports show that OPEC may raise output targets in this coming meeting.
  • Eurogroup and EcoFin are meetings of Financial Ministers in the European Union.

Economic data will be mostly housing related, with home sales, building permits and housing starts the big ones.

  • Existing home sales are expected to remain robust near 10-year highs.
  • Both building permits and housing starts are also expected to remain near 10-year highs despite rising mortgage rates.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1 billion.

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