The Greenback Fallback
Doug Walters
The S&P 500 continued its run-up, while the slide in the U.S. Dollar gained steam following unexpected comments at the World Economic Forum in Davos.
Market Review
Contributed by Doug Walters
The government is back open for business, for now, as a stop-gap budgetary measure was put in place to reopen the doors until February 8th. Lawmakers still seem far away from a deal on immigration, which was the sticking point last time around. To date, equity markets appear unconcerned, preferring to focus more on earnings and commentary our of Davos.
A Weak (Dollar) in Davos
Business, world, and thought leaders descended on Davos Switzerland this week for the annual World Economic Forum. President Trump, Treasury Secretary Mnuchin and Commerce Secretary Ross were all in attendance. On the heels of fresh tariffs on imported solar panels and washing machines, Trump’s Davos speech attempted to bridge the gap between the forum’s theme of global cooperation, and his more protectionist platform. However, it was comments from Treasury Secretary Mnuchin that had the most pronounced market impact. With respect to the U.S. dollar, Mnuchin asserted that, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.”
The U.S. Dollar fell about 1% on the day of Mnuchin’s speech. He and others later attempted to walk back these comments, but the dollar remained under pressure, down about 1.7% on the week. As we discuss in our Spotlight segment, currency moves can have a big impact on portfolios.
| Indices & Price Returns | Week (%) | Year (%) |
|---|---|---|
| S&P 500 | 2.2 | 7.5 |
| S&P 400 (Mid Cap) | 0.8 | 5.0 |
| Russell 2000 (Small Cap) | 0.7 | 4.7 |
| MSCI EAFE (Developed International) | 1.6 | 6.6 |
| MSCI Emerging Markets | 2.5 | 9.1 |
| S&P GSCI (Commodities) | 2.3 | 4.2 |
| Gold | 1.3 | 3.6 |
| MSCI U.S. REIT Index | 1.2 | -4 |
| Barclays Int Govt Credit | 0.0 | -0.7 |
| Barclays US TIPS | 0.2 | -0.6 |
Spotlight: Currency Impact in 2017
The U.S. Dollar weakness is not isolated to this week; it has been in decline for over a year now (see our Strategic Asset Allocation section). Currencies can be volatile, and this latest move serves as a helpful reminder of the importance of portfolio diversification. We regularly highlighted last year how well international stocks performed. However much of that was due to currency moves. While developed international stocks in the MSCI EAFE Index were up about 15.8% in local currencies, thanks to the weak dollar, U.S. investors in the index enjoyed a 25.7% return (in dollar terms); a 9.9% difference. Thank you diversification!
Strategy Update
Contributed by Max Berkovich ,
STRATEGIC ASSET ALLOCATION
Resistance is Futile!
Bonds took a break from their recent downward trend, with rates remaining nearly unchanged for the week. Equities though, showed zero resistance this week, marching towards, you guessed it, new highs. Emerging Markets was the top asset class on the back of higher oil prices. Speaking of international markets…
- The U.S. Dollar has declined against a basket of major currencies, with the ICE U.S. Dollar Index down nearly 3.25% year-to-date after being down nearly 10% last year.
- The Euro has been rising against the U.S. Dollar for some time thanks to positive economic growth in Europe and a shift to central bank tightening.
- Countries can weaken their currency to help their exports be more price competitive around the globe. To avoid currency wars, leading nations often tighten or loosen their monetary policies somewhat in sync. This helps to promote less currency volatility and a focus on organic economic growth.
- Weakness in the U.S. Dollar is considered to have a net positive effect on Emerging Markets, which tend to hold, borrow and transact in the greenback.
STRATEGIC GROWTH
Going Off the Rails
The Health Care sector had a standout week, but Energy did even better thanks to a natural gas price reaching levels not seen since May. Industrials, on the other hand, could not stay on track thanks to….
- Union Pacific Co. (UNP) reported what appeared to be an in-line quarter, but the exorbitant expectations after the company’s 32% stock climb in 2017 called for more. Industrial product transports in the 4th quarter were up 28%, while agricultural products and coal were down 4-5%. The company purchased over $1 Billion of its stock in the quarter as well. Analysts voiced concern over pricing pressure and increasing fuel costs going forward.
STRATEGIC EQUITY INCOME
A Look Inside the Sponsor of Tomorrow
The Telecom sector was the biggest winner, but it was joined by Utilities perhaps as a reprieve from recent weakness for high yielding stocks, as interest rates marched higher. Consumer, especially Discretionary was the laggard. In other strategy news…
- Intel Corp. (INTC) was again making headlines, but this time not due to the Meltdown and Spectre chip flaws. This time the stock reported a consensus smashing quarter. The chip maker beat estimates significantly and increased its dividend by over 10%. A look inside the report revealed that the company had year-over-year growth in its Data Center and Internet of Things groups of over 20%. Future guidance also includes double-digit growth in Data Center revenue and a tax rate of 14%, down from 19.8% last year.
The Week Ahead
Looking to NET Another Month of Robust Job Growth
Non-farm payroll is expected to add around 165,000 new jobs for January.
- The U.S. added 148,000 jobs in December.
- Wage growth will be under a microscope, especially with minimum wage increases in 18 States and 20 cities in January.
Eurozone’s fourth-quarter preliminary GDP will be released on Tuesday.
- Europe’s economy expanded 2.3% over the past year, inspiring a 17-year high in economic confidence across the 19-country union.
- We will look to see if the U.S.’s large import number translates to an export gain for Europe.
Technology companies take center stage as earnings continue to roll in.
- Strategic holdings QUALCOMM (QCOM), Microsoft (MSFT), Alphabet (GOOG,GOOGL), and Apple (AAPL) will be the stars of Wednesday and Thursday evening.
- The Healthcare space will also share the stage, as Strategic holdings McKesson (MCK), Pfizer (PFE) and Anthem (ANTH) are on the docket.
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