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Strategic Insights

Volume 8, Edition 12 | March 18 - March 22, 2019

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The Madness of March

Doug_Walters Doug Walters | Articles

Read Time: 2:30 min | Video: 4:32

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What do the NCAA basketball tournament pools and investing have in common? Hopefully very little… but for some, probably too much…

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko

Stocks grasped defeat out of the jaws of victory this week as a stellar performance on Thursday was followed by a cold streak Friday. Was the kickoff off of March Madness to blame? After all, billions of dollars in lost productivity are being sucked out of corporations as employees fill out and monitor their NCAA tournament brackets. Unlikely. Instead, investors were focused on soft overseas economic data, Fed commentary, and an inverted yield curve. So, is it time to jump out of the game, or perhaps put your money on a Cinderella story investment “guaranteed” to outperform in a downturn? Of course not. Unlike the NCAA tournament, investing is a long-term endeavor, and you do not have to pick just one winner. We prefer to build portfolios that provide clients diversified exposure across the economic cycle. Anything else is gambling in our view.

 

Headlines this Week

  • Economic growth scares spooked equity markets on Friday, both home and abroad, but boosted bonds.
  • The U.S. Federal Reserve capitulated once more. Growing fears surrounding a slowdown of the global economy caused the central bank to cut its Gross Domestic Product (GDP) growth for both this year and next. The Fed’s Chairman, Powell, set the stage for one rate hike in 2019. In addition, the Chairman announced a slowdown in the pace of balance sheet runoff this spring and an end to the balance sheet contraction program in September.
  • Bonds gained as yield’s swiftly declined following the Fed’s comments. The two-year U.S. Treasury yield is back near last year’s low, creating yield inversion between the U.S. Feds fund rate and short-term treasuries. The yield curve flattened, and the thirty-year Treasury dipped below 3% again. German ten-year bund yields dropped below zero again. On the positive side, the dropping interest rates have boosted the housing market, as existing home sales jumped by over 11% this month.
  • Brexit update – European Union (EU) leaders agreed to extend the Brexit deadline until April 12th. However, if there is support for the Brexit plan, the deadline to exit the EU will be pushed back to May 22nd if the British agree to it. Goldman Sachs sees a “coin toss” for the Brexit plan to succeed, while a “no-deal” Brexit and no Brexit at all are still possibilities, with the latter at a 35% probability.
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Spotlight: Bracketology

Famed billionaire investor Warren Buffett likes to make a splash during March Madness. Last year we discussed his $1 Billion prize for anyone able to produce a perfect NCAA basketball tournament bracket (Art of the Turnover). With odds (at best) of 1 in 128 Billion, the “Oracle of Omaha” was unlikely to be called on this challenge. It is believed that no one has ever produced a perfect bracket.

However, employees of his company, Berkshire Hathaway (owner of brands like Geico, Dairy Queen, Lubrizol, Fruit of the Loom, and Duracell) have an easier challenge. If they can correctly pick the teams that make it to the sweet sixteen, he will pay them $1,000,000 a year for life. Not too shabby for an office March Madness pool! At Strategic, our own master of bracketology is Senior Advisor (and Syracuse Orange super fan), Michael McGraw. He may not be able to offer you $1,000,000 a year for correctly picking the sweet 16, but he can help you get your financial plan on track, so you won’t ever have to put your faith in dreams of get-rich-quick schemes.

The Week Ahead

  • Apple (AAPL) has a “special event” on Monday, where a streaming-video service is expected to be unveiled.
  • Friday is the original Brexit deadline. An extension is in the works.
  • On the economic front: the final 4th quarter 2018 GDP, housing data, the University of Michigan Consumer Sentiment Index, and Chicago Purchasing Managers Index.
  • Central bank watch: speeches are scheduled for Federal Reserve officials, European Central Bankers, and the Bank of Japan Chairman.
  • In sports: we will see round 3 and 4 of the NCAA Basketball Championship and the opening weekend of the Major League Baseball season.

Stock Highlights from Max

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Re-Rated

The Financial sector had a week that was even more awful than the Syracuse Men’s basketball team’s. Falling interest rates and inverting yield curves wreaked havoc on regional banks, with some down more than double digits. While lower rates may hurt interest income, mortgage refinancing should help overcome some of this headwind. Meanwhile, the Utility and REIT sectors were the leaders as beneficiaries of plummeting rates. In other news…

  • Williams-Sonoma Corp. (WSM) reported earnings this week. While the initial market reaction of a standing ovation was a bit overdone, the retailer of home goods and furnishings did report a great 4th quarter. A $0.13 beat on earnings and a 9.5% increase in sales for the year was only the start. The company also boosted its stock buyback by $500 Million, bumped its dividend by over 11%, and increased its guidance for the full year. Digging deeper, same-store sales were 2.4% higher for the quarter, a little less than expected, but its West Elm stores had an 11% increase, and online sales were 14% higher. The Pottery Barn stores, whose sales were down slightly this quarter, subdued enthusiasm.
  • The Walt Disney Co. (DIS) closed its $71.3 Billion acquisition of most of Twenty-First Century Fox this week. The deal adds assets such as Fox’s film and TV studios, FX Network, National Geographic, Star India, and an additional 30% stake in Hulu (taking the ownership up to 60%). This deal promises to reshape Hollywood, news, and sports. Stay Tuned!

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.2 billion.

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