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Strategic Insights

Volume 8, Edition 27 | August 5 - August 9, 2019

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Through the Wringer

Doug_Walters Doug Walters | Articles

Read Time: 3:00 min

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Market moves put us investors through the wringer this week, but we came out clean on the other side as the resilience of the U.S. economy remains hard to ignore…

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko

Equity markets are not for the faint of heart! This week alone we saw U.S. stocks fall nearly 4% in one day, only to claw back all of those losses within the next three days. While this does not happen every week, it is not all that unusual. Stocks are risky. That is why we demand a long-term return for holding them, and also why we work with clients to create a diversified portfolio that matches both their willingness and ability to take on risk. Long-term investors need not worry about this short term volatility.

Headlines This Week

Global equity markets took a wild ride this week as investors attempted to digest the extension of U.S. tariffs on Chinese imports. In retaliation, the Chinese Central Bank devalued its currency, which helps them to maintain export prices. Some economists view the U.S. – China trade conflict as a trade war with no end in sight. The U.S. collected about $27 billion in new tariffs over the past 12 months, all of which has been paid out to farmers harmed by China retaliation.

China’s attempt to bring Hong Kong under tighter control fueled protests that have run all summer long, with protests only escalating. Foreign companies in Hong-Kong are talking about relocating to other regions if the political environment between Hong Kong and China does not improve.

  • Protestors fear if China gets its way, they will be able to extradite and try people in mainland courts, where justice is believed to be more factitious.

Tensions flared in the Kashmir region after India revoked the region’s autonomy. This action increased tensions between the two nuclear-armed neighbors, India and Pakistan.

The yields on long-term U.S. Treasuries plummeted, making the yield inversion between long and short-term rates even wider. Of course, the Fed can act by cutting short-term rates to close the gap and stimulate the economy. Inversions, the traditional indicators of recession, have been less impactful due to the low rate environment across the globe.

  • Expectations of further rate cuts from the Federal Reserve have reintroduced the possibility of negative rates at home.
  • This possibility boosted Gold to a six-year high.

The Week Ahead

A few of our portfolio holdings release earnings next week, including Walmart, Inc. (WMT) and Deere & Co (DE).

  • Walmart continues to roll out one and two-day delivery options and has seen its online sales pick up steam.
  • Deere & Co. is expected to report weak results. The heavy machinery company has faced a challenging environment due to the trade wars’ effect on agricultural prices, which impacts the capital expenditure plans of American farmers.

Germany will release its Q2 GDP figures on Wednesday.

  • Since Germany is the Eurozone’s largest economy, a higher reading will be seen as a positive for the Euro.

Closer to home, the U.S. is releasing the July Consumer Price Index (CPI) on Tuesday.

  • The CPI (excluding Food and Energy) is a comparison of the changes in the price of a basket of goods and services, compared to a basket of goods and services from a prior period.  A rising index reading indicates inflation.
  • Economists will be keeping an eye on the CPI for some hints to interest rate policy.

Stock Highlights from Max

Disney Logo Booking Holdings     CVS

Interest rates dominated market action more than earnings this week. Lower rates squeezed banks, leaving Financials the worst sector this week. As always, the Utilities and REITs sectors were the big winners for the same reason. Just because rates were in the driving seat doesn’t mean earnings did not cause volatility. These three certainly did…

  • The Walt Disney Co. (DIS) unfortunately stepped into a trap. Expectations were sky-high, while results were not so stellar. Revenue came in $1.16 Billion shy, and earnings per share were $0.39 below consensus. With the recent acquisition of Fox assets and Hulu rolling into Disney results, there was a lot of noise. CEO Bob Iger said this would be one of the tougher quarters to explain. Iger identified the substantial investment in the direct-to-consumer streaming service as a big culprit. Hopefully, the investment will lead to offsetting revenue post-launch. Iger also announced a Disney Plus, Hulu and ESPN Plus bundle would come with a $12.99 monthly price tag, while Disney Plus stand alone would be $6.99. Parks attendance fell 3% this quarter, but Disney is attributing this to demand management for the Galaxy Edge resort.
  • Booking Holding, Inc. (BKNG), formerly known as Priceline, did not have the same problem. Booking topped expectations. The company smashed gross booking expectations of 1.3% increase with a not too shabby 4.8% increase and an even more significant margin on a constant currency basis of 10%. Also, the company reported that room nights sold were higher by 11.8% for the quarter.
  • Another earnings season star was CVS Health Corp. (CVS) which also topped expectations and boosted guidance. CVS’s success as a mix of pharmacies, drug-benefit services, and health insurance is out hustling its closest competitor, who is set to shut down 200 more locations in the U.S.

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Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.3 billion.

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