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Strategic Insights

Volume 6, Edition 26 | July 30 - August 4, 2018

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Trillion Is the New Billion

Doug_Walters Doug Walters | Articles

Read Time: 5:00 min

Week_Ahead_Image

While other FAANG stocks have stumbled as of late, Apple can seemingly do no wrong, becoming the first U.S. trillion-dollar company…

Market Review

Contributed by Doug Walters

U.S. equities pushed forward this week thanks in large part to the first U.S. trillion-dollar company, Apple (AAPL). Without the tech giant’s contribution, the S&P 500 would have been flat. Second quarter earnings continue to drive headlines and distract investors from the uncertainty of the trade and tariff discussions which continue to escalate.

FAANG Diastema

We are about 80% through the second quarter corporate earnings season. Results have been robust in aggregate, with sales up nearly 10% compared to this time last year and versus an expectation of under 8%. Median sales growth over the past 20 years is about 7%, so these are good numbers. However, we have yet to hear from most retailers. The sector has struggled in recent years to navigate the disruption of online shopping.

We are seeing a sizable gap forming amongst the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Alphabet). Apple’s positive results this week are in stark contrast to the recent weakness in other FAANG stocks. Facebook and Netflix are both down about 18% from their peaks, yet Apple advanced almost 9% this week to become the first U.S. trillion-dollar company.

No matter how you slice it, a trillion dollars is a lot of money. There is only $1.67 trillion of currency in circulation in the U.S., so if you were planning on purchasing all of Apple’s stock with physical cash, think again. Even Paul Manafort would have trouble spending a trillion dollars. He could buy one of his $15,000 ostrich jackets for every man 45 and over in the U.S. (all 64 million of us), and he would still have $40 billion of pocket money left.

Spotlight: Counting Your Money

Big numbers spur the imagination. As I was contemplating Apple’s milestone, I started thinking about how long it would take to count a trillion dollars in singles. Assuming a rate of two bills per second, it would take nearly 16,000 years!

Unfortunately, after all that time, your trillion dollars would not be worth a trillion dollars anymore thanks to inflation. Think about the $0.45 one paid for a Big Mac when introduced in 1967 versus the $5.50 paid today. Inflation! Any guesses how much a trillion dollars would be worth in the year 17,862 assuming just 2% inflation? Zero. Not just pennies… zero. In fact, thanks to inflation, your trillion dollars would be worth less than a penny within 1,700 years.

While this is a somewhat ridiculous thought experiment, it does highlight the very real risk that inflation poses. It is not enough to hide your life savings under the mattress and hope for the best. Long-term savings should be invested to earn a return sufficient to offset the inflation headwind.

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Strategy Update

Contributed by Aleksey Marchenko

STRATEGIC ASSET ALLOCATION

Other Milestones Around the Globe

U.S. equity markets finished the week on a positive note while bonds posted slight declines after the U.S. Fed hinted that a rate hike is very likely in September. Emerging Markets and Developed International both declined about 1% during the week, as the U.S. dollar strengthened against a basket of major currencies. Speaking of Developed and Emerging Markets…

  • The Bank of England (BOE) increased rates by a quarter of a percent, moving their interest rates from 0.50% to 0.75%, while the European Central Bank (ECB) held their refinancing rate steady at 0% (where it has been since 2016).
  • Our India holding of WisdomTree India Earnings Fund (EPI) has rallied over 1.7% this week and stood out against its Emerging Markets peers. EPI is outperforming the MSCI Emerging Markets index by over 2.5% year-to-date.
  • India’s 2018 GDP’s growth is estimated to rise to 7.5%, outpacing China’s for the fourth year in the row.

STRATEGIC GROWTH

Good Is Not Good Enough

The earnings season for the Technology sector made one thing clear – meeting estimates is not good enough. Both Technology and Industrial sectors lagged this week, despite some earnings reports that wowed investors. On opposite ends of the spectrum were…

  • Cognizant Technology Solutions Corp. (CTSH), the technology consulting and services company, reported nearly inline sales and beat on earnings per share by about 8%. Unimpressed, investors punished the company for not improving their top line growth, with the stock finishing nearly 6% lower for the week. Despite the rough week, CTSH is up over 9% year-to-date.
  • Xylem Inc. (XYL), the water technology provider, reported a beat on both sales and earnings. The company also impressed investors with strong order growth, paving the way for a robust 2019. For the job well done, investors rewarded the company’s stock with an over 8% gain for the week.

STRATEGIC EQUITY INCOME

A Trillion-Dollar Apple

The Healthcare, Consumer Staples, and Utilities sectors had a good week, shrugging off any anticipation of rising interest rates. The Technology sector had a rough start to the week but was able to recover thanks to one company…

  • Apple Inc. (AAPL) became the first world’s trillion-dollar company by market capitalization after they reported 40% growth in earnings per share and 17% growth in sales on a year-over-year basis. 41.3 million iPhones were sold vs. 41.8 million sold during the same period a year ago. While iPhone unit numbers might not be impressive, customers demonstrated a clear willingness to pay more.

The Week Ahead

Contributed by Aleksey Marchenko

TIP for the Week

Trade balance numbers from European Union (EU) countries and China will be closely watched.

  • Germany, Italy, and the United Kingdom are estimated to show nearly flat trade balance numbers for June.
  • China’s imports are expected to grow 6.9% in June vs. 6.0% in May, while exports are estimated to decline slightly during the same period.

Inflation data, measured by the Producer Price Index (PPI) and Consumer Price Index (CPI), are expected to show little change from the same month last year.

  • For July, PPI inflation is to be 2.7% year-over-year with CPI at 3.0%.

Purchasing of existing homes is on a declining trend. The survey from the Mortgage Bankers Association (MBA) applications measures mortgage loan application volume.

  • Low housing supply (at historic lows), along with higher mortgage rates and prices are widely expected to continue to pressure real estate activity.
Indices & Price ReturnsWeek (%)Year (%)
S&P 5000.86.2
S&P 400 (Mid Cap)1.25.2
Russell 2000 (Small Cap)0.69.0
MSCI EAFE (Developed International)-1.7-3.6
MSCI Emerging Markets-2.3-7.9
S&P GSCI (Commodities)-0.64.4
Gold-0.8-7.1
MSCI U.S. REIT Index3.20.9
Barclays Int Govt Credit-0.1-2.1
Barclays US TIPS-0.3-2.3

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