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Strategic Insights

Volume 4, Edition 31 | August 24 - 28, 2015

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Walk on the Wild Side

Mike Leist Michael Leist | Articles

Read Time: 3:30 min

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Stock market volatility and economic indicators battled for the attention of Central Bankers who were busy discussing inflation in Jackson Hole.

Market Review

Contributed by Alan Leist, III

Stock market volatility and economic indicators battled for the attention of Central Bankers who were busy discussing inflation in Jackson Hole.

Wild Ride: Equity weakness and China concerns sparked suggestions that we may not see a Fed Funds rate hike in 2015. However, the stock market is not the economy, and solid GDP growth is probably more relevant to the Fed.

  • After a dramatic five day decline of more than 10%, equities finished strong to cut losses in half and actually post gains on the week.
  • Helping sentiment on Thursday, US Q2 GDP growth was revised higher (see Economic Commentary).
  • The robust GDP report, and subsequent comments from bankers, renewed speculation that a 2015 rate rise from the Fed may still be in the cards.

The Economy, Stupid: Central bankers from around the world convened in Wyoming.

  • While Fed Chairwoman Yellen skipped the event, other Fed officials on hand continued to focus on the strength of the U.S. economy NOT the stock market volatility triggered by China’s troubles.

Economic Commentary

A strong upward revision in U.S. GDP notwithstanding, investors remained concerned about the potential spillover effects to the U.S. from the slowdown in China.

Stale Stats? The revised estimates from the Commerce Department showed that Q2 U.S. economic output expanded at +3.7% rate, significantly higher than the earlier estimate of +2.3%.

  • The substantial revision was driven by better than expected government and consumer spending, and home building.
  • Investors however remained concerned that the GDP  report is backward looking, providing little visibility into the future in the midst of Q3’s global econ shift.

Over Exposure? In the chart below, we get a sense of U.S. exposure to Chinese GDP growth by taking a look at the trade between the two countries.

  • China’s slowdown will of course affect the U.S. through many channels, but the disruption in trade is expected to be minor contrary to conventional wisdom.

Our Take: While only 1% of U.S. GDP is directly tied to trade with China, investor concern is still justified.

  • China is the largest economy in the world on a purchasing power parity basis and accounts for roughly a third of the world’s GDP growth.
  • A deep, uncontrolled slowdown to the point of recession would have contagion implications in not only the U.S. but also developed Asia, Europe and emerging markets the world over.

Looking Ahead to Next Week

Contributed by Aaron Evans

Labor of Love: The August non-farm payrolls and unemployment report will be the highlight of next week’s economic calendar.

  •  Amidst the markets recent volatility, investor and Fed focus should turn to economic fundamentals, with few more key than the strength of the U.S. labor market.

Beige is Back: The Fed’s annual Beige Book report on the state of the economy will be released on Wednesday.

  • The survey will provide insight on how each Fed member views the state of the economy before their September meeting.

Global Studies: Finance ministers and central bank governors from around the world will meet at the annual G-20 summit in Ankara, Turkey.

  • Sluggish global growth (China in particular), rising U.S. interest rates, sliding oil prices and the perpetual Greek sovereign debt crisis are likely to highlight the agenda.

Investment Strategy

STRATEGIC Asset Allocation

Europe and Beyond: The lackluster performance of equities over the past three months has created some valuation opportunities to capitalize on.

  • Recently, we have been favoring the improving valuations of international developed equities in the midst of the market’s noise and volatility.

Texas: Commodities have been amongst the worst performing asset classes this year. This week, many commodities finally rebounded, including oil which lead the move.

  • Regular and disciplined rebalancing on extreme moves ensures upside is captured on the rebound.

STRATEGIC Growth

The Beat Goes On: Energy and tech had a strong bounce from last week, while consumer staples lagged. In other news…

  • ULTA Beauty (ULTA) continued its streak of topping expectations. The company had same store sales jump 10% for the quarter and online sales jump 43%. The company sees sales in the mid to high teens for full year 2015.

STRATEGIC Equity Income

Topping on the Berger: The flight to safety trade was reversed this week as utilities lagged, a failed acquisition in the space didn’t help. Speaking of acquisitions…

  • Schlumberger Ltd. (SLB), the oilfield services goliath, got a little bigger with the proposed acquisition of smaller rival Cameron Intl. (CAM). The price tag on the cash and stock deal is $12.7 Billion, a 56.3% premium to prior days close.

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