Contributed by Doug Walters
U.S. equities found a path to new highs this week as corporate earnings kicked off in earnest and the European Central Bank struck a dovish tone. There was no shortage of political drama, but as we have come to expect, the market continues to take it in stride.
We exited our first full week of corporate earnings Friday, with nearly half of Financials having already reported. Overall, sales growth continues to be positive, with 73% of companies in the S&P 500 beating analyst expectations thus far. As we have said in the past, solid growth is important to justify the current above average equity valuation levels.
A Maverick Market
Republican Senators failed to pass a “repeal and replace” health care bill this week and appear to be setting their sights now on just repeal, with replace to come later. A bipartisan solution incorporating the best ideas that both parties have to offer seems unlikely at this point. Making matters more difficult for Republicans is the sad news that John McCain was diagnosed with an aggressive brain cancer. Add to that the daily flow of D.C. drama (Russia probe, an Attorney General under fire, an exiting Press Secretary), and it is amazing the market has been so robust. Welcome to 2017.
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||0.5||6.8|
|Russell 2000 (Small Cap)||0.5||5.8|
|MSCI EAFE (Developed International)||0.5||14.5|
|MSCI Emerging Markets||1.3||23|
|S&P GSCI (Commodities)||-0.6||-6.8|
|MSCI U.S. REIT Index||0.7||1.2|
|Barclays Int Govt Credit||0.3||1.2|
|Barclays US TIPS||0.5||0.4|
Apple has disrupted both the personal computer and mobile market over the past 15 years as the Silicon Valley company engineered explosive growth. The stock now trades more on free cash flow yield than on prospective growth, but there are other companies seeking the same type of disruption-based growth. Hyperloop companies, for example, are looking to disrupt the transportation industry by revolutionizing rail travel.
Hyperloop One has raised $180 million in funding with promises of industry disruption. The company completed its first full-scale test run, using magnetic levitation to transport a vehicle 70 mph for 5.3 seconds. A rival company Hyperloop Transportation Technologies (HTT) has made deals with several governments and has the following characteristics that enable exponential growth:
- Being nimble
- Being disruptive through new technology
- Servicing a big market
HTT has few full-time employees, with most of the critical engineering work outsourced and paid for in stock options. HTT co-founder Bibop Gresta boasts about having received 60,000 engineering hours through this unconventional model. The company’s motto is “Transportation Reinvented.” Through the use of advanced magnetic technology, HTT hopes to build hyperloops that will enable transport from DC to New York in 29 minutes.
The global transportation industry is worth trillions of dollars and technological advances have the potential to be enormously value added. We have already seen Uber disrupt transportation, taking market share from traditional taxi drivers. But this could also impact local businesses such as bars and restaurants, that may see a spike in beverages served. We expect disruption to be a theme in the coming months and years, and as investors must remain vigilant regarding their implications.
The market CHUGGED along
Consumer Confidence readings have been robust this year and are expected to remain strong for July.
- High consumer confidence should translate to positive sales growth for the retail sector.
Home sales for new and existing homes are expected to decline slightly in June vs. the prior month.
- In May, newly built homes sold at an annualized rate of 610,000.
Utility stocks we hold are set to report earnings next Wednesday, with our focus on NextEra (NEE).
- NextEra (NEE) is the largest owner and operator of wind and solar electricity generation in North America. Their earnings should shed some light on the renewable energy market.
Gross Domestic Product’s (GDP) first preliminary results will be reported on Friday.
- GDP is expected to grow by nearly 3% in the second quarter vs. 1.4% growth during the same quarter last year.
Google’s parent company Alphabet Inc. (GOOG, GOOGL) is scheduled to report earnings on Monday evening.
- Investors will focus on Google’s core business’ pay-per-click volume and growth, cloud business and the launch of YouTube TV.
- Investors speculate that YouTube TV might take market share from AT&T’s (T) Direct TV.
Earnings season is officially in full gear.
- 22 of Strategic’s holdings are reporting quarterly earnings next week.
Durable goods orders index is used to measure the conditions of U.S. manufacturing.
- Analysts are expecting 3% growth in June which would be the strongest growth in a single month this year.
Contributed by Max Berkovich ,
STRATEGIC ASSET ALLOCATION
Still Super Mario!
10-year U.S. Treasury yields moved from 2.33% to 2.23% this week. Lower yields mean higher Treasury prices. The European Central Bank (ECB) was in part responsible for the gain, as President Mario Draghi reiterated his stance on monetary easing policy. Draghi also joined Chairwoman Yellen with a 2% inflation target.
- The now notable differences between the U.S. central bank and ECB policies is that the U.S. Federal Reserve is preparing to scale back its massive balance sheet of $4.5 trillion, while the ECB intends to continue to buy €60 billion in bonds each month. With further U.S. rate hikes still anticipated, we remain cautious on bond duration.
Dollars and Cents
While bonds have gained, the Dollar Index (DXY) has declined this week by nearly 1.30% after the ECB released their position on monetary policy. Some experts blame a weakening in the GOP’s agenda for the dollar’s decline, but all evidence point to a single event—the ECB’s decision on Thursday.
- A weaker dollar helps Gold prices and should boost U.S. exports.
- The DXY index measures the strength of US Dollar against a weighted basket of major global currencies. The Euro has a 56.7% weight in this basket.
Red Hot Deals
Visa Inc.’s (V) hot earnings report boosted financials to the top, while the industrials sector served up a bitter taste as transportation companies failed to deliver. Two noteworthy acquisitions in the Staples sector this week…
- Church & Dwight Co., Inc. (CHD) acquired Water Pik, Inc. for $1 Billion. WaterPik is the market leader in water-jet technology in both oral water floss and showerheads. The new addition is supposed to complement the Orajel and Arm & Hammer Spinbrush and toothpaste brands.
- Spice company McCormick & Co., Inc. (MKC) announced a much more expensive acquisition, paying $4.2 Billion for the food division of British consumer giant Reckitt Benckiser Group plc. (RBGLY). McCormick now adds French’s mustard, Frank’s Red Hot sauce and Cattlemen’s BBQ sauce to its line-up of spices and condiments.
STRATEGIC EQUITY INCOME
Interest rates moved down this week and that propped up Utilities and Telecom to leading sectors for the week. Health Care, on the other hand, received a dose of bad medicine when the CFO of Medtronic Ltd. (MDT) blamed a computer crash for negatively impacting the company’s upcoming results. Several banks in the strategy reported solid earnings results this week, but two did offer other news…
- Bank of New York Mellon Corp. (BK) abruptly changed CEO’s this week. Charles Scharf, formerly CEO of Visa Inc. (V), will replace Gerald Hassell who ran the bank since 2011.
- BB&T Corp. (BBT) announced they will accelerate $920 Million of the authorized $1.88 Billion stock buyback plan that runs through the 2nd quarter of 2018.
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