Contributed by Doug Walters
U.S. equities were on hold this week, trading sideways, before dipping Friday. Investors are weighing the economic data, which still points to a robust economy and the potential impact of a protracted trade dispute with China. But eyes are increasingly turning to the Fed rate decision next week which has the potential to overshadow all else in the near term.
The Federal Reserve has continued its two-year trend of steadily raising rates under the direction of Chairman Powell. The probability of a rate rise next week is about 80%, so it seems unlikely that the Fed will deviate from its gradual tightening. While the Fed is much more focused on the economy than the stock market, recent investor jitters may influence the language about the path of future rate decisions. Any softening of the tone could help support stocks. In the meantime, we believe investors should treat the recent weakness as a holiday sale! Human nature is to flee in the face of loss, but we recommend investors start bargain hunting.
Spotlight: An Unprecedented Rise
There is much about this latest Fed rate cycle that is unprecedented. In the aftermath of the Financial Crisis, rates were uncharacteristically held near zero for seven years, allowing the economy to regain steam. But even the gradual increase of the past few years is unusual in U.S. rate history. Typically rates have been increased sharply and cut swiftly as the Fed tries to get ahead of the economy. Some have argued that Chairwoman Yellen was too slow in beginning the current tightening phase. However, so far, the market has responded nicely to the well-telegraphed gradual tightening, and there are no signs (like rising inflation), that the pace is too slow. Time will tell if the path of the past 10-years has been prudent, but it has certainly been interesting for us wonky Fed watchers.
STRATEGIC ASSET ALLOCATION
A Taxing Dilemma
Only growth stocks eked out a gain this week as U.S. equity markets traded lower. Bonds moved higher as U.S. Treasury yields slipped. As this year approaches an end, we want to take a moment to discuss mutual fund capital gain distributions.
- Taxable accounts holding mutual funds could be in for another year of sizable gains. Some notable funds have announced that they are planning to pay out 10% or more of net assets as taxable gains. This is a bitter tax bill in a year when fund returns could be negative.
- As investors are leaving mutual funds for ETFs, money managers have no choice but to sell their longtime holdings to fund those distributions. A ten-year bull market in equities has generated some large returns, which is great for those who enjoyed the run.
- If you are a new investor and looking to invest in mutual funds, it would be wise to wait to purchase until the fund pays out its gains.
- If you are holding mutual funds, be mindful of mutual fund capital gains taxes and work with your advisor to minimize the tax bill if possible.
- Note – if a fund is paying a double-digit percentage in capital gains, it may be a sign that investors are racing for the exit door and it may be time to exit the investment. Funds may have paid out some gains earlier in the year so check for full year distributions. Please visit the mutual fund’s website for the details on capital gains estimates.
Microchip stocks helped boost the Technology sector to the top. On the other hand, the Health Care sector was the biggest laggard thanks to…
- Johnson & Johnson Corp. (JNJ) was rattled by a story by Reuters claiming that the company knew for years that its baby powder could be contaminated by asbestos. The story claims that company insiders failed to disclose what they knew for over 30 years. JNJ has been involved in over 12,000 product liability lawsuits relating to the talcum powder. The company denied the report, claiming the story to be “one-sided, false, and inflammatory.” The company also claims it has studied over 100,000 people and the study showed that talc does not cause cancer nor asbestos-related disease. The market was not buying the denial though.
STRATEGIC EQUITY INCOME
The Energy sector was the big laggard as oil prices continue to trend lower. Technology was the leading sector. Speaking of Technology…
- Cisco Systems Inc. (CSCO) was reported to have outbid fellow strategy holding Intel Corp. (INTC) and Broadcom Inc. (AVGO) for optical microchip maker Luxtera Inc. Luxtera is a private company. According to a report, the, yet to be revealed, deal price should be in the hundreds of million range. It looks as if the routers and switches company is moving into microchips. Luxtera makes chips that can turn light from fiber optic cables into electronic signals. The company can produce these chips at high volumes, something that has eluded other chipmakers.
The Week Ahead
Contributed by Aleksey Marchenko
Central Banks Will Provide the FIRE Next Week
Federal Reserve is expected to hike rates again on Wednesday.
- Chairman Jerome Powell is expected to provide further rate hike guidance for 2019 and economic projections.
Interest rates from the Bank of Japan (BOJ) and the Bank of England (BOE) are widely expected to stay put.
- Both central banks have yet to hike rates as their economies have struggled to produce any meaningful growth and inflation.
Reporting earnings from our holdings this week is Oracle Corp. (ORCL) on Monday.
- Oracle is expected to show a slight decline in its revenue, but over 11% growth in earnings.
Economic data includes Gross Domestic Products (GDP) for the 3rd quarter, Housing Permits and Starts, Durable Goods Orders and Shipments, Personal Consumption Expenditure (PCE) and Personal Income.
- Only the housing data is released before the Federal Reserve holds its meeting.
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||-2.7||-8.8|
|Russell 2000 (Small Cap)||-2.6||-8.1|
|MSCI EAFE (Developed International)||0.3||-13.5|
|MSCI Emerging Markets||0.4||-14.9|
|S&P GSCI (Commodities)||-0.8||-6.7|
|MSCI U.S. REIT Index||-2.2||-1.6|
|Barclays Int Govt Credit||0.1||-2.0|
|Barclays US TIPS||-0.7||-4.4|
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