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Strategic Insights

Volume 7, Edition 9 | February 26 - March 2, 2018

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Why Words Matter

Doug_Walters Doug Walters | Articles

Read Time: 4:30 min

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Neither the Fed’s carefully worded testimony nor the President’s blunt talk on tariffs was received well by investors this week.

Market Review

Contributed by Doug Walters

A positive start to the week was cut short by a returned of focus to macro matters. Fed Chairman Powell’s first testimony in front of Congress raised fears that rising inflation may lead to faster rate increases, while Trump’s abrupt announcement on steel and aluminum tariffs had investors weighing the impact of a trade war. The S&P ended the week down 2%.

Adding Fuel to the Fire

The new Fed Chairman Jerome Powell had his first dance with the House (Tuesday) and the Senate (Wednesday) in his semiannual monetary policy report. Federal Reserve policies have enormous implications for markets, and as a result, investors hang on every wonkish word from the Chairman. Each sentence is carefully chosen and delivered devoid of emotion, making these painful spectacles for us Fed watchers.

Equity markets fell on Tuesday and Wednesday as Powell appeared to indicate that inflation was tracking somewhat higher than previously thought. Rising inflation due to a hot economy would require the Fed to raise interest rates faster to avoid an overheated economy. The Fed had previously indicated the expectation for three rate increases this year, but the probability of a fourth appeared to rise.

While the market attempted to absorb this news, the Trump administration threw some fuel on the fire in the form of broad-based steel and aluminum tariffs. The surprise announcement raised fear of a trade war that could lead to the wrong sort of inflation (rising prices with slowing global growth). Investors were unimpressed, with the S&P 500 falling 2% on the week.

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Fed Chairs are notoriously good at sticking to their talking points and avoiding giving misleading signals. Alan Greenspan, the Fed Chair during the lead up to the Tech Bubble, was no exception. He held his cards very close to his chest. However, many investors claim he provided signals to future rate decisions in the movement of his eyebrows. Perhaps this is why he never took to wearing contact lenses?

Strategy Update

Contributed by Max Berkovich , Aleksey Marchenko

Strategic Asset Allocation

Role Check

Fixed income reprised its role as a source of capital preservation this week, but most bond indexes continue to be in the red for the year. Equity markets took a breather but are still up nearly 14% over the past 12 months. Speaking of the S&P 500…

  • Over 97% of S&P 500 companies have reported their fourth quarter (2017) earnings.
  • According to FactSet, last September, analysts were estimating Q1 2018 earnings to grow by 9.8%. As of Friday, analysts have revised their estimates up nearly two-fold, predicting over 17% growth.
  • Energy and Materials are expected to show the fastest growth, as both sectors are recovering from their lows.
  • However, Technology is the most significant contributor to S&P 500 earnings, accounting for nearly 40% of the growth, with about 21% expected in the first quarter.
  • Looking at forecasts for the whole of 2018, the S&P 500’s aggregate 2018 sales are estimated to grow by 6.3%, with earnings per share growth of 18.5% helped by better profitability, lower taxes, and increase in stock repurchases.

STRATEGIC GROWTH

Just Chile Out!

The Industrials and Energy sectors were the laggards this week, while the Consumer Staples sector was the leader. In other strategy news…

  • Albemarle Corp. (ALB) a specialty chemical company known for its exposure to lithium, the metal used in ion-batteries, reported a strong quarter that topped expectations. Despite the strong results, a report claiming “significant oversupply in the lithium market” soured investor’s response to the positive earnings report. 46.9% of the world’s 16,000,000 tons of Lithium reserves, according to the United States Geological Survey, are in Chile.

STRATEGIC EQUITY INCOME

Taking it to the Maxx

The Industrials sector was a clear laggard this week, even before the tariff news came out. On the other hand, the Consumer Discretionary sector was the undisputed leader thanks to a glowing earnings report from…

  • TJX Companies, Inc. (TJX), the discount retailer doing business under the TJ Maxx, Marshall’s, and HomeGoods brands, spit out a series of news items that pleased investors, including: strong comparable sales in Q4, guidance of sales and earnings growth for fiscal year 2019, a dividend bump of 25% (22nd consecutive year of dividend boosts), a $2.5-3 Billion stock buyback, and a plan to repatriate $1 Billion from Canada on top of the $0.17 per share benefit to earnings from tax cuts.
Indices & Price ReturnsWeek (%)Year (%)
S&P 500 -2.00.7
S&P 400 (Mid Cap)-1.3-1.2
Russell 2000 (Small Cap)-1.0-0.2
MSCI EAFE (Developed International)-2.9-2.2
MSCI Emerging Markets-2.82.0
S&P GSCI (Commodities)-2.3-0.3
Gold-0.61.4
MSCI U.S. REIT Index-2.0-11.8
Barclays Int Govt Credit-0.2-1.7
Barclays US TIPS0.2-1.7

Week Ahead

Contributed by Aleksey Marchenko

Tariffs Garner JEERS Home and Abroad

Jobs report will be released on Friday.

  • Analysts are estimating that the U.S. will add around 190,000 jobs.
  • In 2017, the U.S. added 181,000 jobs per month on average.

Economic data to watch next week includes the PMI, Beige Book, and Trade Balance.

  • The Purchasing Managers Index (PMI) provides insight about of the health of manufacturing and service sectors. The index has tracked above 50 over the past two years indicating expansion.
  • The Beige Book is a survey from the 12 Federal Reserve Districts which gives a broad picture of U.S. economic growth.
  • The Trade Balance deficit is expected to widen slightly, despite the weaker dollar.

Earnings from Dollar Tree (DLTR) and Costco (COST), both Strategic Growth holdings, will be announced on Wednesday.

Rate decisions from the Bank of Japan and the ECB will be closely watched.

  • Rates from both Central Banks are expected to remain unchanged, so focus will be on future guidance.

Speeches from Federal Reserve’s bank supervisor Randal Quarles, Fed Governor Lael Brainard, New York Fed President Dudley, Dallas Fed’s Robert Kaplan, Atlanta’s Bostic, and Chicago’s Evans will give more insight about the state of the U.S. economy and monetary policy.

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Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1 billion.

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