It is hard to imagine; Thanksgiving is over, and Christmas is soon upon us. How time flies. This week, the market remained relatively flat after having risen since the presidential election. I should note, a large portion of the gains are concentrated in the energy and financial sectors. This rally has not seen broad-based gains across all sectors equally. In fact, there has been a forceful rotation out of certain sectors, i.e. staples, utilities, and technology into the sectors above. Taking into account the economic data and the end-of-year optimism, we expect markets to remain at or above where they are today, although a lot is baked into the market at these price levels.
For a quick rundown on sector performance, below are the returns in certain S&P 500 sectors since the presidential election on November 8th.
Financials +13.3% Utilities -5.2%
Energy +8.2% Consumer Staples -4.4%
Industrials +7.7% Technology -1.7%
Materials +5.6% Health Care +0.15%
There were several corporate announcements worth mentioning this week. Nestle reported it made a scientific breakthrough. With pressure building to make healthier products, Nestle has developed a new technology that has the potential to reduce sugar in some of its products by up to 40% without affecting the taste. By hollowing out the structure of sugar crystals, each particle dissolves more quickly on the tongue, so less sugar is needed. In other news, we learned that the CEO of Starbucks, Howard Schultz, is stepping down early next year. Rumors suggest he may be preparing for a political career but are unsubstantiated at this time. His successor has been with the company for the past seven years and has been integral to the company’s growth over that time. As with all things, nothing lasts forever. On that note, it seems Phillip Morris is looking toward a future without cigarettes. Andre Calantzopoulos, CEO of Phillip Morris, told the BBC that the company could eventually stop selling conventional cigarettes. It is launching a smokeless product that heats the tobacco without burning it.
For the better part of this year, OPEC countries tried to reach an agreement on reducing oil production. With each meeting, failure ensued. Certain holdouts, including Russia, Iran, and Venezuela were unwilling to reduce production because of their dependence on oil for revenue. Saudi Arabia did not want to reduce production single-handedly. Without much in the way of details, a deal was struck, and output will be cut by 1.2 million barrels per day. For perspective, this only represents a cut of 3.5% of total output. The price of crude oil shot up 7%, to $51 per barrel, on the news. However, the biggest beneficiary of this move could be the U.S. shale industry. Production costs have been cut roughly in half since 2014, and rising prices could unlock some of the thousands of drilled but uncompleted wells in the United States.
The economic news this week was upbeat. We learned U.S. Gross Domestic Product (GDP) grew a strong 3.2% in the third quarter and today it was announced the unemployment rate fell to 4.6%, it’s lowest since August 2007 (before the financial crisis). Consumer confidence rose to 107 in November versus expectations for 101 and third quarter corporate earnings grew by 5.2%. Lastly, the Fed released the November Beige Book which showed steady economic improvement across a majority of districts across the country. The report also found that labor markets are tightening and staffing services are having difficulty finding workers. All these metrics bode well for the economy and point to an almost guaranteed interest rate hike in a couple of weeks.
In closing, the story of the week is about a Chinese dish many consider a staple. It seems the inventor of General Tso’s chicken, Peng Chang-Kuei, has died this week at the age of 98. What caught my eye is the history of this dish. According to an interview with the China Times, Peng told the reporter the dish was created in 1952 during a four-day visit by U.S. Seventh Fleet commander Admiral Arthur W. Radford. After three days, he had run out of dishes to make for the Admiral. In a moment of genius, he threw together some ingredients and the idea was born. The admiral was so impressed he asked Peng what it was called and on the spot, General Tso’s chicken came into being. Peng chose the name to honor General Tso, a famous military leader from Hunan (Peng’s hometown). In 1973, Peng opened a Chinese restaurant in NYC where it gained prominence in the shadow of the United Nations. The rest of the story is history. To learn more about this story click here. Now you know.
December 2, 2016
After several weeks of solid gains, the market took this week to digest what a Trump presidency will mean for the country. Investors are wrestling with everything from energy policy to health care policy and tax cuts to infrastructure spending. The truth is, we’ll have to wait until after the inauguration in January to know what Mr. Trump’s priorities are for his first hundred days in office. Until then, we will have to rest on what we think he might do and plan accordingly.
President-elect Trump’s cabinet is starting to take shape but is far from complete. What we know so far is as follows:
- Reince Priebus (Chief of Staff) – Former head of the Republican National Committee (RNC)
- Steven Bannon (Chief Strategist & Senior Counsel) – Executive Chairman of Breitbart News (a controversial online news source)
- Jeff Sessions (Attorney General) – Current Senator from Alabama & former U.S. Attorney
- Mike Pompeo (CIA Director) – Current Representative of Kansas and former Army officer
- Michael Flynn (National Security Advisor) – Retired Army lieutenant general
Here’s what’s being strongly speculated
- Mitt Romney (Secretary of State) – Former Governor of Massachusetts and 2012 Republican Party nominee for President of the United States (other suggestions include John Bolton, Bob Corker, Rudy Giuliani and Stanley McChrystal)
- Jamie Dimon (Treasury Secretary) – CEO of JP Morgan (other names include Jeb Hensarling, Steven Mnuchin, and Tim Pawlenty)
- Tom Cotton (Defense Secretary) – Current Senator from Arkansas
- Rudy Guiliani (Homeland Security Secretary) – Former Mayor of New York City
As for what’s been doing well the past couple of weeks, it shouldn’t come as much of a surprise that the energy and financial sectors have been on fire. A recent look at stocks hitting new 52-week highs on stronger-than-normal-volume includes the following: Bank of New York Mellon, JPMorgan, SunTrust Banks, Bank of America, Citigroup, Citizens Financial, Discover, First Republic, Goldman Sachs, Humana, Manulife, Northern Trust, PNC Financial, Regions Financial, and Schwab.
In company news, Coca-Cola is on watch after a report of a potential takeover bid by AB InBev (BUD). 65 top executives at Anheuser-Busch InBev stand to share $350 million in bonus money if $100B in annual revenue is brought in by the company before 2020. The CEO has acknowledged that it’s looking at beverage companies outside of beer since hitting the target through organic growth is virtually impossible. In other news, McDonald’s is now implementing self-ordering kiosks across its stores as had been tested earlier this year in a few select locations. The company also is talking about table service. I’m just wondering when I’ll be able to order a McSteak and some McMashed Potatoes. Kellogg announced it would soon be introducing Cinnamon Frosted Flakes. Wait… they don’t already offer that you say? I couldn’t agree more.
To close out the week, I came across a story that I think may interest you. New Jersey is a state that distinguishes itself in many ways. One way that might surprise you is that it is illegal to pump your gas in the Garden State. Enacted in 1949, the Retail Gasoline Dispensing Safety Act and Regulations banned drivers from pumping their gas in New Jersey. The passage of the act was motivated by something a little less pure than safety: money. In the 1940’s, when self-service was unheard of in most of the country, a gas-station owner named Irving Reingold offered lower prices to customers willing to pump their gas. The gimmick was wildly popular and soon became a threat to competing gas stations. According to Bergen County’s The Record, “rival station owners reacted by persuading state lawmakers to outlaw self-serve.” To this day, you still cannot pump your gas in New Jersey. Now you know.
What a week. Because we have clients on both sides of the political spectrum, I have to make these comments as neutral as possible for fear of offending. However, a Trump presidency will have an impact in many ways that should be open to discussion. What we just experienced was no less historical than the Brexit or the Chicago Cubs winning the World Series. However, in this case, the ramifications are huge (no pun intended).
Let’s go through some of the implications:
Federal Reserve & Monetary Policy – While the Fed is committed to hiking interest rates, the pressure may diminish as fiscal policy takes over. Many believe monetary policy has run its course. With a Congress in gridlock these past eight years, fiscal policy was not possible. Now that Republicans control both the legislative and executive branches, it is conceivable that government spending will increase. Mr. Trump has made it clear he is not afraid of deficit spending (very much like President Reagan) and intends on making infrastructure a priority for his administration. On a side note, some have wondered if Janet Yellen, Chair of the Federal Reserve, would be forced to resign. Her term with the Federal Reserve is over in 2018, and it is likely Mr. Trump will choose to replace her at that time.
Taxes – Mr. Trump’s campaign rhetoric might have been populist, but his tax plan isn’t. The Tax Policy Center estimates the Trump tax plan would give nearly half its benefits to the highest-income 1 percent – those making $700,000 or more. Put another way, on average middle-income households making $48,000 to $83,000 would see a tax cut of $1,000 while those making more than $3.7 million would receive a benefit of more than $1 million. On the corporate front, U.S. multinationals have more than $2 trillion in foreign profits sitting overseas. Mr. Trump has proposed cutting the 35% tax rate down to 10% on these foreign profits – payable over ten years. If the last repatriation in 2004 is any guide, companies repatriating profits use the money to pay dividends to shareholders and buy back stocks. Economists expect deficit spending could add as much as $1.5 trillion to the federal debt over the next decade if his tax plan was to be implemented.
Trade – This one is a sticky subject and perhaps the least clear of Mr. Trump’s plans. NAFTA has come under fire, but it is uncertain he can do anything without some legislation on the matter. On the other hand, the TPP (Trans-Pacific Partnership) could very well be dead in the water since it has not been ratified. What Mr. Trump can do, via executive order, is to levy tariffs up to 15% on goods and products coming into the United States. One area that comes to mind is automobiles made in Mexico by U.S. manufacturers. The UAW has stated it will work with Mr. Trump in this area. No doubt China will be a large point of interest, but it is difficult to know if Mr. Trump’s rhetoric will manifest in some negative action against our second largest trading partner.
As for which sectors could do well under a Trump presidency, we have to turn to industrials, materials, financials and some healthcare companies. Investors like industrials and materials because of potential domestic spending on infrastructure projects, i.e. road, bridges, airports, electric grid, etc. Mr. Trump has proposed a $1 trillion infrastructure renewal plan. Why financials? Well, because Mr. Trump’s platform was clear on reducing regulations, particularly the Dodd-Frank Bill and the most recent DOL Fiduciary Rule which won’t take effect until April 2017. The first regards capital requirements for financial companies that are considered systemically important (SIFI). It has other major provisions, but preventing another financial crisis like that in 2008 is its primary goal. The second regards fiduciary standards in the financial services industry. Some argue these regulations and rules make it extraordinarily hard for consumer banks, investment banks and insurance companies to make money. As for the healthcare sector, it is a mixed bag. Repealing the Affordable Care Act (aka Obamacare) could hurt insurance companies and hospitals but could help pharmaceutical companies (which have come under some heat for price gouging). One last beneficiary of a Trump presidency could be the defense sector since government outlays have shrunk each of the past six years. With a focus on terrorism, it is conceivable a Trump administration will increase spending in this area.
In closing, the election this year came as a shock to many people. If the past is an indication, I would expect some of you feel unsettled by the result. Much like the Brexit, markets around the world dropped and then rose to a level well more than where they were before the election. If there’s anything the day-by-day workings of the market teach us, it’s that slow and steady wins the race. The short-term fluctuations in the market, which loom so large to investors, have little to do with the long-term accumulation of wealth. Rest assured, as we learn more about what Mr. Trump’s presidency will bring, we will keep you informed and position your portfolios to take advantage of the opportunities as they arise.
Also, we invite everyone (in the Cincinnati area) to the Olde West Chester Christmas Walk this Saturday. We prefer to call it the “Harvest” Walk but have been unable to convince the powers that be to change the name! The hours are from 2 pm to 9 pm, with crowds getting large around 5:30 pm. There is a parade at 7 pm and things wrap up at its conclusion. We hope those of you in the area stop by and say hello. We’d love to see you! As usual, we will have hot beverages and cookies to stave off the cold and a $100 drawing for a Jags gift card.
November 11, 2016
If you needed more evidence that investors are on edge, all you need to look at is the eight straight down days that preceded today. If the Dow closes down today, it will be the first time in thirty-six years the market had been down nine straight days. As it is, eight straight down days last occurred October 2008. Rest assured, the presidential election is almost here, and with it an end to the uncertainty. Assuming we don’t have a contested election, by this time next week, we will know who will be the 45th president.
In economic news, the Nonfarm Payrolls report was released today and fortunately, it came in at 161,000 jobs created in the month of October. This is fortunate, because had it come in substantially lower or substantially higher it might have had an impact on the presidential election. However, even more significant is the 2.8% year-over-year wage gain which is the strongest since June 2009.
In other news, you may not have noticed as the price of crude oil climbed from a low of $27.50 per barrel in February of this year to $50 per barrel just two weeks ago. The increase is directly attributed to a slowdown in U.S. production, particularly in higher cost shale fracking operations. However, an expectation that OPEC would agree to a production cut has also helped push prices higher. We learned this week that friction between OPEC nations, specifically between Saudi Arabia, Iraq, and Iran, could derail the much-anticipated supply cuts. The price of oil has dropped back to $45 per barrel as of today, with further downward pressure likely as the rig count climbs and OPEC countries quarrel going into its next meeting on November 30th. The good news is gasoline prices, which have been pretty low for some time now, should stay low in the near-term.
Hopefully, you had the opportunity to watch the historic World Series between the Chicago Cubs and the Cleveland Indians. The Cubs shed themselves of the “Curse of the Billy Goat” ending a 108-year wait for a World Series title. So can we draw any conclusions for the stock market from this win? I know this is silly but, over the month following their last victory in 1908, the Dow Jones jumped 8% (a similar-sized gain these days would add 1,400 points), while the index slumped almost 5% after the Indians’ last win in 1948. Both also happened to be election years.
As far as the Federal Reserve goes, the committee met this week and decided not to raise interest rates. The decision was not a surprise since a move this close to the presidential election might have been seen as suspicious, and the Federal Reserve wants to maintain the appearance of being apolitical. It did note, “the case for an increase” has strengthened with only two dissenters this time. We are all but guaranteed a rate hike at its next meeting in December.
In closing, the story of the week is a nostalgic one. With the Chicago Cubs win this week, I thought it might be fun to look at what Chicago looked like the last time they won. Newsday.com compiled a list of things that didn’t exist 108 years ago. The list includes the Cleveland Indians, nylon, FM radio, sliced bread, canned beer, the zipper, the assembly line, traffic signals, band-aids and Wrigley Field itself. Another list I came across noted:
- Harry Caray was born and died
- A man landed on the moon
- Sixteen U.S. presidents were elected
- Eleven amendments were added to the Constitution
- Prohibition was created and repealed
- Alaska, Arizona, Hawaii, Oklahoma and New Mexico were admitted to the Union
- And the Cubs played almost 15,000 regular-season games, losing the majority of them
Now you know!
November 4, 2016