Innovation: Not Just an Idea

Mar 29, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Today was a great end to a great quarter.  The gains experienced in the S&P 500 in the first quarter are among the best in the past decade.  The quarter certainly benefited from an oversold bounce back, after the fourth quarter’s heavy 14% slump, but analysts still see a positive year ahead.  While there could be some bumps in the second quarter as the market struggles with earnings growth and a slower economy, positive U.S. China trade talks and investment sentiment could propel stocks higher.  Here’s to wishing for a repeat.

Before I get to the fun stuff, let’s talk numbers.  In 2018, U.S. companies repatriated $664.8 billion of offshore profits to the U.S.  While this is a significant amount of money, it is far less than the $4 trillion that had been expected as a result of the 2017 tax reform.  That’s not to say that the tax reform wasn’t successful.  In 2017, U.S. companies repatriated only $155 billion.  To some extent, the tax on this repatriated money was included as an offset to the decrease in tax revenue due to the corporate tax cuts.  With repatriation falling well below estimates, we have yet another puzzle piece as to the reasons for the record setting monthly deficits and quickly rising national debt.

In company news, we learned this week that Apple is expanding its service offerings.  This move will help it diversify away from hardware, i.e. iPhones.  Among its new offerings were four major categories: Apple TV+ (new original content), Apple TV Channels (channel aggregation), Apple Arcade (online gaming), and Apple Card.  Of the four, the Apple Card is the real innovation.  The company plans on issuing a credit card with no number or name on its face and no magnetic strip on its back.  It will be made of titanium and have an embedded chip for credit card readers.  MasterCard sees banks following Apple’s lead to increase security.

We also learned this week that Johnson & Johnson had positive results from two Phase 3 clinical trials evaluating its investigational antihistamine-releasing contact lens.  Patients wearing the contact lenses experienced significantly lower itching within fifteen minutes of lens insertion and lasting up to twelve hours.  This is potentially big news for those who suffer from seasonal allergies but choose to wear contact lenses.  Since these lenses are in clinical trials, it is unknown when they will become available for purchase and there is no mention of the price premium these lenses will certainly carry.

Another company that continues to push the technology envelope, which may come as a surprise, is McDonald’s.  Its recent acquisition of Dynamic Yield is expected to give it the ability to vary electronic menu boards based on time, weather, and regional factors.  It could allow McDonald’s to respond to customer preferences in real-time.  Naturally, this reminds me of Uber and its dynamic pricing model.  But also interesting is the about-face the company has taken regarding the movement to raise the minimum wage.  Once a stalwart opponent of legislation to hike the minimum wage, it will no longer take part in efforts to lobby against it.  In fact, I can’t help but wonder if its push to utilize technology, i.e. cashier-less kiosks, will result in fewer employees in the long run and a significant competitive advantage versus its peers, especially given a higher minimum wage.  Sneaky?  Maybe.  Strategic?  Definitely.

In closing let’s talk about trying to time the market.  I’m sure you all know that this is not only difficult but also impossible to do over the long-run.  An investor needs to be right twice, correctly predicting when to move out of and then when to move back into the market.  To that end, I received an email from Wells Fargo this week that demonstrated this reality in a way that is hard to ignore.  It looked at market returns over the last thirty years (1998-2018) and found that if one were fully invested over the entire time period, the annual return was 7.61%.  Missing the ten best days out of the thirty years (10,950 days) resulted in an annualized return of 5.16%.  Missing the thirty best days gave a return of 2.07%, and missing the fifty best days resulted in a loss of -0.47%.  The takeaway is that missing even a handful of days when the stock market experienced its best gains can dramatically reduce returns.  Statistically speaking, it’s best to stay the course.  Now you know.

March 29, 2019

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