Helping fuel the domestic stock market, this week the European Central Bank extended its stimulative efforts (easing) and removed restrictions on the types of securities it could purchase (easing), even though it announced it would slow the pace of its bond-buying activity (tightening). To us, that sounds like a doctor extending a prescription for painkillers albeit it a lower dosage to treat the pain, but to also reduce the risk of becoming overly reliant on the drug.
The fact that the ECB extended the stimulus program given the outcome of the Italian referendum just days before was hardly a surprise and means the US continues to look like the best neighborhood in the still-struggling global economy. The US dollar is off its late-November high, but remains elevated compared to year ago levels, which means we’ll continue watching new export orders in the coming PMI data from Markit Economics. Generally speaking, a strong dollar, while good for US tourists traveling abroad, tends to impede US export activity, which serves as a headwind for economic growth.
While it has an ample supply of tinder, we don’t see the market overheating . . . yet.
Recognizing that stock valuations have stretched further and further these last few weeks, we would recommend investors be selective and opportunistic over the coming weeks. From a sector perspective, industrial, materials and financials have all been performers while companies like Amazon (AMZN) and Facebook (FB) have lagged substantially.
The question we would suggest investors ask is if the thematic drivers that are powering those businesses, and even that at Alphabet (GOOGL) have changed in the last month? Has there been a marked slowdown in the shift toward digital commerce that is one of the key tenants of our Connected Society investing theme? Have advertisers suddenly decided to do an about face and shift advertising dollars back to radio and print, shunning online and mobile platforms? Did consumers decide to abandon online and mobile search?
Nope, nope, and nope, and those are just a few examples.
While we are all for taking advantage of discrepancies, we have to be mindful as well as that there are times when those discrepancies could take a bite on one’s backside. As we’ve shared recently, past a certain point, the stock market’s valuation and expectation will have to contend with economic reality.
Yes, the changing of the President tends to result in a wave of optimism like we are now seeing and that tends to bolster the stock market. Looking into the past, we saw that when President Reagan was elected the S&P 500 rose 18 percent through mid-February only to give back all its gains by the end of March. We will continue to be prudent with the cash in the portfolio, watching for signs of a pullback in the stock market, especially small-cap stocks, have risen rather far, rather fast.
Turning to the Week Ahead
We’ll see another downtick in the sheer number of companies reporting quarterly earnings this week, with just five S&P 500 companies reporting December quarter results. On a per-share basis, estimated earnings for the S&P 500 companies in 4Q 2016 have fallen by 2.2 percent since September 30. As a result of those downward revisions, the estimated year-over-year earnings growth rate for Q4 2016 is 3.0 percent today vs. 5.2 percent on September 30. Pardoning the sandbox math, this means that current quarter earnings will be down sequentially — more on this in a few sentences.
While the number of companies reporting is far less than just a few weeks ago, there will still be a number from which we will glean thematic data points and insight. These include Cashless Consumption investment theme company Verifone Systems (PAY) as well as Oracle (ORCL) and Adobe Systems (ADBE) that are Connected Society theme players. With President-elect Trump declaring he will unleash all of the US’s energy resources, commentary from Arch Coal (ARCH), a Scarce Resource theme company, should prove rather illuminating. As it pertains to our Aging of the Population investing theme, there are a number of events slated for next week including:
- Guggenheim Securities 4th Annual Boston Healthcare Conference (Dec. 13);
- BMO Capital Markets Prescriptions for Success Healthcare Conference (Dec. 14);
- Bank of America Merrill Lynch Midwest Healthcare Conference (Dec. 14);
- RBC Capital Markets Healthcare Investor Day (Dec. 15); and
- CVS Health (CVS) 2016 Analyst Day (Dec.15).
Other notable conferences to watch this week include the 2016 Cowen and Company Networking and Cybersecurity Summit that should offer some insight on that aspect of our Safety & Security investing theme. There will also be a number of analyst meetings next week including ones from General Electric (GE), Honeywell (HON), United Technologies (UTX) and Prudential Financial (PRU). These briefings should also help determine if the current expectation for a quarter-over-quarter downtick in S&P 500 earnings in 4Q 2016 is warranted, (see that, we didn’t forget).
Aside from the Fed’s FOMC meeting, we’ll be getting the November reports for Retail Sales, Industrial Production, Inflation and Housing Starts. Those reports along with the outlooks from industrial companies Honeywell and GE, mentioned above, should put some context around the recent run up in the industrial sector. Since early November, The Industrial Select Sector SPDR Fund (XLI) has been on a tear, climbing 13 percent in anticipation of fiscal stimulus policies to be put forth by President-elect Trump. Our thinking is let’s hear what these companies see near-term and what they expect on the horizon for 2017.
Rounding out next week, we’ll see the latest installment of the Star War franchise – Rouge One: A Star Wars Story — hit theaters and at least Chris Versace will be there with a big tub of popcorn. And for those subscribers wondering, he is thoroughly enjoying AT&T’s DirecTV Now and used it to watch Lenore Hawkin’s latest visit with Varney & Co. on the Fox Business Network.