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Investors Take Stock of the State of the Economy After a Disappointing GDP Print


Investors Take Stock of the State of the Economy After a Disappointing GDP Print

Last week was a busy one, as the pace of corporate earnings picked up considerably. President Trump spoke at the World Economic Forum in Davos ahead of this week’s State of the Union Address, and we received our first look at how the domestic economy fared in January. For team Tematica, last week meant attending the Inside ETFs 2018 conference in Florida, not a bad thing given the recent cold snap that hit the country. The conference was filled with meetings and conversation ranging from Bitcoin to new ETF investment strategies, more food than one can possibly eat and an insane amount of walking. My feet are only now recovering.

Among the many conversations had at Inside ETF 2018, we had the pleasure of speaking with Doug Yones, the Head of Exchange Traded Products at NYSE and Jamie Wise at Periscope Capital, which is responsible for the BUZZ Indexes and BUZZ US Sentiment Leaders ETF (BUZ). We shared these conversations, which among other things touched on the rapid growth of the ETF industry, how it’s maturing and innovating as we celebrate the 25th anniversary of the SPDR S&P 500 ETF Trust (SPY), and why it’s likely to continue to take in assets in last week’s Cocktail Investing podcast. If you missed it, you can listen to it here.

Now let’s tackle the week ahead…

On the Economic Front

Following Friday’s disappointing December quarter GDP print of 2.6%, investors will be taking stock of the state of the economy in the current quarter. As we wrap January and move into February, this means examining the January data that will be coming our way over the next few weeks to corroborate the improving outlook signaled by the January Flash PMI data from IHS Markit. One of the key reports this week will be the January ISM Manufacturing Index, due out on Thursday.

Also, on the docket this week, we have the December Personal Income & Spending and Construction reports as well as several looks at job creation in January before Friday’s January Employment Report. Inside the Employment Report, we’ll be looking at wage data, following the recent report that showed little progress in non-supervisory wages year over year in December. Let’s remember too that several states hiked minimum wages in January, and a growing list of companies have more recently announced wage hikes, which should show up in the February Employment Report. We expect some positive year over year comparisons, but we are not expecting the January findings to ignite inflation concerns. We’ll continue to watch the coming data to gauge if wage related inflation does begin to heat up.

We expect some disruption to rear its head in the December construction report due out on Thursday, owing to the severe cold and winter storms that hit late in the month. We suspect that by the time that report hits, however, the investment community will already be looking forward given what is expected to be unveiled on Tuesday at President Trump’s first State of the Union Address. Much like at the World Economic Forum this week, we expect the President to signal much progress on the economy, bringing jobs back to the U.S., cutting regulation and the benefits to be had from tax reform. There may be some new details that emerge on those fronts, but odds are we’ve heard most of it already.

The new expected item to be shared during the State of the Union address will be the president’s $1.7 billion rebuilding US infrastructure framework. Investors have been waiting for these details to emerge, which will address the pain point that is the sad state of the nation’s roads, bridges, tunnels, dams, ports, airports and the like. Coming off tax reform, as well as the short-lived government shutdown, we see this next agenda item creating jobs while driving revenue and profits for companies poised to benefit from related infrastructure spending.  The question yet to be answered in all of this is how the rebuilding and upgrading will be paid for? Needless to say, we look forward to learning what more is to be had on Tuesday night.

On the Earning Front

As I mentioned above, the pace of corporate earnings picked up last week but in the coming days it will be akin to drinking from a fire hose as more than 425 companies will deliver their most recent set of earnings reports. As a guide, the frequency of earnings beats and outlook increases picked up as last week wore on, due in part to tax legislation benefits. I expect that same trend to continue this week leading the stock market to melt up even further, stretching historical metrics even further as this happens. Lenore Hawkins, Tematica’s Chief Macro Strategist, detailed the richness of these metrics in Friday’s Weekly Wrap, which you can find here.

Exiting the week, we’ll have a statistically significant number of companies in the S&P 500 that will have reported, and this should give us a firm view not only 2017 EPS for the collected 500 companies but do the same for 2018 as well. Current expectations have S&P 500 earnings rising to $153.08 in 2018, up from $130.33 in 2016, and based on Friday’s market close the S&P 500 is trading at just under 19x on those 2018 EPS expectations. In our view, while we expect the market to melt up further, it means it is increasingly priced to perfection. Our key concern remains the transformation of lower tax rates into greater spending given consumer debt levels and the lack of skilled workers at a time when interest rates are rising following a boom in corporate debt over the last several years. We will continue to be vigilant with the Tematica Investing Select List.

Now, amid the sea of earnings to be had this week here are the ones that we’ll be focusing on:

  • Monday, January 29: Lockheed Martin (LMT) and J&J Snack Foods (JJSF)
  • Tuesday, January 30: Brinker (EAT), CNH Industrial (CNHI), Corning (GLW), McDonald’s (MCD), Paccar (PCAR), SAP SE (SAP) and Electronic Arts (EA)
  • Wednesday, January 31: Boeing (BA), Ericsson (ERIC), AT&T (T), Facebook (FB), Microsoft (MSFT), PayPal (PYLP), Qualcomm (QCOM),
  • Thursday, February 1: Altria (MO), Hershey Foods (HSY), MasterCard (MA), Ralph Lauren (RL), Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Visa (V)
  • Friday, February 2: Estee Lauder (EL), Honda Motor (HMC), Sony (SNE).

Thematic Signals

Each week we look for data points pertaining to our 17 investment themes, or as we call them Thematic Signals. These signals can either be confirming or they can serve to raise questions as to whether a theme’s tailwinds are strengthening or ebbing. Be sure to check out the Thematic Signals section of our website to read more about these stories and others we publish throughout the week.

Normally, we share several signals, but this week I wanted to spend some time on a recent announcement by thematic investing poster child Amazon (AMZN) – the opening of its first Amazon Go store. This new concept store from Amazon leverages aspects of our Disruptive Technologies and Cashless Consumption investing themes to bring about a “truly cashless grocery experience” with no checkout line. We here at Tematica could not be more thrilled from a thematic and personal perspective.

As the Chicago Tribune shared, “No carts, no lines, no waiting (unless you count the loiterer in the soda aisle — he’ll still be there.) The store accurately inventories what you take and charges your Amazon account, efficiently delivering an electronic receipt after you’ve left. Like most things that Amazon does, this smells like inevitability. We know, as surely as we knew the day that first Amazon box showed up on the doorstep, that the future of shopping has arrived.”

To see an example of Amazon’s “Just Walk Out” technology that powers Amazon Go and how the technology works, watch this video.  Pretty impressive.

For now, Amazon Go is just a pilot store, but let’s remember the retail footprint Amazon acquired with its Whole Foods acquisition, which should factor in its growing list of Amazon book stores, kiosks and pop-up shops. To us, the real question is whether Amazon will leverage this “Just Walk Out” technology for its own uses across existing and future brick & mortar locations, or, once honed and refined, will it replicate what it did with Amazon Web Services – make its technology platform available for other companies to use, driving revenue and high margins in return at Amazon?

Time will tell, and the implications to be had are big, especially for the 3.5 million cashier jobs in the U.S. currently —making waves into our Tooling & Retooling investment theme. One way or another, Amazon is poised to serve up further disruption and that is one of the reason it is a core holding on the Tematica Investing Select List.

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