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The One Risk Percolating in the Back of Most Investors’ Minds


The One Risk Percolating in the Back of Most Investors' Minds

One of the central questions exiting last week was would the federal government shut down? Early Saturday morning we had the answer, and yes it was shut as the deadline to fund the government passed without a new spending bill. It’s being reported that talks are continuing, but as I write this early Sunday morning, certain parts of the federal government are set to remain closed heading into the work week.

Candidly, it seems like a game we’ve seen before — political chicken, and the word to focus on amid all of the cable TV finger pointing is “duration.” How long will the federal government be closed?

Answer: Right now, no one is sure, but as we all know, the longer it is closed the odds are a minor disruption becomes a larger one.

Here’s the thing, if we used the US stock market as a barometer for the shutdown, one would have thought there was little to no chance of it happening.

Why? Because US stocks continued their melt up, setting some new record highs in the process as investors focus on the EPS hikes to be had following tax reform and prospects for more Wall Street strategists to boost their price targets for the S&P 500. We’ve seen some of this already, and with the pace of 4Q 2017 earnings quickening this week and next, odds are we will see much more of it.

My view remains that in the near-term the market will continue to melt higher, and with the CNNMoney Fear & Greed Index holding steady last week at “Extreme Greed”, up from “Greed” a month ago, I suspect many investors will welcome it. As that happens, and we see already stretched valuation metrics become even more so, I’ll be watching for confirming signs for one risk that is percolating in the back of this investor’s mind — will the impact of tax reform on the economy live up to expectations being set given consumer debt levels and dearth of skilled workers when the stock market is increasingly priced to perfection. For more on those stretched valuation, I’d suggest checking out last week’s Cocktail Investing podcast.

Now, here’s what I’ll be focusing on in the week ahead.

On the Economic Front

Last week’s December reports for housing starts and industrial production served as a reminder of the impact to be had from the severe cold and winter weather. Odds are this will have some impact in the December data for Existing Home Sales as well as New Home Sales that we’ll get later this week. With wintry conditions continuing into January, we expect to see some further disruption in construction and we’ll be listening for confirming commentary

This week also brings the first print for 4Q 2017 GDP, which according to the Atlanta Fed’s forecast, is expected to clock in around 3.4%. The usually more conservative NY Fed is calling for an initial number of 3.9% for the quarter, and both of those figures compare to the 3.1%-3.2% notched in 2Q-3Q 2017.  As we wait for what is likely to be an upbeat report, we’d remind readers that the devil for this report is in the details, and that means digging below the headline figure. We’ll be ready for that.

Helping add some context to that GDP report will be the December durable orders report. Following the flat performance in the November data, we’ll be eyeing the December figure for core capital goods as well those for the coming months to get a read on the degree to which companies are actually investing incremental tax reform dollars in their businesses vs. using the incremental cash flow to fund dividend hikes and stock repurchase programs.

All that, and we also have the World Economic Forum meeting in Davos, plus the Flash PMI January figures for the U.S., eurozone and Japanese economies. We’ll be scrutinizing what’s said as well as what isn’t with regard to global monetary policy and trade in addition to its impact on the dollar.

Related: Why 2018 Will Be A More Interesting Year Than Many Are Expecting

On the Earnings Front

Next week more than 300 companies reporting earnings this week, a dramatic pick up from the 85 that reported over the last four days of trading. To put that in perspective, ending last week we heard from just over 10% of the S&P 500 and in the coming days, we have far more reporting quarterly results, discussing the tone of the current quarter and offering their view on tax legislation benefits to be had.

Do we expect all those to be a blustery as Connected Society company Apple (AAPL), last week shared that over the next five years it expects to contribute $350 billion to the US economy, create 20,000 jobs in the process, and bump up its Advanced Manufacturing Fund to $5 billion from $1 billion? No, but again, all those upped EPS forecasts will have a cascading effect on market expectations and I’m looking to determine the degree.

Among those more than 300 companies issuing quarterly results this week, here are some of the ones that I’ll be focusing when it comes to the Tematica Investing Select List:

  • Netflix (NFLX) to assess international streaming growth, and get its updated view on the increasing competitive original content market.
  • Hand in hand with that, are we seeing the pace of cord cutting pick up at Verizon (VZ) and Comcast (CMCSA)?
  • Is the new blonde espresso delivering for Starbucks (SBUX)? Is the company still focused on China? What’s next for its food offering as McDonald’s (MCD) and Dunking Donuts (DNKN) shake up their menus?
  • While we wait for President Trumps rebuilding US infrastructure framework, what inning are we in for post-hurricane rebuilding? That’s the question for Caterpillar (CAT) and United Rentals (URI).
  • Following all the newly announced connected gadgets at CES 2018, does Lam Research (LRCX) see an even bigger market for semi-cap equipment this year? Does Intel (INTC) see one for chips?

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 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. Here are some of the highlights we saw this week:

Baby Boomer aging facts paint a growth pictureAging of the Population

Another reminder there is no fighting Father Time and our Aging of the Population theme is fueled by an expanding market. Read more here

Bankrate findings raise questions on consumer spending

Cash-Strapped Consumer

Normally, here at Tematica we love to get new data, but from time to time we get confirming data that puts a sour taste in our mouth. New findings from Bankrate offer support for our Cash-Strapped Consumer investing theme, and it ties with something we’ve been talking about on our Cocktail Investing podcast – rising consumer debt with a Fed that has been and is poised to continue increasing interest rates. Barring a pronounced move higher in wages, which we haven’t seen, that’s a recipe for more pressure on consumer spending – a key driver of the domestic economy. We continue to question if consumers will spend tax legislation related benefits or get their financial house in order. Read more here.

Passing right over our crumbling bridges, roads and tunnels

Economic Acceleration/Deceleration

It’s no mystery that America’s infrastructure is in dire shape — in particular, the bridges, roads and tunnels in our cities largest cities. The American Society of Civil Engineers’ annual grade for our infrastructure currently stands at a D+, with an estimated cost of $3.9 trillion to bring it up to a B-level. That’s nearly 4 trillion — trillion with a “T” — just to make our daily commute good, not great. Read more here.

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