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Why Uncertainty is the Name of the Game


Why Uncertainty is the Name of the Game

Last week marked the first day of Spring, which was welcomed with yet another nor’easter winter storm, as well as Fed Chairman Powell’s first post FOMC meeting press conference and renewed questions over user data and privacy following a new scandal for Facebook (FB). As Lenore Hawkins, Tematica’s Chief Macro Strategist, and I pointed out in our post-Fed meeting comments, the revised outlook calling for stronger economic growth and lower unemployment with no meaningful change in the Fed’s inflation forecast seems rather Goldilocks in nature and therefore rather unlikely. As Powell admitted, this consensus reflects the best forecast the Fed’s monetary policy committee based on what it sees today. As we know, the economy, much like investing, isn’t static – it’s not a photograph, but more like a drama that has many twists and turns.

The tone for the shortened week ahead us due to the Easter holiday weekend was set late last week amid tit for tat trade tariffs announced by President Trump and China, as well as the news that Trump begrudgingly signed the $1.3 trillion spending bill passed by Congress that would keep the government funded and open until late this year.

The bottom line is the stock market and investors have been grappling with the return of uncertainty and volatility in the market place. Last week certainly stoked those flames, which led the market to erase year to date gains. Many investors are likely reacting like a deer caught in the headlights, uncertain of where to turn next. The answer is in the data to be had and understanding which companies are better insulated from any potential trade war. People will still eat, consume electricity, need water and other inelastic goods and services in the short-term. That likely means those companies and ETFs, such as Utilities Select Sector SPDR ETF (XLU), will be safe-havens in the near-term.

As investors flock to these and other safe-havens, we expect the investment community will be assessing the potential impact of trade tariffs to be had – most notably disruptions and higher costs – on expected 2018 earnings. This could make for a very interesting 1Q 2018 earning season that kicks off shortly after the Easter holiday.

Here at Tematica, we’ll continue to listen to the and thematic signals as we once again build our shopping list for thematically well-positioned companies to buy at better prices. For more on thematic investing and why we see it as more powerful than the stale and tired sector investing, here’s this week’s Cocktail Investing podcast –How and Why the Thematic Approach Helps You Make Better Investments. For the Tematica Investing Select List, we’ll continue to favor companies sitting in the cross hairs of our investing themes that are poised to grow their businesses faster than the overall stock market.

While Thursday’s economic reports showed X, the new focus will be watching the economic data to be had in the coming months to see if it supports the Fed’s current forecast and what they may mean for a potential fourth rate hike this year. While the data comes in and we digest the latest trade developments from Washington, we’ll continue focus on data points for both our thematic tailwinds as well as headwinds and pain points. Much more on that, our thematic lens and our investing themes can be heard on last week’s Cocktail Investing podcast.

The economic and earnings data we’re watching this week

As I mentioned above, it’s going to be a shorter than usual week with the stock market closed in observance of Good Friday ahead of the Easter holiday weekend. In terms of economic data reports to focus on, there will be two we here at Tematica will be putting under the microscope.

The first one is the February Personal Income & Spending report. As Lenore and I have talked about quite a bit of late, consumer debt has continued to move higher with little improvement in wages for the majority of workers. In this report we’ll be looking for confirmation of that viewpoint and support for our Cash-strapped Consumer investing theme as well corresponding positions on the Tematica Investing Select List. To be more specific, if the February consumption figure comes in greater than income growth we could see more concerns raised for GDP growth in the coming quarters.

The second is the February figure for the PCE Price Index, which is the Fed’s preferred inflation gauge. Over the last few, the core PCE Price Index was up 1.5% year over year, well below the Fed’s 2% inflation target. Given the updated economic forecast the Fed served up last week, which was rather Goldilocks in nature, team Tematica will diligently watch for inflationary signs in the data that could quickly reignite the notion of four rate interest rate hikes this year. In and of itself, we do not see a major difference between three and four rate hikes this year, but odds are it would add the growing number of worries had across the stock market.

Related: The Economy, the Trump Tariffs, Inflation: the Fed’s Next Move

On the earnings front, we have a handful of companies reporting this week. From a thematic perspective, we see the results from McCormick & Co. (MKC) offering several signals over the health of the US consumer as well as confirmation for the rise aspect of our Rise & Fall of the Middle Class. With Nike (NKE) sharing this week it will expand its relationship with Amazon (AMZN), we’ll be looking to see how LuLuLemon Athletica (LULU) looks to position itself for our Connected Society tailwind. Other reports to watch this week for signals on our Affordable Luxury, Aging of the Population and Content is King themes include Restoration Hardware (RH), Walgreens Boots Alliance (WBA) and GameStop (GME).

Stepping back, the companies that report earnings this week and next will likely set the tone we’ll hear for 1Q 2018 earnings season. One central question that will be pondered concerns EPS expectations and whether the year over year 18%-20% EPS growth forecasts are still achievable. Pardon the cribbing of the old NBC tag line, but to me, that makes the earnings report to be had over these next few weeks must see reading, and I’ll be sharing my thoughts with Tematica Investing subscribers.

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.

Fortnite is the harbinger of more pain for the already struggling toy industry
Themes: Connected Society, Content is King

While it is rather clear to us why Toys R Us is filing bankruptcy and even Star Wars themed toy sales weren’t enough to help Mattel (MAT) this past holiday season, in-app purchases for the new iOS version of Fortnite are rather revealing. The recently launched gaming app, which sits at the center of our Connected Society and Content is King investing themes, typifies the shift toward gaming, and mobile gaming, in particular, that has changed the kinds of toys that children of all ages play with…. Read more here

BlackBerry rising from obscurity as it embraces our Safety & Security theme
Themes: Connected Society, Safety & Security

Unlike companies like GoPro and SNAP, which have failed to realize their entire business is a feature, not a product, Blackberry has embraced the fact that at its core feature is security, not connectivity in the form of a phone or smartphone.  This is perspective is reinforced with its recently announced deal with former rival Microsoft… Read more here

The Rise of the New Middle-Class theme lets India air traffic take off and much more
Theme: Rise & Fall of the Middle Class

Month to month economic and industry data can fluctuate, which is why we look at the data over a longer term. While passenger air traffic spiked in February, we see the annual growth rate of more than 20% over the last several years reflecting the growing economy and rising disposable income that are drivers of our Rise of the New Middle Class investing theme. In addition to incremental spending on travel, other areas benefitting from this theme include leisure spending, housing and furnishings, premium branded apparel, higher end autos, restaurants and connected devices. In short, those devices and activities that denote some degree of status have been achieved… Read more here

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