The following commentary is an excerpt from the Weekly Roundup to Trifecta Stocks subscribers originally sent on Jan 13. Click here to learn more about this dynamic portfolio and market information service.
As we tread into December-quarter earnings season, we're seeing more investors start to question the rally over the last several weeks or how much more room there is to run. These are fair questions, in our view, given the sharp rise in the major market indices despite the near-term tone of the economy, unknowns on the potential economic impact of President-elect Trump's policies and political issues in the eurozone.
If you haven't heard about those eurozone issues yet, there's a potential Frexit (France) on top of Italeave (Italy) and Brexit, not to mention we are due for another round of Greek drama. As the Wall Street Journal reported this morning, "The government, knowing voters' exhaustion, is adamant that it won't legislate a multiyear package of pension cuts and income-tax increases, which the International Monetary Fund says is the only way for Greece to hit its agreed-upon budget targets."
We also heard from Federal Reserve Chair Janet Yellen this week that "the US economy is doing well and faces no serious obstacles in the short term, with the labor market looking pretty strong." To us that sounds like "because things aren't bad, they're good," which as most of us know is not exactly one in the same. As far as the labor market looking pretty strong, yes, the unemployment rate has come down significantly, but we can't say the opposite has happened for the labor force participation rate and payroll-to-population ratio. In that regard, we agree with Chicago Fed President Charles Evans's view that the economy "needs longer term strategies to expand a labor force constrained by issues like population aging and lagging productivity."
We view Yellen's comments as simply reinforcing the cheerleader-like role the Fed tends to play when it comes to the economy. However, we'll continue to let the data be our guide when it comes to the Fed and assessing the Trump Trade.
That data includes not only the latest rash of economic numbers, but company commentary that we'll collect this earnings season. We had a few earnings reports so far this week, including from Bank of America (BAC) , JPMorgan Chase (JPM) and other financials, but the one that caught our eye was WD-40 (WDFC) .
WD-40 reported disappointing results, due in part to the strength of the dollar. While most of us think of WD-40 for its industrial lubricant products, it derives 40% of its revenues from markets outside of the U.S. The dollar aside, the company's domestic business fell 4% year over year, which, in our view, helps to confirm the disconnect between the move in the stock market, especially industrial stocks, since November and the tone of the domestic economy.
WD-40's dollar comments add to those previously from Honeywell (HON) , Adobe Systems (ADBE) and others over the last few weeks. As such, we expect companies with meaningful non-U.S. exposure to offer cautious guidance over the next few weeks, including our own International Flavors & Fragrances (IFF) .
Coming out of the holiday shopping season, the big economic data point this week was December retail sales. Given comments from Macy's (M) , J.C. Penney (JCP) , Kohl's (KSS) and several other retailers over how they performed during the holiday shopping season, we were not expecting any upside relative to expectations. Our skepticism proved to be well founded because for the second year in a row, December retail sales ex-auto missed expectations, coming in at +0.2% month over month vs the consensus forecast of +0.6%. And if we stripped out gasoline sales, which were +2% month over month due to the recent rise in oil prices, comparisons would have been even weaker.
However, there was some positives inside the retail sales report, including that nonstore retail sales rose more than 13%, year over year, for the month vs. a 3.4% increase year over year for retail sales ex-food and autos. For 2016 in full, nonstore retail sales advanced 11.5% year over year in 2016 vs. 2.9% for retail ex-food and autos. To us, those comparisons certainly confirm the ongoing shift toward digital commerce that is propelling the online and mobile shopping businesses at Amazon (AMZN) and Alphabet (GOOGL) as well as consumer delivery business at United Parcel Service (UPS) .
The "net net" as they say for the week had the Dow Jones Industrial Average and the S&P 500 dip modestly, while the tech-heavy Nasdaq Composite Index climbed 1.0%. Amazon and Facebook (FB:Nasdaq) were the portfolio's top performers for the week. As we close out the week, the continued move higher in MasterCard (MA) leaves roughly 8% potential upside to our $117 price target. Even looking at the current consensus price target of $119, offers less than 10% upside. As such, we're downgrading the shares to Two rating from One.
Early in the week we trimmed our positions in Disney (DIS) and United Parcel Service (UPS) , primarily to bring them back near the portfolio's 5% threshold. As we did this, we used the proceeds as well as some portfolio cash to add to our McCormick & Co. (MKC) and International Flavors & Fragrances holdings.
Later in the week we initiated a new position in AMN Healthcare (AMN) , a health-care staffing solutions company as a play on both the aging domestic population and current health-care worker shortage that is expected to continue, especially for nurses. If you missed our deeper thoughts on why we added AMN, or the technical perspective on the shares, you can find those here and here, respectively.
As we mentioned above, earnings season kicked off this week, but next week we really start to see a pick-up in the number of December quarter reports, with more than 100 companies reporting -- 33 of which are in the S&P 500 (including five Dow 30 components). Making this a little more frenetic is the fact that domestic stock markets are closed this Monday (a three-day weekend for some of us).
From a Trifecta perspective, we have no companies reporting, but from a data point perspective we'll be paying attention to what results from American Express (AXP) and Netflix (NFLX) may mean for our MasterCard and Amazon positions.
On the economic front, next week brings several additional pieces of December data -- industrial production, housing starts -- that should help bring 4Q 2016 GDP into focus. We'll also get a few regional Fed reports for January as well as the Fed's Beige Book for January, which should help start to frame the tone of the economy for 2017.
Ahead of those reports, the consensus offered by the Wall Street Journal's Economic Forecasting Survey has 4Q 2106 GDP at 2.1%, 1Q 2017 at 2.2% and 2Q 2017 at 2.4%. Rounding out next week, is Inauguration Day, which means before too long we should be start to see some meat on the policy bones that soon-to-be-President Trump and crew will be putting forth.
Meanwhile several Fed heads, as we like to call them, will be speaking next week: New York Fed President William Dudley on Tuesday; San Francisco Fed President John Williams on Tuesday, Wednesday and Friday; Minneapolis Fed President Neel Kashkari Wednesday; and Philadelphia Fed President Patrick Harker Friday. Amid the various comments, we'll try to zero in on what the Fed may be thinking when it comes to its December pronouncement that it could raise interest rates three times in 2017. As we said when that was uttered, we'll watch the data and see.
