The following commentary is an excerpt from the Weekly Roundup to Trifecta Stocks subscribers originally sent on Feb. 10. Click here to learn more about this dynamic portfolio and market information service.
For a week that started off with the S&P 500 in the red, the market finished things off back in record territory. With little in the way of economic data amid the continued earnings maelstrom, the driver of the market's climb this week was more political than fundamental. On Thursday, President Donald Trump said that in coming weeks he would announce something "phenomenal" in terms of taxed, although he offered no further details. We are all for tax reform and the freeing up of capital that would get businesses to invest and help put more disposable income dollars into consumer pockets.
As investors, we've seen a number of times when the market gets ahead of itself, which tends to be in lockstep with "buy the rumor, sell the news." It appears the current administration is looking to decouple the tax-reform issues into two buckets -- corporate and individual -- which we think is a smart move. In our view, there is a better chance of passing corporate tax reform on a standalone basis than if it were tied to overhauling the individual tax code. As you know, we largely stay out of the political fray here at Trifecta, but we can hear the faint chant of "fat cat" as Washington looks to overhaul the individual tax code, which means this is bound to be a larger fight.
We're optimistic, but we'd be remiss if we didn't consider any potential risks. The two we see are timing and magnitude -- the timing of business-friendly tax cuts and the degree of the cuts vs. existing corporate tax rates. Also during the week, the dollar hit an 11-day high and oil prices once again inched higher.
Stepping back and looking at the overall market, it appears the overall breadth of its move has been rather narrow. At the same time, with the rise back into record territory, valuations are once again stretched. The S&P 500 exited the week at a forward P/E ratio of 17.3, which is well above the five-year average of 15.2 and the 10-year average of 14.4. It's worth noting that, at least from a historical perspective, when valuations are stretched, breadth is narrow and complacency high, the stage tends to be set for pullbacks.
Turning to the Trifecta portfolio, once again a number of our One-rated positions moved higher in excess of the overall market this week. And even though we have two Three-rated stocks, both climbed more than the market as well.
Outside of the Trifecta portfolio, we delve into other companies looking for data points and other useful commentary. The one that caught our eye this week was from Emerson Electric (EMR) CEO David Farr : "As I've said, I've always felt that 2017 would be a good year of building that foundation and see an improvement. I see a much stronger 2018 than I see 2017. But I see right now, based on what I'm seeing from the customer base, based on what I'm hearing from some of our customers and what they're saying they're going to spend on capital next year, overall, I think the pressure is upward." Later speaking on tax reform, Farr said: "I'm looking for clarity by late summer, early fall and that gives me time, as I get into execution later this year, early 2018 based on if I have to change anything."
Both of Farr's comments are in sync with what we've been seeing in recent economic data, and our thoughts that the soonest we are likely to see the benefits of Trump's economic stimulus is in the second half of 2017. Nevertheless, we'll continue to let the data and political developments talk to us lest we get caught flat footed.
After a rather light economic calendar this week, the flow picks up with a slew of January data (PPI, CPI, Retail Sales, Industrial Production, Housing Starts) and some February data (Empire Manufacturing, Philly Fed Index) as well. Inside the January Retail Sales data, we'll be looking for further favorable data for several of our positions.
On top of all of that, Fed Chair Janet Yellen will give her semiannual monetary policy testimony before the Senate Banking Committee next Tuesday-Wednesday. Given comments that have started to bubble up over a potential March rate hike (the FOMC's next monetary policy meeting), we expect the market to tune in and dissect Yellen's economic commentary and rate-hike language. As Yellen begins her second day of testimony, the Atlanta Fed issues its latest findings on business inflation expectations. Last week we pointed out rising prices in the ISM and Markit Economics January manufacturing data, and that will have us scoring the Atlanta Fed data for potential confirmation. Strong Chinese trade numbers out today added to a sense that inflationary pressures could be stirring.
Finally, it's being reported that Greece's finance minister and international creditors made "substantial progress" in narrowing their differences over the bailout program that would keep the Greek economy afloat, amid renewed tensions about the country's future in the euro. The Netherlands goes to the polls on March 15, followed by France in April and May and Germany in September, and the issue of providing more loans to Greece is politically sensitive. Needless to say, we'll be looking to see how things play out over the coming weeks.
As the pace of earnings takes a brief respite ahead of the reporting from "funny fiscal" companies such as retailers that end their years in January, we'll look to put some of the portfolio's cash position to work.
