Trifecta Stocks: War of Words Heats Up as Economy Cools

 | Aug 13, 2017 | 12:00 PM EDT
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The following is an excerpt from Trifecta Stocks Weekly Roundup sent to subscribers on Aug. 11. Click here to learn about this dynamic portfolio and market information service.

After climbing fairly steadily year to date, this week saw a change in market sentiment as North Korea and its weapons developments took over center stage from corporate earnings and economic data. While the main focus was the heightened uncertainty following the back-and-forth between the Trump White House and North Korea, the week's economic data affirmed the slowing view for the domestic economy.

Among the data, U.S. producer prices unexpectedly fell in July, recording their biggest drop in nearly a year and pointing to a further moderation in inflation that could push out Fed rate hike expectations even further. This produced a shift toward safer assets like the shares of McCormick & Co. (MKC) and International Flavors & Fragrances (IFF) that have predictable businesses and rising dividend policies vs. more discretionary-related ones like MGM Resorts (MGM) .

The net result of the political and economic news of the week led all the major U.S. stock indices to fall 1.1%-1.5% over the last five days, the steepest decline in three months, with the CBOE S&P 500 Volatility Index (VIX) hitting its highest level since the election, popping more than 40% in just one day. By Friday's close, the volatility index had risen over 60% during the week and the Nasdaq had dropped below its 50-day moving average. Bear in mind that on average, over the past decade, the U.S. stock market has experienced a 5% pullback during August, and so far this year has seen the calmest period in terms of daily movements in more than 50 years.

Inside the Trifecta portfolio, we had several companies that outperformed the indices on both an absolute and relative basis, including Applied Materials (AMAT) , CSX (CSX) and the aforementioned IFF and MKC shares. As pleasing as that was, the reality is the market move and uncertain tone weighed on a number of our positions during the week. As one might expect during a week such as this, high fliers such as Amazon (AMZN) , Facebook (FB) and Universal Display (OLED) saw their shares come under pressure. While we understand the desire to protect profits, we also understand the multiyear tailwinds that are propelling the businesses of those companies as well as the ones at Applied Materials, Dycom (DY) and others in the portfolio.

As political tension mounted, we added to our inverse ETF positions this week, and we'll continue to watch developments for what they could mean on the global political stage and for the stock market. As you likely gathered by the inverse ETF additions, we are watching both fundamentals as well as technicals for the S&P 500 and Russell 2000 as well as other key market indices. We're also watching the same for each of the portfolio holdings as we look to balance limiting potential downside with scaling into key positions. On that front, we've upped Facebook shares to a One rating from Two this week, and continue to evaluate similar moves in Alphabet (GOOGL) and others.

As the week concluded, around 2,500 companies have reported earnings so far this season, and while EPS growth for the S&P 500 companies has been over 10%, the strongest performance since the fourth quarter of 2011, there has been little if any reward given to stock prices. During the week, we saw signs that bricks-and-mortar retailers like Macy's M continue to struggle against the consumer shift to digital commerce that is benefiting our Amazon shares. We also saw struggles at companies like Snap (SNAP) and Blue Apron (APRN) , which in our view are more features than true product or service companies -- in short, we are not surprised by their results and stock price performance.

As we close the books this week, we'd note that expectations still call for significant earnings growth for the S&P 500 in the back half of 2017, but we will continue to watch the data to determine if those expectations are indeed overly robust.

Turning to next week, we expect the weekend's political events will dictate how the week starts off. That will soon be followed by the July retail sales report, which we'll be eyeing not only for Amazon but also Alphabet shares and overall consumer spending trends. As a reminder, over the last several months we've seen that report miss expectations more than surprise on the upside -- not a good sign for a consumer-led economy. That report will be followed by several pieces of July housing data, which should help solidify the early view on third-quarter GDP, as will the July take on industrial production that will be out later in the week. Currently, the forecast range for GDP during the current quarter spans from 2% on the low end to 3.5% on the high end. Our suspicion is that, much like we saw in the first half of the year, as more data come in, we're apt to see the Atlanta Fed's 3.5% forecast deteriorate to something closer to the NY Fed's 2% forecast.

Also next week, we'll get the July FOMC minutes. Even though expectations for the next rate hike continue to slip, we'll be sure to read them with an eye for the Fed unwinding its balance sheet as soon as September. We expect that unwinding to have a tighter monetary policy bent to it, and that means we'll be watching not only the start of it, but the overall pace of that unwinding and what it may mean for the domestic economy. 

On the earnings front, we have Applied Materials on deck, and following a bullish report from competitor Lam Research (LRCX) , we expect solid results to be had. A number of non-portfolio companies are reporting next week, particularly in the consumer/retail space, like Walmart (WMT) , Target (TGT) and Ross Stores (ROST) . We'll be watching those reports for clues on overall consumer spending and expectations for the current back-to-school shopping season as well as any first glimpse at year-end holiday spending expectations. Of course, we'll also be parsing comments for the shift to digital commerce as well as any moves to bolster exposure to those tailwinds.

As we close out the week, we've taken steps to insulate the portfolio from additional political drama over the weekend. We've ample cash in the portfolio that serves not only as a cushion, but also offers some dry powder for us to be opportunistic should the current volatility continue and stock prices get resized. Much like the Hippocratic oath, our goal is to do no harm to the portfolio, and that means we'll continue to "measure twice" with our three-pronged investing approach before pulling the trigger on a new position or adding to an existing one near term. In a few weeks, we'll be entering what has historically been one of the worst-performing months for stocks. We'll continue to tread prudently.

Enjoy the weekend, and we'll see you back here next week.

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Bitcoin. Plunged below $8,000 over the weekend.



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