In a pleasant surprise last week, GDP growth for the third quarter came in at 2.1%, slightly stronger than the 1.9% we expected. At the same time, consumer confidence fell in November, its fourth straight month in decline. This highlights concerns for both business conditions and employment heading into the holiday shopping season. While we are expecting a strong holiday shopping this year given the low unemployment and modest wage growth, the surprise move would be to the downside. Deterioration in new home sales and consumer confidence last week also underscore concerns we have with the consumer sector.
In a speech last week, Federal Reserve Chairman Powell indicated, “Monetary Policy is now well positioned to support a strong labor market and return inflation decisively to the 2% target. At this point in the long expansion, I see the glass as much more than half full.” We expect the Fed to remain on hold with the current level of short term rates. The health of the consumer sector will be critical to 2020 economic growth.
The holiday shopping season is off to a strong start with online sales of $7.4 billion reported on Black Friday according to Adobe Analytics. This is up from $6.2 billion in online sales last year.
This week’s issue of Barron’s has a wonderful article called “Tough Times for Tech Pioneers” by Eric J. Savitz. The article discusses the demise of legacy tech companies and their struggle to stay relevant as the industry shifts to a business model of subscription based services and the cloud, artificial intelligence, and data analytics. The table titled “Evolution of Tech Giants” lists the top 15 technology companies by market cap at the beginning of each decade, starting in 1980 with IBM the largest at $37.6 billion. Today, Apple is the largest at $1.17 trillion, and IBM isn’t even on the list. Eastman Kodak was number two on the list in 1980.
For the short trading week, stocks continued their strong performance, with the DOW adding 1%, NASDAQ adding 2%, and S&P rising 1.2%. For November, the S&P climbed 3.4%, and year to date, gains are 25.3%. 7 of the 11 sectors are up more than 20%, and 2 are up in the high teens, so there is broad participation in this year’s rally. For the first time since 2013, all eleven sectors are on pace to be positive for the year. Technology is the leader, returning 42%. However, through last month, Health Care has been able to keep pace, matching Technology with 6% returns.
We continued to see the shift from physical stores to online as Friday saw an increase of 15% in online sales, up to $4.2 Billion. Retailers appear to be off to a decent start as we head into the holiday period, as we’ve had near record low unemployment and good wage growth. Amazon has been the largest player in the online space leading into Cyber Monday, but both Walmart and Target saw bigger jumps in online customer spending during the first 2 weeks of November compared with the same period last year. Walmart saw a 51% increase and Target saw a 47% increase, while Amazon customer spending grew 32%. The gap is starting to close between Amazon and competing retailers as they are investing in e-commerce options and winning back market share.
The largest percentage gainers from last week were Bed Bath and Beyond, Dick’s Sporting Goods, and Best Buy, returning 16%, 16%, and 11%. Dick’s Sporting Goods reported its strongest same store sales since 2013, with 6% growth vs the 2.9% expected. Sales were up 5% and e-commerce was up 13% as it beat on revenue and earnings and raised its profit outlook. They expect between $3.5-3.60 per share this year, up from $3.30. They are also expecting overall same store sales to increase 3%, compared with a 3% drop in 2018. The SPDR Retail ETF, ticker XRT, rose 3.5% last week in anticipation for this past weekend, and the ETF is up 9% YTD.
Rates did not move during a light trading and economic data holiday week. Corporate spreads did tighten during the quiet week as the need for secondary issues did not disappear with the lack of primary issuance. As spreads have tightened this year, the corporate curve has steepened roughly 20 bps. This is unsurprising news, as overall volatility has increased and low interest rates this year have caused investors to take a more defensive stance. With spreads relatively tight and liquidity quickly evaporating, we too have taken a defensive stance across our portfolios. We are still slightly short the duration of our benchmarks and have significantly decreased our exposure to spread duration by selling down credit 10 years and out. We will remain defensive until we see valuation in the credit markets improve.
U.S. high yield had a good week to close out a strong November. The index saw 12 bps of tightening, with total return equal throughout the different quality tiers. All ratings returned just short of 0.5% in the shortened week. In regards to excess return, year-to-date high yield is outpacing the investment grade index with 6.8% versus 5.3%. BBs have led this charge, with over 8.5% excess return, while CCCs actually have negative excess return so far in 2019. High yield credit investors that have favored the up in quality trade have likely had the best year to date performance of any fixed income investors. 10-year plus IG investors have come just short of BBs, despite the longer duration and dramatic drop in the yield curve we have seen this year.
As expected, the primary market was slow last week. The lone notable issuer last week was mid-BB issuer, Melco Resorts. The company upsized their offering of 10yr senior notes to $900 million after seeing an oversubscription of 10x, due in part to the very low supply last week and month end positioning of portfolios, but still showing the strong demand investors have for yield while staying somewhat conservative in risk. Sometime before the end of the year, Cox Media is expected to issue over $1 billion of 8 year notes to finance the Apollo Global buyout.
In a typical year, when high yield is outperforming the fixed income asset class, the general rule would be the up in quality trade from CCCs and Bs into BBs; however, with higher quality junk credits tightening in spread and lower quality widening, investors are left with the difficult call to move up in quality sacrificing even more spread than they have already given up. For investors that have centered themselves in BBs, the up in quality trade to low IG looks attractive, as spread differences among BBs and BBBs are very low, but investors that have been involved in low quality credits, case by case analysis should be taken on company specific credit metrics. Most investors and publications do not anticipate a December like 2018, but investors should keep an eye on the busy slate of economic data coming out this week like nonfarm payrolls and ISM manufacturing data.
In our own strategies, we are moving up into BBB credits. For instance, we purchased Royal Bank of Scotland 2023’s at a 2.7% yield. We believe the marginally lower yield to BBs is well compensated by the higher quality protection.
In the energy markets, crude oil and natural gas both fell last week on the usual suspected of trade war escalation and oversupply. Eyes will be on the OPEC+ meeting this Friday, where expectations of deeper cuts have somewhat dampened.
Our income series models have performed quite strongly this year. While equities have been a great asset class this year, performance in our income models have also been driven by fixed income. Our US credit ETF is up 15% this year, outpacing many equity markets, including emerging markets. Given the tightening of credit spreads and stretched valuation, we are moving to a more defensive structure by shifting the allocation to a shorter duration credit ETF, ticker SPSB. This fund invests in short maturity corporates and has a duration of 1.75%, adding protection against both spread widening and increases in interest rates.
This report is published solely for informational purposes and is not to be construed as specific tax, legal or investment advice. Views should not be considered a recommendation to buy or sell nor should they be relied upon as investment advice. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Information contained in this report is current as of the date of publication and has been obtained from third party sources believed to be reliable. WCM does not warrant or make any representation regarding the use or results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and does not accept any responsibility for any loss or damage that results from its use. You should assume that Winthrop Capital Management has a financial interest in one or more of the positions discussed. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Winthrop Capital Management has no obligation to provide recipients hereof with updates or changes to such data.
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