Market Continues To Shake Of Any Bad News, Melts Higher And Higher

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by: Tematica Research

Last week, the S&P 500 shrugged off a string of what would normally be market-impacting negative news to once again move higher week over week. We're talking about the rumors of potential Apple (NASDAQ:AAPL)-related iPhone demand concerns, a downgrade of Nike (NYSE:NKE) shares by Goldman Sachs and a sharp cut to General Electric's (NYSE:GE) outlook. And for some whipped cream and cherry on top, we saw downside guidance from both Honeywell (NYSE:HON) and NCR Corp. (NYSE:NCR).

To be fair, there was one item in particular to note on the good news side of the ledger - the Senate passing a budget resolution that moves us one step closer to tax reform. There are still, of course, several more hurdles to go, including reconciling the Senate budge with one from the House. But it's a step in the right direction.

That latest moves in the S&P brings the index's year-to-date return up to just shy of 15% and leaves it trading at roughly 19.7x consensus 2017 earnings. We've seen a steady melt-up in the market over the last several weeks, stretching that valuation along the way as investors digested prospects for the economy, rebounds in the dollar and oil prices, 3Q 2107 earnings, tax reform, and the latest geopolitical news.

In our view, the market has been rather Teflon-y in nature, but in overbought territory for all three major market indices. That overbought status is especially the case for both the S&P 500 and the Dow Jones Industrial Average. Coupled with near-historic low volatility and a valuation that is head and shoulders above the 5- and 10-year averages, we'd argue it's priced to better than perfection as we face the bulk of 3Q 2017 earnings over the next three weeks. When the market is priced to perfection, it means expectations that are running high are fueling the market, and like a toddler on Christmas morning, it doesn't take much to turn a face of joy into a scowl. We'll continue to be mindful and prudent when it comes to the holdings on the Tematica Investing Select List as we once again drink from the earnings fire hose this week.

On the Economic Front

As we saw last week, the impact of the September hurricanes continued to reverberate through the monthly economic data. Based on what we've seen thus far, we would agree with the following comment from the Federal Reserve's latest tally of anecdotal feedback on the economy, better known as the Beige Book:

"Reports from all 12 Federal Reserve Districts indicated that economic activity increased in September through early October, with the pace of growth split between modest and moderate."

We expect more of the same this week, with the September reports for Durable Orders and New Home sales. Inside those two reports, we'll be assessing orders for core capital goods - better known as durable orders less aerospace and transportation - and pricing vs. inventory dynamics in the housing industry. As those reports are published, we expect to see some final fine tuning to the 3Q 2017 GDP forecasts ahead of the first formal view of that figure from the Bureau of Economic Analysis, which will be coming up next week. As a reminder, the Atlanta Fed's GDPNow is currently calling for a reading of 2.7%, while the NY Fed's view is a more sobering 1.7%.

Like clockwork, we expect that initial take on 3Q 201 GDP will give way to more questions surrounding the Fed and its stated goal of boosting interest rates at least four times before the end of 2018. The odds of the next rate hike continue to fall in December, and our view here at Tematica remains that given where we are in the business cycle - long in the tooth, that is - barring a total disaster, the Fed is apt to boost rates rather than not so as to be prepared for the next eventual economic downturn.

As many of the herd focus on this arguable rear-view mirror data point, following last week's better-than-expected October Empire Manufacturing and Philly Fed surveys, we'll be focusing on the October Flash PMI data from Markit Economics. This data set should lend some perspective around the true strength of the underlying economy versus the lingering impact of the September hurricanes.

On the Earnings Front

As 3Q 2017 earnings have started to swell from a frequency perspective, we're hearing more companies mention the weight of the recent weather disasters on their business. As we closed last week, 228 companies reported earnings, and based the result tabulated by Briefing, 68% beat EPS expectations versus 22% missed the mark. In looking at reported revenue, 74% delivered year-on-year improvement, while 26% experienced year-over-year declines.

This week, we have more than 850 companies reporting, and the frequency will be fast, if not furious. That will especially be the case on Thursday, when 336 companies are set to issue their results. Last week, we shared with Tematica Investing subscribers some of our strategies for getting through such a hectic period, and it means having a short list of "must-listen-to" reports, followed by those one can skim for what we call tailwind and headwind data points for our 17 investing themes.

As we digest these, some questions we'll be looking to answer this week are:

  • Is Affordable Luxury company V.F. Corp. (NYSE:VFC) seeing any impact from Amazon's (NASDAQ:AMZN) push into apparel?
  • What's the latest on AT&T's (NYSE:T) pending merger with Time Warner (NYSE:TWX) as it looks to move to a Connected Society and Content is King company?
  • With expectations for more Asian tourism in the U.S., more US businesses are embracing Cashless Consumption player Alipay (NYSE:BABA), and how does this factor into Boeing's (NYSE:BA) outlook for international travel and the demand for aircraft?
  • Will Dr Pepper Snapple (NYSE:DPS) follow PepsiCo (NYSE:PEP) in shunning sugar and aim to position its business more in line with our Food with Integrity theme vs. Guilty Pleasure?
  • The same can be asked of Dunkin' Brands (NASDAQ:DNKN) and following Starbucks' (NASDAQ:SBUX) latest food menu additions that cater to low-carb lifestyles.
  • The outlook for brick-and-mortar retail remains painful, but does mall operator Simon Property Group (NYSE:SPG) see something we don't? How goes its transition from shopping destinations to food and entertainment?
  • With NFL ratings plummeting, what does this mean for Buffalo Wild Wings (NASDAQ:BWLD)?
  • As we begin looking at the speed of the global economy for 4Q 2017, how does Caterpillar (NYSE:CAT) see things shaking out?
  • As we get ready for the holiday shopping season, are Connected Society companies United Parcel Service (NYSE:UPS) and Amazon as bullish on digital commerce prospects as the National Retail Federation?

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 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. Here are some of the highlights we saw this week:

Aging of the Population

Japan, China, and the U.S. working-age populations a headwind to global growth

A new report from Deloitte highlights one of the downsides of our Aging of the Population theme - the simple fact that economic growth is tied to the number of working-age people in a country's population. Given prospects for a rising working population, India is widely expected to be the driver of global growth in the coming years, while Japan, China, and the U.S. contend with a shrinking working age population. According to Gallup, worldwide 32% of working-age adults are employed full time, and that likely means global growth will be challenged in the coming years as that working-age population shrinks further.

Connected Society

Facebook joins Amazon in disrupting food delivery

Recently it was announced that Amazon partnered with Olo, a supplier of order and pay technology to thousands of U.S. restaurants, to expand its burgeoning food order/delivery service. After testing a similar solution over the last year, Facebook (NASDAQ:FB) is now taking its own take on this live across the U.S. As we watch these and other competing services that are likely to develop (where is Alphabet/Google (GOOG, GOOGL) on this?), it will be interesting to see the split between online orders at home or office vs. mobile orders.

We suspect mobile activity, as with several other aspects of our Connected Society investing theme, will win the day. We also suspect restaurant companies, especially smaller ones, breathing a sigh of relief that as they embrace this technology disruptor, their fate may be somewhat different than brick & mortar retail.

Affordable Luxury/Cash-Strapped Consumer/Connected Society

Rent the Runway seeks to broaden appeal with new monthly service | Chain Store Age

Yesterday, apparel Rent the Runway company announced a new, lower-priced service to broaden its target audience:

The New York-based company on Monday announced a less costly membership option that allows women to rent four items from its website, choosing from a curated selection of everyday styles from more than 200 brands. At the end of each month, members can either send the goods back or buy them at the company's members-only discount. The new service, called RTR Update, costs $89 a month. The company's other membership service for everyday wear, which launched in 2016 and is called RTR Unlimited, is going up from $139 per month to $159 per month.

We always like it when we see news such as this that touches on a number of themes!

Connected Society/Content is King

Nielsen to measure Connected Society streaming content, viewers

Given the growing number of cord-cutters in the U.S. as more shift from broadcast TV to a variety of streaming services, Nielsen (NYSE:NLSN) is pivoting its business model to ride this Connected Society tailwind. Give the enormous pool of advertising dollars that are at stake given the shift in viewer consumption habits, it makes perfect sense that Nielsen would look to remain relevant lest it sees this revenue stream evaporate alongside the number of people still watching broadcast TV. As the new ratings are tallied and compared, we suspect that Nielsen's findings will confirm our Content is King investment theme as well.

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