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Jul 17 2018

7/17/18 Market Notes

Stocks were mixed on Monday, as eight of the eleven S&P sectors were lower for the day. The energy
sector fell 1.18% as oil dropped by 4.13% to $68.08 per barrel (WTI), while financials performed
best, rising 1.80% as JP Morgan (JPM) shares rose 3.97% to help lift the Dow Jones Industrial
Average into positive territory. The tech heavy NASDAQ fell ¼%, while small cap stocks as
represented by the Russell 2000 index retreated 0.57%. On the geopolitical front the summit between
President Trump and President Putin dominated the headlines, while Netflix (NFLX) dominated the
business headlines. After the close Netflix reported earnings that missed new subscriber targets,
causing the stock to drop as much as 13% in afterhours trading.

The Ten Year Treasury Yield rose slightly as strong consumer data encouraged investors that strong
economic growth is sustainable, while the U.S. dollar was mostly lower. Overnight, Asian bourses
fell, as lower energy prices raised concerns for the commodity sensitive economies. European markets
are mostly higher this morning, as strong multi-national corporate earnings are helping ease concerns
about the impact of trade conflicts.

Amazon Prime Day, a thirty six hour marathon sales event, kicked off at 3:00 PM yesterday
afternoon, suffering several technological glitches due to heavy internet volume. Amazon (AMZN)
shares closed higher on Monday, but are trading down overnight as the so called FANG (Facebook,
Amazon, Netflix, Google) are all trading lower in sympathy with Netflix.

Pre-market futures are mixed this morning, as investors wait for Industrial Production data and Home
Builder Sentiment figures. CSX Corp (CSX), United Health Group (UNH), Goldman Sachs (GS), and
Johnson & Johnson (JNJ) are amongst widely held stocks reporting earnings today.


The GGFS Investment Committee

Jul 16 2018

7/16/18 Market Notes

It’s Deja Vou again and again for investors, as stocks have started the last six weeks on shaky ground
before regaining their footing and ending the week higher; a cycle that appears to repeat this Monday
again. After a weekend promise by Saudi Arabia to boost oil production and a report that President
Trump is considering tapping our strategic oil reserves to counter recent price gains, oil prices are
selling off, with West Texas Intermediate oil trading below $70 for the first time since late June. The
U.S. dollar is reversing some of its recent gains, falling against major currencies on what is most
likely profit taking by traders.

It’s all about earnings this week, as roughly 18% of S&P 500 constituents will report second quarter
results this week. While only 5% of the S&P 500’s constituents have reported so far, 89% of these
have exceeded expectations, with a blended year-over-year growth rate of 19.9%. PepsiCo (PEP), JP
Morgan (JPM), and Bank of America (BAC) are amongst companies that have already beaten
earnings forecasts. Information Technology (IT) and Healthcare shares are expected to produce the
most positive surprises (according to FactSet), while energy shares are expected to provide the biggest
year-over-year earnings growth. Consumer discretionary shares have issued the most amount of
warnings for Q2 earnings so far, citing a strengthening U.S. dollar and rising commodity prices
(principally oil) as the main reason for the downgraded outlook.

As of last Friday, the S&P 500’s forward P/E ratio is 16.6X, well above its 10 year average of 14.4X
and close to its 5 year average of 16.2X. Should earnings growth match expectations, stocks should be
viewed as fully but fairly valued at current levels. On a sector basis, Financial and Telecom shares
have the lowest forward P/E ratio, followed by Consumer Staple shares, which have recently begun to
outperform the broader market, after lagging significantly year-to-date. Consumer Discretionary and
IT shares have the highest forward P/E ratios, although they also boast the highest growth

Treasury yields are slightly higher this morning, as market participants wait for the latest set of
economic data, as well as results from the highly anticipated Amazon Prime Day, which kicks off at
3:00 PM Eastern Standard Time today.

The GGFS Investment Committee

Jul 13 2018

7/13/18 Market Notes

Up and down and round’ n round, that’s been the cycle for stocks over the past few weeks, falling
sharply one day, then gaining the next. None-the-less, the overall trend for stocks has been positive,
rising 3 ½ % so far this month, as investors focus on economic data and earnings reports. The
benchmark Ten Year Treasury has behaved similarly to stocks, with yields rising on falling as trade
tensions flare up or ease; while oil prices have declined by more than 5% since hitting a recent high in
late June.

Economic data continues to be mostly robust, pointing to continued strong economic growth. And, in
the early days of the second quarter earnings season, corporate profits seem poised to impress
investors. However, gains will likely be muted and volatility is almost sure to persist as President
Trump’s saber rattling and harsh rhetoric is beginning to turn into a trade war, after announcing an
intent to place tariffs on an additional $200 billion in Chinese goods. Commodities, whose prices are
mostly influence by demand expectations, have all fallen in recent weeks, with copper trading almost
15% below its June peak. Copper, aka Dr. Copper, has long been viewed as a ‘canary in the coal
mine’ as history suggests a sharp price drop in copper is a precursor to a recession. Of course, no
indicator is infallible.

In spite of the geopolitical tensions and the increasing possibility of a trade war, earnings data should
trump headline risks. Analysts are expecting year-over-year earnings growth for the S&P 500 to rise
by more than 20%, and 32% for the S&P 600 whose constituents are mostly domestic small cap
companies. Moreover, earnings and revenue growth are expected to remain strong in the second half
of the year as analysts expect consumer spending to pick up as a result of last year’s enacted tax

The GGFS Investment Committee

Jul 11 2018

7/11/18 Market Notes

The Dow Jones Industrial Average ended higher for the fourth day in a row, rising 148 points on
Tuesday, lifted by strong gains in Proctor & Gamble (PG), Walmart (WMT), and Boeing (BA). Other
major stock indexes also made gains, albeit much smaller ones. Markets were encouraged by a
stronger than forecast second quarter earnings report by PepsiCo, raising expectations of a overall
strong earnings period.

Overnight, international bourses declined sharply, after President Trump announced tariffs on an
additional $200 billion in Chinese goods and went on a blistering tirade at a press conference in
Brussels ahead of a key NATO meeting. The United States accounts for roughly 19% of China’s
overall exports, making the U.S. its largest trading counterparty. Taking into account the previously
imposed tariffs, roughly half of Chinese exports to the United States are now potentially subject to
additional tariffs. Unlike in its previous moves, the Trump administration appears to have more
carefully curated the goods subject to the new tariffs. For instance, mobile phones (Apple iPhone) are
excluded from the list, signaling that the U.S. is attempting to avoid self-harm in the process.
The new tariffs are expected to take effect in late August. China’s Commerce Minister said that China
would react appropriately to the “bullying tactics”, including using qualitative retaliatory measures.
These might include longer inspection periods (this tactic was often used during the cold-war, when
produce would be left sitting on the docks for days or even weeks until inspected, then being returned
for being spoiled), delaying approvals of Chinese investments into the Unites States, or restrict and
limit visitor visas for Chinese citizens to the U.S. – a $120 billion annual industry for the U.S.

President Trump’s actions and words are also impacting U.S. markets this Wednesday morning, as
U.S. equity futures are pointing to a sharply lower open, with DJIA pre-market futures indicating a
200 + point drop. Oil prices are also lower on the news, as WTI is down more than 1% and BRENT
Crude is over 2 ½% lower. U.S. Treasury yields are also lower, with the spreads between the five
year, ten year and thirty year yield sitting at 10 basis points each – in other words, investors are only
being compensated 0.2% more to invest in a 30 year Treasury Bond than a five year Treasury Note.

On the economic front, investors will get the latest Wholesale Inventory figures and Producer Price
Index data today, there are no major earnings reports scheduled today.

The GGFS Investment Committee

Jan 30 2017

Last Weeks Market Recap

Market Recap

Equities inched higher last week as the S&P and other major indexes gained about 1% and the Dow Jones Industrial Average crossed the psychologically important 20,000 mark. Treasury Yields remained relatively steady, and the U.S. dollar lost a little bit of ground against other major currencies as some of President Trump’s policies came into focus. On the economic front, data was mixed with Durable Goods orders and GDP disappointing slightly, while existing home sales and trade data came in line with expectations. On the earnings front, so far 170 of the S&P 500 constituents have reported. Of these, 52% have reported positive revenue (sales) surprises, while 74% have reported positive earnings surprises – following the trend of recent quarters.


Looking ahead

After President Trump’s executive order banning travel from seven middle-eastern countries, which was announced on Friday, expect the media to focus on this topic and the potential impact on businesses. In our view, it is unlikely that this will have a deep or lasting economic effect, however there could be a long-lasting impact on international relations. From a market perspective, earnings will continue to matter most, followed by economic data releases relating to home prices, inflation and consumer confidence. Wednesday’s FOMC meeting could bring the second consecutive interest rate hike, however given some of the more benign inflation and growth data released last week there is an equal chance of no moves.

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