BY ERIC STURDZA
In September, investors and the Federal Reserve were faced with noisy economic data releases as Hurricanes Harvey, Irma, and Maria affected the economic landscape. Nonetheless, the minutes from the Federal Open Market Committee (FOMC) meeting in September included remarks on the near-term effects of these natural disasters, revealing broadly unaltered views on the underlying pace of growth and inflation (in line with market responses).
Specifically, the minutes stated that “Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”
Nevertheless, the Investment Adviser believes that the Fed is not going to simply look past these reports (contrary to suggestions by mainstream news) due to the fact that the indicated and surprising resilience could worry both, doves and hawks. After all, if it turns out that the storms did indeed not have a significant impact on the unemployment rate, hawks could think that they are “falling behind the curve”, whereas doves may be pushed to realise how tight the labour market potentially is.
Nonfarm payrolls (NFP) were heavily impacted by the hurricanes (headline NFP declined by 33k in September). However, the hurricanes’ impact on the latter seems to have vanished at the time of writing. The US September household survey indicated that the unemployment rate declined to 4.2% following a decline in unemployment of -331k over the month. Important to highlight is, that these figures appear to be impacted by the hurricanes.
On the inflation front, gasoline prices rose by more than 11% during the month and given the fact that the CPI’s energy component is typically lower in September, it is expected that seasonally adjusted headline CPI will be boosted.
Finally, during the week of the 29th of September, the White House was busy producing key market-oriented headlines. The framework on tax cuts was released alongside President Trump’s summoning of Kevin Warsh (a leading candidate to replace Janet Yellen). In this regard, the key appears not to be whether the tax plan will be passed in its current or in a slightly altered format but more so the point in time at which the plan will be passed. The fact that this initiative is launched at the mature stage of the market cycle (solid confidence, strong labour market, rising incomes, and healthy balance sheets to name a few) and not in a typical post-recession environment means that the tendency to spend could increase by more than historically observed.
All in all, the S&P 500 initially declined at the beginning of the month only to later end it on a new high following the news from the White House and more solid than anticipated economic data releases.
In September, the Fund returned +1.18% against an increase of +2% for the benchmark. In terms of sector allocation, not being exposed to Energy and Telecommunication Services acted as a headwind, whilst not being exposed to Utilities and Real Estate acted as a small tailwind. In terms of stock selection, Autozone was the largest contributor (+0.37%) followed by Dollar Tree (+0.29%) and Bank of the Ozarks (+0.27%). On the other hand Envision Healthcare (-0.44%) and Allergan (-0.35%) were the largest detractors over this period.
Going into the earnings season, the Investment Adviser is confident that the potential upside in the portfolio remains compelling compared to the benchmark. More company specifics will be given in the following commentary as more details on the ongoing fundamentals of the Fund’s individual positions will be revealed when companies publish their results.
The views and statements contained herein are those of the Eric Sturdza Banking Group in their capacity as Investment Advisers to the Fund as of 12/10/2017 and are based on internal research and modelling.