While U.S. equity markets continue to grind higher, with the S&P 500 now up roughly 20% since the market bottom on November 4th, 2016 and 12% YTD, our sense is that sentiment remains neutral to modestly bearish largely due to the facts that (1) the Fed has started tightening; (2) stock valuations are not inexpensive and (3) expectations are very low for anything positive occurring in D.C. As we look into year-end, we believe the most important market development should be whether or not Republicans pass a meaningful tax reform package. We continue to give the GOP the benefit of the doubt. Further, we believe that a positive turn in U.S. economic surprises in the 2H ‘17 will drive a sharp rotation into Value stocks.
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Vornado Realty Trust (VNO) completed the Reverse Morris Trust Transaction with The JBG Companies on July 20 by spinning off its Washington DC Business, Vornado/Charles E. Smith, and merging it with the operating company and certain select assets of The JBG Companies. The combined entity is named JBG SMITH Properties (JBGS), and is now the largest pure-play Washington, DC real estate company.
The ‘Trump Trade’ – At Risk of Breaking Down?
• The most important market development over the remainder of the year should be whether
Republicans pass a meaningful tax reform package.
• If the GOP is successful, business and consumer confidence should rise.
• We continue to give the Republicans the benefit of the doubt, and as a result, see upside to
consensus expectations calling for moderate to flattish U.S. consumer spending.
• While this past Friday’s retail sales report was weak, it only accounts for roughly 40% of
total consumer spending.
• We’re more interested in PCE, which has been growing at a faster rate.
The most important development over the remainder of 2017 will be whether or not Republicans pass meaningful tax reforms. If the GOP is successful, consumer confidence measures should rise further and lead to stronger-than-expected spending. If not, the ‘Trump Trade’ will be at risk of permanently dissolving. However, we’re giving Republicans the benefit of the doubt.
Consol Energy (CNX) announced the filing of its Form 10 in relation to the company’s spin-off of its coal business, Consol Mining Corporation. Consol is shifting away from coal and instead concentrating on natural gas exploration and production. The coal business will include the Pennsylvania Mining Complex, the company’s ownership in CNX Coal Resources LP (CNXC), the coal export terminal at the Port of Baltimore, and undeveloped coal reserves located in the Northern Appalachian, Central Appalachian and Illinois basins.
We track the share price performance of thematic stock baskets relative to a sector neutral benchmark. Year-to-date, companies with high international revenues, our top stock idea model (SIM), companies with high EPS growth, companies with high sales growth, and high beta stocks have been top performing themes. Year-to-date, the worst performing themes have been value stocks, stocks with low P/E’s, banks with high incremental return on tangible assets, high short interest, and our ‘All Weather’ theme. In June, there was a notable shift into value and cash usage strategies as many growth and int’l themes that outperformed during the first five months of 2017 underperformed. Click here for more information.
We believe that the biggest surprise in the first half of 2017 was better-than-expected global growth, which lead to consensus expectations rising for Europe, Japan, and China. As discussed in this note, we remain bullish on the outlook for the global economy and equity markets, despite the recent back up in interest rates and historically low volatility. However, we expect to see a shift in leadership, with the U.S. providing the biggest upside surprises in the back half of the year.
CEO Changes. The most recent companies with a CEO change include: Sanmina (SANM), Marsh & McLennan (MMC), OM Asset Management (OMAM), Columbia Banking System (COLB), Gentherm (THRM), Sarapeta Therapeutics (SRPT), Monro Muffler Brake (MNR0), Snyder’s-Lance (LNCE), Pandora Media (P), Valmont Industries (VMI), Popular (BPOP), Commercial Metals (CMC), Halyard Health (HYH), Chemical Financial (CHFC), Whirlpool (WHR).
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