Market Commentary - 3rd Quarter 2019
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The S&P 500 Index gained 1.2% during the third quarter of 2019. During the period a variety of news topics dominated the business headlines including US/China trade negotiations and related tariff issues, monetary policy, US political campaign rhetoric and increasing concerns about US and Global recessionary fears. From a performance perspective, defensive sectors led the way with Utilities, Real Estate and Consumer Staples outperforming during the quarter. Conversely, Energy, Health Care and Basic Materials lagged.
Underlying US economic fundamentals remain positive as consumer consumption, job growth and wages remain resilient. Overall, household consumption accounts for approximately 70% of US GDP. Exhibit 1 below illustrates that the US consumer remains a source of strength during the current economic expansion.
On the flip-side, capital spending trends indicate businesses are being cautious most likely due to concerns around global growth and trade-related issues. Job growth remains solid albeit at a slowing rate of growth. Retail sales are positive and housing activity has increased driven by lower mortgage and refinancing rates.
As we enter the final quarter of 2019, we believe the risk of recession remains low but the overall probability has increased due to slowing international growth, slower capital spending and uncertainty surrounding trade policies and tariffs. We will specifically be focusing on the upcoming earnings season with emphasis on management commentary on end market demand, business visibility and earnings guidance.
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Target Corp. (TGT)
is a general merchandise retailer that sells products through its 1850 stores and growing digital channels. It is an attractively valued company whose management has continued to deliver solid comps growth, EBIT improvement, and out performance in a slowing industry. Target trades at 16x PE [NTM] vs. Walmart Inc. trading at 22x PE [NTM] despite TGT having a better 2-Year same stores sales stack of +9.9% vs. +7.8% for WMT. Target’s management continues to invest in their digital space, pickup & delivery offerings, as well as adding additional capacity within existing store footprint. We continue to see a number of positives for Target and view the company as a core holding within our large-cap equity strategies.
MasTec Inc. (MTZ)
is another company that ranks well within our fundamental and quantitative screening process. The company engages in the provision of infrastructure construction services & consulting. Mastec trades at a discounted valuation (11.5x PE NTM), while offering revenue visibility driven by strong end-market demand and contract wins. We believe the company offers an opportunity to benefit from various secular growth trends. With margins increasing and visibility at historic levels, MasTec offers exposure to 5G deployment, increase in data demands, an aging electric grid that requires upgrading, and energy supply chain bottle neck issues. We believe MTZ continues to remain an attractive investment due to its strong earnings growth, free cash flow growth, and consistent execution within their end-markets.
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Our strategies experienced a huge rally through August and then tapered off towards the end of the quarter. Overall performance came in about 20 basis points lower on US Treasuries and municipal bonds for the quarter. However, fixed income is having one of its best years. Some of the drivers included monetary policy domestically and abroad, the prevalence of negative global rates, and the perceived global slowdown. Additionally, political uncertainty across the globe adds to the anxiety and angst amongst investors. As a result, the flight to quality, “safe haven assets” are benefitting the fixed income asset class. We believe the flight to quality trend should persist throughout the end of 2019.
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As we enter the final quarter of 2019, we will continue to monitor the health of the US consumer regarding retail sales, housing activity, and jobs growth. We expect the FOMC will retain an accommodate stance towards monetary policy in order to keep the US economy growing. In this environment, we believe our disciplined value investment process which seeks to identify attractively valued businesses, good corporate stewardship towards capital allocation and shareholder value and improving financial results should perform well.
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As always please reach out with any questions or concerns.
Thank you,
Joseph Sharma, CFA
Chief Investment Officer
Direct: (908) 741-8340
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Oliver Luxxe Assets, LLC is a SEC-Registered Investment Adviser. A copy of the Firm’s Current Disclosure Brochure can be found on the SEC’s IAPD site (
https://adviserinfo.sec.gov/IAPD) or may be requested at any time by contacting us.
Significant risk may accompany investments in stocks, bonds or other asset classes over short periods of time. Investment return and principal value will fluctuate with changes in market conditions. Your investment may be worth more or less than your original cost.
Past performance is not indicative of future results.
This report is a publication of Oliver Luxxe LLC. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of subjects discussed. All expressions of opinion reflect judgment of author as of date of publication and are subject to change. Information contained herein does not involve rendering of investment advice. A professional adviser should be consulted before implementing any of strategies presented. Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell securities mentioned herein. Different types of investments involve varying degrees of risk. Economic factors, market conditions, and investment strategies will affect performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements relating to objectives, opportunities, and future performance of U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “should,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to economic conditions, changing levels of competition in industries and markets, changes in interest rates, and other economic, governmental, regulatory and other factors affecting a portfolio’s operations that could cause results to differ materially from projected results. Such statements are forward-looking in nature and involve known and unknown risks, uncertainties and factors, actual results may differ materially from those reflected in forward-looking statements. Investors cautioned not to place undue reliance on forward-looking statements / examples. None of Oliver Luxxe LLC or any affiliates, principals nor any other individual / entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.
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