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An Alternative To Money Market Funds

April 2018

March and the first quarter of 2018 are behind us and what a period it was!! Volatility returned in force in early February. Rising bond yields and fears of inflation helped trigger the plunge in the global equity markets during the first quarter. The Federal Reserve did raise the base rate by a quarter point as expected on March 21. New Fed Chairman Jerome Powell did state there will likely be more increases in 2018 and 2019. Despite this quarter point increase, the yield on the 10 Year US Treasury did not reach 3%. At the end of the first quarter, the yield actually dropped to 2.74%, possibly signalling the Fed may not be as aggressive in raising rates as earlier feared.

Some of the best performing stocks in 2017 were the FAANG stocks: Facebook, Apple, Amazon, Netflix and Google (Alphabet). Apple, Google and Amazon ended the first quarter as the three largest stocks by market capitalization in the S&P 500. Combined, these three firms comprise about 10% of the entire S&P 500’s market capitalization. Overall, technology represents about 25% of the S&P 500’s market capitalization.

A couple of recent events has called into question the extremely high valuations for several of these companies. The recent disclosure about how data from Facebook can easily be manipulated has slammed its share price and other social media stocks as well. Driverless car issues hit Nvidia, Google and Tesla shares. Goldman Sachs recently slashed its estimate for Apple’s iPhone sales. Amazon is again receiving harsh tweets from President Trump over its business practices, its $1.46 per parcel discount from the US Postal Service and the low amount of tax it pays. At its peak, Amazon was trading at 250x earnings even though its revenues grew by 31% in 2017 while its profits grew by 25%.

Both Brent and West Texas Intermediate (WTI) crude oil performed well during the first quarter on signs the global expansion is continuing. Brent Crude traded above $70 per barrel and ended the first quarter @ $69.35 per barrel. Meanwhile, WTI ended the first quarter @ $64.91 per barrel, a healthy sign as the peak driving season approaches for Europe and North America.

In its April 2 edition, Barron’s columnist Jack Hough wrote a very bullish column on the outlook for US refiners. The Trump tax cuts and the expected jump in gasoline demand are expected to drive the share prices of the US refiners much higher going forward. If that is the case, the US pipeline firms should benefit as well. The energy group in general and the pipeline sector in particular have been laggards for the past few quarters.

My weekly radio show on WWPR 1490 AM airs at 12.30pm each Friday. My prior radio shows and newspaper columns are available on our website (www.1490wwpr.com).

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