A Trillion Milestones

We don’t typically opine on individual securities outside of their impact on a specific market segment or the market in general, but recently Apple (AAPL) hit a valuation milestone no other U.S. company had ever achieved. On August 1st, Apple became the first U.S. company to eclipse a market capitalization (stock price multiplied by the number of outstanding shares) of $1 trillion!

Put simply, we are wired to observe and recognize milestones. They are easy to measure, compare and remember (most of the time). In fact, some of them, such as the first manned landing on the moon, invoke an emotional sense of pride in who we are and the values we represent. While others, such as a wedding anniversary (you better remember), have a more personal meaning. To be clear, Apple’s capitalization feat is not comparable to either of these milestones. While the $1 trillion valuation is largely based on the collective value investors place on Apple’s future earnings, the recycled coverage by media outlets is fascinating. Consider this list of previous market capitalization levels, that while interesting, are often repeated when covering a new milestone:

• First U.S. company to reach $1 billion – U.S. Steel (1901)
• First U.S. company to reach $100 billion – GE (1995)
• First U.S. company to reach $500 billion – Microsoft (1999) – Apple was the 6th in 2012
• First U.S. company to reach $1 trillion – Apple (2018)

Although Google (a measly $870 billion market capitalization😊) is a less than effective search tool for tracking media coverage as far back as 1901, the media coverage for the $500 billion and $1 trillion milestone are strikingly similar. The space requirements of currency storage (stacked or end-to-end) are a given to create a mental picture of the event’s size in the physical world. However, some of the less obvious comparisons are also strangely repeated for both milestones. To summarize the similarities in media coverage, $1 trillion would buy you the inflation adjusted value of many of the same things as Apple’s previous $500 billion milestone would have:

• the nearly 50,000 miles of U.S. Interstate Highway System;
• the entire National Football League;
• the top 50 valued sports teams in the world; or
• every home in several major metropolitan areas.

We even came up with one of our own that actually points in the opposite direction, namely, – you could have purchased slightly more iPhones in 2012 with only $500 billion.

• $500 billion / $399 in 2012 = approximately 1.25 billion iPhones
• $1 trillion / $999 in 2018 = approximately 1 billion iPhones

While any company’s ability to innovate, adapt, and evolve to meet marketplace needs is ultimately one of the primary drivers of its long-term valuation potential, arbitrary milestones are just more fun to talk about. So, although Apple has received an excessive amount of media sound-bites for reaching a nice, round $1 trillion, does it have a deeper or actionable meaning? Not to be anticlimactic, but outside of an interesting piece of historical market trivia, probably not too much.

Important Disclosure Information
This is neither an endorsement of nor a recommendation to buy Apple Inc. (AAPL).

The views and opinions expressed are solely those of AndCo Consulting. This should not be regarded as investment advice or as a recommendation regarding any particular course of action. AndCo does not provide investment advice to individual participants and you should confer with your financial advisor for additional information. This is not an offer to sell or a solicitation to buy securities.

This document has been prepared for educational and informational purposes only, and is not intended to provide, and should not be relied upon, for legal or tax advice. Certain information is based on sources and data believed to be reliable, but AndCo cannot guarantee the accuracy, adequacy or completeness of the information.

Opinions expressed reflect prevailing market conditions at the time this material was completed and are subject to change. Moreover, the material provided herein is valid as of the date of posting and not as of any future date and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after such date.

AndCo Consulting is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.

AndCo Consulting acquires Summit Strategies public fund general consulting practice

AndCo Consulting (AndCo), is pleased to announce the acquisition of the Summit Strategies (Summit) public fund general consulting practice. Summit is an independent, national institutional consulting firm located in St. Louis, MO. The acquisition will increase AndCo’s significant and growing presence in the public plan market and post-acquisition AndCo will provide investment consulting services to $115 billion in institutional client assets across 33 states, the District of Columbia, Canada, and Bermuda.

Summit was founded nearly two decades ago with the sole purpose of helping its clients reach their investment goals through a philosophy that is client-focused, results-driven, and delivered through impactful resources. “Summit’s independent model, customized service philosophy, and similar geographic footprint made the acquisition of its public fund consulting practice a perfect fit”, said Mike Welker, President and CEO of AndCo Consulting. “We look forward to servicing these clients within the independent model and high-quality custom service standard to which they are accustomed.” “Finding the right fit for our public fund clients was of the utmost importance in our selection process” said Steve Holmes, President/CEO of Summit Strategies Group. “We have had a long mutual respect with AndCo as competitors in the institutional consulting space and believe they are a great fit for our public funds practice”.
The transaction will close on October 15th, 2018.

About AndCo

AndCo is a full-service employee owned Independent registered institutional investment consulting firm, founded on the belief and conviction that only an independent institutional consulting firm can put their clients first in every situation. The firm is comprised of a dedicated group of industry specialists with diverse business backgrounds working together toward the common goal of simplifying the investment and fiduciary decisions of fund sponsors. AndCo serves as an independent fiduciary to each of its clients and avoids all conflicts by accepting no soft-dollar compensation, having no broker dealer affiliations, selling no investment products, and has no pay-to-play arrangements. AndCo’s headquarters is located in Orlando, FL and has satellite offices in Chicago, IL; Tulsa, OK; Cleveland, OH; Detroit, MI; Reno, NV; Pittsburgh, PA and Dallas, TX.

The firm Website: www.andcoconsulting.com

Contact:
Lauren Leetun
Findsome & Winmore for AndCo Consulting
407-592-7923
lleetun@findsomewinmore.com

Update on Interest Rates

As expected, the Federal Reserve (the Fed) voted to raise interest rates for the second time this year at their June meeting. With this increase, the Fed Funds rate (range) increased from 1.50%-1.75% to 1.75%-2.00%.  Importantly, the Fed updated its forecast for potential rate hikes for calendar year 2018 to four as the U.S. unemployment rate fell to cyclical lows while headline inflation remains above target. The Fed’s dot-plot (chart 1 below) shows that the number of Fed Governors expecting higher interest rates in 2018 increased from the previous meeting in March.  It is important to remember that the dot plot represents the individual forecast for interest rates at various future periods for the 12 members of the Federal Open Markets Committee (FOMC) as well as the seven remaining Reserve Rank presidents who are not currently voting members of the committee.  This means while each plot chart may have up to 19 dots (people may abstain and/or seats may be vacant), only 12 of the dots on each chart represent voters on the Fed Funds rate.

During his post-meeting press conference, Chairman Powell provided positive comments about the current state of the economy, noting that the recent rise in oil/gas prices has had a negligible effect on the growth trajectory. As evidence of the recent robust growth, the Atlanta Fed GDPNow model is forecasting GDP growth of nearly 4.5% in the second quarter (chart 2).  Looking out a bit further, the implied Fed Funds rate for the end of 2019 is above 2.5% (chart 3 gray line), which suggests two additional rate hikes by the end of next year.

So…..what could this mean?

  1. It’s worth keeping an eye on the yield curve. From an interest rate perspective, the short-end of the yield curve has moved higher, while the long-end has continued to flatten. The difference between the U.S. Treasury 2-year and 10-year rates is now roughly 30bps (chart 4). While still positive, you’ll notice that the curve has historically been a fairly reliable predictor of future recessions as it has inverted prior to the three previous recessions illustrated by the gray bars in chart 4. In fact, every recession in the past 60 years was preceded by a negative term spread (inverted yield curve) that occurred 6 to 24 months before the official start of the recession. While the wide timeframe between inversion and recession makes preemptive or actionable investment decisions suspect, we believe the ongoing shape of the yield curve is certainly worth monitoring.
  2. There could be global implications. The U.S. dollar has continued to strengthen relative to a basket of foreign currencies and is up nearly 8% YTD (chart 5). While some of the strength in the dollar can be attributed to the Fed’s rate hikes and the resulting demand for U.S. bonds, some of the strength may be due to the changing narrative regarding synchronous global growth. News out of Europe, Japan and China has been that these economies are showing signs of slowing as foreign central banks begin the process of winding-down their bond purchases (quantitative easing measures). As was the case in the U.S., the process of tapering could prove a delicate balancing act, especially in Europe and Japan where economic growth has remained below expectations. It will certainly be interesting to watch how the bond markets react once the European Central Bank and the Bank of Japan step aside. While Japan may be a special case (having been mired in a decades-long economic slump), countries like Spain and Italy have seen their Treasury bonds trade at yields below equivalent U.S. Treasury bonds. Should those rates rise substantially, it may place additional pressure on those economies and governments.
  3. Don’t forget emerging markets. The U.S. dollar’s strength over the first half of 2018 has also put significant pressure on EM currencies. As evidence, chart 6 illustrates that EM local currency bonds (blue shaded area) have sold off as the U.S. dollar has strengthened (green line). In fact, the U.S. dollar is near all-time highs against the Argentine peso, Brazilian real and Turkish lira (see charts 7-9). From a review of the economic data, it appears the fundamentals remain largely intact for EM countries. Further, given the growth expectations in the U.S., growth in these EM countries could benefit from increased export activity. As we have reviewed, the potential impact of rising U.S. interest rates and the changing slope of the U.S. yield curve have far-reaching investment and economic implications across the globe that extend well beyond the bond market.

Appendix

Chart 1: Fed Dot Plots

Source: Bloomberg.com

Chart 2: US GDP Forecast

Source: Federal Reserve Bank of Atlanta

Chart 3: Implied Fed Funds

Source: Bloomberg.com

Chart 4: US Treasury 10-Year minus 2-Year and Fed Funds

Source: Federal Reserve Bank of St. Louis

Chart 5: US dollar

Used with permission of Bloomberg Finance L.P.

Chart 6: US dollar versus emerging market local currencies

Used with permission of Bloomberg Finance L.P.

Chart 7: US dollar versus Argentine peso

Used with permission of Bloomberg Finance L.P.

Chart 8: US dollar versus Brazilian real

Used with permission of Bloomberg Finance L.P.

Chart 9: US dollar versus Turkish lira

Used with permission of Bloomberg Finance L.P.

 

References:  

Chart 1: Fed Dot Plot, https://www.bloomberg.com/graphics/fomc-dot-plot/

Chart 2: GDP Forecast, Federal Reserve Bank of Atlanta, https://www.frbatlanta.org/cqer/research/gdpnow.aspx

Chart 3: Implied Fed Funds, https://www.bloomberg.com

Chart 4: US Treasury 10-Year minus 2-Year and Fed Funds, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/

 

Important Disclosure Information

The views and opinions expressed are solely those of AndCo Consulting. This should not be regarded as investment advice or as a recommendation regarding any particular course of action. AndCo does not provide investment advice to individual participants and you should confer with your financial advisor for additional information.

This document has been prepared for educational and informational purposes only, and is not intended to provide, and should not be relied upon, for legal or tax advice. Certain information is based on sources and data believed to be reliable, but AndCo cannot guarantee the accuracy, adequacy or completeness of the information.

This article may contain statements of future expectations, estimate, projections, and other forward-looking statements that are based on available information and AndCo Consulting’s view as of the time of those statements.  Such forward-looking statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties.   Actual results, performance or events may differ materially from those expressed or implied in such statements. 

Opinions expressed reflect prevailing market conditions at the time this material was completed and are subject to change. Moreover, the material provided herein is valid as of the date of posting and not as of any future date and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after such date. 

AndCo Consulting is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.