Morningstar Runs the Numbers

Inspired by Harper's Index (with a tip of the hat to FiveThirtyEight's Significant Digits blog), Morningstar Runs the Numbers uses a numbers-based approach to highlight recent Morningstar research, along with some outside news stories.

2% Inflation expectations have been rising (to over 2% by some measures) since the election due to the expected combination of infrastructure spending and tax cuts. Karen Wallace wrote this week on what the market expects inflation to look like.

Another market-based gauge of inflation is the 5-year, 5-year forward inflation expectation rate, which also shows an increase in expected inflation. It jumped from 1.89% on Nov. 8 to 1.97% on Nov. 9, and was over 2% as of Nov. 10. As the name implies, clumsily, this is an expectation of inflation over the five-year period that begins five years from today. Some prefer this measure to the [TIPS] breakeven inflation rate, because longer-term inflation expectations tend not to be as affected by cyclical factors.

$1 trillion The market seems to think Donald Trump's campaign pledge to spend $1 trillion over 10-years on infrastructure has a good chance of happening. But Kristoffer Inton thinks the package isn't a done deal and that given the run-up in share prices of building materials firms there isn't much investment opportunity today.

We're skeptical that the touted $1 trillion infrastructure spending plan will be executed in its proposed form. We think the shares of these companies are now pricing in significant growth, and we see little risk-adjusted upside at this time.

13% Only 13% of actively managed equity funds beat a comparable Vanguard index fund on an after-tax basis for the 10-years ending June 2016 per a new Morningstar study. Jeff Ptak concludes that this means trying to buy active stock funds in a taxable account is a bad idea.

Most U.S. active equity funds failed to beat a relevant Vanguard index fund before and after taxes. This is not an isolated occurrence, as the clear majority of these funds have failed to beat a comparable index fund over most of the 10-year periods we studied. Given these long odds, investors should think twice about putting taxable money to work in active stock funds.

9

.

We don't expect to materially alter our $76 per share fair value estimate for wide-moat Wal-Mart after third-quarter results that included a more than 2% bump in local currency sales but a nearly 60-basis-point erosion in operating margin to 4.3%. Despite the near-term hit to profits, we've long thought that the firm's decision to ramp up investments behind people and technology is essential for the long-term health of the business, and we view this spending as prudent to support its leading competitive edge.

Negative 0.2%

the profit gain is "notable" but she doesn't see the stock as attractively priced today.

17%

to be cautious in projecting these strong results indefinitely into the future.

Admittedly, these metrics are stellar considering we are well into a multi-year housing recovery that we expect will continue through the end of the decade but at a much slower pace than in the recent past. We think the election throws another layer of complexity into forecasting for the business, as Donald Trump's policies are likely to help U.S. domiciled businesses but hinder interest rates, potentially leading to slower housing turnover and slower growth (or possible declines) in housing prices, potentially changing the demand for home improvement longer term. We are considering these factors as offsets today and plan to maintain our $125 fair value estimate, rendering shares as fairly valued, trading at 18 times our 2017 estimate. Our main concern is that top-line growth will slow as improvement in the housing market slows, causing bottom-line growth to taper, as well.

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