Commentary for the week ending 11-18-16

Please note: there will be no market commentary for the next two weeks.  Don’t worry – we’ll be back with our commentary for the week ending 12/9/16.  Thank you. 

The rally in stocks moderated a bit this week, but stocks still remain at or near all-time highs.  For the week, the Dow rose a modest 0.1%, the S&P added 0.8%, and the Nasdaq fared the best with a 1.6% gain.  Bonds prices hit the lowest level in a year as yields continue to rise.  Gold continued to move lower as the dollar hit its highest level in 13 years, off 1.6% this week.  Oil rose on talks of limiting supply, gaining 5.7% to close at $45.58 per barrel.  The international Brent oil rose to $46.89.

Source: Google Finance

The “Trump Rally” continued this week, though the initial euphoria has worn off.  However, it looks like the market continues to believe his policies will be good for the economy and has been encouraged by the personnel appointments he has made so far.

This has new money pouring into stocks and coming out of bonds.  For the one-week period ending November 16th (that’s how they measure these things), U.S. stock funds saw a record amount of money flowing into them.  Specific sectors like financials, healthcare, biotech, and industrials also saw record inflows.

It hasn’t been great for everything, though, as money is flowing out of sectors like utilities, emerging markets, and gold.  Plus, money is leaving bonds, too. 

While the market mostly moved on Trump news the week, there was some other news in the market, too. 

Many Fed speakers were making the rounds and the consensus seems to be that the Fed will raise interest rates in December (this is important because the record low rates have helped push stocks higher).  Even chair Yellen said they were likely to raise rates relatively soon as she made an appearance in front of Congress. 

We heard something interesting in her congressional appearance, too.  She noted that the level of U.S. government debt was a concern and she would be wary of increasing government spending. 

We have to wonder if these comments were made as a result of the Trump election since he has discussed new government spending projects. Just a few months ago, Yellen was advocating for more government spending to boost the economy (LINK).  The comments certainly appear political. 

Also raising some eyebrows for political reasons was economic data released this week.  Several economic reports were unusually good.  The level of people applying for unemployment plunged to its lowest level since 1973.  Plus, the construction of new homes saw its biggest monthly gain since 1982. 

Cynical investors saw these extremely unusual reports as a way to end the current President’s tenure on a solid note.  With politics the way it is today, it wouldn’t be surprising. 


Next Week

Next week will be fairly quiet due to the Thanksgiving holiday.  Technically the market is only closed Thursday, but Friday is usually a very quiet day, too.

As for the economic data we’ll receive, we’ll get info on housing and durable goods.  The minutes from the latest Fed meeting will also be released, but since nothing new came from the meeting, it is doubtful we’ll learn anything new from the minutes of the meeting. 


Investment Strategy

No change here.  We think the economic policies coming from a Trump administration will be positive in the long run.

That said, we are a bit cautious on the market in the short run.  A lot of asset classes have moved to extremely oversold or overbought levels.  Stocks look expensive, bonds look cheap.  The dollar looks to be at an overly-high level, gold, the opposite.  Reversals often occur at these extreme levels.   

Turning to the longer term, we think much of the rise in the market over the past few years has been due to the central banks and their stimulus.  After all, it’s unusual to see record highs in the market while corporate earnings are in a recession.  That would normally make us worry about stocks as the Fed pulls back from its stimulus. 

However, we could see the pro-business policies balance out or negate the pullback in stimulus.  We are unsure how this will eventually play out.  

As for the rest of the portfolio, bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold is another good hedge for the portfolio.  It is only a hedge at this point – rising on geopolitical issues as a flight to safety. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.

Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer.  Our short and medium term investments are the only positions affected by these daily and weekly fluctuations. 


This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the week ending 11-11-16

Election week saw record highs in stocks as they tuned in their best week since 2011.  Through Friday’s close, the Dow rose a solid 5.3% and hit an all-time high, the S&P gained 3.8%, and the Nasdaq rose a nice 3.7%.  Bonds were also a big story as prices dropped dramatically and yields hit their highest level since January.  Gold reversed course and moved lower.  Oil also fell with a 2.3% drop to close at $44.13 per barrel.  The international Brent oil lost a little more than $1 to close down to $44.52.

Source: Google Finance

When I prepare to write these commentaries, I go back and review the news from the past week.  It’s amusing now to see how certain the press was in a Clinton victory.  Not only were they wrong on the election, but they were wrong on the market reaction to a Trump victory. 

The worry behind a Trump win was the uncertainty it would bring to the markets.  We have a pretty good idea how a Clinton presidency would go.  Regardless of it being good or bad, it would have certainty. 

The range of outcomes is wider with an unknown like Trump.  It may be good, but it may be bad.  This is the uncertainty that analysts thought would weigh on the markets.  We saw estimates as high as a 15% drop in stocks with a Trump victory. 

The market did initially fall on the results.  In overnight trading, the Dow was briefly lower by 800 points.  We came into the office reading headlines like “Market Bloodbath” and “Global panic in stocks.” 

Obviously this didn’t last long. 

We slowly started to hear people actually assessing the Trump economic policies:

“Wait, so we will get lower taxes?” 
“We’ll get lower regulations?”
“There will be a repatriation of corporate earnings on cash stuck overseas?”
“We’ll actually get a business-friendly Washington?”

Investors began to realize that this administration could be very good for business.  It was frustrating to many that this was not realized before the election, regardless of how loud it was shouted. 

Regardless, stocks moved higher on the potential for pro-business policies.  Specific sectors that would do well under a Trump administration (like banks, insurance, oil, coal, infrastructure, pharma and biotech, defense, industrials, and manufacturing) provided an extra boost to the market. 

The consensus is that it will be nice to finally get some pro-business policies in Washington. 

Switching gears a bit, corporate earnings season is winding down.  90% of companies in the S&P 500 have reported results and according to Factset, earnings are on pace to rise 2.9%.  This is much better than the negative number analysts were estimating. 

Since the election is the theme of this commentary, we’ll fit earnings into that theme.  A common excuse for companies missing earnings this quarter has been to blame the election.  It’s like the weather excuse we highlight often (where it’s cold, so people didn’t shop, or it was warm and people didn’t buy jackets, which have higher profit margins), but this quarter the election often took the blame for bad earnings.

It was cited by Starbucks and McDonalds.  Dunkin Donuts blamed the “overwhelming dampening effect of presidential election.”  And apparently people take fewer cruises because of the election, as was cited by Carnival Cruise Lines. 

In the end, 80 companies in the S&P 500 used the election as an excuse for lower earnings.  However, this was lower than the 100 who cited it in 2012, which we suppose is an improvement.

We think the economic policies coming from a Trump administration will be positive in the long run.

That said, we are a bit cautious on the market in the short run.  Stocks have very quickly moved from cheap to expensive and we wouldn’t be surprised to see them take a breather here.  

One concern, while we are seeing an increase in the stocks making new highs for the year, we’re also seeing an increase in companies making new lows.  This is not a sign of a healthy market and is something to keep an eye on. 

Another concern is the sharp move lower in bond prices (which means a higher move in yields).  This could signal trouble is afoot.  Investors might be seeing higher inflation,

or it may be a flight to quality, or it might just be a rotation out of bonds and into stocks.  At this point, it’s too early to tell, but is something to keep an eye on. 

Turning to the longer term, we think much of the rise in the market over the past few years has been due to the central banks and their stimulus.  After all, it’s unusual to see record highs in the market while corporate earnings are in a recession.  That would normally make us worry about stocks as the Fed pulls back from its stimulus. 

However, we could see the pro-business policies balance out or negate the pullback in stimulus.  We are unsure how this will eventually play out.  

As for the rest of the portfolio, bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold is another good hedge for the portfolio.  It is only a hedge at this point – rising on geopolitical issues as a flight to safety. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.

Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer.  Our short and medium term investments are the only positions affected by these daily and weekly fluctuations. 

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the week ending 11-4-16

It was another week with the markets ending in the red.  Through the Friday close, the Dow was lower by 1.5%, the S&P fell 1.9%, and the Nasdaq fared the worst with a 2.8% drop.  Gold did nicely with a 2.3% gain.  Oil fell to its lowest level in six weeks with a 9.3% decline to close at $44.13 per barrel.  The international Brent oil lost $4 to close down to $45.60.

Source: Google Finance

The week was very similar to last week – stocks moved steadily lower as cautious investors refused to make any big bets on the market before the election. 

This decline in the market has been historic, too.  The loss on Friday marked a nine-day losing streak for the S&P 500.  The last time the S&P was lower for nine straight days was in 1980.  Of course, the magnitude of this decline has been nowhere near the losses of 1980.  This decline has seen a modest loss of 2.9% compared to a large drop in 1980, so a little perspective is important. 

As for the events of the week, we had many economic reports and still a lot of corporate earnings coming in. 

Starting with earnings, Factset reports roughly 400 companies in the S&P 500 have reported results, with earnings on pace to rise 2.6%.  This is much better than the negative quarter analysts expected and could mark the end to the earnings recession we have seen over the last six quarters. 

Economic data was heavy due to the end of the month and results were generally good, but not great.  Both the service and manufacturing sectors showed expansion, though were both less than expected.  Personal spending was better than expected while personal income was worse than expected.  Productivity was a bright spot, rising for the first quarter in a year. 

The employment report for October was somewhat weak, adding 161,000 jobs.  This number is closely watched since it is one of the Fed’s main focuses.  The result was not too hot or cold, so it likely had little impact on the Fed’s economic policy. 

The Fed did hold a policy meeting this week, too.  No changes to their policy were expected and none were announced.  However, it is looking more likely that they will change their stimulative policy in December and raise interest rates. 

We’ve seen the Fed talk tough about raising rates before, only to find many excuses not to.  A lot will transpire between now and December, so there are many possibilities to keep them from raising rates.

Finally, this weekend we have the Blue Angels performing here in Jacksonville.  Thursday and Friday were their practice days and they flew right outside out office.  Below is a couple pictures – our favorite is the last picture.  In it you can see the plane above a tree with two Bald Eagles in the lower part of the picture.  You can’t get much more America than that! 

Next Week

Next week looks very quiet for economic data and the pace of corporate earnings will slow.  Of course, the election will dominate the news and will have the most impact on the market. 


Investment Strategy

Again, no change here.  Stocks have sold off recently, but it is difficult to really tell what the market will do until after the election.  Stocks look to be on the cheap side in the short term (a week to a few weeks) and could be poised for a rebound, but we’ll have to wait and see. 

From a longer term perspective, everything looks expensive.  Central bank policies have driven asset classes higher, which leaves few places to hide if the market were to turn.  We worry this is an asset bubble that will end badly – but knowing when that day of reckoning is remains anyone’s guess. 

Bond yields fell this week (so prices ticked higher), but remain at the top of the range of the uptrend that started in July.  We don’t expect a significant change here as we think prices will remain relatively high and yields low as demand from investors will keep prices elevated, even with higher rates from the Fed.     

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible.  We keep a longer term focus with these investments. 

Gold is another good hedge for the portfolio.  It is only a hedge at this point – rising on geopolitical issues as a flight to safety. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.

Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer.  Our short and medium term investments are the only positions affected by these daily and weekly fluctuations. 


This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.