The Trump rally continued this week as stocks again reached new record highs. For the week, the Dow gained 3.0%, the S&P rose 3.1%, and the Nasdaq saw a solid 3.6% return. Bonds prices continue to hover around the lowest level in a year as yields have risen. Gold moved lower on the week, off 1.4%. Oil prices saw little change, closing at $51.48 per barrel. The international Brent oil ended the week at $54.36.
Source: Google Finance
This week was the first one in five years where all three major indexes rose five days in a row. Clearly investors are enthusiastic about the potential for economic growth under a Trump administration and are pouring new money into the market, pushing stocks to new record highs.
More cabinet appointments released this week were also cheered by investors. These are business leaders with real leadership experience, not the bureaucrats we often find in Washington. The news was cheered by investors as it is a positive sign for U.S. businesses.
Investors are being more selective here, too, as new money is flowing into companies whose revenue mostly comes from the U.S. Transport-related stocks, in particular, have benefitted. These are companies in sectors like airlines, railroads, and shipping. This is worth mentioning since their performance is confirming the “Dow Theory.”
The Dow Theory basically suggests that new highs in the broader market need to see transportation stocks also moving higher. Transports are seen as a proxy for the health of the economy since they move the goods and raw materials used in manufacturing and construction. So if they do well, the broader market tends to do well.
Transports rarely make highs when the broader market is about to fall, which suggests the rally has legs and could continue.
The week did not have a lot of other market moving news. One bit of news we did have came from Europe with their central bank’s policy meeting.
The stimulus policy from the European Central Bank (or ECB) is set to wind down in March. Investors believed the ECB would announce an extension of this program since their economy still remains fragile.
The ECB did announce a stimulus extension, though at a smaller amount than expected. They are currently printing the equivalent of $85 billion a month to pour into the markets, but will be lowering the amount to $63 billion a month. However, the program is expected to run until the end of 2017, which is longer than originally expected. So all-in-all, it was a wash that met expectations.
All these years of money printing have produced little in the way of results and we don’t think more of the same will produce anything different. We only need to look at the reaction of our markets over the past month to see what needs to be done. Pro-growth policies will get them out of this rut – lower taxes, less regulations, stable currency, etc. They keep digging the hole deeper until real reforms like these are enacted.
Next Week
The big news next week will come from our Fed and their policy meeting. There is a nearly 100% chance they raise interest rates at this meeting. The unknown is the pace of future rate hikes. They are likely to take a wait-and-see approach and not announce anything too drastic, but a stronger stance with more rate hikes will probably weigh on the market.
There will be a handful of important economic reports, too. There will be data on retail sales, industrial production, housing, and inflation at the consumer level.
Investment Strategy
We still think stocks are on the expensive side in the short-term, but have thought that the last couple weeks as stocks continued to rise. We aren’t selling here and have enjoyed the rise, but are very cautious. We would wait for a pullback before putting any new money into the market.
While we are cautious in the short term, we are optimistic in the longer run. We had been cautious – and still are to some degree – because much of the rise in the market over the past few years has been due to the central banks and their stimulus. The money they have printed has caused markets to rise and may have inflated bubbles.
However, we could see the new pro-business policies balance out or negate the distortions caused by the stimulus. We are unsure how this will eventually play out, but pro-growth policies will be a net positive for the economy. Often the path of the economy can differ from the stock market.
While stocks look expensive here, bonds prices look cheap and this could be a good opportunity to add to fixed income positions.
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.
More cabinet appointments released this week were also cheered by investors. These are business leaders with real leadership experience, not the bureaucrats we often find in Washington. The news was cheered by investors as it is a positive sign for U.S. businesses.
Investors are being more selective here, too, as new money is flowing into companies whose revenue mostly comes from the U.S. Transport-related stocks, in particular, have benefitted. These are companies in sectors like airlines, railroads, and shipping. This is worth mentioning since their performance is confirming the “Dow Theory.”
The Dow Theory basically suggests that new highs in the broader market need to see transportation stocks also moving higher. Transports are seen as a proxy for the health of the economy since they move the goods and raw materials used in manufacturing and construction. So if they do well, the broader market tends to do well.
Transports rarely make highs when the broader market is about to fall, which suggests the rally has legs and could continue.
The week did not have a lot of other market moving news. One bit of news we did have came from Europe with their central bank’s policy meeting.
The stimulus policy from the European Central Bank (or ECB) is set to wind down in March. Investors believed the ECB would announce an extension of this program since their economy still remains fragile.
The ECB did announce a stimulus extension, though at a smaller amount than expected. They are currently printing the equivalent of $85 billion a month to pour into the markets, but will be lowering the amount to $63 billion a month. However, the program is expected to run until the end of 2017, which is longer than originally expected. So all-in-all, it was a wash that met expectations.
All these years of money printing have produced little in the way of results and we don’t think more of the same will produce anything different. We only need to look at the reaction of our markets over the past month to see what needs to be done. Pro-growth policies will get them out of this rut – lower taxes, less regulations, stable currency, etc. They keep digging the hole deeper until real reforms like these are enacted.
Next Week
The big news next week will come from our Fed and their policy meeting. There is a nearly 100% chance they raise interest rates at this meeting. The unknown is the pace of future rate hikes. They are likely to take a wait-and-see approach and not announce anything too drastic, but a stronger stance with more rate hikes will probably weigh on the market.
There will be a handful of important economic reports, too. There will be data on retail sales, industrial production, housing, and inflation at the consumer level.
Investment Strategy
We still think stocks are on the expensive side in the short-term, but have thought that the last couple weeks as stocks continued to rise. We aren’t selling here and have enjoyed the rise, but are very cautious. We would wait for a pullback before putting any new money into the market.
While we are cautious in the short term, we are optimistic in the longer run. We had been cautious – and still are to some degree – because much of the rise in the market over the past few years has been due to the central banks and their stimulus. The money they have printed has caused markets to rise and may have inflated bubbles.
However, we could see the new pro-business policies balance out or negate the distortions caused by the stimulus. We are unsure how this will eventually play out, but pro-growth policies will be a net positive for the economy. Often the path of the economy can differ from the stock market.
While stocks look expensive here, bonds prices look cheap and this could be a good opportunity to add to fixed income positions.
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.
