The markets spent all week in negative territory before a gain Friday pushed them back to the unchanged level. For the week, the Dow was lower by 0.1% while the S&P and Nasdaq were up 0.1%. Most commodities rose on the week, with gold up 2.8%. Oil was higher by 1.3% to close at $53.85 per barrel. The international Brent oil, which is used for much of our gas here on the east coast, closed up to $56.72.
Source: Google Finance
Washington still was a focus of investors this week, but corporate and economic fundamentals also played a role in the direction of the markets.
The week opened with the biggest decline of the year for stocks. Investors were unnerved by the immigration halt (a “halt” is temporary, a “ban” is permanent) and subsequent protests.
The worry is that the new administration will get bogged down with these tangential issues and lose political capital. The markets have risen in anticipation of pro-business policies and the loss of political capital decreases the chances of reforms being implemented.
While news out of Washington weighed on the markets this week, fundamentals helped them.
The week opened with the biggest decline of the year for stocks. Investors were unnerved by the immigration halt (a “halt” is temporary, a “ban” is permanent) and subsequent protests.
The worry is that the new administration will get bogged down with these tangential issues and lose political capital. The markets have risen in anticipation of pro-business policies and the loss of political capital decreases the chances of reforms being implemented.
While news out of Washington weighed on the markets this week, fundamentals helped them.
Stocks rose sharply Friday after the monthly employment report, turning in the best day of the year for stocks. The economy added 227,000 jobs last month, well above the 175,000 expected by economists.
Data on the strength of the manufacturing sector came in very solid as well, and stands at its highest level in 2 years. The service sector was not as strong as last month, but is still growing at a decent pace.
Consumer spending and incomes rose last month, which is good, but spending rose more than incomes. This means that people are using more debt to finance purchases, which is a bad trend if it continues for long enough.
Corporate earnings were a big story as about 100 companies in the S&P 500 reported results. There were some disappointing reports from some big names, like Under Armour, Exxon, Harley Davidson, UPS, and some banking companies. This pressured the markets.
However, we saw good results from companies like Apple and Facebook, which, in turn, helped markets.
As it stands now, about half of the companies in the S&P 500 have reported earnings and the results have been decent. According to Factset, earnings are on pace to rise 4.6% over the past year, much higher than the 3.1% expected just before earnings season started. Revenue (or sales) have also risen 4.6% and though this is a decent gain, it has been less than expected.
Finally, the Fed was in the news as they held a policy meeting this week. The meeting was pretty unremarkable and they announced nothing new, so it had little impact on the markets.
Next Week
Next week will be very quiet for economic data, but we’ll still see a lot of corporate earnings releases with about 75 companies in the S&P 500 reporting results.
Investment Strategy
No change here. Stocks are not at a level we find attractive to buy, but we aren’t concerned with a significant sell-off at this time. We will say that the market is long overdue for a correction. Stocks are at all-time highs while fear of a correction is low, which is often a recipe for trouble.
While we are cautious in the short term, we are more optimistic in the longer run. We had been cautious on the long term – 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. It may have caused markets to rise, but has also distorted markets and created bubbles, which usually ends badly.
Our optimism comes from the new pro-business policies that may 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.
Bond prices no longer look cheap, either, and we would hesitate to add to short-term fixed income positions at this time.
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, though they are looking cheap.
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.
Data on the strength of the manufacturing sector came in very solid as well, and stands at its highest level in 2 years. The service sector was not as strong as last month, but is still growing at a decent pace.
Consumer spending and incomes rose last month, which is good, but spending rose more than incomes. This means that people are using more debt to finance purchases, which is a bad trend if it continues for long enough.
Corporate earnings were a big story as about 100 companies in the S&P 500 reported results. There were some disappointing reports from some big names, like Under Armour, Exxon, Harley Davidson, UPS, and some banking companies. This pressured the markets.
However, we saw good results from companies like Apple and Facebook, which, in turn, helped markets.
As it stands now, about half of the companies in the S&P 500 have reported earnings and the results have been decent. According to Factset, earnings are on pace to rise 4.6% over the past year, much higher than the 3.1% expected just before earnings season started. Revenue (or sales) have also risen 4.6% and though this is a decent gain, it has been less than expected.
Finally, the Fed was in the news as they held a policy meeting this week. The meeting was pretty unremarkable and they announced nothing new, so it had little impact on the markets.
Next Week
Next week will be very quiet for economic data, but we’ll still see a lot of corporate earnings releases with about 75 companies in the S&P 500 reporting results.
Investment Strategy
No change here. Stocks are not at a level we find attractive to buy, but we aren’t concerned with a significant sell-off at this time. We will say that the market is long overdue for a correction. Stocks are at all-time highs while fear of a correction is low, which is often a recipe for trouble.
While we are cautious in the short term, we are more optimistic in the longer run. We had been cautious on the long term – 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. It may have caused markets to rise, but has also distorted markets and created bubbles, which usually ends badly.
Our optimism comes from the new pro-business policies that may 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.
Bond prices no longer look cheap, either, and we would hesitate to add to short-term fixed income positions at this time.
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, though they are looking cheap.
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.
