Commentary for the week ending 4-28-17

Markets either hit or closed in on new record highs this week.  Through Friday’s close, the Dow rose 1.9%, the S&P added 1.5%, and the Nasdaq hit a new record high with a 2.3% gain.  Bond prices backed off this week as yields moved slightly higher.  Gold turned in another negative week, off 1.5%.  Oil was lower, too, falling 1.0% to end at $49.19 per barrel.  The international Brent oil, used for much of our gas here in the East, fell to $51.70.

Source: Google Finance

It was a solid week for the markets, which saw stocks start with their best two-day gains since the election. 

The momentum to start the week came from the first round of Presidential elections in France held over the weekend.  The two candidates selected to go on to the next round of voting were the consistent frontrunners in the polls, so the results did not surprise the market.  That lack of surprise was nice for the markets since it meant there wasn’t any bad news, so stocks rose sharply as a result.

The final round of voting is May 7, which may bring more volatility depending on the results.

The other big news helping the market this week was a new tax plan from the Trump administration. 

They announced a big cut in the corporate rate and a lowering and simplification of rates on the personal side.  It would also repeal several other taxes and deductions. 

As you can see in the nearby chart, our tax rates have remained constantly high while other countries have lowered theirs as a way to be more competitive.  The U.S. is now one of the least-competitive countries for business. 

We think this is a very solid proposal with a focus on economic growth.  There are doubts about how much can get through Congress, so it is unlikely to get implemented in its current form.  We just hope it doesn’t get watered down too much.

Economic data released this week left much to be desired.

The big news came on Friday with the GDP report, which showed the economy grew at its weakest pace in three years.  

Other data was lackluster, too.  Consumer confidence ticked lower, though it still remains near historically high levels. 

Durable goods (which are items with a longer life, like a refrigerator, car, or furniture) rose, but at their slowest pace in three months. 

It wasn’t all bad, though, as there were some bright spots.  The Case-Shiller housing report showed home prices rose at the fastest pace since 2014.  This is good news for anyone who owns a home. 

However, it raises questions of whether prices are rising too much. 

Home prices have historically tracked wages and as we can see in the chart nearby, home prices have far outpaced wage growth.  Part of this may be due to low interest rates making the home more affordable, but it is still something to keep an eye on. 

We saw an interesting chart on economic data from Bloomberg.  There is an economic index called the Citi Economic Surprise Index, which tracks how economic data is faring relative to expectations. The index rises when economic data is better than economist expectations and falls on the opposite. 

As you can see in the chart below, the index has fallen sharply (the blue line), which means economic data has been well below expectations.  Notice how closely the stock market (the white line) has been following this index.  If this trend holds, the large drop in the Economic Index suggests a fall in stocks is possible. 

Finally, corporate earnings had their busiest week yet.  With about 60% of companies in the S&P 500 having reported, the results have been better than expected as earnings are on pace to rise 12.5% during the past year, according to Factset.  This is solidly above the 9% analysts originally expected and is a very respectable number. 


Next Week

Next week looks to be another busy one for both economic data and corporate earnings.  Though we’re just past the peak of earnings season, we’ll still get a slew of corporate results.

For economic data, we’ll get info on the strength of the service and manufacturing sectors, personal income and spending, factory orders, and the big report on employment comes on Friday. 


Investment Strategy

In the short run (a week to a couple weeks or so), stocks were on the cheap side last week, but the gains this week quickly put them to the expensive side.  We see more risk to the downside at this point in the short run.   

Looking out a little longer, our outlook remains unchanged.  We still have some caution on the market over possible bubbles formed over the years due to the central banks and the trillions they have printed as stimulus.  However, we believe new pro-business policies will be implemented that will negate or at least reduce the distortions caused by the stimulus.  We are unsure how this will eventually play out, but think the pro-growth policies will be a net positive for the economy.  

Bond prices are still on the high side and don’t look attractive in the short run.  

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.

Commentary for the week ending 4-21-17

Volatility picked up this week, with stocks closing in positive territory.  For the week, the Dow rose 0.5%, the S&P gained 0.9%, and the Nasdaq climbed a nice 1.8%.  Bond prices hit their highest level in five months as their yields fell.  Gold hit its highest level since November, though closed the week with a slight decline of 0.3%.  Oil broke below the $50 level with a loss of 6.7% to end at $49.63 per barrel.  The international Brent oil, used for much of our gas here in the East, fell to $52.05.

Source: Google Finance

After starting out the year on such a positive note, stocks have been stuck trending lower since the beginning of March.  We’ve talked about it often – investors were enthusiastic over the Trump pro-business economic policies, but recently began having doubts about them being implemented. 

Also weighing on investors’ minds lately were several geopolitical issues like North Korea, Syria, and the French election which could determine the fate of the Euro since several candidates support leaving the union (the first round of voting gets underway this weekend).  

Recent economic data has been softer, too, and that trend continued into this week.  We saw poor numbers on housing, an underwhelming industrial production figure, and several poor regional economic data surveys. 

The poor economic data has caused GDP estimates for the first quarter to be lowered.  The usually-accurate Atlanta Fed sees economic growth at a disappointing 0.5%. 

These concerns have caused investors to leave stocks and move to investments that typically do well when people are worried – things like bonds and gold.  In fact, Merrill Lynch puts out a monthly manager survey which tracks the actions of professional investment managers, and they found that these investors have the smallest amount of money allocated to stocks since 2008. 

The market clearly needs some good news to get back on track, and got a little dose of that this week.

First, corporate earnings started rolling in in earnest this week.  The bar is set very high here with analysts predicting the best quarter since 2011.  Results this week were fairly decent, too.  It is very early into earnings season, but results are on track to meet those high expectations.

Worth noting, though, is that companies who did not meet expectations saw their share prices punished.  This week we saw Johnson & Johnson, Goldman Sachs, and IBM take significant hits after they failed to meet estimates. 

Stocks also got a boost when it looked like a Trump economic policy got new life. 

Treasury Secretary Steve Mnuchen indicated that tax reform would be coming soon.  We’ve heard this before and failed to see any follow-through, but it was something the market wanted to hear.  Stocks shot higher.  As seen below, an index of companies with historically high tax rates did particularly well on the news. 

Finally, we have yet another example of the over-exuberance in the tech startup area.

Bloomberg ran a funny story (LINK) on a company called ‘Juicero’ that sells a $400 machine which makes fresh-squeezed juice. 

The business model is that customers purchase bags of a juice concoction from Juicero, then insert them into this squeezer which then squeezes the bag to produce a cup of fresh juice.  It has some big-name backers like Google and has raised almost $120 million from investors.

The funny thing Bloomberg found was that the $400 machine is entirely unnecessary.  People can take the bag of juice concoction and simply squeeze it with their bare hands to easily produce a cup of juice – no need for the expensive presser.  We wonder how investors ever thought this was a good idea in the first place.

Next Week

Next week looks to be a busy one.  We won’t get a lot of economic reports, but we’ll get some important ones.  The most important will be the GDP number which comes out on Friday.  We’ll also get info on durable goods, housing, and consumer confidence. 

The week will also be the busiest one of the season for earnings.  180 companies in the S&P 500 will report results, so we’ll get plenty of info on how corporations fared last quarter. 

The French primary election will be this weekend, too, so the results may add some volatility to the market.


Investment Strategy

As mentioned above, stocks have been in a downtrend since the beginning of March.  While there are many reasons to be worried, there are some signs the sell-off is overdone.  One example comes from a measure of volatility. 

Without getting too into the details, a good time to invest is when investors are betting the market is riskier right now than in future months. 

The nearby chart presents this graphically (the indicator is on top, the S&P 500 stock index is on the bottom).  Historically, each time the indicator dips below the blue line – when investors see more risk now than in the future – the market tends to rebound.  Hopefully this holds true this time.

So in the short term, we think the odds of a rebound have increased, but wouldn’t be surprised to see continued volatility. 

Our longer-term outlook remains unchanged.  We still have some caution on the market over possible bubbles formed over the years due to the central banks and the trillions they have printed as stimulus.  However, we believe new pro-business policies will be implemented that will negate or at least reduce the distortions caused by the stimulus.  We are unsure how this will eventually play out, but think the pro-growth policies will be a net positive for the economy.  

Bond prices are on the high side and don’t look attractive in the short run.  

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.

Commentary for the week ending 4-7-17

Please note: there will be no market commentary next week due to the Easter holiday.  Thank you.

Stocks were slightly lower on the week.  Through the close Friday, the Dow was down just 0.03%, the S&P was lower by 0.3%, and the Nasdaq fell 0.6%.  Bond prices rose as yields fell, with prices hitting the highest level in more than a month.  Gold moved higher, rising 0.4%.  Oil also moved higher, up 3.4% this week to $52.29 per barrel.  The international Brent rose to $55.26.

Source: Google Finance

There was a lot going on this week to affect the market, making it unusual to see them end the week with slight little change.  

One of the big topics was economic data.  With the month and quarter ending last week, several important reports started rolling in this week.  The main takeaway we saw with the data was that economic growth looks to be slowing. 

Two important reports on the strength of the service and manufacturing sectors of the economy showed a slight decrease from the previous month.  They are still at a high level relative to recent months, but it was a slowdown, nonetheless.  Also, a report showing a slowdown in auto sales was interpreted as weakness in the economy, too.

The big monthly report on employment was released on Friday and came in much lower than expected.

Economists expected to see 175,000 jobs added over the past month, only to be surprised when the number came in at just 98,000.  The two previous months saw significant reductions, too.  These numbers were very disappointing and stocks immediately moved lower on the news. 

The Fed was also in the news this week with the release of the minutes from their latest meeting. 

One focus of the minutes was on the path of future interest rate hikes, which still looks to be two or three for the year.  The other focus was on how to shrink the size of their balance sheet, which was something they hadn’t talked much about until now. 

The “balance sheet” is the bonds the Fed owns, which they printed money to buy in order to bring borrowing rates down and boost the economy.  They printed $3.5 trillion over the last eight years in order to do this.  Without getting into the details, the policy helped boost the market, but a shrinking of the balance sheet would be a headwind for the market to compete with. 

We don’t think much about how big these numbers actually are, but if you were to count one second for every dollar they printed, it would take you 111,000 years.  These are massive numbers and a reminder of how extreme our stimulus polices have been. 

Finally, with this being Masters week, it’s time for some interesting Masters info.  According to Golf Magazine, there is a natural spring that runs through the 13th and 14th holes of Augusta National that spurts gold dust when it rains.  Looks like golf may not be the only way to make some money there!

Next Week

Next week looks to be another busy one.  We’ll get several important economic reports, including data on inflation, retail sales, and employment. 

Earnings for the first quarter will begin coming in next week, too.  Analysts see 9.1% growth in first quarter, which would be the highest in six years.  Revenue (what a company earned through sales) looks solid, too, expected to rise 7.1%.  It would be good to see revenue growth picking up, since so much of the earnings increases we have seen came from cutting costs, not higher sales. 


Investment Strategy

With the lack of change in the market this week, there is no change to our investment strategy.  The window in which the broad market looked like an attractive buy (in the short term) came and went, and stocks no longer look attractive.  However, we think the momentum is still to the upside. 

We remain optimistic on the longer term, too.  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 are on the high side and don’t look attractive in the short run.  

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.

Commentary for the week ending 3-31-17

Markets turned in nice gains this week.  Through Friday’s close, the Dow gained 0.3%, the S&P added 0.8%, and the Nasdaq did particularly well with a 1.4% rise.  Gold took a turn lower, falling a slight 0.1%.  Oil reversed its recent decline, rising 5.9% this week to $50.85 per barrel.  The international Brent rose to $52.74.

Source: Google Finance

Stocks entered the week facing headwinds as last week’s selling carried into this week.  The decline ended convincingly on Tuesday, but before it did, the Dow saw eight-straight down days.  This is something that hasn’t happened in six years.  Of course, the decline six years ago was 6.7% – this recent decline was a loss of only 1.9%.  In terms of corrections, this was very mild. 

This week also marked the end of the first quarter, which was a very solid one.  The Dow rose 4.6%, the S&P gained 5.6%, and the star performer was the Nasdaq, which saw a 9.8% gain. 

The quarter was remarkable, too, in just how quiet it was.  In fact, it was the least volatile quarter since the 1960’s according to the Dow Jones Market Data Group.  The S&P averaged a move of just 0.3% on a daily basis, the lowest since 1965.  It was quiet out there!

One of the more interesting stories we saw this week was about the divergence between “soft” and “hard” economic data. 

“Soft” economic reports are generally survey-related ones that measure things like optimism, outlook, and expectations.  These have been very solid, like reports that CEO’s are the most optimistic in seven years according to the Business Roundtable, small business optimism soared after the election, and a report on consumer confidence this week hit its highest level since 2000. 

“Hard” economic reports, on the other hand, are the reports with actual quantifiable data, which have been weak.  Retail sales are slowing, business investment is lagging, and this week we learned the GDP for 2016 was just 1.6%. 

According to Morgan Stanley, this gap between “soft” (the tan line) and “hard” data (the blue line) has never been wider. 

This difference is worth noting.  The market has more of a solid foundation if it rallies on actual positive economic data.  The rally we have had is based on expectations, which is less-stable footing for the markets.  As we saw with the failure to pass the health care law, the market can quickly move lower if expectations are not met.  

Finally, we haven’t talked much about Europe lately but there was news out of England worth noting.  The country formally began the process of leaving the European Union this week.  This wasn’t unexpected, so it had no noticeable impact on the markets.  However, the divorce process could get messy and add some volatility to the markets in the months ahead.


Next Week

With both the end of the month and quarter this week, economic reports for those periods will start rolling in next week.  We’ll get info on the strength of the service and manufacturing sectors, trade, and employment.  We’ll also get several Fed speakers and the minutes from their latest meeting. 


Investment Strategy

The window in which the broad market looked like an attractive buy (in the short term) came and went, and stocks no longer look attractive.  However, we think the momentum is still to the upside. 

We remain optimistic on the longer term, too.  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 are on the high side and don’t look attractive in the short run.  

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.