Commentary for the week ending 8-25-17

Markets found some stability this week after several rough weeks.  Through the Friday close, the Dow rose 0.6%, the S&P gained 0.7%, and the Nasdaq was higher by 0.8%.  Bond prices did not see a lot of activity as they remained on the high side and yields on the low side.  Gold closed not far from where it started, up 0.3%.  Oil saw a lot of activity and closed down 1.3% to $47.86 per barrel.  The international Brent oil ended the week at $52.35.

Source: Google Finance

Markets were much calmer this week and the big moves we had were to the upside.  This provided some time for the wounds of the last two week to heal.

Interestingly enough, the market still looks to be trading in-line with its historical average.  This could be a problem if the trend holds as we are entering what is historically the weakest part of the year. 

The week was fairly uneventful in terms of market-moving news.  Washington continued to have an impact on the market as stocks rose on talks of possible tax reforms and fell on concerns about the approaching debt ceiling and a potential government shutdown. 

The Fed was a focus, too, as all eyes were on their annual Jackson Hole symposium Friday and Saturday.  This symposium is important because new central bank policy ideas have been announced here in the past, so investors were paying attention for anything new. 

In particular, central banks have expressed a desire to pull back on their stimulus programs, so investors were looking for any new details on policy tightening.  Investors don’t seem to think further tightening will come this year as the odds of another Fed interest rate hike stands at just 40%. 

By the conclusion of the event we learned little new.  Fed chief Janet Yellen gave a speech on the financial crisis and the regulatory reforms that were implemented as a response while avoiding discussion of current Fed policy.  The head of the European Central Bank made similar comments while suggesting they will have stimulus for longer than many expect. 

Switching gears, economic data this week was light but the data we received was disappointing.  Home sales continue to fall, but interestingly enough, home prices continue to rise.  Also, durable goods sales saw a large drop from the previous month of 6.8%, though it didn’t look that bad when you break down the individual components.

Despite the poor data this week, the economic picture looks to be improving.   We’ve talked recently about 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 seen a significant improvement, which means economic data has been well above expectations.

Another sign of economic growth is the performance of “base” metals.  These metals are commonly used in commercial and industrial purposes and include metals like copper, lead, zinc, nickel, and others.  Investors see demand for these metals as a sign of economic growth since they are used to make so many things. 

These base metals have been climbing over the last several months and many are trading at the highest level in several years.  The chart below shows the performance of copper, which is trading at its highest level in three years.  This is a positive development. 

Next Week

With the month ending next week, we’ll get a few important economic reports, including the monthly employment figures and data on the manufacturing sector.  We’ll also get info on personal income and spending, consumer confidence, and inventories. 


Investment Strategy

Stocks still appear to be on the cheap side on a short term basis.  We think a move higher looks more likely than a further decline.  We are cautious, though, since we are entering a historically volatile part of the year for stocks. 

As for our longer term view, our outlook is a little less rosy but still positive.  We were hoping to see some pro-business reforms being implemented in Washington – lower taxes, regulations, etc. – but the likelihood of any significant reforms has diminished.  The overall business climate is still favorable, which we think will still help the market. 

Bond prices are around the high end of the range they have been trading in (so yields are on the low end).  We believe yields will stay low and prices high for the foreseeable future, but don’t see a lot of upside potential in their prices 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.


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 8-18-17

It was another rough week for the market.  Through the close Friday, the Dow was lower by 0.8%, the S&P lost 0.7%, and the Nasdaq fell 0.6%.  Investors seeking safety pushed bond prices higher as yields went lower.  Gold moved slightly lower on the week, off 0.3%.  Oil was also lower, down 0.3% to $48.73 per barrel.  The international Brent oil closed at $52.86.

Source: Google Finance

This week was an unusual one in that we had the best day for stocks since April and also had the worst day since May.  It’s safe to say volatility has returned. 

There were many stories driving the markets this week.  Washington, the Fed, corporate earnings, and the terror attack in Barcelona all played a part. 

News out of Washington consumed most of the oxygen, but it didn’t have much impact on the market as stocks were higher while the drama unfolded. 

The early rise in stocks could at least partially be attributed to cooling tensions in North Korea over the weekend and the “buy-the-dippers” moving back into the market.  It wasn’t until later in the week that cracks emerged. 

First, there were rumors that President Trump’s chief economic advisor, Gary Cohn, would be leaving the administration.  He is a very pro-growth, pro-business and his departure was a worry to the market.  The rumor was incorrect and quickly refuted and the market rebounded as a result.

The reaction in the market shows how badly investors want pro-business reforms.  Unfortunately those reforms seem less and less likely.  Companies in a high tax bracket are a good proxy for pro-business policies since they stand to benefit the most.  As you can see in the chart below, they rose immediately after the election but have been losing ground ever since.  

The Fed also weighed on the market this week.  The minutes from their latest policy meeting were released and showed a split between members who think the Fed should continue to pull back on its stimulus policy and those who are taking more of a “wait-and-see” approach.  The Fed likes to have more consensus before changing policy, so the odds of another reduction in stimulus by raising interest rates (which will make it more costly to borrow money) have fallen sharply.

Normally this would make the market happy since it means the stimulus is likely to be around longer.  However, some comments in the minutes caught investors off-guard. 

From the minutes:  “Vulnerabilities associated with asset valuation pressures had edged up from notable to elevated.”  This means worries are growing that their policies are pushing markets too high and creating bubbles.  This type of language is new and signals the Fed may not be interested in pushing markets higher or supporting them should there be another correction.  

Also weighing on the market was corporate earnings.  Earnings have been very good so far, rising about 10% according to Factset.  This has helped the markets move higher recently.  However, some investors believe this is the peak of earnings and they will start moving lower in the coming quarters.  Several companies warned about future earnings and investors are starting to take notice. 

It wasn’t all bad news this week.  Economic data was mostly positive.  Retail sales came in at their best level since December and industrial production rose for another month. 

This has caused economists to raise their GDP forecasts for the quarter.  Below is the forecast from the Atlanta Fed’s “GDP Now” which has been a fairly accurate predictor of GDP.  The Atlanta Fed’s prediction is the brown line while the consensus of other economists is the blue shaded region. 

Finally, it looks like the eagles have returned to their nest outside our office.  The nest had been vacant for several weeks, but it doesn’t look like the ospreys which formerly occupied the nest are ready to leave and are putting up a fight. 

Next Week

Economic data will be light next week.  We’ll get some info on housing and durable goods, and that’s about it. 

The big news will come from the central banks.  The Fed is holding their annual symposium in Jackson Hole and policy changes are often discussed at the event.  Leaders of our Fed and the European Central Bank will hold discussions and investors will be watching closely. 


Investment Strategy

We weren’t surprised to see stocks rebound higher early in the week after last week’s selloff.  However, we were surprised when stocks sold off so strongly later in the week. 

One item we’re keeping an eye on is market breadth.  “Breadth,” without getting too specific, is the amount of stocks moving higher versus ones moving lower.  

The chart below shows that starting in late July, more and more stocks were moving lower and the amount of bullish (or positive) stocks and the amount of stocks trading below their recent averages has also been trending lower.  Yet the market remained high.  This is a red flag.  We would like to see these improve before we get too confident of a rebound.  

There are a number of stocks that are trading at attractive levels to us on a short-term basis.  As mentioned above, though, we remain cautious as there’s still some weakness out there and we’re also approaching a volatile period for the market, so we are keeping a short-term perspective here.    

As for our longer term view, our outlook is a little less rosy but still positive.  We were hoping to see some pro-business reforms being implemented in Washington – lower taxes, regulations, etc. – but the likelihood of any significant reforms has diminished.  The overall business climate is still favorable, which we think will still help the market. 

Bond prices have risen and their yields falling, and we believe yields will stay low and prices high for the foreseeable future. 

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 8-11-17

Markets turned in their worst week in months as volatility returned to stocks.  For the week, the Dow fell 1.1%, the S&P lost 1.4%, and the Nasdaq fared the worst with a 1.5% drop.  Bond prices moved higher as yields fell.  Gold had a nice week, rising 2.4%.  Oil turned lower, down 1.6% to $48.70 per barrel.  The international Brent oil moved down to $52.05.

Source: Google Finance

What started out as a nice week for stocks ended up being the worst week since March.   Before getting into the decline, it’s important to discuss where the market was before heading lower because it held some clues that a decline may be coming. 

The Dow had risen steadily for 10-straight days through Monday while notching record highs along the way.  This made investors very complacent with little fear of a downturn.

The VIX Index, which is considered a “fear gauge” since it rises when there is more fear in the market, recently hit levels not seen in over two decades and traded not far from there early this week.  Extreme levels of fear or complacency are often the times when reversals do occur. 

We also saw a lack of trading volume as stocks reached these new highs.  High trading volume shows conviction, so the lack of trading volume suggested doubts about these record highs.  In fact, at one point the largest index fund in the world, the SPY S&P Index Fund, had the lowest amount of shares traded since 2006.  That’s very quiet!

With a market rising 10 days on such little volatility, low volume, and extreme complacency, some investors were getting jittery and looking for a reason to sell.  The rhetoric around North Korea this week provided that opportunity to sell and investors flooded for the exits.

Stocks sold off sharply and had their worst day since May.  Once quiet, that volatility index shot higher to its highest level since the election.   

While the decline was the worst in several months, a longer-term perspective keeps it in context.  The decline was modest and we still sit not far from record highs.

We should start to get used to the volatility, too, as we expect it to pick up in the coming weeks and months.  As you can see in the chart below, we are nearing what is historically the most volatile part of the year. 

Getting into some of the news for the week, earnings season is nearing a close and has been very good.  According to Factset, earnings are on pace to rise 11% while revenue (what a company earned through sales.  Earnings are what remain after costs are subtracted) looks to rise nearly 6%.  These are solid numbers and well above estimates, which is one reason stocks had fared so well recently. 

Economic data was mostly good this week, too.  An employment report showing the amount of job openings and hires, called the JOLTs report, showed a record high in the amount of jobs openings but indicated hiring has been flat. 

Worker productivity over the past quarter increased by more than expected, up 0.9%.  This number is rather modest, but is an improvement from last quarter’s flat reading.

Inflation was also in focus as inflation at the producer level declined and rose modestly at the consumer level, with both being below estimates.  These reports are important because they are a key metric for the Fed’s economic policy.  With the readings lower than expected, it suggests the Fed may keep its stimulus policy in place for longer. 

Lastly, small business optimism rose over the past month, with a worry about taxes remaining the number one concern. 

Next Week

Next week looks to be a little quieter for economic data.  Notable reports include info on retail sales and industrial production, plus info on housing. 

Corporate earnings are winding down, but we’ll still hear from some big names like Wal-Mart and Home Depot.

Also, the minutes from the latest Fed meeting will be released, though we aren’t expected to hear anything new.  Several regional Presidents will also be making speeches, which may tell us more about the Fed’s outlook for their economic policy.


Investment Strategy

The recent selloff pushed a number of stocks to attractive levels to us.  Prices are still on the high side for the longer run, but we wouldn’t be surprised to see markets move higher from here.  There’s still some weakness out there and we’re also approaching a volatile period for the market, so we are keeping a short-term perspective here.    

As for our longer term view, our outlook is a little less rosy but still positive.  We were hoping to see some pro-business reforms being implemented in Washington – lower taxes, regulations, etc. – but the likelihood of any significant reforms has diminished.  The overall business climate is still favorable, which we think will still help the market. 

Bond prices have risen and their yields falling, and we believe yields will stay low and prices high for the foreseeable future. 

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.