Stocks turned in their first negative week since the beginning of September. For the week, the Dow was lower by 0.5% while the S&P and Nasdaq both lost 0.2%. Bond prices were slightly lower as their yields inched higher. Gold moved higher, up 0.5%. Oil prices continued moving higher, reaching their highest price in two years and up 2.2% this week to $56.90 per barrel. The international Brent oil moved higher to close at $63.60.
Source: Google Finance
Stocks have had quite a run, rising for eight-straight weeks and notching a slew of records until this week. We expected to see a sharp pullback in the market at some point and we briefly got one on Thursday, where the market was down more than 1% before rallying to close at about half that level. Was that it for the pullback or is there more pain in store? We’ll discuss this more in the Investment Strategy section later in this commentary.
There was very little economic data this week and corporate earnings are winding down, so the attention shifted to Washington and their progress on the tax bill – where the lack of progress caused that Thursday pullback.
The Senate took up the bill this week after the House put together a plan the previous week. The Senate significantly watered down many of the bill’s benefits and caused investors to wonder if a plan would even be passed at all.
The chart below shows the faith investors are putting into tax reform, as companies who currently have high tax rates continue to falter. These stocks would be rising if meaningful tax reform was likely.
There was very little economic data this week and corporate earnings are winding down, so the attention shifted to Washington and their progress on the tax bill – where the lack of progress caused that Thursday pullback.
The Senate took up the bill this week after the House put together a plan the previous week. The Senate significantly watered down many of the bill’s benefits and caused investors to wonder if a plan would even be passed at all.
The chart below shows the faith investors are putting into tax reform, as companies who currently have high tax rates continue to falter. These stocks would be rising if meaningful tax reform was likely.
Some of the changes to the tax plan on the individual side include moving from three (or four) proposed tax brackets to seven, plus a slew of other complications. It’s unlikely we’ll only need one sheet of paper to do our taxes, like we had hoped.
The corporate side keeps the 20% tax rate – which is good – but the lower rate would be delayed by a year until 2019. We believe this could have serious negative consequences for the economy since businesses would simply delay any big plans until the lower rate kicks in.
The corporate side keeps the 20% tax rate – which is good – but the lower rate would be delayed by a year until 2019. We believe this could have serious negative consequences for the economy since businesses would simply delay any big plans until the lower rate kicks in.
The market sold off strongly as the details of the tax plan were released. This suggests the market has been pricing in tax reform and any further disappointment could push stocks even lower.
It also shows that President Trump’s economic policies are, in fact, having an impact on the market. This week marked one year since the Trump election and many commentators were on TV discussing his impact on the market. Their overall takeaway was he had little, if any, impact on stocks.
However, the reaction in the market this week shows this to not be true since the market moved lower when it looked like the tax plan was not progressing. Pro-business policies are being priced in and investors could be in for an unpleasant surprise if these policies are not enacted.
Switching gears, corporate earnings season is winding down a little more than 90% of companies in the S&P 500 have reported their third quarter results. Earnings are on pace to grow 6.4% according to Factset, which is above the 4.2% growth predicted at the beginning of earnings season.
Continuing with the corporate story, Apple – the most valuable company in the world – crossed the $900 billion valuation level this week (valuations come from the stock price multiplied by the amount of shares outstanding). It’s quickly approaching the $1 trillion level, which will come when their share price hit the $195 level (it’s currently trading at $174). It’s had quite a run!
It also shows that President Trump’s economic policies are, in fact, having an impact on the market. This week marked one year since the Trump election and many commentators were on TV discussing his impact on the market. Their overall takeaway was he had little, if any, impact on stocks.
However, the reaction in the market this week shows this to not be true since the market moved lower when it looked like the tax plan was not progressing. Pro-business policies are being priced in and investors could be in for an unpleasant surprise if these policies are not enacted.
Switching gears, corporate earnings season is winding down a little more than 90% of companies in the S&P 500 have reported their third quarter results. Earnings are on pace to grow 6.4% according to Factset, which is above the 4.2% growth predicted at the beginning of earnings season.
Continuing with the corporate story, Apple – the most valuable company in the world – crossed the $900 billion valuation level this week (valuations come from the stock price multiplied by the amount of shares outstanding). It’s quickly approaching the $1 trillion level, which will come when their share price hit the $195 level (it’s currently trading at $174). It’s had quite a run!
Next Week
Economic data picks up next week. We’ll get info on inflation, retail sales, industrial production, and housing. Corporate earnings are on the wane, but we’ll hear the results from several big retailers.
Washington will also be in focus as the House is expected to bring their version of the tax bill to the floor for a vote while the Senate works on their version. This could add a little volatility to the market.
Investment Strategy
This week we saw the large pullback in the market we had been expecting, but it didn’t last long. At one point Thursday, the Dow was down over 250 points, only to close the day down 100. Investors strongly bought the dip, which is a positive sign for the market.
That said, stocks are still on the expensive side in the short term and it’s just too soon to tell if Thursday’s selloff was that big decline we were looking for or if it was just the start. Looking at some of the indicators we have discussed the last few weeks, we can see some are still lower while others may be improving. This is something to keep an eye on.
Economic data picks up next week. We’ll get info on inflation, retail sales, industrial production, and housing. Corporate earnings are on the wane, but we’ll hear the results from several big retailers.
Washington will also be in focus as the House is expected to bring their version of the tax bill to the floor for a vote while the Senate works on their version. This could add a little volatility to the market.
Investment Strategy
This week we saw the large pullback in the market we had been expecting, but it didn’t last long. At one point Thursday, the Dow was down over 250 points, only to close the day down 100. Investors strongly bought the dip, which is a positive sign for the market.
That said, stocks are still on the expensive side in the short term and it’s just too soon to tell if Thursday’s selloff was that big decline we were looking for or if it was just the start. Looking at some of the indicators we have discussed the last few weeks, we can see some are still lower while others may be improving. This is something to keep an eye on.
Our longer term outlook remains positive, but less rosy than it was several months ago. We’re encouraged to see pro-business reforms coming out of Washington, although they are increasingly becoming watered-down. Additionally, companies have favored returning cash to shareholders through dividends and buybacks over the last several years and we believe the lack of reinvestment in their companies will weigh on earnings in the future.
Bond yields may move a bit higher from here and prices lower in the short run, but we don’t see a lot of movement here.
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.
Bond yields may move a bit higher from here and prices lower in the short run, but we don’t see a lot of movement here.
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.
