Stocks continued their march higher this week, closing at record highs. Through Friday’s close, the Dow rose 1.3%, the S&P gained 0.9%, and the Nasdaq was higher by 1.4%. Bond prices closed the week relatively unchanged. Gold took a turn higher, up 0.8%. Oil prices closed the week relatively unchanged after gains early in the week, closing down just 0.03% to $57.36 per barrel. The international Brent oil moved slightly lower to close at $63.25.
There were a few different stories making headlines this week, though it was hard to tell if they were sending the market higher or if it was just a continuation of the upward trend we’ve been seeing lately.
The big story of the week was the tax bill working its way through Congress, where a tentative agreement on the bill’s details was reached between the House and Senate.
Looking at the details, the corporate side still looks pretty good. The tax rate won’t be 20%, but 21%, and it will go into effect next year along with a host of other benefits. This would be undoubtedly good for corporations and earnings.
The individual side isn’t great, but looks better than earlier plans and will be a net positive.
As has been the case for much of this process, however, it was two steps forward and one step back. Shortly after announcing the details, some Senators announced they would withhold their support over last minute demands.
The big story of the week was the tax bill working its way through Congress, where a tentative agreement on the bill’s details was reached between the House and Senate.
Looking at the details, the corporate side still looks pretty good. The tax rate won’t be 20%, but 21%, and it will go into effect next year along with a host of other benefits. This would be undoubtedly good for corporations and earnings.
The individual side isn’t great, but looks better than earlier plans and will be a net positive.
As has been the case for much of this process, however, it was two steps forward and one step back. Shortly after announcing the details, some Senators announced they would withhold their support over last minute demands.
The news caused markets to fall, especially the banking sector and small cap stocks, which are expected to benefit the most from a tax cut.
As it stands now, they look to have enough votes to pass and a final vote is scheduled for next Tuesday. However, nothing is certain with this bunch.
The Fed was also in the news this week as they held their final policy meeting of the year. They announced an increase in interest rates (the cost to borrow money), which was largely expected and saw no reaction in the market.
Their projections for next year did include an upgrade in their economic growth forecast, which gave a boost to the market.
Economic data released this week was very positive. Retail sales were strong last month and have grown at 5.8% over the past year, which is the best pace since 2012.
Small business optimism rose to its highest level since 1983.
As it stands now, they look to have enough votes to pass and a final vote is scheduled for next Tuesday. However, nothing is certain with this bunch.
The Fed was also in the news this week as they held their final policy meeting of the year. They announced an increase in interest rates (the cost to borrow money), which was largely expected and saw no reaction in the market.
Their projections for next year did include an upgrade in their economic growth forecast, which gave a boost to the market.
Economic data released this week was very positive. Retail sales were strong last month and have grown at 5.8% over the past year, which is the best pace since 2012.
Small business optimism rose to its highest level since 1983.
The next chart is an interesting comparison between small business optimism and GDP. They tend to track fairly closely but as you can see over the last few months, optimism is very high while GDP remains low. If the pattern continues, it is possible that GDP will rise considerably – or optimism will fall sharply.
Sticking with the optimism theme, Gallup reported that investor optimism is at the highest level since 1999.
Inflation reports also showed increases, though not as large as forecasted. Inflation metrics that exclude food and energy moderated, which is important to note since this is the way the Fed prefers to measure inflation.
Lastly, we’ll talk about bitcoin since it seems like everyone is talking about bitcoin.
This week was an important one for the digital currency as a US market opened to trade their futures (without getting into the details, basically “futures” are a way to bet on their future price). This added credibility to bitcoin, which is important for a currency you cannot see or touch.
The price of bitcoin rose again this week and has risen so much that it is being compared to notable bubbles of the past. As you can see in the chart below, its rapid ascent has made it the largest bubble in the history of the world. Of course, it can only be considered a bubble if it were to pop, which remains to be seen. Bubbles rarely pop when everyone expects it to, as they are now.
The chart may be a little difficult to read, but bitcoin is the red line, which recently surpassed the tulip bulb mania of the 1600’s.
This week was an important one for the digital currency as a US market opened to trade their futures (without getting into the details, basically “futures” are a way to bet on their future price). This added credibility to bitcoin, which is important for a currency you cannot see or touch.
The price of bitcoin rose again this week and has risen so much that it is being compared to notable bubbles of the past. As you can see in the chart below, its rapid ascent has made it the largest bubble in the history of the world. Of course, it can only be considered a bubble if it were to pop, which remains to be seen. Bubbles rarely pop when everyone expects it to, as they are now.
The chart may be a little difficult to read, but bitcoin is the red line, which recently surpassed the tulip bulb mania of the 1600’s.
This image seems appropriate for the holiday season:
Next Week
Washington and the tax reform will likely stay in the headlines next week and could add to market volatility.
As for economic reports, we’ll get info on housing, personal income and spending, and durable goods.
Investment Strategy
No change here. Stock prices remain on the high side at this time and we are hesitant to add new money here. We are still positive on the market and they could start a new leg higher if tax reform is implemented – but could just as easily move lower if it does not.
The market does have seasonal factors working in its favor here, too. December is historically the best month for stocks and has been higher about 75% of the time.
Our longer term outlook remains positive, but less rosy than it was a few months ago. We like seeing pro-business reforms come out of Washington, but they tend to get watered down as they move through Congress.
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.
Washington and the tax reform will likely stay in the headlines next week and could add to market volatility.
As for economic reports, we’ll get info on housing, personal income and spending, and durable goods.
Investment Strategy
No change here. Stock prices remain on the high side at this time and we are hesitant to add new money here. We are still positive on the market and they could start a new leg higher if tax reform is implemented – but could just as easily move lower if it does not.
The market does have seasonal factors working in its favor here, too. December is historically the best month for stocks and has been higher about 75% of the time.
Our longer term outlook remains positive, but less rosy than it was a few months ago. We like seeing pro-business reforms come out of Washington, but they tend to get watered down as they move through Congress.
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.
