Commentary for the week ending 1-26-18

It was another week higher for stocks, but another week with more volatility.  Through Friday’s close, the Dow rose 2.1%, the S&P gained 2.2%, and Nasdaq was higher by 2.3%.  Falling bond prices (and rising yields) have been a big story for weeks, but the trend stalled this week.  Gold saw a positive week, up 1.2%.  Oil prices again hit their highest level in three years, up 4.5% this week to close at $66.24 per barrel.  The international Brent oil moved own to $70.29.

Markets turned in another week of record gains, but it looked like some jitters crept into trading.  There were several days where stocks had solid gains early in the day, only for them to turn and move lower into the close. 

Of course, “volatile” is a relative term these days.  Stocks are still quiet on a historical basis.  The image below shows that it’s been nearly 100 days without a decline of more than 0.6% in the S&P 500.  The chart shows just how rare this is.   

Even more incredibly, it’s been almost 200 days since we’ve had back-to-back losses of more than 0.25% in the S&P.  The chart below again shows how rare these conditions are.   

Getting into the events of the week, much of the attention was on business and political leaders gathered in Davos for the World Economic Forum.  Attendees gather here annually to discuss the pressing issues of the world – though we often question if anything tangible ever comes from these events.

A big topic of discussion has been the strength of the U.S. dollar.  Heading into this week, the dollar was already at three-year lows. 

This is unusual since currencies tend to reflect the strength of an economy and with ours improving, normally the dollar would be strengthening. 

Why does this matter?  First, it makes commodities and imports more expensive because it takes more dollars to buy that product.  This is part of the reason why oil prices have risen.  The weak dollar also reduces the amount of investment in the U.S. by foreign investors and makes our borrowing costs rise (through higher interest rates).   

However, large U.S. businesses like a weaker currency because it makes their products more attractive to shoppers overseas since they will cost less. 

At any rate, the topic of the dollar dominated headlines after Treasury Secretary Steve Mnuchen was quoted as saying the weaker dollar was good for the U.S. and helps our exports.   This was newsworthy because historically Treasury Secretary’s only say the U.S. supports a stronger dollar.  The dollar dropped even further after the reports. 

After the news broke, Secretary Mnuchen quickly noted that these comments were taken out of context.  He said the U.S. does support a strong dollar – in the long run – but that we have little impact on the currency in the short run – which is true, though is not often mentioned. 

President Trump was also quick to clarify and the remarks halted the dollar’s decline. 

Back here at home, investors had their eyes on several economic reports.  Data on housing showed the pace of homes sales declined last month, but capped off the best year since 2006 for existing home sales and 2007 for new home sales.  Also, data on durable goods showed an increase from the previous month. 

The big report came on Friday with the release of fourth quarter GDP data.  Economists were expecting a number around 3%, only to be disappointed with a print of 2.6%.  Digging into the individual components, however, showed there was a lot of strength.  The big detractor to the GDP number was imports.  Last quarter had the largest amount of imports since 2010, which took almost two points off that 2.6% number. 

Next Week

Next week will be a busy one.  On the economic side, we’ll get info on housing, personal income and spending, the strength of the manufacturing sector, and the always-important employment report.  The Fed will also be holding a policy meeting.  No changes to their policy are expected, but investors will be watching for clues on future policy changes. 

We’re also in the busy part of earnings season, so there will be a lot of company-specific news for investors to digest.

Finally, the State of the Union address from President Trump is likely to have people talking.  His performance this week in Davos was solid and helped the markets and will likely do the same with a solid performance again this week. 


Investment Strategy

We continue to believe markets are at very high levels here.  Last week some of the indicators we follow showed stalling, but they improved again this week.  There doesn’t seem to be a lot of red flags out there for the market (which in itself could be seen as a red flag). We don’t see a large drop on the horizon, but are cautious about putting new money into the broader market at this point. 

We are positive on the market and economy in the longer term, too, as pro-business policies will be beneficial to businesses. 

Bond prices have trended lower (and yields higher) the last few months and are now around their lowest level in three years.  We’ll be looking to see if buyers step in here to buy at these low prices and higher yields as they have done in the past, or if this is a shift in the bond market and prices will keep falling.  

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 prefer developed markets to emerging ones at this time.


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 1-19-18

Stocks again closed at record highs this week, but volatility returned to trading.  For the week, the Dow was higher by 1.0%, the S&P rose 0.9%, and Nasdaq gained 1.0%.  Bonds were again a big story this week, with prices moving much lower as yields rose.  Gold moved slightly lower, off 0.3%.  Oil prices came off their highest level in more than three years, down 1.1% this week to close at $63.57 per barrel.  The international Brent oil moved own to $68.65.

In a rare turn of events, the market did not march straight higher this week.  Volatility crept back into trading and stocks saw some relatively large swings between gains and losses.  The Dow rose over 280 points early Tuesday, only to close the day lower.  This was followed by a gain of more than 300 points Wednesday, a drop of nearly 100 Thursday, and a 50 point gain Friday. 

Amid the volatility, markets closed the week at new record highs.  The Dow also notched its fastest ever rise of 1,000 points.  Last Tuesday the Dow hit 25,000 and this Tuesday it hit 26,000.  Of course, the percentage gain gets smaller with every 1,000 point rise, but it is still noteworthy. 

As we can see in the chart below, the rise in the market has accelerated since the beginning of the year. 

A lot of new money has entered the market since the beginning of the year.  Bank of America Merrill Lynch reported that last week was the sixth-biggest ever for money flowing into stock funds.  They also report that cash balances among portfolio managers is at a five-year low.  This indicates money has come out of cash and into stocks. 

These two points and the rapid rise in the market does give us pause.  We’ll discuss this more in the “Investment Strategy” section below. 

Bonds continued to be a big story this week.  Prices have been falling and yields rising steadily since the beginning of the year, with yields now at their highest level in three years. 

There’ve been a number of reasons cited for the falling bond prices.  One is simply money is coming out of stocks and into bonds.  Investors see economic growth picking up, prompting them to pull money out of safe havens like bonds and into riskier investments like stocks. 

Global economic growth is improving, too, which may lead to foreign central banks pulling back on their stimulus sooner than expected.  Their stimulus has kept bond prices high, so a pullback would cause bond prices to move lower and yields rise. 

With these higher bond yields, investors looking for income can now earn higher interest by investing in bonds.  Previously, investors looking for income went to stock sectors that paid higher dividends – sectors like utilities, telecoms, real estate, etc.  Investors are now pulling money out of those dividend paying stocks and putting money into relatively safer bonds who are providing more income.

The sectors that have fared the worst this year have been those dividend-paying sectors, as can be seen in the chart below. 

Economic data was relatively light this week and the reports we did receive were mixed.  Industrial production ticked higher and stands at levels last seen in 2014.  Also, the Fed’s Beige Book (which gives an anecdotal look at the strength of the economy) continued to show “modest to moderate” growth, but had a more optimistic outlook for 2018.

On the negative side, housing data was poor and several regional economic reports showed weakness. 

These negative reports have caused a reversal in the Citi Economic Surprise Index, which we’ve often mentioned in the past.  The index 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.  It is also fairly correlated to the stock market.  

As you can see in the chart below, the index has seemed to top and may be heading lower, which could be a bad sign for stocks. 

Lastly, the potential government shutdown made headlines late in the week as the odds of a shutdown increased.  The news may have added to some of the volatility in the markets this week.  However, shutdowns have historically had little impact on the market.  Let’s hope that holds true this time as well.

Next Week

We enter the meat of earnings season next week with many big names reporting.  By the end of the week, about one-fifth of companies in the S&P 500 will have reported results.

As for economic data, we’ll get more info on housing, durable goods, and the big GDP report for the fourth quarter. 


Investment Strategy

As mentioned earlier, markets are at very high levels now.  We wouldn’t be surprised to see a pause or slight decline here, but we don’t see a large drop on the horizon.  We also wouldn’t be surprised to see markets move higher, too, but now doesn’t look like a great time to put new money in.  Insurance to protect portfolios from a move lower, like protective puts, are very cheap presently and may make sense for some investors.

We are positive on the market and economy in the longer term, too, as pro-business policies will be beneficial to businesses. 

Bond prices have trended lower (and yields higher) the last few months and are now at their lowest level in three years, as mentioned earlier.  We’ll be looking to see if buyers step in here to buy at these low prices and higher yields as they have done in the past, or if this is a shift in the bond market and prices will keep falling.  

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 prefer developed markets to emerging ones at this time.


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 1-12-18

At the risk of sounding redundant – it was another record week for stocks.  Through Friday’s close, the Dow was higher by 2.0%, the S&P gained 1.6%, and Nasdaq added 1.7%. Bonds were a big story this week, with prices moving much lower as yields rose.  Gold had another positive week, up 1.2%.  Oil prices hit their highest level in more than three years, up 4.8% on the week to close at $64.40 per barrel.  The international Brent oil moved up to $69.81.

The record rally for stocks continues, with markets having their best start to a year since 1964.  Again, there wasn’t much news driving stocks higher this week.  Instead it’s a continuation of those favorable conditions for the markets – solid economic growth, pro-business economic reforms, and rising corporate earnings.   

The recently passed tax law has played a big role in the markets ascent.  Companies will pay less in taxes so more money will become profits.  This boosts stock prices. 

We’re also seeing many companies announce plans to give that extra money to their employees through higher wages and bonuses, like Wal-Mart did this week.  This gives a boost to the economy, which is also good for markets. 

We don’t talk about bonds too often, but they were a big story this week.  Bond prices have fallen the last several months (so yields have risen), but the selling has increased sharply since the beginning of the year.  Much of this is money coming out of the bond market and going into the stock market. 

A story this week sharply added to the selling, though.  News reports suggested that China would slow or stop their purchases of U.S. bonds (purchasing bonds of other countries is common).  Bond prices fell sharply on the news. 

However, China denied the reports, calling it “fake news.”  Bond prices moderated a bit from there, but never fully recovered. 

The pickup in economic growth has many investors wondering if inflation will also start increasing.  Growth and wages are rising (the news from Wal-Mart this week adds fuel to this story) and commodity prices have begun to rise, so it’s fitting that many investors see inflation on the horizon.

Inflation reports released this week suggested a firming in inflation, but not really an acceleration.  Inflation at the producer level (PPI) ticked slightly lower while inflation at the consumer level (CPI) ticked slightly higher.  On a year-over-year basis, both remain near the 2% level, which is the Fed’s goal before they pull back further on their stimulus. 

As for other economic data this week, retail sales rose again last month.  The figures for the previous two months were also revised higher, which resulted in a solid 5.5% growth in sales over the fourth quarter. 

On the negative side, an employment report (the JOLTs report) showed a slight decline in both the amount of job openings and hirings from the previous month, though they both still stand near historic highs.  Also, small business optimism ticked lower, but it, too, still stands near historic highs. 

Lastly, corporate earnings for the fourth quarter began rolling in this week.  Several big banks reported results on Friday, showing mixed results. 

This quarter will be a bit squirrely due to companies taking charges and repositioning due to the tax law.  However, analysts still predict an 11% increase in earnings according to Factset, which is a pretty high bar. 


Next Week

Next week will be fairly quiet for economic data, where we’ll get info on housing, industrial production, and the Fed’s Beige Book, which gives an anecdotal look at the strength of the economy. 

Investors will be watching corporate earnings, though, as earnings season really gets underway next week. 


Investment Strategy

The stock markets continue to show strength here.  While we think they are on the expensive side in the short run, many leading indicators we follow continue to show strength and suggest a large decline is unlikely. 

Also showing that the market is strong was a selloff early Wednesday that had the Dow down by more than 100 points.  The decline was quickly bought and stocks closed the day relatively unchanged.  This tells us the market still has buyers that can push the market higher. 

Our only concern is that everyone seems to be optimistic at this point.  It’s at points of extreme optimism and pessimism that markets tend to reverse. 

Bond prices have trended lower (and yields higher) the last few months, as mentioned earlier.  We’ll be looking to see if buyers step in here to buy the higher yields as they have done in the past, or if this is a shift in the bond market and prices will keep falling.  

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 prefer developed markets to emerging ones at this time.


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 1-5-18

Stocks ended the first week of the year at new record highs.  For the week, the Dow rose 2.3%, the S&P gained 2.6%, and Nasdaq added a solid 3.4%. Bond prices didn’t see a lot of change on the week, but remain around the lowest level of the past few months.  Gold continued to rise, up 0.8%.  Oil prices hit their highest level in three years, up 1.9% on the week to close at $61.59 per barrel.  The international Brent oil moved up to $67.79.

Welcome to 2018!  We hope you had a nice holiday season. 

As we enter a new year for the markets, we can only hope it will be as good as 2017.  The year was one for the record books, not just by hitting new highs, but for the lack of volatility.  The S&P didn’t see a single down month and the Dow only had 10 days with a move of more than 1%.  That is historic. 

The steady rise in the S&P for 2017 can be seen in this chart:

After this remarkable run, it is natural that some investors would be cautious.  History has shown us, though, that markets often keep rising after a big year. 

According to research done by Bespoke Investments, the S&P 500 has seen 32 years with gains of more than 20% (the S&P was up 22.5% in 2017 when including dividends).  In the year that followed, the market was up two out of three times and had an average gain of 10.5%.  Five times it was up more than 20%!

Getting into the week, stocks kicked off the year in historic fashion, hitting record highs every day.  The last time this happened was 1964 when it opened the year with six-straight records. 

Several important economic reports were released this week and the results leaned to the negative side.  The strength of the manufacturing sector hit its highest level since 2004, but the service sector weakened to a four-month low. 

The employment report for December was also much weaker than expected.  Estimates were for 180,000 jobs to be added, but the number came in at only 148,000.  This is a considerable slowdown from the 228,000 added last month. 

Lastly, the Fed was also in the news as the minutes from their December meeting were released.  They didn’t reveal anything new as the Fed continues to see a gradual increase in interest rates over the next year.  They see growing economic growth with a boost from the tax cuts, but don’t suggest stronger growth will cause them to raise rates at a faster pace. 

Funny enough, the disappointing jobs report this week reduced the odds of the Fed raising rates at a faster pace.  This was seen as a positive by the market and helped stocks rise. 


Next Week

Corporate earnings for the fourth quarter start rolling in next week, with many banks in particular reporting results.  Next week will be fairly busy for economic data, too.  Of the notable reports, we’ll get info on inflation, retail sales, and employment.


Investment Strategy

The turn of the calendar often prompts people to think about changing their investment strategies, but the dynamics of the markets don’t change because of the calendar.  We still see strong economic growth, solid corporate earnings, and a pro-business government – all of which are long-term positives. 

Stocks look to be on the expensive side in the short-term, though this doesn’t mean they can’t keep rising from here.  We’re not seeing a lot to worry about at this point, which is reflected in some of our indicators we often show here:

Bond prices have trended lower (and yields higher) the last few months.  We’ll be looking to see if buyers step in here to buy the higher yields as they have done in the past, or if this is a shift in the bond market and prices will keep falling.  

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 prefer developed markets to emerging ones at this time.


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.