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.
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.
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.
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.
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.
