Commentary for the week ending 3-23-18

Please note: there will be no market commentary next week due to the Easter holiday.  Thank you.

It was another rough week for the stock market as it turned in its worst week in over two years.  Through Friday’s close, the Dow lost 5.7%, the S&P fell 6.0%, and the Nasdaq plunged 6.5%.  Bonds prices rose modestly again as their yields were lower, though they saw some large swings this week.  Gold moved higher, up 2.7%.  Oil also rose, rising 5.6% to close at $65.74 per barrel.  The international Brent oil rose $5 cents to $70.36.

Looking at a chart with a longer time-frame, we can see the market is now lower for the year and trading back to December levels.

This week was interesting in that the sectors that had done well recently fared the worst while the underperformers saw some life.  The tech and financial sectors had been pillars of this market, yet they were hit the hardest this week.  These two sectors make up 40% of the S&P 500, so their decline had a significant impact on the market. 

On the other hand, utility companies had been underperforming the market, only to fare the best this week – though it was still negative. 

There were several stories driving the markets this week, but we’ll start with tech as negative headlines from this sector set the tone for the week.

On Monday, Facebook dominated headlines with the news of their mishandling of user data, resulting in its worst day in four years.   Facebook is one of the largest tech names and is currently the second-most popular stock in the market (behind Amazon), so the news brought down the entire tech sector.  As mentioned earlier, tech makes up a large percentage of the broader market, so it had an outsized effect on the market. 

Below is a chart of the technology-related “FANG” stocks – Facebook, Amazon, Apple, Netflix, and Google.  We can see how much this group has outperformed the broader market – until this week.

Worries over protectionism remain a concern for investors, too.  This week, President Trump announced new tariffs on Chinese goods coming into our country as a response to their unfair trade practices. 

Concerns grew further when Chinese officials responded by announcing new tariffs on U.S. goods shipped to China.  Most investors agree that a response to unfair Chinese trade practices is needed, but there is always the worry over an escalating trade war. 

While the risks of a trade war remain low at this time, investors are starting to move to investments that will be least impacted from a trade war.  Small cap stocks, in particular, will hold up well since smaller companies typically don’t have exposure to foreign markets.  This chart shows how smaller stocks have done compare to larger ones:

Lastly, the Fed was in the news as they held one of their policy meetings.  As expected, they announced a further pullback in their stimulus program by raising interest rates (low interest rates make it easier and cheaper to borrow money and have helped push stock prices higher). 

However, investors were more interested in future policy actions by the Fed.  The Fed still expects to raise rates two more times this year – as expected – but estimated three rate hikes next year as the economy improves.  This is up from the two rate hikes originally projected.  This slight difference was seen as a negative by investors and added pressure to the market. 

We think these rising interest rates are key to the volatility in the markets.  Low rates act like a pain killer for the market.  As we saw the last several years during historically low interest rates, the market shrugged off any bad news and steadily moved higher with little volatility.  Now rates are rising and the pain killer is coming off, leaving it exposed to large swings on market-moving headlines. 


Next Week

There won’t be a lot of news to move the market next week, though that doesn’t mean it will be a quiet one for the markets – which will be shortened by the Good Friday holiday.  We’ll get only a handful of earnings and economic data will be light, where we’ll get more info on housing and personal income and spending.  There’s no telling what might come out of Washington, however, so it might be another volatile week. 


Investment Strategy

The strong selloff this week has stocks near oversold (cheap) territory from a short-term perspective.  However, the markets remain volatile and it’s anyone’s guess where the market will go in the short run so we’d be cautious here, though some buying on stability might not hurt. 

Looking out longer remains difficult, too.  While we think our economy is poised to do well, higher interest rates from the removal of the Fed’s stimulus introduces a new wrinkle and will add to the volatility.  It’s tough to predict where the market will go from here.   

As for bonds, their recent losses are making them look a little more attractive, too.  Yields may be starting to move lower so bond prices will rise as a result.   

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 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 3-16-18

It was a negative week for the stock market.  For the week, the Dow fell 1.5%, the S&P lost 1.2%, and the Nasdaq was down by 1.0%.  Bonds prices rose slightly as their yields were lower.  Old took a turn lower, off 0.7%.  Oil was up 0.3% to close at $62.25 per barrel.  The international Brent oil rose just 50 cents to $65.99.

The market was interesting this week in that stocks started every morning higher but closed in the red at the end of the day (except Friday).  In fact, the S&P 500 was down four-straight days for the first time this year. 

A lot of the movement in the market was again driven by news out of Washington – and it was a wide variety of news this week.  The news wasn’t necessarily negative, but created uncertainties and the market hates uncertainties. 

First, concerns remain over the steel and aluminum tariffs.  The broad nature of the tariffs is the primary concern here.  A response to unfair trade policies by other countries is understandable, but broad protectionism through tariffs risks provoking a trade war.  Comments from German chancellor Merkel this week about trade retaliation confirmed the reason for concern.  

Additional worries of protectionism were also raised this week when President Trump blocked the merger attempt between technology companies Broadcom and Qualcomm. 

Broadcom is based in Singapore and is attempting to take over/merge with U.S.-based Qualcomm.  However, there are worries that technology secrets could find their way into China’s hands.  Citing national security reasons, President Trump ordered a halt to this deal.  While it may or may not have been the right decision, it is the first time a President has put the brakes on a deal like this. 

Then we had a handful of White House staffing and advisor changes in significant positions.

Finally, there was the announcement that the special investigation under Mueller would be looking into President Trump’s business dealings. 

Altogether, these stories added to the uncertainty on the direction of policy coming out of Washington and as we said earlier – the market hates uncertainties.

Getting into economic data for the week, where all eyes were on the inflation reports that were due to be released.  These reports would be the last look at inflation before the Fed holds a policy meeting next week and inflation is one of their core factors in determining economic policy. 

The results showed inflation at the consumer level was in line with expectations with a slight tick higher while inflation at the producer level (the business level) was a bit higher.  However, the reports didn’t show significant inflation so the market saw it as a positive. 

Also on the positive side, industrial production improved significantly last month, notching its second-biggest gain in eight years. 

On the negative side, housing data came in sharply lower while retail sales declined slightly.  This decline in retail sales marked the third-straight month of declines, something that hasn’t happened in three years. 

These negative reports have economists lowering their expectations for economic growth this quarter.  Economists at the Atlanta Fed – who are usually fairly accurate – have lowered their estimate to below 2%.  Remember, the Trump administration is aiming for 3% growth, so this would be a major disappointment. 

Lastly, small business optimism now stands at the best level since the 1980’s. 

A major reason for the improvement is that business owners are no longer as worried about taxes and government regulations, which is a significant positive for the economy.

Next Week

All eyes will be on the Fed next week as they hold another policy meeting.  They are widely expected to announce a pullback in their stimulus by raising interest rates.  More importantly, investors will be watching for clues on future rate hikes.  An indication of more rate hikes is likely to weigh on the market.

Economic data will be quieter next week, where we’ll get info on housing and durable goods. 


Investment Strategy

Still no change here.  Stocks moved a bit lower this week, but still look to have room to run higher.  However, the markets remain volatile and it’s anyone’s guess where the market will go in the short run.  We’d be careful putting new money into the market here.  

Looking out longer is more difficult, too.  While we think our economy is poised to do well, higher interest rates from the removal of the Fed’s stimulus introduces a new wrinkle and will add to the volatility.  It’s tough to predict where the market will go from here.   

As for bonds, their recent losses are making them look a little more attractive, too.  Yields may be starting to move lower so bond prices will rise as a result.   

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 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 3-9-18

Stocks turned in a solid week.  Through the Friday close, the Dow rose 3.3%, the S&P gained 3.5%, and the Nasdaq hit a new record high with a 4.2% gain.  Bonds were relatively unchanged on the week.  Gold also turned in a relatively unchanged week, up just 0.1%.  Oil was higher, rising 1.5% to close at $62.12 per barrel.  The international Brent oil rose to 65.49.

This week was another one with big swings in the market.  While there have been big moves the last few weeks, stocks are still trading in the upward range they have been over the last two years. 

As for the news of the week, Washington had investors attention and news from DC was responsible for most of the moves in the market. 

Last week the possibility of tariffs rattled the markets as investors worried the protectionist tenor coming from Washington would result in a trade war with other countries.  No one wins in a trade war, which put pressure on stocks. 

Those trade concerns spilled into this week as the rhetoric from both sides picked up.  However, markets rose when investors learned the tariffs would be watered down to give concessions to Canada and Mexico. 

A trade war appears unlikely, but if one were to materialize, small and mid-cap stocks would fare the best.  They have little exposure to overseas markets and would not experience the penalties that a global company would face.  These sectors held up well throughout these tariff talks for this reason. 

The other news out of Washington driving the markets was the departure of Gary Cohn, the top economic advisor to President Trump.  He has “Street cred” in the eyes of investors – a former president of Goldman Sachs who is knowledgeable in finance and the markets and is seen as a voice of reason. 

News of his departure sent stocks down immediately.  The announcement was made after market hours, so overnight trading showed the Dow down as much as 450 points.

However, markets came back the next day to close with only modest losses.  This is a good sign for the markets and shows there are buyers stepping in on the declines to help push markets higher.

Switching gears, there were several economic reports released this week, but only one had an impact on the market – which was nice to take the focus off of Washington. 

The monthly jobs report was released on Friday, coming in much better than expected.  Economists were looking for about 200,000 jobs to be added last month, but the actual number came in at 313,000.  Additionally, the previous two months were revised higher, making the numbers look even better.

This number was solid, but what really gave fuel to the market was the data on wages, which was lower than expected.  Wages rose 2.6% over the past year, below the 2.8% expected.  Bad news is good news for the market here since it indicates a slack in the labor force and, therefore, less chance for the Fed to pull back further on their stimulus. 

As for other economic data, factory orders declined and our trade deficit hit its worst level since 2008.  On the positive side, the Beige Book continued to show modest-to-moderate growth, though there were signs of rising inflation and wages in this anecdotal report.  This is something to keep an eye on.  Also, the strength of the service sector remains strong and both the manufacturing and service sectors continue to grow.  

Next Week

Odds are next week will be another volatile one.  Washington will remain in focus, but it will also be another busy one for economic data.  We’ll get info on inflation, retail sales, housing, and industrial production. 


Investment Strategy

Still no change here.  Stocks have resumed their climb and probably have room to run higher.  However, volatility remains and it’s anyone’s guess where the market will go in the short run.  We’d be careful putting new money into the market here.  

Looking out longer is more difficult, too.  While we think our economy is poised to do well, higher interest rates from the removal of the Fed’s stimulus introduces a new wrinkle and will add to the volatility.  It’s anyone’s guess how this will play out. 

As for bonds, their recent losses are making them look a little more attractive, too.  We’d like to see prices come down further before making any significant purchases, though. 

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 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 3-2-18

It was yet another volatile week in the markets.  Through Friday’s close, the Dow fell 3.1%, the S&P lost 2.0%, and the Nasdaq was down 1.1%.  Bond prices took a turn higher for the first time in months as yields fell.  Gold had a negative week, off 0.5%.  Oil was also lower, down 3.3% to close at $61.45 per barrel.  The international Brent oil fell to 1.1%.

Volatility doesn’t seem to want to go away, with the markets seeing moves of more than 1% every day this week.  We also had four-straight down days for the Dow, something which hasn’t happened since 2015.  Markets are now trading back at levels we saw late last year. 

Two big stories contributed to the market action this week: tariffs and the Fed. 

We’ll start with tariffs, which caused the market selloff on Thursday and Friday.  In response to what President Trump perceives as unfair trade practices by other countries, tariffs were announced on steel and aluminum imports. 

This is a difficult subject because on one hand you want to do something about unfair trade, but on the other hand you are raising prices on everything that uses these metals.  It also risks provoking a trade war as other countries retaliate by adding a tariff on products we export to them.  This is why stocks sold off on the announcement. 

The Fed was also in the headlines as new Fed chairman Jerome Powell made his first appearance before Congress.

He provided his take on the current economic environment, indicating the economy was improving and inflation looked to be picking up.  Investors were concerned that this brighter economic picture may force the Fed to pull back on its stimulus faster than expected, so stocks dropped on the news. 

There was a variety of economic reports released this week, though they had very little impact on the market.  On one hand, there were some record positive economic reports but we also had a handful of negative surprises. 

For the positive reports, consumer confidence came in at its best level since 2000.

Also, the strength of the manufacturing sector stood at its highest level since 2004.

On the negative side, home sales for both new and existing homes fell last month, though prices rose.  Sales of durable goods fell while GDP for the fourth quarter was revised a tick lower than initially expected. 

Lastly, this week we closed out a rough February, but we are entering historically one of the best months of the year for stocks.  Also, the March-April combination is the best two-month stretch of the year.  This gives us something to look forward to.

Next Week

Next week will be another busy one.   For economic data, we’ll get info on the strength of the service sector, factory orders, trade, and the always-important monthly employment report.  Trade and tariffs will also be in focus and likely contribute to the volatility. 
 

Investment Strategy

Still no change here.  Stocks are moving back towards oversold (cheap) territory, but we are not looking to do any buying amid the volatility and would like to see a larger pullback before making any large commitments. 

Looking out longer is more difficult, too.  While we think our economy is poised to do well, higher interest rates from the removal of the Fed’s stimulus introduces a new wrinkle and will add to the volatility.  It’s anyone’s guess how this will play out. 

As for bonds, their recent losses are making them look a little more attractive, too.  We’d like to see prices come down further before making any significant purchases, though. 

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 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.