Commentary for the week ending 4-27-18

Stocks closed slightly in negative territory this week, though they ended well off their lows.  For the week, the Dow was off 0.6%, the S&P lost just 0.01%, and the Nasdaq declined 0.4%.  Bonds were a big story again this week as their yields rose and prices fell.  Gold moved lower again, down 0.9%.  Oil was slightly lower on the week, off 0.5% to close at $67.97 per barrel.  The international Brent oil, which is used for much of our gas here in the East, rose slightly to $74.44.

The headlines coming from the markets this week were all positive – corporate earnings are having their best quarter since 2011 and economic data released this week was solid.  Unfortunately that didn’t translate into higher stock prices. 

First we need to talk about the bond market, which made headlines as yields hit their highest level since 2013.  Bonds are a broad category with many different maturities, but here we’re talking specifically about 10-year government bonds, which are seen as a benchmark for the bond sector. 

The rise in bond yields is important because it makes it more costly to borrow money – loans and mortgages are more expensive and credit card interest rates are higher.  There is the concern that when borrowing slows down, the economy will also slow down.

The other benefit of low yields is they act like a pain killer for stocks.  Bad news has less effect on the markets when rates are low.  We’re seeing more volatility in the markets now that rates have risen and we could see more volatility if they rise further. 

Yields have primarily been rising on expectation that the Fed will raise interest rates.  Rates have been held at a record low level as a part of their stimulus, but as the economy improves and inflation rises, there is less need for stimulus. 

Switching gears to corporate earnings, where the results from the first quarter still look solid.  This week was the busiest one of the season, with nearly 1/3rd of companies in the S&P 500 reporting results.

According to Factset, earnings have grown by more than 20%, which makes it the best quarter since 2011.  Additionally, 80% of companies have posted better results than analysts estimated.  The image below shows just how unusual this is.  

The solid results have many wondering if this is as good as it gets.  That idea was reinforced by Caterpillar’s earnings results this week. 

Caterpillar is seen as a bellwether for industrial companies, so their results are watched closely.  CAT had great results and forecasted solid earnings for the remained of the year – just not at as solid of a pace as the first quarter.  The stock sold off strongly on the news and pulled the rest of the market with it. 

As for economic data this week, the results were all positive.  Consumer confidence moved higher, weekly jobless claims hit their best level since 1969, durable goods posted a solid increase, and housing reports all showed an increase from the previous month though prices continue to outpace wage growth.

Also, the GDP economic report came in at 2.3% growth, much higher than the 1.8% economists expected. 

Lastly, we haven’t talked about bitcoin in a long time.  Though it remains well off its highs, it has been creeping higher and approaching the $10,000 level.  We found it interesting how bitcoin prices have moved similarly to the stock market – and can possibly even be seen as a leading indicator, showing when investors are moving into and out of riskier assets

Next Week

Next week again looks to be a busy one.  Corporate earnings will still come in at a steady pace while we’ll get economic data on the strength of the manufacturing and service sectors, personal income and spending, housing, and the important monthly job report. 

There is also a Fed policy meeting where they are expected to announce another increase in interest rates. 

Lastly, several members of the Trump administration will be heading to China to discuss trade, so the trade debate may pick up again.


Investment Strategy

Still no change here.  Stocks have moved off their oversold (cheap) levels and the gains of the last few weeks were due for a pause.  They still appear to be on the cheap side overall, so we think the odds of a large pullback now are low. 

The longer term direction of the market is a little difficult to predict.  Fundamentals remain very good with pro-business policies out of Washington providing a solid tailwind.  However, rising interest rates (which are like Kryptonite to stocks) could pull markets lower.  It’s tough to say where we think the market will go the long run.   

Bonds are also volatile at this time.  Yields have broken out higher in the last two weeks (so prices moved lower), but we think they don’t have much room to run 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 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 4-20-18

Stocks moved higher for another week.  Through the Friday close, the Dow gained 0.4%, the S&P rose 0.5%, and the Nasdaq was higher by 0.6%.  Bonds prices saw a notable move lower as their yields rose to the highest level since 2014.  Gold was off this week, down 0.8%.  Oil was slightly higher while hitting their highest prices in three years, up 1.3% to close at $68.26 per barrel.  The international Brent oil, which is used for much of our gas here in the East, rose to $73.71.

Here’s a longer view of the market, where you can see we’ve moved nicely off early-April’s lows:

The week on Wall Street was a pretty calm one in terms of market-moving headlines.  Fundamentals like corporate earnings are back in focus while guesses on the Fed’s economic policy continue to move markets.

The week opened with worries over geopolitical tensions after missile strikes in Syria over the weekend.  There was a concern of escalating tensions with Russia launching some form of retaliation, but as is the way of the news cycle these days, the Syrian strikes quickly faded from the headlines and were all but forgotten by the end of the week.  

Corporate earnings are back in focus as results for the first quarter really picked up this week.  Hopes are high here as analysts predict the best earnings season since 2011.

Of course, there are worries these expectations are too high.  Lofty expectations make it hard for companies to deliver solid results that will boost stock prices. 

However, the results look strong.  Though only about 16% of companies in the S&P 500 have reported results, 82% of them have beaten analysts’ estimates according to Factset.  This shows that companies continue to do better than expected, even with the high bar. 

The recent tax cut has been the main driver for the outperformance.  The image below shows how much impact the new law has had on the large banks, but the same story plays out across the board.  Less money going to the government means more profit and more opportunities for companies. 

Economic data released this week came in solid, as well.  Industrial production improved over the last quarter while retail sales rose from the previous month, ending a three month downtrend. 

Economic data released by the Fed with their Beige Book report (which gives an anecdotal look at the strength of the economy) showed economic growth continues to expand. 

One thing that caught investors’ eye, however, is signs of inflation.  Companies in the aluminum and steel industries reported double-digit increases in their metals costs due to the tariffs.  Higher oil and gas prices are also boosting costs.  These higher costs will be passed on to us at the store, which will result in higher inflation numbers. 

This is important because inflation is one of the primary indicators the Fed looks act when determining their economic policy.  Higher inflation numbers will cause them to pull back on their stimulus program by raising interest rates and the odds of additional rate hikes has increased.  Higher rates are like a pain killer being removed from the market, which could add to volatility. 

Next Week

Next week looks to be a busy one.  It will be the busiest week of corporate earnings season, with about a third of the S&P 500 reporting results.  There will also be several economic reports to watch, including GDP for the first quarter and info on durable goods and housing. 



Investment Strategy

No change here.  Stocks have moved off their oversold (cheap) levels and the gains were due for a pause.  They still appear to be on the cheap side overall, so we think the odds of a large pullback now are low. 

The longer term direction of the market is a little difficult to predict.  Fundamentals remain very good – pro-business policies out of Washington provide a solid tailwind.  However, rising interest rates (which are like Kryptonite to stocks) could pull markets lower.  It’s tough to say where we think the market will go the long run.   

Bonds are also volatile, but their prices have remained in an uptrend for the last several months.  Yields may break out and move higher (so prices move lower), but we think they don’t have much room to run 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 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 4-13-18

It was a nice week for investors as stocks turned in their best results in more than a month.  Through Fridays close, the Dow rose 1.8%, the S&P gained 2.0%, and the Nasdaq returned a solid 2.8%.  Bonds prices fell for another week as their yields rose.  Gold moved higher again, up 0.9%.  Oil moved sharply higher on Mideast concerns, rising 8.5% to close at $67.39 per barrel.  The international Brent oil, which is used for much of our gas here in the East, rose to $72.62.

While stocks still saw some large swings this week, the concerns weighing on the market over the last few weeks faded from the headlines.  However, investors seem to be sitting on the sidelines as this week saw the lightest trading volume of the year. 

Investors are also continuing to pull money out of the stock market.  While the rise in the market this week was encouraging, we need to see investors coming back in before we get too optimistic.

As mentioned above, the worries of the last few weeks seemed to subside this week.  Trade worries, in particular, cooled off.  Over the weekend, President Trump softened his tone on trade and expressed his hope that a trade deal could be worked out before any tariffs are enacted. 

The Chinese President also made comments that the country is working to open their economy to make trade fairer – though we’ve heard this for years. 

New worries out of Washington were raised, however, when missile strikes in Syria were discussed.  That alone wouldn’t be too problematic, but it could potentially trigger a Russian response that would increase tensions. 

Also, stocks moved lower when President Trump’s personal lawyer had his office raided by the FBI.  The drama never ends. 

While news out of Washington had the biggest impact on the markets, it was Facebook that dominated headlines. 

Facebook’s CEO and founder Mark Zuckerberg testified in front of Congress about the handling of user data and privacy.  Nearly two entire days of airtime on the financial news channels were devoted to this testimony while most people had little, if any, interest in the hearings. 

In the end, the only thing we learned is how incompetent many members of Congress are.  This is something we often see during financial hearings – Congressional members can have a very limited understanding of the subjects they are responsible for.  It’s a little alarming when you realize these are the people who are governing the country. 

Switching gears, the Fed was also in the news this week as the minutes from their last meeting were released.  The Fed members showed more confidence in the strength of the economy and that inflation was rising to their 2% target (though they are mandated with keeping prices stable, which is 0% inflation). 

The minutes were seen as “hawkish,” which meant investors see the Fed as more likely to keep pulling back on the stimulus by raising interest rates.

On the subject of inflation, reports released this week shows inflation continues to rise.

We also saw small business optimism tick down over the past month, though it still remains at a high level.

Lastly, corporate earnings for the first quarter started rolling in this week.  Banks are typically first to report and the companies that released their data all came in better than expected.  Analysts see the earnings this quarter as coming in the best since 2011, so the bar is set very high here. 

Next Week

Corporate earnings really start coming in next week, so the focus will (hopefully) shift from Washington to fundamentals like individual companies.  As for economic data, we’ll get info on the strength of the economy from the Fed’s Beige Book report, retail sales, housing, and industrial production.


Investment Strategy

Stocks have come off their “very oversold” level with the gains this week, though they still look to be on the fairly cheap side.  Markets are likely to remain volatile and it’s anyone’s guess where the market will go in the short run, but some buying might not hurt with a longer term perspective.  Remember, buy when others are fearful. 

The longer term is a little difficult to predict, too, though.  Fundamentals remain very good – pro-business policies out of Washington provide a solid tailwind.  However, rising interest rates (which are like Kryptonite to stocks) could tug markets lower.  It’s tough to predict where the market will go from here.   

Bonds are also volatile, but their prices have remained in an uptrend for the last several months.  Yields may break out and move higher (so prices move lower), but we think they don’t have much room to run 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 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 4-6-18

It was a very volatile week in the markets with stocks ending lower, though the losses were modest given the volatility.  For the week, the Dow was lower by 0.7%, the S&P was off 1.4%, and the Nasdaq fell 2.1%.  Bonds prices came off their highest level in more than year as their yields rose (prices fall when yields rise).  Gold moved higher again, up 0.7%.  Oil was lower on the week, off 4.7% to close at $61.95 per barrel.  The international Brent fell to $66.93.

Zooming out, here’s a look at the market over the past year:

“Volatile” was the word of the week as stocks saw large moves every day.   In fact, the Dow moved over 200 points every day this week. 

The culprits for the volatility remain the same – trade worries and a tech-stock selloff. 

We’ll start with the selloff in technology stocks, which pressured the markets at the open Monday. 

There wasn’t one specific reason for the selling.  Instead, it seems more like investors were looking to take risk off the table.  Since tech stocks have outperformed the market by a wide margin, it made sense to take gains here first and reduce portfolio allocation to this sector.  The tech sector accounts for 20% of the broader market – the most of any sector – so the selling here dragged the broader indexes lower. 

Fun stat: since Monday was also the first day of the second quarter, Monday’s large selloff resulted in the worst start for the second quarter since 1929. 

Grabbing headlines for much of the week was the ongoing trade tensions, which ratcheted up a notch this week. 

On Tuesday, President Trump announced a 25% tariff on $50 billion worth of Chinese imports as a response to their unfair trade practices.  China then swiftly responded with a 25% tariff on $50 billion worth of US imports.  Keep in mind that China already has a 25% tariff on many of our items, so this will be an additional 25% levy. 

The Chinese tariffs were unique in that they targeted items from regions of the country that voted from President Trump.  Chinese media (which is controlled by the government) were quick to point out this fact:

Soybeans are a popular export to China and bore the brunt of the tariffs.  As we can see in the image below, soybeans are mostly found in the heartlands of the country, which is the heart of “Trump Country.”

The Chinese retaliation surprised the markets and sent stocks sharply lower.  However, stocks later rose as investors realized that these announcements were likely opening gambits in a negotiation.  Talks will continue for months before any tariffs become official, and then it could be years before they are actually implemented. 

Unfortunately that sense of relief didn’t last long when President Trump responded with new tariffs on an additional $100 billion in Chinese goods.  This may be yet another salvo in the negotiation, but to investors it’s starting to look like a trade war.  Markets again sold off as a result.

The trade imbalance with China is a serious issue that does need to be addressed.  They have never played by the rules and years of attempts to force them to do so have yielded little.  Perhaps this strategy will work in the long run, but right now it looks a little messy.  

Switching gears to economic data this week, where the results were largely negative.  The strength of the manufacturing and service sectors ticked slightly lower last month, though they remain at a high level.  Also, the economy only added 103,000 jobs in March, a disappointing number that came in much lower than expected.

Amidst all this negative news, the one bright spot is corporate earnings.  Results from the first quarter will begin rolling in next week and the bar is set high.  Data-provider Factset estimates a 17% growth in earnings, which will be the best quarter since 2011. 

Lastly, Masters week would not be complete without touching on the subject.  This year, a glimpse into the life of an Augusta National member, from Golf Magazine:

Next Week

The trade war saga is likely to continue next week, so it may again be a bumpy one.  There will be some economic data we’ll be watching, including inflation reports and info on employment.  Corporate earnings will also begin rolling in, so it will probably be nice to hear some company-specific news instead of these macro stories that have dominated headlines.


Investment Strategy

The selloff in stocks over the past month has put them at an oversold (cheap) level from a short term perspective.  We did a little buying this week as a result, but now look a little foolish as stocks sold off to close out the week.  Markets are likely to remain volatile and it’s anyone’s guess where the market will go in the short run, but some buying on stability might not hurt with a longer term perspective.  Remember, buy when others are fearful. 

The longer term is a little difficult to predict, too, though.  Fundamentals remain very good – pro-business policies out of Washington provide a solid tailwind.  However, rising interest rates (which are like Kryptonite to stocks) could tug markets lower.  It’s tough to predict where the market will go from here.   

Bonds are also volatile, but their prices have remained in an uptrend for the last several months.  Yields may break out and move higher (so prices move lower), but we think they don’t have much room to run 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 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.