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.
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.
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.
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.
