After a month of falling stock prices, markets turned higher this week. Through Friday’s close, the Dow and S&P both rose 2.4% while the Nasdaq added 2.7%. Bonds prices fell as their yields moved higher. Gold saw another week of gains, up 0.2%. Oil prices were down again, off 7.0% to close at $62.86 per barrel. The international Brent oil, which is used for much of the gas here on the East coast, closed down to $72.62.
Investors were happy to close the books on a rough October this week. With a drop of 6.9% in the S&P 500, this month was its worst since 2011.
Several culprits were cited as the reason for the declines in October. The big one was the Fed as it pulls back on its stimulus, plus there was a worry about corporate earnings and the trade issues with China remained.
So with the strong rebound in stocks this week, were these issues resolved? Nope, although there was a thawing in the China story which we’ll get to shortly.
No, we think the main reason for the rise in the markets this week were just that they were too oversold, or had gone down too far, too fast.
Markets often trade on momentum – they might go up just because they’ve been going up (investors see a rising stock or market and put new money in, pushing it higher), and vice-versa. The indicators we follow suggested the momentum had reached an extreme level which often indicates a reversal was likely – and it did, as we saw this week.
Getting into the events this week, first we’ll start with that news on the trade war with China. President Trump tweeted that he had a good conversation with China’s president on trade issues. Progress on trade looked pretty grim for so long, so this potential thawing was warmly greeted by investors.
Several culprits were cited as the reason for the declines in October. The big one was the Fed as it pulls back on its stimulus, plus there was a worry about corporate earnings and the trade issues with China remained.
So with the strong rebound in stocks this week, were these issues resolved? Nope, although there was a thawing in the China story which we’ll get to shortly.
No, we think the main reason for the rise in the markets this week were just that they were too oversold, or had gone down too far, too fast.
Markets often trade on momentum – they might go up just because they’ve been going up (investors see a rising stock or market and put new money in, pushing it higher), and vice-versa. The indicators we follow suggested the momentum had reached an extreme level which often indicates a reversal was likely – and it did, as we saw this week.
Getting into the events this week, first we’ll start with that news on the trade war with China. President Trump tweeted that he had a good conversation with China’s president on trade issues. Progress on trade looked pretty grim for so long, so this potential thawing was warmly greeted by investors.
Markets also saw some gains after it was reported that a possible trade agreement draft was being worked up by the administration.
Corporate earnings were another big story this week as their results look solid. They actually looked solid throughout the decline of the last month, too, but a few warnings from some big companies made investors pause.
With over 350 companies in the S&P 500 having released their results, Factset reports that earnings are on pace to rise 24% over the past year, which is above the 20% growth analysts initially predicted.
Lastly, economic data this week was mixed.
The big report came on Friday with the monthly employment figures. Over the last month we added 250,000 jobs, which was well above the 188,000 estimated. The unemployment rate stands at 3.7%, which is the lowest in 49 years.
With over 350 companies in the S&P 500 having released their results, Factset reports that earnings are on pace to rise 24% over the past year, which is above the 20% growth analysts initially predicted.
Lastly, economic data this week was mixed.
The big report came on Friday with the monthly employment figures. Over the last month we added 250,000 jobs, which was well above the 188,000 estimated. The unemployment rate stands at 3.7%, which is the lowest in 49 years.
The wage level for workers was also released in that employment report. According to the data, wages have risen 3.1% over the past year, which is the highest since 2009. While this is good news, investors are worried that it will prompt the Fed to keep pulling back on its stimulus. This contributed to the decline we saw in stocks on Friday.
The productivity of those workers moved slightly lower over the past quarter, although it still looks decent.
The productivity of those workers moved slightly lower over the past quarter, although it still looks decent.
As for other economic data, personal income and spending were both higher. The strength of the manufacturing ticked lower. Home prices were higher, although the pace of those gains is starting to slow.
Lastly, consumer confidence hit its highest level in 18 years.
Next Week
Next week will be another busy one. While corporate earnings are slowing, we’ll still get a decent amount of results. For economic data, we’ll get info on the strength of the service sector, inflation at the producer level, and another report on employment.
The Fed will be in the news, too, as they hold a policy meeting. No changes are expected, but it will be interesting to see if we hear anything new after the decline we saw in stocks last month.
Investment Strategy
Even with the gains in the market this week, stocks still appear to be on the cheap side in the short term. Markets are still volatile, but we think the trajectory is higher possibly through the end of the year.
There is no change in our longer term forecast, which remains difficult to predict. Fundamentals are still very good with pro-business policies out of Washington providing a solid tailwind. However, higher interest rates have historically pulled markets lower. It’s tough to say where we think the market will go in the longer run.
Bonds are also volatile at this time. Yields are on the high side (and prices on the low side), but we don’t think prices will fall much further and will continue to trade in the range they have been in for the last several months.
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 will be another busy one. While corporate earnings are slowing, we’ll still get a decent amount of results. For economic data, we’ll get info on the strength of the service sector, inflation at the producer level, and another report on employment.
The Fed will be in the news, too, as they hold a policy meeting. No changes are expected, but it will be interesting to see if we hear anything new after the decline we saw in stocks last month.
Investment Strategy
Even with the gains in the market this week, stocks still appear to be on the cheap side in the short term. Markets are still volatile, but we think the trajectory is higher possibly through the end of the year.
There is no change in our longer term forecast, which remains difficult to predict. Fundamentals are still very good with pro-business policies out of Washington providing a solid tailwind. However, higher interest rates have historically pulled markets lower. It’s tough to say where we think the market will go in the longer run.
Bonds are also volatile at this time. Yields are on the high side (and prices on the low side), but we don’t think prices will fall much further and will continue to trade in the range they have been in for the last several months.
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.
