Commentary for the period ending 3-1-19

Hello everyone.  We’ve just flipped the calendar forward to March and hope your February was nice. 

The month was a good one for the markets.  The S&P 500 rose 3.2% and the Dow was up more than 4%.   

Following the solid performance of January, it put the gains for both indexes above 11% for the year so far. That makes it the best start to a year since 1991 and also ranks among the best starts ever.  

Our next chart shows a breakdown of the performance of the different sectors.  It’s interesting to note that the best sector has been the industrials (which is made up of many manufacturing and transportation companies), since they are rarely the leaders. 

The reason for the outperformance is largely due to China and the likelihood of a trade deal.  These stocks were hit hard in the ongoing feud and as the odds of a trade deal rose, these stocks have risen.  

The improving relations with China have played a part in this rise in the market, but there have also been several other factors. 

As reported in our last commentary, the Fed is no longer as adamant on removing stimulus.  Over the last few weeks they have continued to reinforce this idea and stocks have moved higher.  While the stimulus has been good for the market, we do have concerns that it creates larger problems down the road, but that’s a different conversation for a different time.   

Economic data remains decent as nearly all metrics are showing growth.  GDP, for example, was released this week and came in much higher than expected.  

Employment looks good, too, especially when you see articles like this:  

Lastly, corporate earnings for the fourth quarter have also been coming in above estimates. 

With nearly all companies in the S&P 500 reporting results, Factset reports earnings growth of 13.1% and revenue growth (which is the money made by sales.  Earnings are what remain after costs are subtracted) of 5.2%.  These are respectable numbers. 

However, there is a concern that this is the peak of earnings.  Factset is reporting an estimate of negative earnings growth in the first quarter of this year, although sales (or revenue) should continue to grow.  Earnings have been extremely strong recently so it’s natural to see a decline at some point, but it’s still something to keep an eye on. 
 

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How does the market look going forward?  Stocks have risen nearly 20% since their lows in late December and that pace can’t keep up forever.  While we don’t see big gains in the near future, we aren’t seeing any red flags that often appear before a big decline. 

That said, stocks appear a little on the expensive side and we aren’t enthusiastic about putting new money in here.  We aren’t doing any selling, but not actively buying, either.  

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 period ending 2-1-19

Hello all, here’s what’s been going on in the markets.

Stocks have had an incredible start to the year and as you can see, have rallied sharply off the lows of late December. 

In fact, this January saw an 8% gain for the S&P 500 Index, making it the best January since 1987 (we’ll ignore the fact that 1987 also saw a massive collapse in stocks later that year!).

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Helping fuel that rise was comments from the Fed earlier this month and this week, suggesting they were unlikely to pull back on their stimulus any further.  This gave stocks an immediate boost. 

The probability of an interest rate hike any time this year currently stands at less than 10%.

It’s clear that the largest contributor to the direction of the market remains the Fed.  Their comments in October about a pullback in stimulus created the volatility that lasted until the end of the year.  They’ve had to walk these comments back and as they did, stocks have risen. 

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Economic reports have been decent this month, too.  Out this week was the monthly jobs report, showing we added over 300,000 jobs in January: 

The 4th quarter GDP report was due out this week, too, but has been delayed due to the government shutdown.  However, economists are predicting a number between 2.5-3%: 

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Corporate earnings for the fourth quarter have been coming in above estimates, too.  With just over 40% of companies in the S&P reporting results, earnings are on pace to rise over 12% over the past year according to Factset.  While this is a slowdown from the numbers north of 20% last year, it’s still a respectable pace.

There were some pockets of weakness worth noting.  Big global companies like Caterpillar have not done well due to weakness in other parts of the globe.  Overall, though, stocks have done well after reporting earnings.   

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Stocks have had a tremendous run over the last month and still have the momentum to move higher.  However, they appear a little on the expensive side and we aren’t enthusiastic about putting new money in here.  Right now we aren’t doing any selling, but not actively buying, either.  



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 period ending 1-14-19

Hello all, I hope your 2019 is going well.  I wanted to provide a brief market update after the remarkable run stocks have had to start the year. 

Right now, the S&P 500 is up over 2% on the year while having its best start to a year in 13 years.  It’s also up over 10% from the lows hit just before Christmas.  

Since rising so sharply, we wouldn’t be surprised to see the rally stocks take a little breather and maybe even turn lower.  Many of the indicators we follow have risen to “overbought” territory, signaling stocks are expensive and the rally may be running out of steam.  

However, these are short-term indicators that only useful for looking out several days to a couple weeks.  Longer term, we think the market has more room to move to the upside.

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The main concern of the market the last several months has been the Fed.  Chairman Powell expressed commitment to pulling back on its stimulus and raising interest rates, causing the market to fall. 

Lately, though, he has been signaling that they may be pausing on the reduction in stimulus.  This has been a major reason for the recent increase we have seen in stocks.  

While the Fed may not be a problem for stocks in the near term, corporate earnings for the fourth quarter start rolling in this week.  Expectations have been lowered to 11% growth – which is pretty solid – but it is a deceleration from the 25% growth we saw in early 2018.  

The government shutdown is another concern for investors.  While the market has historically risen during these shutdowns, the length of the current shutdown makes this one a little more difficult to predict.  

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In conclusion, we wouldn’t be surprised to see stocks pause or even decline here, but think there are further gains in the coming months.  We wouldn’t put new money in the broader market at this point and instead look to individual names for new money.

Commentary for the week ending 12-28-18

Please note: This will be our very last of these weekly newsletters.  Unfortunately it’s getting increasingly difficult to find the time to put these reports together. We’ll still send out notes when market conditions warrant a commentary, but they will not be on a weekly basis.  We hope you’ve enjoyed reading these commentaries and we look forward to still communicating with you in the future.

Stocks reversed course this week and closed higher.  Through Friday’s close, the Dow rose 2.8%, the S&P gained 2.9%, and the Nasdaq added 4.0%.  Bond prices were volatile but closed with little change.  Gold hit a six-month high on a 2.0% rise.  Oil prices moved lower, down 1.0% this week to close at $45.12 per barrel.  The international Brent oil, which is used for much of the gas here on the East coast, moved down to $52.23.

After the rebound this week, here’s how the market looks with a longer perspective:

With it being such a short week, there wasn’t a lot of news to impact stocks.  But that didn’t stop the market from making some big moves.

The moves were record setting, too.  On Wednesday, the Dow rose 1086 points, which is its highest point gain ever.  In percentage terms, that’s a rise of over 5%, which is the biggest daily percentage gain in nine years. 

Then Thursday the Dow was down over 600 points, only to sharply reverse course late in the day to close 260 points higher.  That’s the biggest point rebound ever. 

As we mentioned, there really wasn’t any news driving the market.  Sure, concerns over the government shutdown and lowered corporate earnings estimates created some volatility, but that wouldn’t cause such dramatic swings. 

No, the reason for the large moves may be at least partially attributable to the subject of a Wall Street Journal article this week (LINK). 

They found that 85% of all trading is done on what they call “autopilot” – where trading is done by machines, models, or passive funds.  Further, trading by “quantitative” hedge funds – which rely on computer programs to trade – is now larger than the amount of trades from individual investors. 

These “autopilot” traders tend to move in one direction like a herd and can cause exaggerated moves in the market – especially when there is lighter trading volume like we had this week.  This is because these computer programs often factor in momentum, where basically they will buy more when the market rises and sell more when it falls.  

With no news this week, this is very likely the culprit of the massive swings in stocks. 

Switching gears – we did have a couple economic reports worth noting this week. 

First, this Christmas shopping season was the best in six years according to Mastercard SpendingPulse.  However, consumer confidence took a turn lower this month.  While it still remains on the high side, some worries are starting to creep into the economy. 

Next Week

It’s a short week next week, but it will still be an important one as we close out 2018.  Stocks are on pace for the first negative year since 2008 – unless the market rises more than 7% on Monday, of course. 

As for economic data, we’ll get data on manufacturing and the always important monthly employment report. 


Investment Strategy

Stocks have been significantly oversold (or cheap) on a short term basis for a couple weeks now.  Here’s a look at some of our indicators – and since it’s our last regularly-scheduled report, we threw a whole bunch of indicators in there:

With such oversold conditions, it isn’t surprising to see a rebound – although the size of the rebound this week was certainly surprising.  The start of the new year has historically traded higher, so it will be important to see if stocks can hold these levels.  It will be a bad sign if they do not. 

As for the longer term direction of the market, we’re currently seeing some of our long term concerns play out.  We’ve consistently written that the economy is on solid footing, but the removal of stimulus has historically pulled markets lower.  As you can tell by the events of recent months, that battle is currently playing out.  Hopefully some equilibrium between the strong economy and falling market will form, but it’s anyone’s guess as to if or when that will be. 

Bonds are also volatile at this time.  Bond prices are extremely high and yields low on a short term basis and we don’t think they have much room to run from here.  We think they’ll remain stuck in the range they’ve seen over the last few months, with higher yields and lower prices, and we wouldn’t be surprised to see the volatility continue.   

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.