Please note: Since Christmas and New Year’s both fall on the weekend this year, there will be no market commentary for the next two weeks. We’ll be back in January and would like to wish you all a great holiday season!
Stocks lost some steam this week with the major markets finishing mixed. For the week, the Dow rose 0.4% while the S&P and Nasdaq were slightly lower by 0.1%. Bond yields rose again this week, so bond prices have fallen. Gold hit a 10-month low with a drop of 2.1%. Oil was slightly higher, up 1.1% to $52.03 per barrel. The international Brent oil ended the week up $1 to $55.33.
Stocks lost some steam this week with the major markets finishing mixed. For the week, the Dow rose 0.4% while the S&P and Nasdaq were slightly lower by 0.1%. Bond yields rose again this week, so bond prices have fallen. Gold hit a 10-month low with a drop of 2.1%. Oil was slightly higher, up 1.1% to $52.03 per barrel. The international Brent oil ended the week up $1 to $55.33.
Source: Google Finance
The excitement for pro-business policies from the Trump administration continues to help stocks. New money is pouring into the market, with Bank of America research indicating the latest week saw the ninth-largest amount of money ever flowing into stocks.
The Wall Street Journal reports that the 8% rise in the Dow since the election is the biggest post-election gain in history. They find that there has been five other instances where the market was up more than 5% after an election, and in all but one time stocks were higher six months later.
That doesn’t mean we should throw caution to the wind. Many comparisons have been made to the Reagan era, which also saw stocks shoot higher over enthusiasm for a pro-business agenda. However, stocks ended up declining for nearly two years to be down almost 20% before eventually rebounding. These economic policies will undoubtedly be good for the economy, but that doesn’t mean stocks can’t still go lower.
The Fed meeting this week showed how vulnerable stocks can be to any upsets. The Fed announced an increase in interest rates on Wednesday, which was largely expected. However, they forecasted more rate hikes last year than many investors were expecting and stocks sold off on the potential for tighter policies.
This reminds us a lot of last year. The Fed hiked rates in December and rattled the markets, especially overseas. Stocks fell sharply at the beginning of the year as a result. Pro-business policies from the new administration may help stem the tide, but we see this as another reason for caution.
As for economic data this week, the results were largely negative. Industrial production declined and remains in negative territory on a year-over-year basis. Never has industrial production been negative for so long and the economy not be in a recession. Also, retail sales were disappointing, inflation reports shows prices are rising faster than expectations, and housing data released this week was very poor.
Next Week
Next week will be a fairly quiet one for scheduled news as investors start gearing up for Christmas. For economic data, we’ll get reports on durable goods and some housing stats. Other than that, it looks like it could be a quiet week.
Investment Strategy
No change here. We still think stocks are on the expensive side in the short-term, though we have thought that the last few weeks and stocks keep moving higher. We would wait for a pullback before putting any new money into the market.
While we are cautious in the short term, we are optimistic in the longer run. We had been cautious on the long term – and still are to some degree – because much of the rise in the market over the past few years has been due to the central banks and their stimulus. It may have caused markets to rise, but has also distorted markets and created bubbles, which usually ends badly.
Our optimism comes from the new pro-business policies that may balance out or negate the distortions caused by the stimulus. We are unsure how this will eventually play out, but pro-growth policies will be a net positive for the economy. However, the path of the economy can differ from that of the stock market.
While stocks look expensive here, bonds prices look cheap and this could be a good opportunity to add to fixed income positions.
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 eventually 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 see weakness around the globe and favor neither the developed or emerging markets, though they are looking cheap.
Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
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.
That doesn’t mean we should throw caution to the wind. Many comparisons have been made to the Reagan era, which also saw stocks shoot higher over enthusiasm for a pro-business agenda. However, stocks ended up declining for nearly two years to be down almost 20% before eventually rebounding. These economic policies will undoubtedly be good for the economy, but that doesn’t mean stocks can’t still go lower.
The Fed meeting this week showed how vulnerable stocks can be to any upsets. The Fed announced an increase in interest rates on Wednesday, which was largely expected. However, they forecasted more rate hikes last year than many investors were expecting and stocks sold off on the potential for tighter policies.
This reminds us a lot of last year. The Fed hiked rates in December and rattled the markets, especially overseas. Stocks fell sharply at the beginning of the year as a result. Pro-business policies from the new administration may help stem the tide, but we see this as another reason for caution.
As for economic data this week, the results were largely negative. Industrial production declined and remains in negative territory on a year-over-year basis. Never has industrial production been negative for so long and the economy not be in a recession. Also, retail sales were disappointing, inflation reports shows prices are rising faster than expectations, and housing data released this week was very poor.
Next Week
Next week will be a fairly quiet one for scheduled news as investors start gearing up for Christmas. For economic data, we’ll get reports on durable goods and some housing stats. Other than that, it looks like it could be a quiet week.
Investment Strategy
No change here. We still think stocks are on the expensive side in the short-term, though we have thought that the last few weeks and stocks keep moving higher. We would wait for a pullback before putting any new money into the market.
While we are cautious in the short term, we are optimistic in the longer run. We had been cautious on the long term – and still are to some degree – because much of the rise in the market over the past few years has been due to the central banks and their stimulus. It may have caused markets to rise, but has also distorted markets and created bubbles, which usually ends badly.
Our optimism comes from the new pro-business policies that may balance out or negate the distortions caused by the stimulus. We are unsure how this will eventually play out, but pro-growth policies will be a net positive for the economy. However, the path of the economy can differ from that of the stock market.
While stocks look expensive here, bonds prices look cheap and this could be a good opportunity to add to fixed income positions.
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 eventually 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 see weakness around the globe and favor neither the developed or emerging markets, though they are looking cheap.
Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
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.
