The markets closed out the first week of 2017 with solid gains. For the holiday-shortened week, the Dow was higher by 1.0%, the S&P rose 1.7%, and Nasdaq turned in a nice 2.5% gain. Bond prices took a turn higher as yields fell this week. Gold had nice week, up 2.0%. Oil was relatively flat, losing just 2 cents to end at $53.70 per barrel. The international Brent oil closed at $56.75.
Source: Google Finance
Welcome to a new year – we hope you had a nice holiday season.
It was a slow start to the year for stocks, but they again reached new highs by the week-end. Though they are at new highs, stocks have really been stalled around this same level since mid-December. We’ll see if the new year gives them any momentum either direction.
The gains in the market this week reminded us to break out the old Stock Trader’s Almanac. History has shown that if stocks (the S&P 500) are higher in their first five days of trading, there is an 86% chance they close the year higher. Of course, last year stocks got off to the worst start in history and closed with near double-digit gains, so maybe we shouldn’t put too much faith in these predictors.
As for the events of the week, we’ll start with the Fed. Minutes from their latest meeting were released. This was the meeting where they raised interest rates for the first time in a year, so investors were interested to see what they had to say.
The biggest takeaway was their uncertainty over the Trump policies. It’s not just uncertainty over things like what the level of lower tax rates will ultimately be or how much infrastructure spending we’ll see. The Fed questions if these policies will even be a positive for the economy.
This is telling since these policies always result in economic growth. The Fed is mostly comprised of academics that see government control and spending as the way to economic growth. It tells us a lot about their thinking – and why they’ve been wrong so often.
It was a slow start to the year for stocks, but they again reached new highs by the week-end. Though they are at new highs, stocks have really been stalled around this same level since mid-December. We’ll see if the new year gives them any momentum either direction.
The gains in the market this week reminded us to break out the old Stock Trader’s Almanac. History has shown that if stocks (the S&P 500) are higher in their first five days of trading, there is an 86% chance they close the year higher. Of course, last year stocks got off to the worst start in history and closed with near double-digit gains, so maybe we shouldn’t put too much faith in these predictors.
As for the events of the week, we’ll start with the Fed. Minutes from their latest meeting were released. This was the meeting where they raised interest rates for the first time in a year, so investors were interested to see what they had to say.
The biggest takeaway was their uncertainty over the Trump policies. It’s not just uncertainty over things like what the level of lower tax rates will ultimately be or how much infrastructure spending we’ll see. The Fed questions if these policies will even be a positive for the economy.
This is telling since these policies always result in economic growth. The Fed is mostly comprised of academics that see government control and spending as the way to economic growth. It tells us a lot about their thinking – and why they’ve been wrong so often.
For a stock-specific story this week, shares of retail companies were hit hard after poor Christmas-season sales figures were released from Macy’s and Kohl’s on Thursday.
More and more people are buying online and avoiding stores, resulting in the lower sales at these stores. The announcements from the two companies brought the entire sector lower, as can be seen in the nearby chart.
As for economic data this week, the results were mixed. Reports on the strength of the manufacturing and service sectors came in at multi-year highs.
More and more people are buying online and avoiding stores, resulting in the lower sales at these stores. The announcements from the two companies brought the entire sector lower, as can be seen in the nearby chart.
As for economic data this week, the results were mixed. Reports on the strength of the manufacturing and service sectors came in at multi-year highs.
The final employment report of 2016 was also released this week. Results were below expectations, with the economy adding 156,000 jobs when estimates were closer to 180,000.
The year was also a disappointment for employment. We averaged 180,000 monthly job gains, making this the weakest year for employment since 2011.
Next Week
Corporate earnings for the fourth quarter start rolling in next week. A modest 3.2% growth expected, but analysts expect this to pick up over the next year to see double-digit returns by the end of the year.
It will be a little quieter for economic data, where we’ll see reports on retail sales and inflation at the producer level.
Many regional Fed presidents will be out making speeches, too, which always has the potential to move the market.
Investment Strategy
Still no change here. We continue to think stocks are on the expensive side in the short-term. We would wait for a pullback before putting any new money into the market.
While we are cautious in the short term, we are more 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.
While stocks look expensive here, bonds prices still 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.
The year was also a disappointment for employment. We averaged 180,000 monthly job gains, making this the weakest year for employment since 2011.
Next Week
Corporate earnings for the fourth quarter start rolling in next week. A modest 3.2% growth expected, but analysts expect this to pick up over the next year to see double-digit returns by the end of the year.
It will be a little quieter for economic data, where we’ll see reports on retail sales and inflation at the producer level.
Many regional Fed presidents will be out making speeches, too, which always has the potential to move the market.
Investment Strategy
Still no change here. We continue to think stocks are on the expensive side in the short-term. We would wait for a pullback before putting any new money into the market.
While we are cautious in the short term, we are more 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.
While stocks look expensive here, bonds prices still 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.
