Another record week for the stock markets. Through the Friday close, the Dow rose 1.0%, the S&P added 0.8%, and Nasdaq gained 1.2%. Gold also moved higher, up 1.4%. Oil saw a volatile week only to close unchanged at $53.85 per barrel. The international Brent oil, which is used for much of our gas here on the east coast, lost just nine cents to close at $56.61.
Source: Google Finance
The week was another mostly quiet one for data. Stocks were helped by decent corporate earnings releases and talk about tax reform.
The market had been treading water for roughly two months now, seeing little movement either direction. Positive earnings and economic data have provided support, but worries have persisted that economic reforms from the new administration will get lost in the shuffle and may not materialize.
Investors were then surprised and happy to hear President Trump announce “something phenomenal on taxes in the next two to three weeks” – his words, not ours.
The impression had been that these reforms were being pushed out to later in the year, to be taken up after changes were made to the healthcare law. That, and the other issues currently dominating headlines, would eat up political capital and jeopardize future economic policy. Seeing tax reform coming soon is a very positive development.
It was also worth noting that the tax announcement came during a meeting between Trump and airline company CEO’s. He has met with business leaders of many companies and industries, which is a great development and signals a focus on economic matters. This is also a positive for investors.
As for the volatility in the market – or lack thereof – this two-month stretch is becoming one for the record books. We haven’t seen a move of more than 1% higher or lower in the S&P 500 in 39 days. This is the longest stretch since 1975.
It’s also been 85 days since we’ve seen a decline of more than 1%, which is the longest stretch since 2006. This party has to end at some point, and history shows it usually isn’t pretty.
The market had been treading water for roughly two months now, seeing little movement either direction. Positive earnings and economic data have provided support, but worries have persisted that economic reforms from the new administration will get lost in the shuffle and may not materialize.
Investors were then surprised and happy to hear President Trump announce “something phenomenal on taxes in the next two to three weeks” – his words, not ours.
The impression had been that these reforms were being pushed out to later in the year, to be taken up after changes were made to the healthcare law. That, and the other issues currently dominating headlines, would eat up political capital and jeopardize future economic policy. Seeing tax reform coming soon is a very positive development.
It was also worth noting that the tax announcement came during a meeting between Trump and airline company CEO’s. He has met with business leaders of many companies and industries, which is a great development and signals a focus on economic matters. This is also a positive for investors.
As for the volatility in the market – or lack thereof – this two-month stretch is becoming one for the record books. We haven’t seen a move of more than 1% higher or lower in the S&P 500 in 39 days. This is the longest stretch since 1975.
It’s also been 85 days since we’ve seen a decline of more than 1%, which is the longest stretch since 2006. This party has to end at some point, and history shows it usually isn’t pretty.
As mentioned earlier, corporate earnings have helped the markets. According to Factset, companies are on pace to report earnings growth of 5.0%, well above the 3.2% originally expected. Improving earnings combined with possible tax reform would be very good for the market.
Next Week
Next week looks to be a little busier for economic data. We’ll get info on inflation at the consumer and producer levels, retail sales, and data on housing.
The pace of corporate earnings releases is beginning to slow, but we’ll still see a pretty good amount of companies reporting results.
Also, Fed chief Janet Yellen will be testifying before Congress this week. Investors will be watching to see if her outlook for the economy or Fed policy has changed.
Investment Strategy
No change here. Stocks keep moving higher, but we think the risks of putting new money in the market at this time are too high. The market is long overdue for a correction, but it’s anyone’s guess as to when that will materialize.
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.
Bond prices no longer look cheap, either, and we would hesitate to add to short-term fixed income positions at this time.
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.
Next Week
Next week looks to be a little busier for economic data. We’ll get info on inflation at the consumer and producer levels, retail sales, and data on housing.
The pace of corporate earnings releases is beginning to slow, but we’ll still see a pretty good amount of companies reporting results.
Also, Fed chief Janet Yellen will be testifying before Congress this week. Investors will be watching to see if her outlook for the economy or Fed policy has changed.
Investment Strategy
No change here. Stocks keep moving higher, but we think the risks of putting new money in the market at this time are too high. The market is long overdue for a correction, but it’s anyone’s guess as to when that will materialize.
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.
Bond prices no longer look cheap, either, and we would hesitate to add to short-term fixed income positions at this time.
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.
