Stocks pushed further into record territory this week. Through the close Friday, the Dow gained 1.8%, the S&P rose 1.5%, and the Nasdaq was higher by 1.8%. Gold moved higher for another week, up a slight 0.1%. Oil prices have seen little change since the beginning of December, hovering in the low $50’s over that time. This week was no exception, closing down 0.9% to $53.37 per barrel. The international Brent oil, which is used for much of our gas here on the east coast, closed down to $55.72.
Source: Google Finance
Stocks continued their remarkable run this week, spurred by the promise of better economic policies. Before modest losses on Thursday, the Dow, S&P, and Nasdaq saw five-straight days of record-high closes. This hasn’t happened in 25 years. The Dow rose every day this week, however, and has seen seven-straight record closes. The S&P also had its longest winning streak since 2013 and the Nasdaq saw seven-straight days of record closes, which last happened in the late ‘90s.
There were a few different stories driving the markets this week. One was the Fed, where Fed chief Yellen testified in front of Congress for the first time since President Trump’s election.
She signaled the economy was continuing to improve and it was possible they would raise interest rates at their next meeting in March. Remember, these low interest rates have helped send stocks higher, so suggestions of a rate hike would normally be met with a move lower in the market. However, stocks continued to rise. It looks like investors think the pro-business policies will outweigh the negatives from rising rates.
Higher interest rates are seen as good for banks, though, since it helps improve their profits. This, and the potential for less regulation, has sent banking stocks on a remarkable run and nearly 20% of the banking sector stocks are at record highs.
As can be seen in the image below, this is more than three-times as many as the next highest sector.
There were a few different stories driving the markets this week. One was the Fed, where Fed chief Yellen testified in front of Congress for the first time since President Trump’s election.
She signaled the economy was continuing to improve and it was possible they would raise interest rates at their next meeting in March. Remember, these low interest rates have helped send stocks higher, so suggestions of a rate hike would normally be met with a move lower in the market. However, stocks continued to rise. It looks like investors think the pro-business policies will outweigh the negatives from rising rates.
Higher interest rates are seen as good for banks, though, since it helps improve their profits. This, and the potential for less regulation, has sent banking stocks on a remarkable run and nearly 20% of the banking sector stocks are at record highs.
As can be seen in the image below, this is more than three-times as many as the next highest sector.
We had several important economic data reports released this week, too. Inflation is a hot topic as inflation is starting to heat up. Inflation at the producer level (PPI) rose at its fastest pace since 2012. Inflation at the consumer level (CPI) rose at its fastest pace since 2013.
On a year-over-year basis, CPI is up 2.5% and core CPI (which excludes food and energy) is up 2.3%. These are both higher than the 2% target from the Fed, which further raises the chance of a rate hike at their next meeting.
Another metric notching new highs is the Philly Fed index, which is a report on the strength of manufacturing in the Pennsylvania, Delaware, and Jersey region. This index rose to its highest level in 33 years.
Yet another economic data point reaching record levels is small business optimism, which reached its highest level since 2004. While clearly a positive, high readings in optimism often come at peaks in the market, so history suggest market returns could be lower in the near future.
On a year-over-year basis, CPI is up 2.5% and core CPI (which excludes food and energy) is up 2.3%. These are both higher than the 2% target from the Fed, which further raises the chance of a rate hike at their next meeting.
Another metric notching new highs is the Philly Fed index, which is a report on the strength of manufacturing in the Pennsylvania, Delaware, and Jersey region. This index rose to its highest level in 33 years.
Yet another economic data point reaching record levels is small business optimism, which reached its highest level since 2004. While clearly a positive, high readings in optimism often come at peaks in the market, so history suggest market returns could be lower in the near future.
Next Week
Next week will be fairly quiet for economic data, with the only notable reports coming from the housing sector. Corporate earnings are slowing, too, but we’ll hear from some big companies like Wal-Mart, Home Depot, and Macys.
Investment Strategy
Still no change here. Stocks continue to move 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 occur.
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 will be fairly quiet for economic data, with the only notable reports coming from the housing sector. Corporate earnings are slowing, too, but we’ll hear from some big companies like Wal-Mart, Home Depot, and Macys.
Investment Strategy
Still no change here. Stocks continue to move 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 occur.
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.
