Markets managed to eke out gains this week, though as momentum began to fade. Through the Friday close, the Dow rose 1.0%, the S&P gained 0.7%, and the Nasdaq was up slightly by 0.1%. Gold turned in a nice week, up 1.7%. Oil remains in the low $50’s, where it has been since early December, rising 1.1% this week to $54.02 per barrel. The international Brent oil, which is used for much of our gas here on the east coast, rose to $56.04.
Source: Google Finance
Stocks again pushed into record territory this week. The Dow notched 11-straight record high closes, the first time this has happened in 30 years. There wasn’t a lot of news driving markets this week, with the focus remaining on Washington.
We did get one piece of news from the Fed with the release of the minutes from their latest meeting. These help give us an insight into their thinking. From the minutes, we could see that they are increasingly considering raising interest rates at their next meeting in March (low interest rates have helped send stocks higher, so an increase in rates is a headwind for stocks).
In true Fed fashion, however, they also cite a low chance of “significant” inflation as a reason to not raise rates. Note the use of “significant,” since inflation is already running at or near their target level. With the lack of any real clarity on when rates will be increased, investors currently see little chance of a rate hike in March.
Stocks have clearly been on a hot streak recently, but we worry investors may be getting too excited. The financial news channel CNBC recently had a graphic suggesting the best move now may be to “Just buy everything.”
We did get one piece of news from the Fed with the release of the minutes from their latest meeting. These help give us an insight into their thinking. From the minutes, we could see that they are increasingly considering raising interest rates at their next meeting in March (low interest rates have helped send stocks higher, so an increase in rates is a headwind for stocks).
In true Fed fashion, however, they also cite a low chance of “significant” inflation as a reason to not raise rates. Note the use of “significant,” since inflation is already running at or near their target level. With the lack of any real clarity on when rates will be increased, investors currently see little chance of a rate hike in March.
Stocks have clearly been on a hot streak recently, but we worry investors may be getting too excited. The financial news channel CNBC recently had a graphic suggesting the best move now may be to “Just buy everything.”
Thanks to research by Charlie Bilello (@charliebilello) at investment firm Pension Partners, just one year ago the network had a graphic saying “Sell everything.”
The timing is what is remarkable here. Just over a year ago, stocks opened 2016 strongly to the downside and continued to move lower through February, scaring investors into selling. As we can see in the chart below, investors were advised to “sell everything,” right when stocks bottomed and moved higher, rising 22% over past year.
Calls to “buy everything” or “sell everything” tend to happen at extremes in the market and as we see in the example above, are often followed by a reversal.
Though we think the market still has momentum to the upside, we are cautious and see some cracks forming.
The market has risen in anticipation of pro-business policies, but those policies may take longer than investors originally thought. Tax reforms may be pushed until late-summer and possibly later. Large infrastructure projects look like they are being pushed to next year. And the border adjustment (import) tax was once shunned by the President, but he may be warming to it.
This is something to keep an eye on.
Next Week
It looks like we’ll see a busier week next week. There will be a number of economic reports, including data on the strength of the manufacturing and service sectors, a revision to GDP, durable goods, inflation, and personal income and spending. Several regional Fed presidents will also be making speeches.
Washington will also remain in focus with President Trump’s address to Congress. Investors will be listening closely to see if any of the pro-business policies will be implemented soon.
Investment Strategy
There is still no change to our investment strategy at this point. 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 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 have spent the year stuck in a range, but do not look like an attractive investment for new money.
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.
Though we think the market still has momentum to the upside, we are cautious and see some cracks forming.
The market has risen in anticipation of pro-business policies, but those policies may take longer than investors originally thought. Tax reforms may be pushed until late-summer and possibly later. Large infrastructure projects look like they are being pushed to next year. And the border adjustment (import) tax was once shunned by the President, but he may be warming to it.
This is something to keep an eye on.
Next Week
It looks like we’ll see a busier week next week. There will be a number of economic reports, including data on the strength of the manufacturing and service sectors, a revision to GDP, durable goods, inflation, and personal income and spending. Several regional Fed presidents will also be making speeches.
Washington will also remain in focus with President Trump’s address to Congress. Investors will be listening closely to see if any of the pro-business policies will be implemented soon.
Investment Strategy
There is still no change to our investment strategy at this point. 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 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 have spent the year stuck in a range, but do not look like an attractive investment for new money.
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.
