Commentary for the week ending 3-24-17

Stocks turned in their worst week of the year.  Through the close Friday, the Dow lost 1.5%, the S&P fell 1.4%, and the Nasdaq was lower by 1.2%.  Bond prices hit their highest level in two months as investors left stocks and moved into bonds.  Gold rose on the week, climbing 1.1%.  Oil continued to lose ground, falling 1.4% this week to $48.14 per barrel.  The international Brent moved lower to $50.97.

Source: Google Finance

The streak of days without a 1% drop in the market (S&P 500) finally came to end this week.  It has been 109 days seen we’ve seen a decline this large, making this the longest stretch without such a move since 1995.  The chart below shows just how rare this occurrence is.    

Events in Washington took the blame for the large sell-off we saw this week.  Stocks had been climbing since the election in anticipation of pro-business policies (tax reform, regulations, etc.) being implemented.  This put stocks into expensive territory as investors piled into the investments that would do well under the Trump administration (this is generally referred to as a ‘crowded trade’). 

The inability to pass the healthcare bill raised doubts among investors that other pro-business policies would be enacted.  Or if they were enacted, they would be watered down.  This prompted investors to rethink their investments and take a little risk off the table, selling stocks and moving to bonds. 

Aside from the news out of Washington, it was an otherwise very quiet week for market-moving news. 


Next Week

Next on the agenda in Washington is tax reform, which is one of the most important topics for investors.   We’ll be closely watching this unfold.  Further disappointments are sure to weigh on the market.

Next week looks to be another quieter one for economic data.  We’ll get info on personal income and spending, inflation, and housing.  Several Fed members will be making speeches, too, but we aren’t expecting to hear anything new from them.


Investment Strategy

We finally got the selloff in the market we had been looking for.  Stocks had looked very expensive, so this selloff was not unexpected.  Actually, it is a sign of a healthy market.

The loss pushed stocks into oversold (cheap) territory and made them an attractive investment for the short-run.  We’d like to see some stability in the market before committing any new money, though.  Events in Washington will be key, so we will be watching them very closely.   

We remain optimistic on the longer term, too.  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 are on the high side and don’t look attractive in the short run.  

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.

Commentary for the week ending 3-17-17

Stocks managed to turn in a positive week this week.  Through Friday’s close, the Dow rose 0.1%, the S&P gained 0.2%, and the Nasdaq added 0.7%.  Bond prices fell to their lowest level in two years before bouncing back sharply to close the week higher.  Gold took a nice turn higher, rising 2.4%.  Oil hit its lowest price since November before rising slightly, up 0.4% this week to $48.72 per barrel.  The international Brent rose slightly to $51.67.

Source: Google Finance

We had a lot of things going on this week, ranging from our Fed, to several economic reports, to even politics in Europe. 

The big story came from the Fed, who announced an increase in interest rates at their meeting this week.  Higher rates means it will cost people a little more to borrow money.  The market had priced in a near-100% chance of a rate hike at this meeting, so the announcement was not much of a surprise. 

The surprise was the reaction in the market as stocks rose sharply on the announcement.  Higher borrowing costs are generally seen as a negative for stocks, so the rise in stocks was unusual. 

The rise looks like it wasn’t a reaction to the announcement of higher rates, but for less chance of higher rates in the future (remember, stock prices are forward looking).  Some investors believed rates could be increased four times this year, but Fed chief Yellen suggested only two or three were likely.

Chair Yellen also cited the positives in the economy as a reason for pulling back on their stimulus.  While economic data has been positive, recent reports have not been as strong as expected.  This has forced economists to lower their economic projections.

One source we watch is the Fed bank of Atlanta.  They put out a forecast for GDP that has been fairly accurate.  The most recent data (LINK) shows a sharp drop in their GDP estimate, as can be seen in chart below (the brown line). 

Economic data released this week supported that weakening theme.  Industrial production was flat and retail sales were up 0.1%, which was below the 0.4% growth seen the previous month.  Inflation data continues to show prices rising, with the CPI at the highest level in five years. 

Investors and businesses have been excited about pro-business reforms that may be coming, and the market has moved higher in anticipation.  However, we need to see them implemented so the results can be seen in the economic data.  That has yet to happen.

Finally, investors were watching the Dutch elections this week.  With both pro- and anti-EU candidates participating, the results would suggest whether the population was interested in staying or leaving the Euro.  The results suggested stay, so the chance of a Euro breakup declined and the market was relieved to see stability in the region. 


Next Week

Next week looks fairly uneventful for economic data, as we’ll get info on housing and durable goods.  More interesting developments will likely come from Washington, where a vote on the new healthcare bill will occur.  Its passage would clear a hurdle that stands in the way of tax reform, so this would be good for the market. 

Many Fed members will be making speeches, but we are unlikely to her anything new from them. 


Investment Strategy

Still no change here.  The market has pulled back since the beginning of March, but is not at a level we find attractive to either buy or sell.  We don’t believe a significant pullback is in the cards, but are cautious about putting new money in at this point. 

Instead of investing in the broader market, there are a number of companies trading at attractive levels at this time.  As mentioned last week, the “breadth” of the market looked poor as there are many companies are trading at discounted levels while the market is near record highs.  That “breadth” improved this week and is not as significant of a concern as last week.     

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 are falling and are likely to continue if interest rates rise, though bonds will begin to offer attractive yields.

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.

Commentary for the week ending 3-10-17

The markets spent all week in negative territory, though a decent gain Friday reduced much of the losses.  For the week, the Dow fell 0.5%, the S&P lost 0.4%, and the Nasdaq fared the best with a slight decline of 0.2%.  Bonds were again a big story as their prices fell and yields rose.  Gold moved steadily lower all week, off 1.7%.  Oil hit its lowest price since December as supply rose, falling 9.2% this week to $48.39 per barrel.  The international Brent oil fell to $51.27.

Source: Google Finance

Stocks closed the week lower for the first time in seven weeks, though this wasn’t too surprising as stocks have been on the expensive side while continuing to reach new highs. 

This week was also notable in that it marked the 8th anniversary of the stock market rally.  The S&P 500 bottomed-out on March 9th, 2009 and has risen over 250% since that time.  The rally is getting a little long in the tooth, but we aren’t seeing the crazy euphoria we saw at market tops in the past.

We have seen one noteworthy change in the market over the last few months, however.  Much of the rally saw stocks very closely correlated, meaning that they would generally rise and fall in unison.  Last month saw the second-least amount of correlation amongst stocks since the rally began.  This is a healthy development, since companies that do well are rewarded and those that do poorly are punished.  This is how investing is supposed to work. 

There was not a lot of news driving the markets this week.  The focus for investors was instead on next week, where the Fed will be meeting to decide on the level for interest rates.  There is a near-100% chance they raise borrowing rates next week as they step back from their stimulative policies.  At one time, this announcement would have weighed on the market, but it looks like investors are more focused on pro-business policies than rising rates. 

Helping to up the rate hike odds this week was the employment report for February.  The economy added 235,000 jobs last month, above the 200,000 economists expected.  The unemployment rate now stands at 4.7%.  These positive reports mean less stimulus from the Fed is needed, which increased the odds of the rate hike.     

Lastly, we’ll take a look at how the various sectors of the market have performed so far this year.  The sectors performing the poorest are the ones that performed well when interest rates were low (they were attractive because they offer a higher yield).  Investors are now fleeing those investments as interest rates increase.   

Next Week

Next week looks to be a busy one.  As mentioned earlier, the big news will come from the Fed as they announce the level of interest rates.  Investors are expecting an increase and will also be watching for clues about how soon the next increase could come. 

We’ll also see a handful of economic reports, including inflation, retail sales, housing, and industrial production. 


Investment Strategy

No change here.  The market is still on the expensive side in the short-term and we still believe there is greater risk to the downside than potential to move higher.  We aren’t overly concerned about a significant drop, but market is long overdue for a correction.

Instead of investing in the broader market, there are a number of companies trading at attractive levels at this time.  It is worth noting that the “breadth” of the market looks to be deteriorating as there are many companies are trading at discounted levels while the market is near record highs.  This is something to keep an eye on.  

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 are falling and are likely to continue if interest rates rise, though bonds will begin to offer attractive yields.

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.

Commentary for the week ending 3-3-17

Stocks closed the week higher yet again while making a string of new records.  For the week, the Dow gained 0.9%, the S&P rose 0.7%, and the Nasdaq was up a slight 0.4%.  Bonds were a big story as their prices fell sharply and yields rose.  Gold ended its winning streak, falling 1.8%.  Oil also moved lower, falling 1.4% to $53.20 per barrel.  The international Brent oil fell to $55.71.

Source: Google Finance

The week was a more active one for stocks.  After 55 days, we finally got a move of more than 1% in the market.  With the stock market as high as it is, we would have thought we’d see a drop of more than 1% before we saw a rise of that much.  However, the gain Wednesday shows it is better to be surprised to the upside than the downside. 

The Dow also crossed the 21,000 level this week.  You’ll recall we just recently reached the 20,000 milestone, and these last 1,000 points came so quick that it tied the record set in 1999 for fastest jump in 1,000 points.   

The week also closed out a very strong February.  The Dow rose 4.8% and S&P rose 3.7%, making this the fourth-straight month of gains.  According to research by LPL Financial, February is historically the worst month in a new Presidency, so February’s gains were unusual, but welcomed. 

Stocks keep rising and look expensive at these levels, though we have thought this for a number of weeks now.  The records being set are often compared to streaks of 1999 or 1987.  Of course, these periods were followed by sharp drops in the market.  Markets are hot right now, but we don’t think we are at the “irrationally exuberant” periods of 2007, 1999, or 1987. 

There’s good reason for investors to be optimistic on stocks.  We now have an administration focused on economic growth and pro-business policies.  The market shot higher on Wednesday after President Trump’s optimistic speech full of policies that will help the economy.  He’s already met with more CEO’s in his six weeks than President Obama did in all eight years.  This is a great sign. 

That doesn’t mean we would blindly throw new money into the market at these record levels.  There are still some headwinds to consider.

One headwind will come from the Fed as they raise interest rates.  The odds of a rate hike at their next meeting in March tripled this week.  A number of regional presidents this week indicated a hike was possible at that time, plus inflation data out this week reached the highest level since 2012.  Higher interest rates are generally bad for stocks, though the increased odds had little impact on stocks this week. 

There may be some signs of irrationality in the markets, too.  Stock for the company Snap, the company behind Snapchat (a messaging service where the message disappears after a set amount of time and users can add graphics to their pictures.  Real ground-breaking stuff (said with a hint of sarcasm)) began trading on Wall Street this week.  It was warmly welcomed and was the biggest IPO in two years. 

Somehow this company loses money and doesn’t make a profit, yet is valued at a higher level than companies like Sony, Hewlett Packard, Target, and Marriott.  This doesn’t make much sense to us. 


Next Week

Next week will be a little quieter for economic data.  The big news will come on Friday with the release of the employment report, but the rest of the week looks fairly uneventful. 


Investment Strategy

There is still no change to our investment strategy.  As discussed above, the market is expensive and we still believe there is greater risk to the downside than potential to move higher.  We do not see the red flags that often precede a pullback in stocks, so we aren’t overly worried about a significant drop.  The market is long overdue for a correction, but it’s anyone’s guess as to when that will occur.

Instead of investing in the broader market, there are a number of companies trading at attractive levels at this time.  It is worth noting that it is odd for so many companies to be trading at discounted levels when the market is at record highs.  This is something to keep an eye on.  

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.