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).
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.
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.
