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.
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.
