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.
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.
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.
