Markets turned in nice gains this week. Through Friday’s close, the Dow gained 0.3%, the S&P added 0.8%, and the Nasdaq did particularly well with a 1.4% rise. Gold took a turn lower, falling a slight 0.1%. Oil reversed its recent decline, rising 5.9% this week to $50.85 per barrel. The international Brent rose to $52.74.
Source: Google Finance
Stocks entered the week facing headwinds as last week’s selling carried into this week. The decline ended convincingly on Tuesday, but before it did, the Dow saw eight-straight down days. This is something that hasn’t happened in six years. Of course, the decline six years ago was 6.7% – this recent decline was a loss of only 1.9%. In terms of corrections, this was very mild.
This week also marked the end of the first quarter, which was a very solid one. The Dow rose 4.6%, the S&P gained 5.6%, and the star performer was the Nasdaq, which saw a 9.8% gain.
The quarter was remarkable, too, in just how quiet it was. In fact, it was the least volatile quarter since the 1960’s according to the Dow Jones Market Data Group. The S&P averaged a move of just 0.3% on a daily basis, the lowest since 1965. It was quiet out there!
One of the more interesting stories we saw this week was about the divergence between “soft” and “hard” economic data.
“Soft” economic reports are generally survey-related ones that measure things like optimism, outlook, and expectations. These have been very solid, like reports that CEO’s are the most optimistic in seven years according to the Business Roundtable, small business optimism soared after the election, and a report on consumer confidence this week hit its highest level since 2000.
“Hard” economic reports, on the other hand, are the reports with actual quantifiable data, which have been weak. Retail sales are slowing, business investment is lagging, and this week we learned the GDP for 2016 was just 1.6%.
According to Morgan Stanley, this gap between “soft” (the tan line) and “hard” data (the blue line) has never been wider.
This week also marked the end of the first quarter, which was a very solid one. The Dow rose 4.6%, the S&P gained 5.6%, and the star performer was the Nasdaq, which saw a 9.8% gain.
The quarter was remarkable, too, in just how quiet it was. In fact, it was the least volatile quarter since the 1960’s according to the Dow Jones Market Data Group. The S&P averaged a move of just 0.3% on a daily basis, the lowest since 1965. It was quiet out there!
One of the more interesting stories we saw this week was about the divergence between “soft” and “hard” economic data.
“Soft” economic reports are generally survey-related ones that measure things like optimism, outlook, and expectations. These have been very solid, like reports that CEO’s are the most optimistic in seven years according to the Business Roundtable, small business optimism soared after the election, and a report on consumer confidence this week hit its highest level since 2000.
“Hard” economic reports, on the other hand, are the reports with actual quantifiable data, which have been weak. Retail sales are slowing, business investment is lagging, and this week we learned the GDP for 2016 was just 1.6%.
According to Morgan Stanley, this gap between “soft” (the tan line) and “hard” data (the blue line) has never been wider.
This difference is worth noting. The market has more of a solid foundation if it rallies on actual positive economic data. The rally we have had is based on expectations, which is less-stable footing for the markets. As we saw with the failure to pass the health care law, the market can quickly move lower if expectations are not met.
Finally, we haven’t talked much about Europe lately but there was news out of England worth noting. The country formally began the process of leaving the European Union this week. This wasn’t unexpected, so it had no noticeable impact on the markets. However, the divorce process could get messy and add some volatility to the markets in the months ahead.
Next Week
With both the end of the month and quarter this week, economic reports for those periods will start rolling in next week. We’ll get info on the strength of the service and manufacturing sectors, trade, and employment. We’ll also get several Fed speakers and the minutes from their latest meeting.
Investment Strategy
The window in which the broad market looked like an attractive buy (in the short term) came and went, and stocks no longer look attractive. However, we think the momentum is still to the upside.
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.
Finally, we haven’t talked much about Europe lately but there was news out of England worth noting. The country formally began the process of leaving the European Union this week. This wasn’t unexpected, so it had no noticeable impact on the markets. However, the divorce process could get messy and add some volatility to the markets in the months ahead.
Next Week
With both the end of the month and quarter this week, economic reports for those periods will start rolling in next week. We’ll get info on the strength of the service and manufacturing sectors, trade, and employment. We’ll also get several Fed speakers and the minutes from their latest meeting.
Investment Strategy
The window in which the broad market looked like an attractive buy (in the short term) came and went, and stocks no longer look attractive. However, we think the momentum is still to the upside.
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.
