Volatility picked up this week, with stocks closing in positive territory. For the week, the Dow rose 0.5%, the S&P gained 0.9%, and the Nasdaq climbed a nice 1.8%. Bond prices hit their highest level in five months as their yields fell. Gold hit its highest level since November, though closed the week with a slight decline of 0.3%. Oil broke below the $50 level with a loss of 6.7% to end at $49.63 per barrel. The international Brent oil, used for much of our gas here in the East, fell to $52.05.
Source: Google Finance
After starting out the year on such a positive note, stocks have been stuck trending lower since the beginning of March. We’ve talked about it often – investors were enthusiastic over the Trump pro-business economic policies, but recently began having doubts about them being implemented.
Also weighing on investors’ minds lately were several geopolitical issues like North Korea, Syria, and the French election which could determine the fate of the Euro since several candidates support leaving the union (the first round of voting gets underway this weekend).
Recent economic data has been softer, too, and that trend continued into this week. We saw poor numbers on housing, an underwhelming industrial production figure, and several poor regional economic data surveys.
The poor economic data has caused GDP estimates for the first quarter to be lowered. The usually-accurate Atlanta Fed sees economic growth at a disappointing 0.5%.
Also weighing on investors’ minds lately were several geopolitical issues like North Korea, Syria, and the French election which could determine the fate of the Euro since several candidates support leaving the union (the first round of voting gets underway this weekend).
Recent economic data has been softer, too, and that trend continued into this week. We saw poor numbers on housing, an underwhelming industrial production figure, and several poor regional economic data surveys.
The poor economic data has caused GDP estimates for the first quarter to be lowered. The usually-accurate Atlanta Fed sees economic growth at a disappointing 0.5%.
These concerns have caused investors to leave stocks and move to investments that typically do well when people are worried – things like bonds and gold. In fact, Merrill Lynch puts out a monthly manager survey which tracks the actions of professional investment managers, and they found that these investors have the smallest amount of money allocated to stocks since 2008.
The market clearly needs some good news to get back on track, and got a little dose of that this week.
First, corporate earnings started rolling in in earnest this week. The bar is set very high here with analysts predicting the best quarter since 2011. Results this week were fairly decent, too. It is very early into earnings season, but results are on track to meet those high expectations.
Worth noting, though, is that companies who did not meet expectations saw their share prices punished. This week we saw Johnson & Johnson, Goldman Sachs, and IBM take significant hits after they failed to meet estimates.
Stocks also got a boost when it looked like a Trump economic policy got new life.
Treasury Secretary Steve Mnuchen indicated that tax reform would be coming soon. We’ve heard this before and failed to see any follow-through, but it was something the market wanted to hear. Stocks shot higher. As seen below, an index of companies with historically high tax rates did particularly well on the news.
The market clearly needs some good news to get back on track, and got a little dose of that this week.
First, corporate earnings started rolling in in earnest this week. The bar is set very high here with analysts predicting the best quarter since 2011. Results this week were fairly decent, too. It is very early into earnings season, but results are on track to meet those high expectations.
Worth noting, though, is that companies who did not meet expectations saw their share prices punished. This week we saw Johnson & Johnson, Goldman Sachs, and IBM take significant hits after they failed to meet estimates.
Stocks also got a boost when it looked like a Trump economic policy got new life.
Treasury Secretary Steve Mnuchen indicated that tax reform would be coming soon. We’ve heard this before and failed to see any follow-through, but it was something the market wanted to hear. Stocks shot higher. As seen below, an index of companies with historically high tax rates did particularly well on the news.
Finally, we have yet another example of the over-exuberance in the tech startup area.
Bloomberg ran a funny story (LINK) on a company called ‘Juicero’ that sells a $400 machine which makes fresh-squeezed juice.
The business model is that customers purchase bags of a juice concoction from Juicero, then insert them into this squeezer which then squeezes the bag to produce a cup of fresh juice. It has some big-name backers like Google and has raised almost $120 million from investors.
The funny thing Bloomberg found was that the $400 machine is entirely unnecessary. People can take the bag of juice concoction and simply squeeze it with their bare hands to easily produce a cup of juice – no need for the expensive presser. We wonder how investors ever thought this was a good idea in the first place.
Bloomberg ran a funny story (LINK) on a company called ‘Juicero’ that sells a $400 machine which makes fresh-squeezed juice.
The business model is that customers purchase bags of a juice concoction from Juicero, then insert them into this squeezer which then squeezes the bag to produce a cup of fresh juice. It has some big-name backers like Google and has raised almost $120 million from investors.
The funny thing Bloomberg found was that the $400 machine is entirely unnecessary. People can take the bag of juice concoction and simply squeeze it with their bare hands to easily produce a cup of juice – no need for the expensive presser. We wonder how investors ever thought this was a good idea in the first place.
Next Week
Next week looks to be a busy one. We won’t get a lot of economic reports, but we’ll get some important ones. The most important will be the GDP number which comes out on Friday. We’ll also get info on durable goods, housing, and consumer confidence.
The week will also be the busiest one of the season for earnings. 180 companies in the S&P 500 will report results, so we’ll get plenty of info on how corporations fared last quarter.
The French primary election will be this weekend, too, so the results may add some volatility to the market.
Investment Strategy
Next week looks to be a busy one. We won’t get a lot of economic reports, but we’ll get some important ones. The most important will be the GDP number which comes out on Friday. We’ll also get info on durable goods, housing, and consumer confidence.
The week will also be the busiest one of the season for earnings. 180 companies in the S&P 500 will report results, so we’ll get plenty of info on how corporations fared last quarter.
The French primary election will be this weekend, too, so the results may add some volatility to the market.
Investment Strategy
As mentioned above, stocks have been in a downtrend since the beginning of March. While there are many reasons to be worried, there are some signs the sell-off is overdone. One example comes from a measure of volatility.
Without getting too into the details, a good time to invest is when investors are betting the market is riskier right now than in future months.
The nearby chart presents this graphically (the indicator is on top, the S&P 500 stock index is on the bottom). Historically, each time the indicator dips below the blue line – when investors see more risk now than in the future – the market tends to rebound. Hopefully this holds true this time.
So in the short term, we think the odds of a rebound have increased, but wouldn’t be surprised to see continued volatility.
Our longer-term outlook remains unchanged. We still have some caution on the market over possible bubbles formed over the years due to the central banks and the trillions they have printed as stimulus. However, we believe new pro-business policies will be implemented that will negate or at least reduce the distortions caused by the stimulus. We are unsure how this will eventually play out, but think the 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.
Without getting too into the details, a good time to invest is when investors are betting the market is riskier right now than in future months.
The nearby chart presents this graphically (the indicator is on top, the S&P 500 stock index is on the bottom). Historically, each time the indicator dips below the blue line – when investors see more risk now than in the future – the market tends to rebound. Hopefully this holds true this time.
So in the short term, we think the odds of a rebound have increased, but wouldn’t be surprised to see continued volatility.
Our longer-term outlook remains unchanged. We still have some caution on the market over possible bubbles formed over the years due to the central banks and the trillions they have printed as stimulus. However, we believe new pro-business policies will be implemented that will negate or at least reduce the distortions caused by the stimulus. We are unsure how this will eventually play out, but think the 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.
