Markets either hit or closed in on new record highs this week. Through Friday’s close, the Dow rose 1.9%, the S&P added 1.5%, and the Nasdaq hit a new record high with a 2.3% gain. Bond prices backed off this week as yields moved slightly higher. Gold turned in another negative week, off 1.5%. Oil was lower, too, falling 1.0% to end at $49.19 per barrel. The international Brent oil, used for much of our gas here in the East, fell to $51.70.
Source: Google Finance
It was a solid week for the markets, which saw stocks start with their best two-day gains since the election.
The momentum to start the week came from the first round of Presidential elections in France held over the weekend. The two candidates selected to go on to the next round of voting were the consistent frontrunners in the polls, so the results did not surprise the market. That lack of surprise was nice for the markets since it meant there wasn’t any bad news, so stocks rose sharply as a result.
The final round of voting is May 7, which may bring more volatility depending on the results.
The momentum to start the week came from the first round of Presidential elections in France held over the weekend. The two candidates selected to go on to the next round of voting were the consistent frontrunners in the polls, so the results did not surprise the market. That lack of surprise was nice for the markets since it meant there wasn’t any bad news, so stocks rose sharply as a result.
The final round of voting is May 7, which may bring more volatility depending on the results.
The other big news helping the market this week was a new tax plan from the Trump administration.
They announced a big cut in the corporate rate and a lowering and simplification of rates on the personal side. It would also repeal several other taxes and deductions.
As you can see in the nearby chart, our tax rates have remained constantly high while other countries have lowered theirs as a way to be more competitive. The U.S. is now one of the least-competitive countries for business.
We think this is a very solid proposal with a focus on economic growth. There are doubts about how much can get through Congress, so it is unlikely to get implemented in its current form. We just hope it doesn’t get watered down too much.
Economic data released this week left much to be desired.
They announced a big cut in the corporate rate and a lowering and simplification of rates on the personal side. It would also repeal several other taxes and deductions.
As you can see in the nearby chart, our tax rates have remained constantly high while other countries have lowered theirs as a way to be more competitive. The U.S. is now one of the least-competitive countries for business.
We think this is a very solid proposal with a focus on economic growth. There are doubts about how much can get through Congress, so it is unlikely to get implemented in its current form. We just hope it doesn’t get watered down too much.
Economic data released this week left much to be desired.
The big news came on Friday with the GDP report, which showed the economy grew at its weakest pace in three years.
Other data was lackluster, too. Consumer confidence ticked lower, though it still remains near historically high levels.
Durable goods (which are items with a longer life, like a refrigerator, car, or furniture) rose, but at their slowest pace in three months.
Other data was lackluster, too. Consumer confidence ticked lower, though it still remains near historically high levels.
Durable goods (which are items with a longer life, like a refrigerator, car, or furniture) rose, but at their slowest pace in three months.
It wasn’t all bad, though, as there were some bright spots. The Case-Shiller housing report showed home prices rose at the fastest pace since 2014. This is good news for anyone who owns a home.
However, it raises questions of whether prices are rising too much.
Home prices have historically tracked wages and as we can see in the chart nearby, home prices have far outpaced wage growth. Part of this may be due to low interest rates making the home more affordable, but it is still something to keep an eye on.
We saw an interesting chart on economic data from Bloomberg. There is an economic index called the Citi Economic Surprise Index, which tracks how economic data is faring relative to expectations. The index rises when economic data is better than economist expectations and falls on the opposite.
As you can see in the chart below, the index has fallen sharply (the blue line), which means economic data has been well below expectations. Notice how closely the stock market (the white line) has been following this index. If this trend holds, the large drop in the Economic Index suggests a fall in stocks is possible.
However, it raises questions of whether prices are rising too much.
Home prices have historically tracked wages and as we can see in the chart nearby, home prices have far outpaced wage growth. Part of this may be due to low interest rates making the home more affordable, but it is still something to keep an eye on.
We saw an interesting chart on economic data from Bloomberg. There is an economic index called the Citi Economic Surprise Index, which tracks how economic data is faring relative to expectations. The index rises when economic data is better than economist expectations and falls on the opposite.
As you can see in the chart below, the index has fallen sharply (the blue line), which means economic data has been well below expectations. Notice how closely the stock market (the white line) has been following this index. If this trend holds, the large drop in the Economic Index suggests a fall in stocks is possible.
Finally, corporate earnings had their busiest week yet. With about 60% of companies in the S&P 500 having reported, the results have been better than expected as earnings are on pace to rise 12.5% during the past year, according to Factset. This is solidly above the 9% analysts originally expected and is a very respectable number.
Next Week
Next week looks to be another busy one for both economic data and corporate earnings. Though we’re just past the peak of earnings season, we’ll still get a slew of corporate results.
For economic data, we’ll get info on the strength of the service and manufacturing sectors, personal income and spending, factory orders, and the big report on employment comes on Friday.
Investment Strategy
In the short run (a week to a couple weeks or so), stocks were on the cheap side last week, but the gains this week quickly put them to the expensive side. We see more risk to the downside at this point in the short run.
Looking out a little longer, our 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 still 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.
Next Week
Next week looks to be another busy one for both economic data and corporate earnings. Though we’re just past the peak of earnings season, we’ll still get a slew of corporate results.
For economic data, we’ll get info on the strength of the service and manufacturing sectors, personal income and spending, factory orders, and the big report on employment comes on Friday.
Investment Strategy
In the short run (a week to a couple weeks or so), stocks were on the cheap side last week, but the gains this week quickly put them to the expensive side. We see more risk to the downside at this point in the short run.
Looking out a little longer, our 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 still 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.
