Commentary for the week ending 5-26-17

Stocks rose steadily for a nice gain on the week.  Through Friday’s close, the Dow rose 1.3%, the S&P gained 1.4%, and the Nasdaq returned a solid 2.1%.  Gold was higher again, up 1.0%.  Oil prices moved slightly lower, off 0.9% to $49.87 per barrel.  The international Brent oil, used for much of our gas here in the East, rose to $52.23.

Source: Google Finance

It looks like last week’s large one-day drop was all but a distant memory this week.  Stocks rose every day since then (though the Dow was down by the slimmest of margins on Friday) and again reached new record highs along the way.  Headlines which might make stocks move lower, like the terrorist bombing in England, were entirely brushed off by the market. 

The technology sector has been a standout in the market’s rise, with five stocks in particular carrying the load – Apple, Facebook, Amazon, Microsoft, and Google.  The S&P is up nearly 8% this year, but would be up only 4.6% if we were to take out just these five stocks.  It does make us a little cautious when only five stocks can make up almost half of the index’s gains. 

Corporate earnings have also helped the market as their results have been better than expected.  Nearly all companies in the S&P 500 have reported results and earnings have grown 13.6% according to Factset.  This is better than the 11% analysts were predicting and marks the best quarter since 2011. 

We’re told that news from the Fed helped the markets this week, too, though we aren’t exactly sure why.

The minutes from their latest meeting were released and told us little we didn’t already know.  The Fed appears to be on pace to raise interest rates at their next meeting in June. 

Normally, higher interest rates are bad for stocks so this news would send stocks lower.  However, several news articles suggested that this was a positive because it indicates the economy is doing well.  Other articles suggested investors took solace that the Fed wouldn’t be raising rates faster than expected.  Either way, the minutes from the Fed were cited as a positive for stocks. 

Economic data released this week was rather poor.  The sale of both new and previously-owned homes declined, while durable goods sales declined and inventories took a turn lower. 

On the bright side, the GDP figure for the first quarter was revised higher from 0.7% to 1.2%.  Though this is still a low number, it is moving in the right direction.

Finally, in light of Roger Moore’s passing, below is a chart comparing the ratings of the James Bond films to the stock market (yes, someone actually did this.  LINK).  You can see there is a slight correlation there.  However, we would take issue with the ratings since it shows “Skyfall” with the top rating.  We think only insomniacs were fond of this movie since they finally found something that would put them to sleep.  

Next Week

Next week looks fairly quiet, especially with the holiday on Monday.  We’ll get a few economic reports worth watching, including info on the strength of the manufacturing sector, personal income and spending, and the always-important monthly employment report. 


Investment Strategy

Stocks have rebounded nicely from the decline we saw last week.  The gains since then have made stocks a less-attractive investment in the short run.  This doesn’t mean stocks can’t keep going higher, but just that the odds of a pause in the market have increased. 

The longer-term outlook is getting a little cloudier.  Much of our enthusiasm came from badly needed pro-growth policies being implemented by the Trump administration.  We’re seeing a lot of pushback against these policies – and really there is pushback against any and every policy from the Trump administration – so reforms may be more difficult.  We are a little less optimistic on the market in the longer run, though believe it still has upside potential. 

Bond prices had looked attractive in the short run, but the moves over the last couple weeks have put them on the expensive side. 

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.

Commentary for the week ending 5-19-17

What otherwise could have been a bad week for the market actually ended with modest losses.  For the week, both the Dow and S&P were lower by 0.4% while the Nasdaq lost 0.6%.  Bond prices rose as their yields moved lower.  Gold had a nice week, rising 2.2%.  Oil prices also moved higher, climbing 5.5% to end at $50.53 per barrel.  The international Brent oil, used for much of our gas here in the East, rose to $53.80.

Source: Google Finance

Stocks had four decent days this week.  Unfortunately it was that fifth day that did them in.  But before getting into Wednesday’s losses, let’s look at the conditions leading up to it. 

The market has been fairly calm since March and extremely quiet over the last two weeks.  Fear of a decline in the market has also been very low. 

Recently we’ve discussed the VIX index, which has been at historically low levels.  The VIX index is a gauge of volatility and is also seen as indicator of fear in the market, since it rises when investors are more anxious and falls on the opposite.  Last week this index hit its lowest level since 1993, so there has been a historically low level of fear in the market.  The market often reverses at such extreme levels. 

We also saw fewer and fewer stocks leading the market higher.  Much of the gains in the market came from big tech names like Facebook, Apple, Amazon, Netflix, and Google (the so-called “FANG” stocks, because of the acronym).  These companies are up between 11-14% since the beginning of March (through Monday), while the S&P is only up 1.1%. 

A market lead by only a few companies is like a house built on sand.  You want to see many companies doing well; otherwise the market is prone to sharp reversals.  A similar story played out in 2007 before the market declines. 

Below is a Reuters article from 2007 (LINK), which sounds very similar to today. 

The quiet conditions and lack of fear in the market perversely made many investors nervous that a reversal was likely.  The headlines Wednesday gave them that opportunity to sell. 

By now you’ve heard the news out of Washington, so we will avoid the rehash.  Much of the recent rally has been predicated on new pro-growth, pro-business policies from the Trump administration.  The slightest possibility of them not being implemented creates a worry for investors. 

Investors sold stocks as a result and the markets had their worst day since September. 

Stocks that would benefit the most from Trump policies fared the worst.  We can see this in the nearby chart, which shows the performance of a basket of stocks with high tax rates. 

With the loss limited to just one day, it shows cooler heads are prevailing and Wednesday’s news was probably the result of a media-driven hysteria.  It is important to note, though, that the press has shown its eagerness to create distractions for an easily-distracted administration, so these political shocks may not be that uncommon.    

Switching gears to economic data, the week was light on important reports.  Several housing reports were released, with existing home sales ticking higher and new home sales ticking lower.  Industrial production, which measures the output of sectors like mining, manufacturing, and utilities, had its best month in three years. 

When looking more broadly at the economic reports of the last few weeks, the results have been disappointing.  We’ve talked recently about 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 white line), which means economic data has been well below expectations.  Notice how closely the stock market (the orange line) had been following this index.  If this trend holds, the large drop in the Economic Index suggests a downturn in stocks is possible. 

Next Week

The Fed will be a big focus next week as several regional presidents will be making speeches.  The odds of an interest rate increase have fallen, so it will be interesting to see if they provide any insight on this.  The minutes from their latest meeting will also be released this week.

Next week looks fairly quiet for economic data.  The most important report will come on Friday with the durable goods report.  We’ll also get more info on housing and a report on retail inventories.  


Investment Strategy

While Wednesday’s loss was the biggest of the year, a longer term chart puts the decline in perspective.  It may have hurt to see your account value fall that day, but a longer-term perspective is important. 

The decline actually put several of our shorter-term indicators at or near oversold levels, which means stocks may have moved down too far and could be due for a rise.  This doesn’t mean stocks can’t keep going lower, but that the odds of a rise in the markets have increased. 

Looking out a little longer, our outlook remains unchanged.  Stock prices are historically on the high side and 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 had looked attractive in the short run, but the moves over the last couple weeks have put them on the expensive side. 

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.

Commentary for the week ending 5-5-17

It’s that time of year again.  As many of you know, our office is located at the entrance of TPC Sawgrass, home of the Players Championship. Tournament practice rounds begin Monday and we will be attending for much of the week. However, we will be in the office every day, though our hours will vary day-to-day. We will continue to monitor the market even though we may not be in the office.  Any phone calls not immediately answered will be returned the same day. We foresee little to no inconvenience to our clients and hope for your understanding. There will be no market commentary next week.  Thank you.
 
It was a very quiet week for the market.  Through the close Friday, the Dow returned 0.3%, the S&P rose 0.6%, and the Nasdaq gained 0.9%.  Bond prices were lower again this week as yields moved slightly higher.  Gold continues to falter, off 3.1%.  Oil was lower, too, losing 5.7% to end at $46.47 per barrel.  The international Brent oil, used for much of our gas here in the East, fell to $49.47.

Source: Google Finance

Markets moved only slightly higher this week, though the slight gains were enough to put stocks at new record highs.  Volatility was very low as stocks traded in a narrow range for the week.  

Volatility was so low, in fact, that a gauge of volatility, the VIX, hit its lowest level in over ten years.  This VIX index is also referred to as a “fear gauge” in that it rises when investors are more anxious about the market, so its current level shows there is very little fear out there.  Perhaps investors are getting too complacent?

What is the reason for the lull in the markets?  Like anything, it’s hard to point to one specific culprit.  Corporate earnings have been solid while economic data has been more “meh” (that would be the technical term), so this may be providing some of the balance in the market. 

We’re also seeing some balance within the market as certain sectors are doing well and while others perform poorly.  Tech stocks, in particular, have been doing very well.  On the other hand, commodity companies have been hurt as commodity prices have been declining. 

This week we saw commodities like oil falling, but also saw notable losses in metals like copper, iron, and nickel.  These can be important indicators of economic health due to their industrial uses.  Precious metals like gold and copper also fell this week and gold even saw its worst day of the year.  Stocks in these commodity sectors did particularly poor this week as a result. 

The Fed was in the news this week as they held one of their policy meetings.  They’ve been in the process of pulling back on their stimulus policies as the economy improved, but the recent spate of poor data had many wondering if they would change their views. 

It turns out, their view remains unchanged and they continue to foresee economic growth later this year.  The news immediately increased the odds of an interest rate hike at their meeting next month. 

As for economic data released this week, the results were mixed.

The big news came on Friday with the monthly jobs report.  We added 211,000 jobs last month, which was well above estimates by economists.  The unemployment rate now stands at 4.4%, which is the lowest in a decade. 

A report on the strength of the manufacturing sector showed a decline from the previous month, though still shows it expanding.  However, the service sector showed solid growth, coming in above estimates. 

When the service and manufacturing sectors are combined, growth still looks healthy, as can be seen in the chart below:

On the negative side, reports on productivity, factory orders, and auto sales were disappointing and came in below estimates.

Finally, in honor of The Players tournament next week, we have added these historic photos of the iconic 17th and 18th holes at TPC Sawgrass.

Next Week

The big news of the week will probably come this weekend with the French election.  The more “status quo” candidate has a 20-point lead in the polls, but as we saw with our election – anything can happen.  We’re told markets would like to see the status quo candidate win, but that’s what we were told about our election, too.  The status quo candidate did not win and markets made historic gains.  Either way, the French results are likely to have an impact on the market.  

We’ll get a few economic reports worth watching, too, including inflation data, retail sales, and employment data.

Corporate earnings are winding down, but we’ll still see many companies releasing data. 


Investment Strategy

With very little movement in the market this week, there is no change to our investment strategy.  In the short run (a week to a couple weeks or so), we see an increased risk to the downside.  That doesn’t mean stocks can’t keep going up, but that the odds of a pause or decline in the markets have increased. 

Looking out a little longer, our outlook remains unchanged.  Stock prices are historically on the high side and 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 have sold off the last few weeks and are looking more attractive. 

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.