Sunday, May 7, 2017

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.