Commentary for the week ending 6-23-17

Stocks managed to inch out a gain on the week.  Through the close Friday, the Dow rose a slight 0.05%%, the S&P gained 0.2%, and the Nasdaq added a nice 1.8%.  Bond prices remained around their highs for the year.  Gold saw some volatility, but ended the week with a slim 0.1% gain.  Oil was lower yet again, down 3.6% to $43.17 per barrel.  The international Brent oil, used for much of our gas here on the East Coast, fell to $45.61.

Source: Google Finance

It was a very uneventful week for the market without a lot of news impacting stocks. 

Investors had to talk about something, though, and oil prices were a major topic of conversation.  Oil prices have now declined more than 20% from highs last reached in February, officially putting it in bear market territory (a “bear market” comes after a 20% decline while the term “bearish” generally means “negative” or “pessimistic”).

The decline in oil is largely due to an increase in production (more supply equals lower prices).  Some of this is from an increase in production here in the U.S., but also from OPEC.  The organization announced production cuts last year, but data shows the cuts aren’t materializing.  This has put pressure on oil prices.  

Low oil prices are nice because it now costs less to fill up our gas tanks, but they also had a negative impact on the stock market.  The stock prices of energy companies have moved lower as oil moves lower, since low oil prices cut into their profits.  This sector turned in its worst week of the year and is down 15% so far this year while the broader S&P is up nearly 9%.  Clearly it has been a drag on the index.

However, there may be signs that oil prices are starting to bottom, as can be seen in the chart below.  If oil prices do turn higher, it could bring the broader stock market higher, too. 

There wasn’t a lot of economic data this week.  We saw some information on housing, which showed home prices continue to rise.  This is good news for anyone who owns a home, but the wider the gap between earnings and home prices, the higher the likelihood for a correction. 

The Fed was also in the news as many regional Fed presidents either made speeches or gave interviews.  The Fed’s decision to raise interest rates last week gave a reason for investors to pay attention, since they could gain some insight on the Fed’s current take on the economy and the possibility of further rate hikes. 

In the end, we really learned nothing new from all the Fed speakers.  Some Fed members thought rates should rise sooner, others later.  However, all indicated they would take a gradual approach before making further changes to their economic policy. 


Next Week

Next week looks to be a little busier.  There will be several economic reports to keep an eye on, including durable goods, consumer confidence, personal income and spending, and more housing data.  

With oil prices being a focus this week, it’s likely investors will be closely watching it again next week. 


Investment Strategy

Still no change here.  We remain cautious on the market at this time as stocks are on the expensive side from a short term perspective.  That doesn’t mean stocks can’t keep rising from here, but just that the odds of a pause or decline have risen.  

Our longer-term outlook remains a little cloudy.  Much of our enthusiasm came from badly needed pro-growth policies being implemented by the Trump administration.  There is a lot of pushback against these policies, 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 also look expensive on a short-term basis. 

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 6-16-17

Markets continued to see a divergence this week with the Dow posting its second-straight week of gains while the Nasdaq had its second week of losses.  Through Friday’s close, the Dow was higher by 0.5%, the S&P was flat with just a 0.05% gain, and the Nasdaq lost 0.9%.  Bond yields hit their lowest level since November as their prices rose.  Gold moved lower for another week, down 1.2%.  Oil was also lower again, off 2.5% to $44.68 per barrel.  The international Brent oil, used for much of our gas here on the East Coast, fell to $47.29.

Source: Google Finance

Investors were a little on edge as we opened the week, unsure how the market would react after late-Friday’s strong sell-off in tech stocks.  The tech sector has been the best performer so far this year, so many were worried this would bring more volatility and cause selling in the broader market.  

While tech stocks continued to see selling pressure this week, it didn’t have much impact on the broader market. 

The tech sell-off isn’t scaring away investors, either, as more new money is coming into the market.  According to a company who tracks money flows in the markets, EPFR Global Data, the past week saw the most new money flowing into stocks all year.  

Getting into the news of the week, all eyes were on our central bank, the Fed.  They held a policy meeting where they announced an increase in interest rates and indicated more would come if the economy performs in-line with their expectations.  An increase in rates makes it a little more expensive to borrow money, which is a way of the Fed pulling back on their stimulus.  The announcement was widely expected, so it was not much of a surprise to investors. 

However, we are hearing more and more investors wonder if the Fed is making a mistake by pulling back on their stimulus.  The economy seems to be stalling and recent inflation data has come in below the Fed’s target.  A tightening of economic policy in a slowing economy often ends with bad results. 

Along those lines, there is an old adage on Wall Street of “Three steps and a stumble.”  This means that the market has historically fallen after the Fed raises interest rates three times.  The third rate hike of this cycle came in March and the fourth occurred this week, which means we are overdue for a correction. 

We aren’t overly worried about a Fed-induced selloff in the market, though.  (This next part is a little wonky, but we’ll try to keep the jargon to a minimum.) 

The rate that the Fed is hiking is called the Fed Funds Rate, which is the interest rate banks charge each other for overnight loans to meet their reserve requirements.  The Fed changes this rate as a way to influence the money supply and the economy.

A rough proxy the market uses for the Fed Funds Rate is the yield (or interest rate) on two-year government bonds (which are short-term bonds that mature in two years). 

When the Fed Funds Rate is below the two-year bond yield, it means credit conditions are “easy” and expansionary.  A Fed Funds Rate above the two-year bond means the Fed is too tight and it is a restrictive policy. 

An easy way to see this is in the chart below – a Bluefin exclusive, I might add.  The top is a chart showing the levels of the Fed Funds Rate and the two-year yields.  The bottom is the stock market.  Notice the green circles – these are where the level of Fed Funds Rate went above the two-year bond, meaning the Fed was too tight.  Shortly thereafter, the stock market fell and a recession followed.  

What this tells us is the stumble will occur when the Fed Funds Rate (red line) goes above the two-year yield (blue line) – NOT after the Fed hikes rates three times.  As you can see in the top chart, the Fed Funds Rate remains firmly below the two-year yield, which means we are not at a level where we should be concerned.   

That wasn’t too wonky, was it?

Lastly we’ll touch on economic data from this week, which had several notable reports.  First, as we mentioned earlier, inflation reports came in lower than expected.  We think this is a good thing because the most prosperous periods in our history came when inflation was low, but the Fed disagrees and wants to see higher inflation.  Therefore, the lower inflation reports were seen as a disappointment.

Other economic reports were disappointing, too.  Retail sales declined from the previous month, manufacturing took a turn lower, and industrial production was flat. 

Below is the latest look at the Citi Economic Surprise Index.  We’ve talked about this index a lot lately, 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) 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

Next week looks to be relatively uneventful.  It’s a quiet one for economic data, with a few reports on housing being the only reports of note. 

Also, many Fed members will be making speeches, so investors will be watching closely for any clues about future policy.


Investment Strategy

No change here – we remain cautious on the market.  Stocks have had the wind at their back, but rose to a level we found unattractive for new money in the short term.  That doesn’t mean stocks can’t keep rising from here, but just that the odds of a pause or decline has risen.  

Our longer-term outlook remains a little cloudy.  Much of our enthusiasm came from badly needed pro-growth policies being implemented by the Trump administration.  There is a lot of pushback against these policies, 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 look too expensive on a short-term basis. 

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 6-9-17

A week of dramatic headlines ended with mixed results.  For the week, the Dow rose 0.3%, the S&P had a loss of 0.3%, and the Nasdaq had its worst week of the year with a 1.6% drop.  Bond yields hit their lowest level of the year as their prices rose.  Gold took a turn lower, off 0.8%.  Oil prices were also lower, off 3.7% to $45.90 per barrel.  The international Brent oil, used for much of our gas here on the East Coast, fell to $48.30.

Source: Barchart.com

Even though there were many dramatic headlines this week, as noted above, they had little impact on the stock market. 

Monday opened fresh off the latest terrorist attack in London, but the news barely caused a ripple in the market – even the London stock market largely brushed it off. 

In fact, the first part of the week was fairly quiet as investors hesitated to make any big bets before the news due later in the week.  Investors were focused on the testimony of the former FBI chief, the policy meeting of the European Central Bank (ECB), and the British election. 

First was the ECB meeting, who announced no changes to their stimulus policy.  They note that the economy is heading in the right direction, but the economy still remains fragile and continues to need this record high level of stimulus. 

Later came the Comey testimony, which saw a massive amount of hype.  Since there were no bombshells, the markets moved higher in relief.   

Finally, the British election saw the current ruling party lose its majority.  This is important because it complicates the “Brexit” discussions, which is the negotiations surrounding the British leaving the European Union.  The “Brexit” will still occur, but the terms may be tougher since there is a different political makeup of Parliament. 

Switching gears and getting into some of the economic data released this week, which was mostly positive.  Productivity in the last quarter was revised from a negative number to flat.  This isn’t something to get excited about, but at least it’s an improvement.  A report on job openings came in at a record high, although the pace of hiring slowed.

Also, last week we got data on the strength of the manufacturing sector, which saw a slight increase.  This week we got info on the service part of the economy and it ticked slightly lower.  A combination of the two shows we remain in an uptrend, though, as can be seen in the image below. 

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 continues to fall, which means economic data has been well below expectations. 

Lastly, a late-Friday selloff in the markets caught investors off-guard.  The selling began in the “Fang” stocks we talked about often.  These are the high-flying tech stocks (Facebook, Amazon, Apple, Netflix, Google) that have driven much of the gains in the market this year. 

There wasn’t any trigger to cause the selling, which made it more worrisome.  Sometimes these stocks that rise solely on momentum can reverse on a dime – and the selloffs can be severe when momentum is lost.  This will be something to keep an eye on. 

Next Week

Next week looks to be a fairly busy one.  First, all eyes will be on the Fed as they hold a policy meeting.  It is widely expected that the Fed will pull back on their stimulus program and raise interest rates.  This means it will make it slightly more costly for people to borrow money.  Stocks have moved higher on low interest rates, so higher rates are usually a negative for stocks.  However, a rate hike is anticipated, so it may not have much effect.  The focus will instead be on the pace of future rate hikes. 

We’ll also get a few important economic reports.  We’ll get info on inflation at the consumer and producer level (CPI and PPI), retail sales, and industrial production.

Lastly, Friday’s sell-off of the tech names has put investors on edge, so markets may be a little more volatile next week. 


Investment Strategy

No change here – we remain cautious on the market.  Stocks have had the wind at their back, but rose to a level we found unattractive for new money in the short term.  That doesn’t mean stocks can’t keep rising from here, but just that the odds of a pause or decline had risen.  

The late-Friday selloff added to our cautious stance. 

Also, as can be seen in the chart below, money is being pulled out of stock-related investments (the darker blue line), and moving into bonds and foreign stocks.  This is another reason for caution on the market.   

Our longer-term outlook remains a little cloudy.  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 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 look too expensive on a short-term basis. 

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 6-2-17

It was another up week for the markets.  Through the close Friday, the Dow gained 0.6%, the S&P rose 1.0%, and the Nasdaq added 1.5%.  Bond prices rose as their yields fell.  Gold saw another positive week, rising 0.8%.  Oil prices took a turn lower, down 4.6% to $47.74 per barrel.  The international Brent oil, used for much of our gas here on the East Coast, fell to $49.95.

Source: Google Finance

This week also marked the end of May, which is historically a period when markets start to see some weakness over the next several months.  That’s the reason for the old Wall Street saying, “sell in May and go away.”  However, stocks did fairly well this May.  The Dow saw a 0.3% rise, the S&P 500 gained 1.2%, and the Nasdaq did particularly well with a 2.5% return.   

Most of the news in the market this week came from economic data releases, which were largely on the disappointing side. 

The big news came on Friday with the release of the monthly employment report.   The results were far lower than expected, with the economy only adding 138,000 jobs last month.  The previous two months were revised lower, too. 

The other disappointing reports included a tick lower in consumer confidence and the Beige Book report (which is the Fed’s anecdotal report on the strength of the economy) noted a slowing growth and less optimism. 

On the positive side, personal income and spending were higher, with spending coming in at the best level of the year.  Also, manufacturing in the U.S. showed a slight increase, which is notable because every monthly release this year has been higher than any month over the last two years. 

We’ve talked recently about “soft” and “hard” economic data, where “soft” economic reports are ones that measure things like optimism, outlook, and expectations while “hard” economic reports are the reports with actual quantifiable data.

A few months ago there was a large gap between these two types of economic reports.  However, this gap has narrowed in recent months as the “soft” economic reports like consumer confidence have declined and there has not been an improvement in “hard’ economic reports. 

There’s nothing wrong with the gap narrowing, but you’d want to see the “hard” reports improve to meet the “soft” data – not the other way around.   

Switching gears to the central banks, the head of the European Central Bank (ECB) announced this week that they would continue with their stimulus program due to concerns over the economy. 

That means they will continue printing money to buy bonds and make it easier for people to borrow money.  They have printed so much money that they just surpassed the amount our Fed has printed and now have the largest balance sheet of any central bank.  Japan is nipping at their heels, who are printing money to buy bonds AND stocks as stimulus. 

This is a dangerous development.  The trillions of dollars printed as stimulus distort the markets and create bubbles – which always end badly.

Next Week

It doesn’t look like there’s a lot on tap to move the markets next week.  We’ll get a few economic reports, including info on the strength of the service sector, factory data, and more info on employment.  There’s always the potential for news out of Washington, so we’ll have to keep an eye out for that, too. 


Investment Strategy

No change here.  Stocks have rebounded nicely from their mid-May decline and continue to rise.  The wind is at the back of the market here, but it is not at a level we find attractive to put new money into the broader indexes.  

Our longer-term outlook has gotten 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 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.