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.
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.
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.
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.
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.
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.
