A volatile week in the markets saw stocks end lower. For the week, the Dow fell a modest 0.2%, the S&P lost 0.6%, and the Nasdaq plunged 2.0%. Bond prices had their worst week since March as bond yields rose sharply. Gold closed the week lower, off 1.1%. Oil prices rose every day this week, up 7.7% to $46.33 per barrel. The international Brent oil, used for much of our gas here on the East Coast, rose to $47.90.
Source: Google Finance
Volatility returned to the stock market in a big way this week. Strong selling one day reversed to become strong buying the next day as bullish and bearish investors battled it out.
The culprit for the back-and-forth this week came largely from comments by central bankers around the globe.
Here in the U.S., our Fed chief Janet Yellen noted that stock prices were on the high side. This made investors a little jittery.
Much of the attention this week was on comments from the head of the European Central Bank (ECB) who indicated they may pull back on their stimulus as the economy improves. These comments seemed innocent enough, but the ECB has been firmly in the “more stimulus” camp for a long time, so it looks to have caught investors off-guard.
The ECB has printed mountains of money to buy bonds as stimulus, which has pushed bond prices to record highs. The possibility of no longer having this buyer pushing up bond prices (and pushing down yields) caused the sell-off in the bond market this week.
The ECB wasn’t the only foreign central bank talking about pulling back on their stimulus, but also the Canadian and British banks. Together, this all had an impact on the market.
This volatile week also capped the end of a very un-volatile first half of the year for the markets. Stocks actually had their best first half in many years. However, stocks may be getting a little too euphoric here.
The business news website “Business Insider” had an interesting take on stock levels (LINK). They compared the price-to-earnings ratio (or P/E ratio, which compares the stock price to its earnings) to the volatility index (or VIX). As can be seen in the chart below, the combination of low volatility and high stock valuations results in a level of euphoria not seen in 20 years.
The culprit for the back-and-forth this week came largely from comments by central bankers around the globe.
Here in the U.S., our Fed chief Janet Yellen noted that stock prices were on the high side. This made investors a little jittery.
Much of the attention this week was on comments from the head of the European Central Bank (ECB) who indicated they may pull back on their stimulus as the economy improves. These comments seemed innocent enough, but the ECB has been firmly in the “more stimulus” camp for a long time, so it looks to have caught investors off-guard.
The ECB has printed mountains of money to buy bonds as stimulus, which has pushed bond prices to record highs. The possibility of no longer having this buyer pushing up bond prices (and pushing down yields) caused the sell-off in the bond market this week.
The ECB wasn’t the only foreign central bank talking about pulling back on their stimulus, but also the Canadian and British banks. Together, this all had an impact on the market.
This volatile week also capped the end of a very un-volatile first half of the year for the markets. Stocks actually had their best first half in many years. However, stocks may be getting a little too euphoric here.
The business news website “Business Insider” had an interesting take on stock levels (LINK). They compared the price-to-earnings ratio (or P/E ratio, which compares the stock price to its earnings) to the volatility index (or VIX). As can be seen in the chart below, the combination of low volatility and high stock valuations results in a level of euphoria not seen in 20 years.
As for economic data released this week, the results were mixed. Durable goods – which are items with a longer lifespan – fell 1.1% over the past month. On the positive side, GDP from the first quarter was revised higher from 1.2% to 1.4% growth.
Next Week
With next week being the first week of both the new month and quarter, we will receive a lot of economic data. We’ll get info on the strength of the manufacturing and service sectors, factory orders, and the monthly employment report.
Investment Strategy
Still no change here. Though stock prices have declined, they are not at a level we find attractive for putting new money in. That doesn’t mean stocks can’t rise from here, but just that the odds of a pause or decline are still high.
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 sold off, but they, too, are not at a level we find attractive for new money.
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.
With next week being the first week of both the new month and quarter, we will receive a lot of economic data. We’ll get info on the strength of the manufacturing and service sectors, factory orders, and the monthly employment report.
Investment Strategy
Still no change here. Though stock prices have declined, they are not at a level we find attractive for putting new money in. That doesn’t mean stocks can’t rise from here, but just that the odds of a pause or decline are still high.
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 sold off, but they, too, are not at a level we find attractive for new money.
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.
