Volatility subsided this week as stocks rose to new record highs. For the week, the Dow gained 1.1%, the S&P rose 1.4%, and the Nasdaq had a nice 2.6% return. Bond prices were mostly higher as yields fell modestly. Gold had a nice week, rising 1.6%. Oil was also higher, up 5.6% to $46.68 per barrel. The international Brent oil, used for much of our gas here on the East Coast, rose to $49.09.
Source: Google Finance
While the last several weeks saw large swings in the markets, much of that volatility subsided this week. Stock indexes closed the week at or near record highs, with a little bit of everything having an impact on the market this week.
Stocks saw some activity early in the week with yet another round of Trump – Russia news. Like the previous attempts, this headline likely won’t have any lasting impact. But every unfavorable bit of news on the Trump administration causes jitters in a market that has risen on the promise of pro-market, pro-economy reforms.
Data released this week on small businesses illustrates this. The small business optimism report is a survey of small business owners. Optimism rose sharply after the election and while it remains well above average, optimism has trended lower as doubts emerge about those pro-business reforms.
Stocks saw some activity early in the week with yet another round of Trump – Russia news. Like the previous attempts, this headline likely won’t have any lasting impact. But every unfavorable bit of news on the Trump administration causes jitters in a market that has risen on the promise of pro-market, pro-economy reforms.
Data released this week on small businesses illustrates this. The small business optimism report is a survey of small business owners. Optimism rose sharply after the election and while it remains well above average, optimism has trended lower as doubts emerge about those pro-business reforms.
Breaking it down further, taxes and red tape are now the top two concerns for small businesses. Investment firm Bespoke Investments reports that the monthly increase in concern for red tape was the largest monthly increase of any category, ever. Politics is clearly on the mind of small business owners.
The Fed was also in the news this week with chief Yellen’s semi-annual testimony before Congress (which is some of the dullest TV you have ever seen). She caught the attention of the market when she suggested the Fed may not be as committed to removing the stimulus as we thought.
The Fed wants to see higher inflation before pulling back on their stimulus. Yellen noted that they will not pull back on stimulus if inflation moves lower. Well, inflation has been trending lower in recent months, so many investors saw this as a sign that stimulus may be around for longer than expected. Stocks rose sharply as a result.
Inflation reports released this week didn’t show any increases, either. Inflation at the produced level did tick slightly higher from the previous month, but core inflation (which excludes food and energy and is a preferred metric of the Fed) moved lower. Inflation at the consumer level was flat from the previous month and core also ticked lower.
Other economic data this week was mixed. Retail sales were lower and job openings fell, while industrial production and job hiring’s rose.
Finally, corporate earnings for the second quarter began coming in this week. The big names were mostly banks that reported late in the week. Earnings weren’t great but better than expected, though bank stocks still fell.
Overall, this earnings season is expected to be good. Factset is predicting 6-7% earnings growth. This is below the nearly 14% growth of last quarter, which was the best period since 2011. However, 6-7% growth is still respectable.
The Fed was also in the news this week with chief Yellen’s semi-annual testimony before Congress (which is some of the dullest TV you have ever seen). She caught the attention of the market when she suggested the Fed may not be as committed to removing the stimulus as we thought.
The Fed wants to see higher inflation before pulling back on their stimulus. Yellen noted that they will not pull back on stimulus if inflation moves lower. Well, inflation has been trending lower in recent months, so many investors saw this as a sign that stimulus may be around for longer than expected. Stocks rose sharply as a result.
Inflation reports released this week didn’t show any increases, either. Inflation at the produced level did tick slightly higher from the previous month, but core inflation (which excludes food and energy and is a preferred metric of the Fed) moved lower. Inflation at the consumer level was flat from the previous month and core also ticked lower.
Other economic data this week was mixed. Retail sales were lower and job openings fell, while industrial production and job hiring’s rose.
Finally, corporate earnings for the second quarter began coming in this week. The big names were mostly banks that reported late in the week. Earnings weren’t great but better than expected, though bank stocks still fell.
Overall, this earnings season is expected to be good. Factset is predicting 6-7% earnings growth. This is below the nearly 14% growth of last quarter, which was the best period since 2011. However, 6-7% growth is still respectable.
Next Week
Next week will be fairly quiet for economic data, with some reports on housing and import prices. Earnings will be a big story as earnings season really gets underway.
Washington will also be a focus as the Senate healthcare bill gets more attention. It’s likely that a success here will be a positive for the market since it increases the chances of tax reform being done soon.
Investment Strategy
No change here. We’re still on the cautious side for investing new money in the broader stock market, and though there are a few individual stocks that appear inexpensive (in the short run), that number is dwindling.
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 have sold off over the last few weeks (as yields rose), and still look somewhat 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.
Next week will be fairly quiet for economic data, with some reports on housing and import prices. Earnings will be a big story as earnings season really gets underway.
Washington will also be a focus as the Senate healthcare bill gets more attention. It’s likely that a success here will be a positive for the market since it increases the chances of tax reform being done soon.
Investment Strategy
No change here. We’re still on the cautious side for investing new money in the broader stock market, and though there are a few individual stocks that appear inexpensive (in the short run), that number is dwindling.
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 have sold off over the last few weeks (as yields rose), and still look somewhat 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.
