Another volatile week saw stocks end with very little change. Through Friday’s close, the Dow rose 0.3%, the S&P gained a modest 0.1%, and the Nasdaq added 0.2%. Bond prices fell again as bond yields continued to rise. Gold moved lower for another week, off 2.4%. Oil prices fell late in the week to move into negative territory, off 3.7% to $44.33 per barrel. The international Brent oil, used for much of our gas here on the East Coast, fell to $46.88.
Source: Google Finance
The markets closed the week not far from where they started, but that doesn’t mean there was little going on. Stocks have seen a lot of volatility over the last few weeks and this week was more of the same.
One interesting development has been the divergence in volatility of the different market indexes. The broader stock market measured by the S&P 500 has seen a notable increase in volatility. However, the Nasdaq, which is more weighted to technology stocks, has seen a much larger increase in volatility. This can be seen in the chart below.
One interesting development has been the divergence in volatility of the different market indexes. The broader stock market measured by the S&P 500 has seen a notable increase in volatility. However, the Nasdaq, which is more weighted to technology stocks, has seen a much larger increase in volatility. This can be seen in the chart below.
The tech sector had been a top performer for much of the first half of the year, but clearly investors are becoming a little more anxious. This is something to keep an eye on.
So what is causing all the volatility? A lot can be blamed on the central banks. It looks like many are preparing to pull back on the stimulus that has supported the markets for the last several years.
Last week we heard that the central banks in Europe and Canada were open to pulling back on stimulus. This week we heard the same from our Fed with the release of the minutes from their latest meeting.
The minutes suggested the Fed was committed to pulling back on their stimulus. Much of the discussion was shrinking their balance sheet, which has ballooned in recent years due to all the money they have printed to buy bonds. This must be unwound at some point, and that point looks to be approaching soon.
Investors are starting to see the central bank backstop may not be there to support the markets as it has in the past, and that’s a worry that has caused the markets to be more volatile.
So what is causing all the volatility? A lot can be blamed on the central banks. It looks like many are preparing to pull back on the stimulus that has supported the markets for the last several years.
Last week we heard that the central banks in Europe and Canada were open to pulling back on stimulus. This week we heard the same from our Fed with the release of the minutes from their latest meeting.
The minutes suggested the Fed was committed to pulling back on their stimulus. Much of the discussion was shrinking their balance sheet, which has ballooned in recent years due to all the money they have printed to buy bonds. This must be unwound at some point, and that point looks to be approaching soon.
Investors are starting to see the central bank backstop may not be there to support the markets as it has in the past, and that’s a worry that has caused the markets to be more volatile.
Getting into the economic data this week, the big news came on Friday with the release of the employment report. The results were much better than expected with a growth of 222,000 jobs. Also, the previous two months were revised higher.
Other data looked good, too. The trade deficit improved and the strength of both the service and manufacturing sectors took a turn higher. Below is a chart showing a combination of the strength of the two sectors, which shows they are trending higher.
Other data looked good, too. The trade deficit improved and the strength of both the service and manufacturing sectors took a turn higher. Below is a chart showing a combination of the strength of the two sectors, which shows they are trending higher.
Next Week
With a big focus on the central banks these days, all eyes will be on Fed chief Janet Yellen next week as she testifies in front of congress.
There will be several economic reports investors will be watching, too, including info on inflation at the consumer and producer levels, retail sales, and a report on employment.
Investment Strategy
We’re still on the cautious side for investing new money in the broader stock market, but there does appear to be a number of stocks that are looking attractive. The Nasdaq, too, appears to be on the oversold side.
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 are also beginning to look 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.
With a big focus on the central banks these days, all eyes will be on Fed chief Janet Yellen next week as she testifies in front of congress.
There will be several economic reports investors will be watching, too, including info on inflation at the consumer and producer levels, retail sales, and a report on employment.
Investment Strategy
We’re still on the cautious side for investing new money in the broader stock market, but there does appear to be a number of stocks that are looking attractive. The Nasdaq, too, appears to be on the oversold side.
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 are also beginning to look 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.
