Commentary for the week ending 9-22-17

It was a mixed week for the markets.  Through Friday’s close, the Dow rose 0.4%, the S&P was flat with a gain of just 0.08%, and the Nasdaq was lower by 0.3%.  Bond prices continued their steady decline (as yields rose).  Gold was also lower for another week, off 1.8%.  Oil prices were again higher, up 1.5% to $50.66 per barrel.  The international Brent oil moved higher to close at $56.90.

Source: Barchart.com

Stock markets again reached new record highs this week, but the gains were only modest.  All eyes were on a Fed policy meeting Thursday and investors were reluctant to place any big bets before this meeting. 

First, a little background.  After the financial crisis in 2008, the Fed embarked on a massive stimulus program to boost the economy.  They wanted to push interest rates lower to make it easier to take on debt and get a mortgage (apparently they view the best way to recover from a housing bubble is to reflate the bubble).  They lowered some rates to zero, while printing money to buy bonds and lower other borrowing costs, like mortgages. 

The bonds they purchased are counted on their balance sheet.  Years of stimulus pushed the balance sheet to a massive level of $4.5 trillion.  The image below shows how the balance sheet has grown not just here, but at other central banks around the world. 

We can also see that as the balance sheet has grown, the stock market has grown, too. 

This Fed meeting this week was important because it signaled that we are, in fact, in the “beginning of the end” of their stimulative economic policy.  They announced they will slowly – very, very slowly – start to shrink the size of their balance sheet. 

They also signaled they will likely raise interest rates one more time this year, which appeared to catch some investors off-guard.  Below we can see how the odds of a rate hike have risen sharply in recent days:

It was clear from this meeting that the Fed will continue to pull back on stimulus, but we were surprised by how little impact the news had on the stock market.  Other markets saw more of the reaction we’d expect, like bond prices and gold falling and the dollar rising.   

Aside from the Fed, there was little other news in the market this week.  Economic data was light and the only reports were disappointing ones on housing. 

Interestingly, housing prices continue to outpace wages.  This goes back to our earlier point of the Fed’s response to a bursting housing bubble was to reflate it. 

We also saw a reduction in GDP estimates for the third quarter.  This analysis comes from the economists at the Atlanta Fed, which have typically been fairly accurate:

Next Week

Economic data picks up next week.  We’ll get info on durable goods, personal income and spending, and more housing data.  Several regional Fed presidents will also be making speeches, which always have the potential to move the market. 


Investment Strategy

No change here.  The market remains on the expensive side in the short run and not at a level we find attractive for new money.  There may still be a little room to run higher, but we are cautious as we enter a historically volatile part of the year for stocks. 

As for our longer term view, our outlook is a little less rosy but still positive.  We were hoping to see some pro-business reforms being implemented in Washington – lower taxes, regulations, etc. – but the likelihood of any significant reforms has diminished.  The overall business climate is still favorable, which we think will still help the market. 

Bond prices continued to move lower this week (so yields rose), but we don’t expect to see a much larger move lower in bond prices and think prices will remain around these high levels.   

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.


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 9-15-17

All three major indexes hit record highs this week.  Through the close Friday, the Dow the Dow had its best week of the year, rising 2.2%, the S&P gained 1.6%, and the Nasdaq added 1.4%.  Bond prices came off their recent highs and yields rose.  Gold fell, losing 1.9%.  Oil prices rose on low supply and high demand, up 6.5% to $49.83 per barrel.  The international Brent oil added slightly more than two dollars to close at $55.48.

Source: Barchart.com

Stocks moved higher this week – helped not by good news, but more from a lack of bad news.  Investors moved out of safe havens like bonds and gold and into stocks.

First we had expectations of another missile launch from North Korea over the weekend that failed to materialize.  They did end up launching one Thursday evening, but it looks like the markets are starting to ignore these launches as it had little impact on stocks. 

Also helping the market was relief that Hurricane Irma was not as bad as forecasted.  Projections of costs in excess of $100 billion to insurance companies were lowered to $20-40 billion.  It’ll still be a significant loss to the insurance industry, but a relief it was not worse. 

Last week we showed charts of insurance companies plunging on the hurricane fears, but they rebounded nicely this week.  First, the ETF of insurance companies:

And the group of reinsurance companies we highlighted last week, who lost as much as 30% in a matter of days:

Economic data released this week leaned more to the negative side.  Both retail sales and industrial production took a turn lower.  On the positive side, we had good data on employment while small business optimism moved a notch higher. 

A couple reports on inflation were released this week, too, and both showed inflation ticking higher.  Inflation at the producer level (PPI) rose 0.2% on the month to stand at 2.4% on an annual basis. 

Inflation at the consumer level (or CPI) had its biggest jump since January, rising 0.4% on the month and 1.9% over the past year.  Some of the increase can be blamed on rising gas prices after the hurricane, but many other costs are rising, too.

These inflation reports are important because they were the last reading before the Fed policy meeting next week.  The Fed wants to see inflation at 2% before they pull back further on their stimulus program, and this week’s report puts inflation awfully close to that level.  That raised the odds of a pullback in stimulus where the Fed would increase interest rates which raises borrowing costs.

Finally, one last note of a political nature.  This week congressional Democrats introduced a single-payer healthcare bill.  It was amazing to see such a large amount of the Democrat party openly supporting socialist ideas.  That road would be a very dangerous one for the country. 

Next Week

Moves in the market were muted late this week as investors were hesitant to place any large bets before the Fed meeting next week.  Investors don’t expect a hike in rates at this meeting, but will be listening for clues whether there will be one this year.  We do expect to hear something about the Fed’s balance sheet and they may begin to let it shrink.

Economic data will be fairly quiet, where we’ll get some info on housing and leading economic indicators. 


Investment Strategy

The market is on the expensive side in the short run and not at a level we find attractive for new money.  There may still be a little room to run higher, but we are cautious as we enter a historically volatile part of the year for stocks. 

As for our longer term view, our outlook is a little less rosy but still positive.  We were hoping to see some pro-business reforms being implemented in Washington – lower taxes, regulations, etc. – but the likelihood of any significant reforms has diminished.  The overall business climate is still favorable, which we think will still help the market. 

Bond prices came off their highs this week (so yields rose), but we don’t expect to see a large move lower in bond prices and think prices will remain around these high levels.   

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.


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 9-8-17

Please note: there may be no market commentary next week, depending on the strength of Hurricane Irma.  Thank you. 

The holiday-shortened week was not a good one for the markets.  Through the Friday close, the Dow was lower by 0.9%, the S&P lost 0.6%, and the Nasdaq dropped 1.2%.  Bond prices continued to rise and again hit their highest level of the year as yields keep moving lower.  Gold had another good week, rising 1.6%.  Oil also turned higher, up 0.6% to $47.56 per barrel.  The international Brent oil added slightly more than a dollar to close at $53.75.

Source: Google Finance

A lot of bad news plagued the market this week. 

Stocks opened the week fresh off new threats from North Korea as they tested their most powerful bomb yet.  The news sent stocks sharply lower on Tuesday. 

The latest hurricane heading towards Florida also impacted the market, especially with hurricane Harvey still fresh on investors’ minds.

Although uncertainty remains on the path of Hurricane Irma, the storm is projected to be the costliest in American history – in addition to the costs from Harvey.  This will be very costly to insurance companies and their stocks took a hit as a result.  

Below is a chart of the insurance sector ETF:

Reinsurance companies were hit even harder, losing as much as 30% this week.  Reinsurance is like “insurance for insurance companies.”  Insurance companies take out their own insurance to protect them from catastrophic losses.  Smaller insurance companies are required by law to have reinsurance, too.  These usually aren’t household names, but they are important in the insurance industry. 

The storm is also expected to impact economic data.  Below is a chart of weekly jobless claims.  The number shot higher last week as a result of Harvey, which was similar to what we saw with hurricane Katrina and Sandy.  Irma is likely to have a similar impact. 

Other economic data this week was fairly positive.  The Beige Book is anecdotal evidence collected by the Fed to gauge the strength of the economy and it showed continued “modest to moderate” growth.  Productivity in the second quarter was revised higher to 1.5%, which is a marked improvement from the 0.1% in the first quarter.

The strength of the service sector also ticked higher last month.  This, combined with the solid manufacturing data released last week, shows a slow and steadily improving economy.

Our central bank, the Fed, was in the news this week as several members publicly commented on their concern over low inflation levels.  Since the Fed wants to see higher inflation before pulling back on its stimulus, this suggests they will be hesitant to do so.  The news pushed bond prices higher as a result.  We thought it would also be beneficial to stocks, but it had little impact.

The European Central Bank (or ECB), was also in the news as they held one of their policy meetings.  Their economy has been improving and many investors believed this would prompt them to pull back on their stimulus.  However, the ECB announced they would make no changes through the end of the year and possibly later. 

There’s still a lot of stimulus out there, even 10 years after our financial crisis. 


Next Week

All eyes here in the South will be on Hurricane Irma as it meanders up Florida.  We’ll also get a few economic reports worth watching, including data on inflation, retail sales, industrial production, and employment.


Investment Strategy

The broader market is not at a level we find attractive for new money at this time (on a short-term basis), but there may still be a little more room to run higher.  We are cautious, though, since we are entering a historically volatile part of the year for stocks. 

As for our longer term view, our outlook is a little less rosy but still positive.  We were hoping to see some pro-business reforms being implemented in Washington – lower taxes, regulations, etc. – but the likelihood of any significant reforms has diminished.  The overall business climate is still favorable, which we think will still help the market. 

Bond prices are at the high end of their trading range (so yields are on the low end).  We believe yields will stay low and prices high for the foreseeable future, but don’t see a lot of upside potential in their prices at this time.   

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.


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 9-1-17

It was another decent week for the markets.  Through Friday’s close, the Dow gained 0.8%, the S&P rose 1.4%, and the Nasdaq had its best week of the year with a solid 2.7% rise.  Bond prices hit their highest level of the year as yields continued to move lower.  Gold also had a good week – its best in a year – climbing 2.5%.  Oil moved lower, down 1.1% to $47.35 per barrel.  The international Brent oil ended the week up slightly to $52.69.

Source: Google Finance

Stocks showed resilience in the face of some difficult headlines this week, which is a positive sign for the health of the market. 

A North Korean missile launch rattled the markets, causing them to open Tuesday with the Dow lower by more than 100 points.  Investors flocked to safe havens like gold and bonds, pushing their prices to the highest levels of the year.  However, stocks reversed course during the day and managed to close well into positive territory. 

The hurricane in Texas also worried investors and had a particular impact on the energy sector.  An interesting dynamic occurred, actually, where oil prices moved lower while gas prices soared to their highest level in two years. 

The difference could be attributed simply to supply and demand.  The storm caused a shutdown in over 20% of our country’s oil refining capabilities.  Gas is made from refined oil.  The shutdown in refiners resulted in a lower supply of gas and therefore, higher prices.  On the other hand, oil moved lower because the closed refiners would not need any oil, which means they have a higher supply and prices fell. 

Switching gears, economic data this week was mostly positive, but the big monthly jobs report came in well below estimates.  Only 156,000 jobs were added last month, below the 180,000 estimate, while the previous two months were also revised lower. 

On the positive side, GDP for the second quarter was revised higher to 3%, which is its highest level in two years. 

Consumer confidence also rose, notching its second-highest reading since 2000. 

Also, manufacturing data hit its best level since 2011 while personal income and spending both moved slightly higher. 

Inflation data released this week showed inflation moving lower.  Inflation is import to watch because it is one of the primary indicators the Fed uses to gauge their economic policy.  The Fed wants to see inflation rising above 2% before pulling back on their stimulative policy, so data this week showing inflation at 1.4% suggests the Fed will keep its stimulus in place.  The market likes stimulus and rose as a result.

Finally, we have now entered September, which is historically the weakest month of the year.  According to the Stock Trader’s Almanac, September has an average return of -0.5%. 

We’ll add a new wrinkle for this year – historically years ending with a “7” (2017) have had an especially rough autumn.  These seasonal dynamics can seem comical, but they do have their basis in reality!

Next Week

Next week will be a short week with the Monday holiday.  We’ll get a few economic reports worth watching, including the strength of the service sector, productivity, and factory orders. 


Investment Strategy

The rise in the market the last two weeks makes stocks look a little less attractive on a short-term basis for new money, but there may still be a little more room to run higher.  We are cautious, though, since we are entering a historically volatile part of the year for stocks. 

As for our longer term view, our outlook is a little less rosy but still positive.  We were hoping to see some pro-business reforms being implemented in Washington – lower taxes, regulations, etc. – but the likelihood of any significant reforms has diminished.  The overall business climate is still favorable, which we think will still help the market. 

Bond prices are around the high end of the range they have been trading in (so yields are on the low end).  We believe yields will stay low and prices high for the foreseeable future, but don’t see a lot of upside potential in their prices at this time.   

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.


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.