Another week of record highs for the markets. For the week, the Dow gained 1.7%, the S&P rose 1.2%, and the Nasdaq added 1.5%. Bond prices fell again as their yields rose. Gold was down for another week, off 0.4%. Oil prices took a turn lower after several positive weeks, down 4.7% to $49.25 per barrel. The international Brent oil moved lower to close at $55.68.
Source: Google Finance
The records keep piling up for the stock markets. Through Thursday, the S&P 500 saw six-straight record high closes, something that hasn’t happened in 20 years.
Stocks have had a lot of help getting here. There’s been decent economic data, rising corporate profits, possible tax reforms, and a business-friendly White House. All are good for the market. That doesn’t mean the market can’t get ahead of itself, though, which we will discuss later.
There was not a lot of news driving the markets this week, leaving economic data to grab the headlines.
We saw very good economic data for most of the week, with reports on the strength of the manufacturing sector reaching 13-year highs, the strength of the service sector hitting a 12-year high, and an improving trade deficit. These reports also noted that the hurricanes of last month had only a slight, if any, impact on the results.
Stocks have had a lot of help getting here. There’s been decent economic data, rising corporate profits, possible tax reforms, and a business-friendly White House. All are good for the market. That doesn’t mean the market can’t get ahead of itself, though, which we will discuss later.
There was not a lot of news driving the markets this week, leaving economic data to grab the headlines.
We saw very good economic data for most of the week, with reports on the strength of the manufacturing sector reaching 13-year highs, the strength of the service sector hitting a 12-year high, and an improving trade deficit. These reports also noted that the hurricanes of last month had only a slight, if any, impact on the results.
However, the hurricanes had a significant impact on the employment report.
Economists were expecting some impact and estimated an increase of 80,000 jobs last month, which is well below average. Unfortunately the actual result showed a decline of 33,000 jobs, which was the first negative month in seven years. The unemployment rate improved as it moved lower to 4.2% - and it’s worth noting the agency producing the unemployment rate – which is different from the one calculating the amount of jobs – noted that the hurricane had little impact since they use a different methodology.
Economists were expecting some impact and estimated an increase of 80,000 jobs last month, which is well below average. Unfortunately the actual result showed a decline of 33,000 jobs, which was the first negative month in seven years. The unemployment rate improved as it moved lower to 4.2% - and it’s worth noting the agency producing the unemployment rate – which is different from the one calculating the amount of jobs – noted that the hurricane had little impact since they use a different methodology.
We often mention 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 has seen a significant improvement and finally breached positive territory, which means economic data has been well above expectations.
As you can see in the chart below, the index has seen a significant improvement and finally breached positive territory, which means economic data has been well above expectations.
Estimates for third quarter GDP have also been rising. The estimate below comes from the economists at the Atlanta Fed, which have a pretty solid track record for predicting the GDP.
One thing the hurricanes had a significant impact on was the municipal bonds of Puerto Rico. These bond prices had been trending lower for some time due to the country’s poor financial conditions. The selling accelerated when the hurricane hit and prices fell further this week when President Trump suggested the debt may be wiped out to help the island recover. At one point, the bonds were selling at just 30 cents on the dollar.
Why is this important? Most individual investors don’t own Puerto Rico bonds directly. However, they can be found in numerous municipal bonds funds that many investors own. Fortunately, these bond funds often have thousands of different bonds, so the impact was likely minimal.
Why is this important? Most individual investors don’t own Puerto Rico bonds directly. However, they can be found in numerous municipal bonds funds that many investors own. Fortunately, these bond funds often have thousands of different bonds, so the impact was likely minimal.
Lastly, we are now in what is historically the most volatile month of the year, but as we can see in the red line below, the market is holding up much better than average.
Next Week
Corporate earnings season for third quarter results gets going next week, with many banks reporting results.
For economic data, we’ll get info on inflation at the consumer and producer levels, employment info, and retail sales. The minutes from the Fed’s latest policy meeting will also be released.
Investment Strategy
As mentioned above, the market has a lot going for it right now. That doesn’t mean it can’t get ahead of itself. We’re seeing stocks at very high levels and would not be surprised to see a pullback or at least a pause in this rally.
Many of the indicators we follow still show strength, though, so we think the odds of a significant pullback are low. Large pullbacks in the market often occur after our indicators move lower while the market was moving higher.
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 significant reforms appear unlikely. 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.
Corporate earnings season for third quarter results gets going next week, with many banks reporting results.
For economic data, we’ll get info on inflation at the consumer and producer levels, employment info, and retail sales. The minutes from the Fed’s latest policy meeting will also be released.
Investment Strategy
As mentioned above, the market has a lot going for it right now. That doesn’t mean it can’t get ahead of itself. We’re seeing stocks at very high levels and would not be surprised to see a pullback or at least a pause in this rally.
Many of the indicators we follow still show strength, though, so we think the odds of a significant pullback are low. Large pullbacks in the market often occur after our indicators move lower while the market was moving higher.
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 significant reforms appear unlikely. 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.
