Slow and steady gains were the story in the markets this week. Through Friday’s close, the Dow rose 0.4%, the S&P gained 0.2%, and the Nasdaq also added 0.2%. Bond prices rose for the first time in several weeks as yields moved slightly lower. Gold was higher on the week, up 2.4%. Oil prices were also higher, up 4.3% to $51.42 per barrel. The international Brent oil moved higher to close at $57.20.
Source: Google Finance
The week was a very quiet one, with little volatility in the markets and light trading volume. In fact, Monday was the quietest day of the year for trading volume, though this was helped by the Columbus Day holiday. The bond market was closed Monday but the stock market was open.
The week continued the trend we’ve seen this year – rising markets, low volatility. So far this year we’ve only had eight days where the S&P has moved more than 1%, which is the least amount of times this has happened since 1965.
We would think the recent pro-economic tax reform announcement was helping the market higher now, but we’re not sure that’s the case. Companies with a higher tax rate should outperform companies with a lower tax rate if that were true, but as you can see in the chart below, they appear to be underperforming.
The week continued the trend we’ve seen this year – rising markets, low volatility. So far this year we’ve only had eight days where the S&P has moved more than 1%, which is the least amount of times this has happened since 1965.
We would think the recent pro-economic tax reform announcement was helping the market higher now, but we’re not sure that’s the case. Companies with a higher tax rate should outperform companies with a lower tax rate if that were true, but as you can see in the chart below, they appear to be underperforming.
Corporate earnings have done well over the past year, too, which also contributed to the market’s rise. Earnings are back in the news as third quarter results started coming in this week.
Banking companies were in focus as several large banks reported results. Results were mostly better than expected and showed improvements over the last quarter. The results started off earnings season on a solid footing.
Banking companies were in focus as several large banks reported results. Results were mostly better than expected and showed improvements over the last quarter. The results started off earnings season on a solid footing.
The Fed was also in the news this week as the minutes from their latest meeting were reported. It didn’t look like there were any surprises – they still look prepared to raise interest rates before the end of the year. Below we can see the odds the market is placing on that rate hike.
There does seem to be some debate amongst the Fed members over inflation. Some believe inflation will rise, others don’t. Their goal is to get inflation above 2% before really pulling back on their stimulus programs, so inflation is an important topic.
This leads us to economic data this week, where we did get some inflation reports. Inflation has moved higher, though a lot of the rise was due to higher gas prices after the hurricanes. Inflation has risen 2.6% over the past year at the producer level and 2.2% at the consumer level. These are both above the Fed’s 2% target and it will be interesting to see if it has any impact on their policymaking.
This leads us to economic data this week, where we did get some inflation reports. Inflation has moved higher, though a lot of the rise was due to higher gas prices after the hurricanes. Inflation has risen 2.6% over the past year at the producer level and 2.2% at the consumer level. These are both above the Fed’s 2% target and it will be interesting to see if it has any impact on their policymaking.
Other economic data this week included information on retail sales, which showed an increase of 1.6% and small business optimism, which ticked slightly lower.
Lastly, we saw interesting data this week on companies repurchasing their own stock. Since 2009, companies have used the low borrowing costs to take on debt in order to repurchase shares of their own stock. This has the effect of pushing their share price higher.
Over the last several months, however, companies have reduced the amount of stock they are repurchasing. This could be a factor that will weigh on the markets.
Over the last several months, however, companies have reduced the amount of stock they are repurchasing. This could be a factor that will weigh on the markets.
Next Week
Corporate earnings will be a big story next week as releases start picking up. As for economic data, we’ll get info on industrial production and housing stats, along with the release of the Fed’s Beige Book, which is an anecdotal report on the strength of the economy.
Investment Strategy
No change here. While the wind is at the market’s back, 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 large pullback are low. Large pullbacks in the market often occur after our indicators move lower while the market was moving higher and this is not the case at this time.
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.
The rise in bond yields stalled out this week as prices moved slightly higher. Yields are at the high end of their range and we don’t think there is much room to move higher, so we think prices will firm up from here.
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 will be a big story next week as releases start picking up. As for economic data, we’ll get info on industrial production and housing stats, along with the release of the Fed’s Beige Book, which is an anecdotal report on the strength of the economy.
Investment Strategy
No change here. While the wind is at the market’s back, 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 large pullback are low. Large pullbacks in the market often occur after our indicators move lower while the market was moving higher and this is not the case at this time.
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.
The rise in bond yields stalled out this week as prices moved slightly higher. Yields are at the high end of their range and we don’t think there is much room to move higher, so we think prices will firm up from here.
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.
