Another week, another round of record highs for stocks. Through the close Friday, the Dow gained a solid 2.0%, the S&P rose 0.9%, and the Nasdaq added 0.4%. Bond prices fell modestly as yields moved slightly higher. Gold turned lower, off 1.7%. Oil prices saw a gain of 0.5% to $51.66 per barrel. The international Brent oil moved higher to close at $57.94.
Source: Google Finance
It seems like nothing is holding this market back as it continues its record-breaking climb. What’s been remarkable is how steady the gains have been since September. The S&P 500 has been lower only three times this month (three!) and nine times in the last two months.
The chart below shows just how steady the rise has been:
The chart below shows just how steady the rise has been:
And here we see how low the volatility has been this year, where the Dow has seen only one year with less volatility in at least 117 years:
Pullbacks in the stock market are quickly bought. On Thursday of this week, the Dow opened lower by more than 100 points, but was quickly bought and ended the day in positive territory.
Bloomberg created a chart showing the amount of times the phrase “buy the dips” was mentioned in the press, meaning how interested investors were in putting new money in the market if it were to see a pullback. As we saw with the pullback this week, investors quickly “bought the dip.” This is actually a positive sign for the market.
Bloomberg created a chart showing the amount of times the phrase “buy the dips” was mentioned in the press, meaning how interested investors were in putting new money in the market if it were to see a pullback. As we saw with the pullback this week, investors quickly “bought the dip.” This is actually a positive sign for the market.
So why has the market been rising? There’s no one answer we can point to. This week stocks were helped when the Senate passed a budget, which moved them one step closer to passing pro-business tax reform. Reports that President Trump may be sticking with a Fed chief whose ideology is similar to the current leader also helped. Corporate earnings added to the optimism as they have been solid overall.
Economic data this week also continued to show decent results. Industrial production ticked higher, despite the hurricanes of the last month. The Fed’s Beige Book, which takes anecdotal reports on the strength of the economy, also showed improvement. Housing data came in on the light side, though.
We’ll conclude this section with two historical notes.
First, 30 years ago this week was the worst one-day drop the stock market has ever seen. Monday, October 19, 1987 is referred to as “Black Monday” because the Dow plummeted almost 23% on that day. For comparison, that would be like losing over 5,200 points on the Dow today. The reasons for the drop are beyond the scope of this commentary, but the interesting note is that if you were to have bought the market on that day, your portfolio would have risen 2,123% since that time.
Economic data this week also continued to show decent results. Industrial production ticked higher, despite the hurricanes of the last month. The Fed’s Beige Book, which takes anecdotal reports on the strength of the economy, also showed improvement. Housing data came in on the light side, though.
We’ll conclude this section with two historical notes.
First, 30 years ago this week was the worst one-day drop the stock market has ever seen. Monday, October 19, 1987 is referred to as “Black Monday” because the Dow plummeted almost 23% on that day. For comparison, that would be like losing over 5,200 points on the Dow today. The reasons for the drop are beyond the scope of this commentary, but the interesting note is that if you were to have bought the market on that day, your portfolio would have risen 2,123% since that time.
Lastly, this year is on pace to be the first year ending in a seven (2017) that did not see a drop in the market between August and November. This sounds silly, but it is an interesting statistic. Every year ending in “seven” since 1887 has seen a decline over this time, and the drop has been 13% on average according to the Leuthold Group.
The Wall Street Journal put together an interesting graphic on the milestone:
The Wall Street Journal put together an interesting graphic on the milestone:
Next Week
Next week will be a busy one for corporate earnings as 200 of the 500 companies in the S&P 500 report results. For economic data, we’ll get info on durable goods, housing, and the GDP report for the third quarter.
Washington will also be in the news as they work towards their tax reform. Investors will be closely watching for any details.
Investment Strategy
No change here. We’ve been expecting to see a pause or decline in this market rally, but have clearly been wrong thus far. We’re still seeing strength in our indicators that suggests a large pullback is unlikely in the short term, but we are cautious after the run the market has had. We’re not selling here, but are reluctant to put new money in at this time.
Pro-business reforms out of Washington are clearly a positive. We wouldn’t be surprised to see the market rise if the odds of reform improve.
Our longer term outlook remains positive, but less rosy than it was several months ago. We’re encouraged to see pro-business reforms coming out of Washington, although they are becoming more watered-down by the day. Additionally, companies have favored returning cash to shareholders through dividends and buybacks over the last several years and we believe the lack of reinvestment in their companies will weigh on earnings in the future.
Bond prices remain on the low side on a short-term basis and yields are on the higher. We don’t think yields have much room to move higher and 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.
Next week will be a busy one for corporate earnings as 200 of the 500 companies in the S&P 500 report results. For economic data, we’ll get info on durable goods, housing, and the GDP report for the third quarter.
Washington will also be in the news as they work towards their tax reform. Investors will be closely watching for any details.
Investment Strategy
No change here. We’ve been expecting to see a pause or decline in this market rally, but have clearly been wrong thus far. We’re still seeing strength in our indicators that suggests a large pullback is unlikely in the short term, but we are cautious after the run the market has had. We’re not selling here, but are reluctant to put new money in at this time.
Pro-business reforms out of Washington are clearly a positive. We wouldn’t be surprised to see the market rise if the odds of reform improve.
Our longer term outlook remains positive, but less rosy than it was several months ago. We’re encouraged to see pro-business reforms coming out of Washington, although they are becoming more watered-down by the day. Additionally, companies have favored returning cash to shareholders through dividends and buybacks over the last several years and we believe the lack of reinvestment in their companies will weigh on earnings in the future.
Bond prices remain on the low side on a short-term basis and yields are on the higher. We don’t think yields have much room to move higher and 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.
