Stocks saw modest gains this week. Through Friday’s close, the Dow rose 0.5%, the S&P inched higher by 0.2%, and the Nasdaq added a decent 1.1%. Bond prices continue to fall, hitting their lowest level in five months as yields moved higher. Gold was lower for another week, off 0.4%. Oil prices rose this week, climbing 5.3% to $54.19 per barrel. The international Brent oil moved higher to close at $60.50.
Source: Google Finance
Stocks were a little more volatile this week as they saw large daily swings. The pullbacks in the market didn’t last long and were quickly bought, which can be seen as a positive sign. There are a few things we are watching, though, which are discussed more in the “Investment Strategy” portion found later in this commentary.
There was a little bit of everything impacting the markets this week. Corporate earnings were a big story and we also saw a few important economic reports. The central banks both here and abroad were also in focus.
First we’ll touch on corporate earnings, with this being the busiest week of releases all earnings season. There’s no question the results have been good. Tech stocks were a bright spot this week as many in this sector reported results and most were well above expectations.
Below is an earnings summary from Thompson Reuters:
There was a little bit of everything impacting the markets this week. Corporate earnings were a big story and we also saw a few important economic reports. The central banks both here and abroad were also in focus.
First we’ll touch on corporate earnings, with this being the busiest week of releases all earnings season. There’s no question the results have been good. Tech stocks were a bright spot this week as many in this sector reported results and most were well above expectations.
Below is an earnings summary from Thompson Reuters:
Economic data was mostly positive this week, too. Durable goods (which are items with a longer life) saw an increase in sales of 2.2%. Housing reports showed new home sales had their best month since 1992 (though no one really seemed to know why) and existing home sales slowed a notch. Housing prices continue to climb, too.
The big economic data came on Friday with the release of the third quarter GDP figure. Economists set the bar low, since no one was really sure how much impact the hurricanes would have on economic growth. The result was a solid 3.0% growth, which was even better considering the impact of the storms during that period.
As for the central banks, much of the focus was on the European Central Bank (ECB), who held a policy meeting this week where they were expected to talk about pulling back on their stimulus program.
The ECB has printed enormous sums over the years to purchase bonds to keep their yields low and have also implemented negative interest rates – something never before seen in the history of the world. As the economy improves, however, they needed to step back from these extraordinary measures. The stimulus has supported the markets, so getting out without upsetting them would be a tough task.
In the end, they announced they would reduce the amount of money they are printing to buy bonds beginning in 2018. However, they would keep buying bonds for as long as needed. The open ended-ness of this statement was seen as a positive, so markets rose as a result.
The ECB has printed enormous sums over the years to purchase bonds to keep their yields low and have also implemented negative interest rates – something never before seen in the history of the world. As the economy improves, however, they needed to step back from these extraordinary measures. The stimulus has supported the markets, so getting out without upsetting them would be a tough task.
In the end, they announced they would reduce the amount of money they are printing to buy bonds beginning in 2018. However, they would keep buying bonds for as long as needed. The open ended-ness of this statement was seen as a positive, so markets rose as a result.
Finally, our central bank, the Fed, was also in the news. Fed chief Janet Yellen’s term ends early next year and President Trump is looking for a successor – and it’s playing out a bit like a scene from The Apprentice.
It looks like the field of contenders has been whittled down to three finalists, one being Janet Yellen herself. Another is Jerome Powell, who is currently on the Fed and is similar to Yellen. The last is John Taylor, who has different views from much of the Fed members (but is more aligned with our thinking – he is more practical and less theoretical).
An appointment of Yellen or Powell is likely to be seen as a positive by the markets since it signals continuity. We think a Taylor appointment would probably be best in the long run, but may create more volatility in the market.
It looks like the field of contenders has been whittled down to three finalists, one being Janet Yellen herself. Another is Jerome Powell, who is currently on the Fed and is similar to Yellen. The last is John Taylor, who has different views from much of the Fed members (but is more aligned with our thinking – he is more practical and less theoretical).
An appointment of Yellen or Powell is likely to be seen as a positive by the markets since it signals continuity. We think a Taylor appointment would probably be best in the long run, but may create more volatility in the market.
Next Week
Next week will be another busy one. Corporate earnings will continue to come in at a steady pace. For economic data, all eyes will be on Friday’s employment report, but we’ll also get info on the strength of the manufacturing and service sectors, productivity, personal income and spending, and consumer confidence.
We’re also expecting to hear President Trump’s choice for Fed chief. He indicated the decision will come before November 4th, so it could come at any time next week.
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.
Some of our indicators have begun to deteriorate, which is something we are keeping a close eye on. The image below shows that as the stock market keeps climbing higher, these indicators are moving lower. This shows investors are taking less risk and the stock market is becoming more susceptible to a correction. This is something to watch closely.
Next week will be another busy one. Corporate earnings will continue to come in at a steady pace. For economic data, all eyes will be on Friday’s employment report, but we’ll also get info on the strength of the manufacturing and service sectors, productivity, personal income and spending, and consumer confidence.
We’re also expecting to hear President Trump’s choice for Fed chief. He indicated the decision will come before November 4th, so it could come at any time next week.
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.
Some of our indicators have begun to deteriorate, which is something we are keeping a close eye on. The image below shows that as the stock market keeps climbing higher, these indicators are moving lower. This shows investors are taking less risk and the stock market is becoming more susceptible to a correction. This is something to watch closely.
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.
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.
