Stocks closed the week with modest gains. Through the Friday close, the Dow rose a slight 0.2%, the S&P added 0.7%, and the Nasdaq gained 1.1%. Bond prices continued to fall (as yields rose). Gold moved lower for another week, off 1.1%. Oil prices were again higher, up 1.9% to $51.64 per barrel. The international Brent oil moved higher to close at $57.51.
Source: Barchart.com
Friday also marked the end to a solid month and quarter for the markets. September is normally a volatile month, but this September was the least-volatile on record. For the quarter, the Dow rose nearly 5% and the S&P 500 rose almost 4%.
When stocks do so well, sometimes we have doubts about the rally and whether it can continue. However, there are a few indicators that can help tell us if we should be “suspicious” of the rally or if it has staying power.
Sectors like transportation-related stocks, small cap stocks, and high yield bonds can be good signals. If they are performing well, it tells us the rally has a strong foundation.
As you can see from the charts below, all appear to be doing well and validate the rally we’ve seen in the markets:
Sectors like transportation-related stocks, small cap stocks, and high yield bonds can be good signals. If they are performing well, it tells us the rally has a strong foundation.
As you can see from the charts below, all appear to be doing well and validate the rally we’ve seen in the markets:
Small cap stocks were also the beneficiaries of the proposed tax overhaul announced in Washington this week. Smaller companies tend to have higher tax rates because larger companies can have operations overseas and are able to take advantage of their lower tax rates. While small cap stocks would benefit the most, really all businesses and the country as a whole would benefit from lower rates. This caused stocks to rise on the news.
Below we can see the performance of companies with a higher tax rate compared to those with lower rates:
Below we can see the performance of companies with a higher tax rate compared to those with lower rates:
Also grabbing headlines this week was comments from Fed chief Janet Yellen. She defended the Fed’s view that they would continue to hike interest rates in the coming months, but was careful to note that they would not do so if economic data came in below their projections. The odds of the Fed raising rates again this year currently stands at 76%, so investors are pretty certain to see another hike this year.
Economic data this week was light, but generally positive. Durable goods showed a decent increase from the previous month, personal income and spending rose, too, but consumer confidence took a little breather.
Economic data this week was light, but generally positive. Durable goods showed a decent increase from the previous month, personal income and spending rose, too, but consumer confidence took a little breather.
The final report on second quarter GDP s also released this week and the number stands at a solid 3.1%. However, we’re almost done with the third quarter now, so the news didn’t receive a lot of attention.
Next Week
We’ll see a pickup in economic data next week due to the end of the month and quarter. There will be reports on the strength of the manufacturing and service sectors, factory orders, and the always important employment report. Investors likely won’t take the numbers too seriously as there is likely to be some skewing from the two hurricanes last month.
Several regional Fed presidents will also be making speeches and this always has the potential to move the market.
Investment Strategy
Still 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 the odds of a pullback are high. More pro-business announcements like what we saw with the tax plan this week would be a boost 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.
We’ll see a pickup in economic data next week due to the end of the month and quarter. There will be reports on the strength of the manufacturing and service sectors, factory orders, and the always important employment report. Investors likely won’t take the numbers too seriously as there is likely to be some skewing from the two hurricanes last month.
Several regional Fed presidents will also be making speeches and this always has the potential to move the market.
Investment Strategy
Still 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 the odds of a pullback are high. More pro-business announcements like what we saw with the tax plan this week would be a boost 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.
