Commentary for the week ending 12-22-17

Please note: there will be no market commentary next week. Have a great Christmas and New Year’s!

Stocks turned in their fifth straight week of gains with a modest rise this week.  Through the Friday close, the Dow rose 0.4% and the S&P and Nasdaq both rose 0.3%. Bond prices moved sharply lower and yields higher.  Commodity prices were up across the board, with gold rising 1.7%.  Oil prices were higher by 1.9% to close at $58.35 per barrel.  The international Brent oil moved up to $65.04.

It was all about taxes this week. 

By now you’ve probably heard about the tax bill passed by Congress this week which will go into effect in 2018.  There will be deep rate cuts for businesses and lower rates on the personal side. 

The effect on businesses will significant.  Companies with higher tax rates will fare the best, of course, and the stock of companies with high rates have outperformed the broader market recently. 

It’s not just the high tax companies that will benefit, but all companies will see some sort of benefit from this bill.  It might not be lower rates, but other things like immediate expensing, which allows a company to write off the cost of an asset immediately as opposed to over time.  Or the ability to repatriate cash held overseas at a lower rate, rather than the 35% or more from before.  Or a handful of other benefits. 

The benefits to these corporations will spill over to the workers, as well.  This week we heard many companies announce plans to boost hiring, increase wages, and give bonuses.  Combined with lower tax rates on the individual side, this will be an extra bonus for workers. 

While the bill will be great for the economy and corporate profits, what will it do to the stock market?

One would think it would be good for the market, but that isn’t always the case.  Just look at the reaction in the market this week – the markets stalled on the passage of the bill.  This is because the direction of the markets doesn’t always follow the direction of the economy.  

The image below shows that while the market and GDP often trend in the same direction, there are periods where they move in opposite directions.  This means we shouldn’t load up on stocks just because of the passage of the tax bill.  

Economic data released this week was very good.  Housing reports show considerable strength in the sector.  Durable goods rose, though slightly less than expected.  Personal income and spending were both higher, too. 

The revised GDP report for the third quarter was also released, showing a slight tick lower in GDP than previously thought.  GDP for that period still stands at 3.2% growth, though, which remains a respectable number.  

Overall, the economic picture looks to be doing quite well.  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 risen sharply and stands at multi-year highs, which means economic data has been well above expectations.  This tends to correlate strongly with the stock market, making it a positive sign for stocks.   

Lastly, we’ll touch on bitcoin since we’ve mentioned over the last few weeks.  It’s been the hot market the last few weeks and everyone has been jumping on board. 

While we understand and appreciate the concept, the price seemed to have risen too high and too fast to be sustainable.  One of the many signs of the over-exuberance is the reaction in the market to companies changing their names to include the words “bitcoin” or “blockchain” in the name. 

One of the more fun examples of this came this week from the Long Island Iced Tea company.  The tiny company put out a press release that they will be focusing on the blockchain technology and changing their name to “Long Blockchain Corp.” 

The stock rocketed higher on the news:

This is highly reminiscent of the late ‘90’s, where companies would include “.com” or other internet-sounding words in their name and see the stock immediately shoot higher.  These types of events tend to happen at the peak of exuberance.

Some cracks did begin to show as the week closed.  The digital currency was trading above 19,000 at one point, only to fall sharply on Friday and trade in the 12,000-range.  These volatile moves can shake out a lot of investors. 


Next Week

Next week will be a very quiet one with the Christmas holiday.  We’ll get a few economic reports, including more info on housing and consumer confidence. 

Next week is typically when we see the “Santa Claus rally,” where stocks rise into the end of the year.  It may sound silly, but on average, the market rises 1.4% over the next six trading days. 


Investment Strategy

Still no change here.  Stock prices remain on the high side from a short-term perspective.  We don’t see signs of a big drop coming and are still positive on the market overall and very positive on the economy.  We think the tax bill creates a tailwind for stocks, but as mentioned above, that doesn’t always translate into a higher stock market.  

Bond prices have fallen sharply and yields have risen over the past week.  We’ll be looking to see if buyers step in here to buy the higher yields as they have done in the past, or if this was a shift in the bond market and prices will keep falling.  

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 prefer developed markets to emerging ones at this time.


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.

Commentary for the week ending 12-15-17

Stocks continued their march higher this week, closing at record highs.  Through Friday’s close, the Dow rose 1.3%, the S&P gained 0.9%, and the Nasdaq was higher by 1.4%.  Bond prices closed the week relatively unchanged.  Gold took a turn higher, up 0.8%.  Oil prices closed the week relatively unchanged after gains early in the week, closing down just 0.03% to $57.36 per barrel.  The international Brent oil moved slightly lower to close at $63.25.

There were a few different stories making headlines this week, though it was hard to tell if they were sending the market higher or if it was just a continuation of the upward trend we’ve been seeing lately.   

The big story of the week was the tax bill working its way through Congress, where a tentative agreement on the bill’s details was reached between the House and Senate. 

Looking at the details, the corporate side still looks pretty good.  The tax rate won’t be 20%, but 21%, and it will go into effect next year along with a host of other benefits.  This would be undoubtedly good for corporations and earnings.

The individual side isn’t great, but looks better than earlier plans and will be a net positive.   

As has been the case for much of this process, however, it was two steps forward and one step back.  Shortly after announcing the details, some Senators announced they would withhold their support over last minute demands. 

The news caused markets to fall, especially the banking sector and small cap stocks, which are expected to benefit the most from a tax cut. 

As it stands now, they look to have enough votes to pass and a final vote is scheduled for next Tuesday.  However, nothing is certain with this bunch.   

The Fed was also in the news this week as they held their final policy meeting of the year.  They announced an increase in interest rates (the cost to borrow money), which was largely expected and saw no reaction in the market.

Their projections for next year did include an upgrade in their economic growth forecast, which gave a boost to the market. 

Economic data released this week was very positive.  Retail sales were strong last month and have grown at 5.8% over the past year, which is the best pace since 2012.  

Small business optimism rose to its highest level since 1983.

The next chart is an interesting comparison between small business optimism and GDP.  They tend to track fairly closely but as you can see over the last few months, optimism is very high while GDP remains low.  If the pattern continues, it is possible that GDP will rise considerably – or optimism will fall sharply. 

Sticking with the optimism theme, Gallup reported that investor optimism is at the highest level since 1999. 

Inflation reports also showed increases, though not as large as forecasted.  Inflation metrics that exclude food and energy moderated, which is important to note since this is the way the Fed prefers to measure inflation. 

Lastly, we’ll talk about bitcoin since it seems like everyone is talking about bitcoin. 

This week was an important one for the digital currency as a US market opened to trade their futures (without getting into the details, basically “futures” are a way to bet on their future price).  This added credibility to bitcoin, which is important for a currency you cannot see or touch.

The price of bitcoin rose again this week and has risen so much that it is being compared to notable bubbles of the past.  As you can see in the chart below, its rapid ascent has made it the largest bubble in the history of the world.  Of course, it can only be considered a bubble if it were to pop, which remains to be seen.  Bubbles rarely pop when everyone expects it to, as they are now. 

The chart may be a little difficult to read, but bitcoin is the red line, which recently surpassed the tulip bulb mania of the 1600’s. 

This image seems appropriate for the holiday season:

Next Week

Washington and the tax reform will likely stay in the headlines next week and could add to market volatility. 

As for economic reports, we’ll get info on housing, personal income and spending, and durable goods. 


Investment Strategy

No change here.  Stock prices remain on the high side at this time and we are hesitant to add new money here.  We are still positive on the market and they could start a new leg higher if tax reform is implemented – but could just as easily move lower if it does not.  

The market does have seasonal factors working in its favor here, too.  December is historically the best month for stocks and has been higher about 75% of the time. 

Our longer term outlook remains positive, but less rosy than it was a few months ago.  We like seeing pro-business reforms come out of Washington, but they tend to get watered down as they move through Congress. 

Bond yields may move a bit higher from here and prices lower in the short run, but we don’t see a lot of movement 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.

Commentary for the week ending 12-1-17

Please note: there will be no market commentary next week.  Thank you.

It was a very active week for the markets.  Through the Friday close, the Dow rose 2.7%, the S&P gained 1.4%, while the Nasdaq was lower by 0.6%.  A large decline in bond prices Friday (and rise in yields) put them to a relatively unchanged level on the week.  Gold was down slightly, off 0.6%.  Oil prices turned lower, down 1.1% to $58.29 per barrel.  The international Brent oil moved lower to close at $63.70.

Stocks had a lot of action this week, with events unfolding in Washington having a major impact. 

The focus for most of the week was the tax bill working its way through the Senate.  A frenzy of negotiations and tweaks to the bill had the market rising when progress was made and falling on the setbacks.  The sausage-making process isn’t pretty and unfortunately the longer this process goes on, the worse the bill looks. 

Markets rose sharply Tuesday as more Senators got on board:

And news of John McCain’s support of the tax bill sent markets sharply higher Thursday, giving the Dow its best day of the year.

Companies with high tax rates (like banks and smaller companies) did very well this week, too, as the odds of a tax cut increased. 

At the end of the week, it appeared the Senate had the votes to pass their version of the bill.  This is promising, but it’s too early to get excited.  From here the bill goes to conference where the differences between the House and Senate bills are worked out to produce one final bill.  That version must then be passed by both the House and Senate. 

Also impacting the market was Friday’s news of ex-national security advisor Mike Flynn pleading guilty to lying to the FBI.  There are many unknowns with this story and over the weekend it turned out much of it was false, but the damage was done markets moved sharply lower since it could impact the pro-business policies of this administration. 

We’ve heard some investors and television pundits saying that Washington has had no impact on the market, but this week undoubtedly proves that the market is being moved by the policies of this administration. 

Switching gears, the week was also helped by a strong start to the Christmas shopping season.  Black Friday and Cyber Monday were both the strongest days ever for online sales, according to Adobe.  It’s too early to tell how much impact that had on in-store sales, but early reports look positive. 

Economic data this week was mostly positive, too.  The biggest news was the GDP report for the third quarter, which was revised to show 3.3% growth instead of 3.0% initially estimated.  This comes after a 3.1% growth in the second quarter, so economic growth has been solid. 

Housing reports also came in solid, with home prices continuing to climb (and they are far outpacing the growth in wages). 

Consumer confidence continues to look strong, hitting its highest level in 17 years. 

Lastly, a big story this week was Bitcoin.  There has been a lot of excitement as its price has skyrocketed recently and is up almost 1,000% this year. 

We won’t get into the pros and cons of the cyber currency, but stories like this usually happen at market tops:

Next Week

Washington and the tax reform will likely stay in the headlines next week and could add to market volatility. 

We’ll see some important economic reports, including factory orders, the strength of the service sector, and culminating with the big monthly employment report on Friday.


Investment Strategy

Stock prices remain on the high side at this time and we are hesitant to add new money here.  We are still positive on the market and as we saw this week, markets could start a new leg higher if tax reform is implemented – but could just as easily move lower if it does not.  

The market does have seasonal factors working in its favor, though.  December is historically the best month for stocks and has been higher about 75% of the time. 

Our longer term outlook remains positive, but less rosy than it was a few months ago.  We like seeing pro-business reforms come out of Washington, but they tend to get watered down as they move through Congress. 

Bond yields may move a bit higher from here and prices lower in the short run, but we don’t see a lot of movement 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.