Commentary for the week ending 2-23-18

Stocks had a volatile week but a late-week surge put them firmly in the green.  Through the Friday close, the Dow rose 0.4%, the S&P gained 0.6%, and the Nasdaq was higher by 1.4%.  The story was similar in the bond market where they saw little change on the week.  Gold moved lower, off 1.9%.  Oil was positive on the week, up 3.1% to close at $63.57 per barrel.  The international Brent oil rose to $67.10.

Our market commentary will be a little short this week as I’ve been considerably under the weather for much of the week.  That said, though markets saw some big swings, there wasn’t a lot of news to report on anyway.  

A major factor behind the market swings has been the Fed and expectations for how much they will pull back on their stimulus.  The Fed minutes from their latest meeting were released on Wednesday, giving us some insight on this. 

Fed officials seemed to show more confidence that the economy was picking up and that inflation was moving closer to their 2% inflation growth target (though they have a mandate from Congress for stable prices – which means 0% inflation – but we digress). 

This sounds like a positive development, but good news is bad news here since it means they could pull back more on their stimulus by raising interest rates faster than expected.  In fact, investors originally believed the Fed would raise interest rates three times this year, but the odds of a fourth rate hike is picking up.

Lastly, corporate earnings have been very solid this quarter, rising 15% according to Factset.  However, earnings from Wal-Mart contributed to the large selloff Tuesday. 

While their numbers were generally solid, their online sales grew by just over 20%.  Though this sounds impressive, investors were expecting growth of around 50%, so the number was seen as a disappointment.  Shares of the stock dropped 10%, its biggest one-day loss in 30 years.


Next Week

Next week will be a little busier for economic data.   We’ll get info on housing, durable goods, personal income and spending, the revision to GDP, and the strength of the manufacturing sector. 

New Fed chief Jerome Powell will be making his first appearance before Congress and investors will be watching closely for any clues on the prospect of future interest rate hikes.
 

Investment Strategy

No change here.  Stocks have come off their attractive-looking levels for new money, but still look to have room to move higher.

Looking out longer, though, is becoming more difficult.  While our economy is likely to do well, higher interest rates from the removal of the Fed’s stimulus introduces a new wrinkle and will add to the volatility.  It’s anyone’s guess how this will play out. 

On to bonds, where prices have trended lower (and yields higher) the last few months and are now around their lowest level in four years.  Buyers have yet to step in here, signaling this may be a shift in the bond market where yields continue to rise.   This is good for investors needing more income, but the overall price of the bonds are lower.

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 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 2-16-18

An awful week in the markets last week turned into a great week this week.  Through the close Friday, both the Dow and S&P rose 4.3% and the Nasdaq gained 5.3%.  Bond prices again fell as their yields moved higher.  Commodities turned higher, with gold up 2.6%.  Oil moved higher by 4.1% to close at $61.61 per barrel.  The international Brent oil rose to $64.90.

After two of the worst weeks in stocks in over two years, this week we rebounded for the best week in over five years for the S&P 500.  Losses from the recent plunge were cut in half.  

Investors reentered the market this week to buy up stocks that are now seen as trading at a more reasonable level.  Solid fundamentals are still cited as the reason for investing in stocks at this point.  Economic growth is accelerating and the new tax law will boost corporate profits and worker pay.  The economy definitely has a tailwind behind it.

We saw this week, though, that some serious jitters remain, particularly around inflation. 

Inflation worries helped spark the selloff two weeks ago, so investors have been watching this metric closely.  As we’ve often discussed here, higher levels of inflation will cause the Fed to pull back on their stimulus.  The record low interest rates from the Fed have acted like a pain killer and were key to pushing stocks higher over the years.  As that pain killer is removed, we become more susceptible to large swings in the market like we saw the last few weeks. 

Inflation reports released this week revealed a lot of that volatility. 

Data on inflation at the consumer level (the CPI report) was released Wednesday, coming in hotter than expected.  Markets were trading higher before the announcement and immediately plunged on the news, though they later rebounded. 

A report Friday showing rising import prices was also seen as inflationary and markets dropped sharply on the news.  Again, though, they later rebounded.

This dynamic is likely to continue.  While we have positive economic data, we also have a Fed pulling back on the stimulus that has helped prop markets up.  This could be a recipe for more volatility in the markets.

Other economic data this week was mixed.  On the negative side, retail sales fell and industrial production was lower despite positive expectations. 

On the positive side, small business optimism improved and is inches from its recent peak. 

An interesting part of the survey revealed that for the first time in five years, the primary concern for small business owners was not taxes or government regulations.  This is a great sign. 

Next Week

Next week will be very quiet for economic data, where we’ll get info on housing and little else.  The Fed will be in focus as several members will be making speeches, plus the minutes of their latest meeting will be released.  Corporate earnings re trailing off but many reports will still be released this week, which also has the potential to impact the market. 


Investment Strategy

Stocks quickly came off their attractive-looking levels for new money, but still look to have room to move higher.

Looking out longer, though, is becoming more difficult.  As discussed earlier, the economy clearly has tailwinds at this time.  However, higher interest rate from the removal of the Fed’s stimulus introduces a new problem and will add to the volatility.  It’s anyone’s guess how this will play out. 

On to bonds, where prices have trended lower (and yields higher) the last few months and are now around their lowest level in four years.  Buyers have yet to step in here, signaling this may be a shift in the bond market where yields continue to rise.   This is good for investors needing more income, but the overall price of the bonds are lower.

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 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 2-9-18

It was an awful week on Wall Street.  Through Friday’s close, the Dow and S&P 500 both fell 5.2% and the Nasdaq was off 5.1%.  Bond prices continue to fall as their yields move higher.  Commodities were again lower across the board with gold off 1.4%.  Oil prices had their worst week in two years, plunging 9.8% to close at $59.05 per barrel.  The international Brent oil moved down to $62.71.

First, the good news: stocks are looking cheaper.  The bad news is it took the worst week in two years to get there.

News reports on the drop in stocks were hard to miss this week, so you’re probably aware of the sharp decline in the markets.  In just two weeks, they’ve fallen more than 10% from their highs. 

This week also had both the first and second-largest point decline in the Dow ever.  Of course, the decline sounds ominous, but this is more because the market levels are so high and a point worth less than it used to be.  On a percentage basis, the declines this week don’t even rank in the top-100 of all market declines.  

The decline in stocks has been strong and swift, but some perspective is needed.  Stocks are trading back to December levels and we’re still up 12% over the past year. 

Just like last week, there was no specific news or events responsible for market decline this week.  The upward momentum in stocks has broken down – and that alone can spook investors and cause markets to fall. 

The most likely culprit for the volatility has been the rising interest rates.  The bond market has seen a sharp rise in yields (and, therefore, a drop in prices) and this raises concerns among investors. 

Eyes often glaze over at the mention of the word “bonds,” but stick with us for a minute… 

Investors are concerned that the improving economic data will cause the Fed to pull back further on their stimulus.  For years they’ve printed money to buy bonds and lower interest rates as a way to boost the economy.  This has acted like a pain killer for the markets, allowing stock and bond prices to rise even in the face of disappointing fundamentals.  

Now the stimulus is being removed as the economy improves and the party is ending.  Interest rates are moving higher, which is like a kryptonite for stocks.  This contributed to the volatility. 

Additional spending from Washington announced this week also added to the problem.  The increase in spending will result in deficits (only in the short term, we believe) that need to be financed by debt.  That means the government needs to sell bonds, only the Fed will not be there to buy them like they did in the past.  This, too, is a concern for investors. 

Outgoing Fed chairwoman Janet Yellen probably didn’t help the market much this week, either.  Her term officially ended this Monday and the reigns were handed over to new chief Jerome Powell. 

In her last interview as Fed chief, Yellen indicated stock prices were on the high end and that this was a concern. 

It’s never good to hear the Fed chief say this, especially when one of their “unofficial” objectives was to raise stock prices.  This comment, along with significant last-minute restrictions she placed on Wells Fargo bank, added to investors’ concerns.   It also seemed cowardly to do on her last day in office and gave her predecessor another problem to worry about. 

Turning to economic data this week, a report on the strength of the service sector came in at its highest level in ten years.  This was yet another report showing the strong economy, causing investors to worry that an additional pullback in stimulus was likely.

On the negative side, the trade deficit continued to grow.  Out exports rose – which is a positive – but imports grew even more.  This is a very important metric for GDP.  A large level of imports took two points off GDP last quarter and is likely to weigh on GDP again this quarter. 

Lastly, corporate earnings remain strong.  According to Factset, earnings are on pace to rise 13% over the past year while sales have increased 7.5%.  The level of sales is noteworthy as they have now risen the past six quarters.  Much of the rise in earnings over the last several years has come from companies cutting costs – not from increasing sales, so this is a positive development. 

Next Week

Volatility will likely persist next week regardless of any economic reports or corporate earnings, but there will be a few things to keep an eye on.  For economic data, we’ll get info on inflation, retail sales, industrial production, and housing.  There will still be many earnings reports released, which can always have an impact on the individual stocks.


Investment Strategy

The selloff we’ve seen over the last two weeks has put markets into oversold (cheap) territory in the short run.  We did a little nibbling this week when we wrongly thought markets were turning higher and we’re likely to commit more when we see some positive traction take hold. 

The best time to buy is when you see other investors selling in a panic.  A great contrary indicator is when CNBC talks about turmoil in the markets.  As you can see in the chart below, they often display these graphics at market bottoms (the red circles).  

Another interesting real-time metric comes from CNN.  They put out a sentiment gauge (LINK) that looks at several pieces of market data to determine if investors are “fearful” or “greedy.”  This week we hit the highest “fear” level since 2015.   As a wise investor once said, “be fearful when others are greedy and greedy when others are fearful.”

While the market decline over the last two weeks has been significant, it may be presenting a good buying opportunity for stocks. 

Bond prices have trended lower (and yields higher) the last few months and are now around their lowest level in four years.  Buyers have yet to step in here, signaling this may be a shift in the bond market where yields continue to rise.   This is good for investors needing more income, but the overall value of the bonds are lower.

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 2-2-18

It was a rough week on Wall Street as stocks turned in their worst performance two years.  For the week, the Dow fell 4.1%, the S&P lost 3.9%, and Nasdaq was down 3.5%.  Bonds remained a big story as their prices fell further and yields rose.  Commodities were lower across the board with gold off 1.6%.  Oil prices came off their highest level in three years, down 1.6% this week to close at $65.06 per barrel.  The international Brent oil moved down to $68.23.

Volatility really picked up this week as stocks sold off strongly, turning in their worst week in two years. 

First, the good news.  This week we closed out the month of January, which was the best month in 18 months and best January since 1987. 

There is an old saying on Wall Street: “As goes January, so goes the year.”  It’s called the January Barometer and it suggests that a positive January results in a positive year, and vice-versa.  History shows it has been right about 75% of the time, so there may be something to it. 

While the month was good, this week was downright rough for investors.  Friday alone saw a 2.5% drop on the Dow and was down nearly 700 points at one time – the worst point decline since 2008.  Clearly the charts we showed last week of the winning streaks in stocks abruptly came to an end this week (the charts showed it’s been almost 100 days without a 0.6% decline in the S&P and 200 days without back-to-back declines of more than 0.25%).

Bouts of selling like we saw this week are really not that unusual.  As those charts suggested, the real anomaly has been the lack of volatility.  Stocks have seen remarkable gains and were on the expensive side, so a pullback was not unexpected – although this week’s selloff was stronger than we’d have imagined. 

Several of our indicators were severely overbought (expensive), suggesting a pullback was possible:

What caused the selling we saw this week?  There wasn’t (and usually isn’t) one thing we can point to as the culprit.  We’ve seen volatility picking up moderately over the last two weeks, so there was a clue investors were getting antsy. 

One factor contributing to the selling was a rumor that many large investment funds – like pension funds – would be doing rebalancing this week. 

For a little background, a fund may have a 50/50 target allocation between stocks and bonds, but the performance of the stock market may have increased the value of their stock holdings to make the portfolio 60% stocks and 40% bonds.  This would require rebalancing, so their stock holdings would have to be sold to get back to that 50/50 allocation.  Such a large amount of selling can have an impact on the market.

Another factor for the selloff in stocks would be the rising bond yields.  Yields have been rising sharply (so their prices have been falling), and higher bond yields make dividend stocks less attractive.  High dividend-paying sectors like utilities and telecoms were hit especially hard this week as a result. 

Yet another likely reason for the selloff was better economic news.  Yes, good news was bad news.  The Fed is slowly pulling back on its stimulus program, which had helped to boost stock prices.  An acceleration in economic growth means the Fed may pull back on stimulus even faster, which they alluded to in a policy meeting this week.  Less stimulus will also weigh on stock prices. 

The week was a busy one for economic data, too.  On the positive side, home ownership ticked higher and consumer spending was up.  Consumer confidence also rose and remains near the highest level since 2000:

One interesting component of the consumer confidence number was people’s expectations for stock market increases, which stood at an all-time high.  This reading was taken last week (before this week’s decline) and as is often the case, when everyone believes something about the market, the opposite usually happens. 

The strength of the manufacturing sector ticked slightly lower, but remains within the upper trend we’ve seen since 2016.

Lastly, the always-important monthly employment report came in stronger than expected, with the economy adding 200,000 jobs last month. 

On the negative side, productivity declined for the first quarter in two years, which is an important factor for economic growth.  Also, people are saving at the lowest level since 2005.  These low savings rates often came before economic busts (late 1990’s and mid-2000’s), so this is also a metric to keep an eye on. 

Lastly, this week was the busiest one for corporate earnings reports from the fourth quarter.  Results have been solid, with Factset reporting a 12% growth for the quarter.  Even more impressive has been companies increasing their expectations for the upcoming year, which should be a positive for stocks. 


Next Week

Next week will be a fairly quiet one for economic data.  We’ll get info on the strength of the service sector and employment.  It will be a busy one for corporate earnings, though, as we continue to get a solid amount of corporate info. 

Talks of a possible government shutdown are likely to accelerate next week, which is likely to create some volatility. 


Investment Strategy

No change here.  In the short run, we’ll need to see stocks come off further before committing any new money to broader indexes.  We’re upbeat on the market in the longer term, though, as new economic policies will help corporate earnings and the economy in general. 

Bond prices have trended lower (and yields higher) the last few months and are now around their lowest level in four years.  Buyers have yet to step in here, signaling this may be a shift in the bond market where yields continue to rise.   This is good for investors needing more income, but the overall value of the bonds are lower.

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.