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.
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.
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.
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.
