Commentary for the week ending 5-25-18

Markets saw a lot of movement this week, closing with modest gains.  For the week, the Dow was higher by 0.2%, the S&P rose 0.3%, and the Nasdaq returned 1.1%.  Bond yields moved off their highest level since 2011 as their prices rose.  Gold finally turned higher after trending lower since April, rising 0.9% this week.  Oil reversed course, too, declining from its highest level since 2014.  It lost 5.3% this week to close at $67.50 per barrel.  The international Brent oil, which is used for much of our gas here in the East, closed down to $76.33.

There was very little economic data or corporate earnings reports to move markets this week.  Instead, stocks moved sharply on geopolitical headlines  North Korea and China received a lot of attention

The chart below shows the market reacting to the various headlines this week:

Stocks opened the week on a positive note as fears of a trade war with China eased over the weekend.  Proposed tariffs were put on hold while trade negotiations continued. 

It looked like progress on trade was being made, too.  The U.S. planned to ease sanctions on Chinese telecom company ZTE for their violations while the Chinese agreed to buy more agricultural products and lowered the duties for autos coming in to their country.

Unfortunately the good news didn’t last long. 

Tuesday afternoon, President Trump hinted that the summit with North Korea scheduled for June 12 might not happen.  Stocks moved lower on the comments and continued lower into Wednesday.

By Thursday morning, President Trump announced the summit was cancelled, causing stocks to again fall. 

While a possible resolution in the North Korean drama would be great for the world, the stock market is looking at this more in the terms of trade with China. 

China’s influence on North Korea cannot be overstated and this was being used as a part of the trade negotiations with China.  The U.S. had softened its tone on trade with China in exchange for their help in bringing North Korea to the table.  Now that the summit is off, there is a worry that the U.S. may again take a hard line with China. 

It wasn’t all bad news this week, as the minutes from the Fed’s latest meeting helped give stocks a boost. 

The minutes showed that the Fed is very likely to pull pack further on their stimulus by raising interest rates at their next meeting (higher interest rates would make it more expensive to borrow money).  However, the pace of any future increases in rates looks to be moderate. 

As you can see in the chart below, the odds of a fourth rate hike this year dropped sharply:

Lastly, economic data released this week was light, though the reports released were on the disappointing side.  Sales of durable goods, which are items that have a longer life span, fell from the previous month.  Additionally, the pace of housing sales also declined from the previous month.  This may reflect the higher mortgage rates that make it more expensive to purchase a home. 

Next Week

A new month begins next week, which means we’ll start getting economic data for May.  The big report comes on Friday with the monthly employment report and we’ll also get info on the strength of the manufacturing sector.  The Fed will also release its Beige Book report, which gives an anecdotal look at the strength of the economy. 


Investment Strategy

No change here.  Stocks are still on the expensive side in the short term.  That doesn’t mean we think they are going to fall, just that the odds of a decline are higher than a rise. We would be cautious about adding new money here.  

The longer term direction of the market remains difficult to predict.  Fundamentals are still very good with pro-business policies out of Washington providing a solid tailwind.  However, rising interest rates are like Kryptonite to stocks and could pull markets lower.  It’s tough to say where we think the market will go the long run.   

Bonds are also volatile at this time.  Yields have broken out higher in the last few weeks (so prices moved lower), but we think they are near the high end of their range right now.

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 5-18-18

Large declines early in the week put stocks in a hole they couldn’t climb out of.  Through Friday’s close, the Dow and S&P were both down 0.5% and the Nasdaq fell 0.7%.  Bond yields continued to move higher, hitting their highest level since 2011.  Gold moved lower for another week, off 2.0%.  Oil keeps climbing, up 1.0% this week to close at $71.35 per barrel.  The international Brent oil, which is used for much of our gas here in the East, hit its highest level since 2014 to close at $78.71.

It would figure that last week – the week we were out of the office – would be the best week in two months and see stocks higher every day.  This week – where we were back in the office – was a little more challenging.

We’ll get to stocks in a minute, but the bond market continued to be a big story this week. 

This week bond yields hit their highest level since 2011 (which means prices hit their lowest level), as measured by the 10-year government bond (which is seen as a benchmark for the bond market).   

Two factors have been behind the falling prices and rising yields for bonds.  One is the improving economy.  Investors move out of stocks and into the safer bond market when they are worried about the future.  As the economy improves, this reverses.

Another major factor is the Federal Reserve, who have set a a path of raising interest rates, albeit at a slow pace. 

Why are bond yields important?  They make it more expensive to borrow money, since you will have to pay the money back at a higher interest rate.  For example, mortgage rates are now at the highest level since 2011, which makes it more expensive to buy a home. 

These higher rates are impacting the stock market.  Just this week, losses were mostly confined to sectors that don’t do well when interest rates rise – sectors like real estate and utilities.  These sectors offer a high dividend so they are popular when bond yields are low.  They lose appeal when bond yields rise, hence the selloff this week. 

The improving outlook on the economy is also causing the U.S. dollar to strengthen.  The dollar has seen an increase of 4% already this month. 

A stronger dollar is generally good for the U.S., but it can have some drawbacks.  Companies that sell their items overseas, for example, tend not to do as well since the stronger dollar makes our items look more expensive to foreign buyers and therefore reduce sales. 

For this reason, the stronger dollar played a part in the recent volatility in the market. 

One area that does well in an improving economy and strong dollar is small cap stocks.   This sector hit a new record high this week.

Smaller companies are not as internationally-focused and get more of their sales here in the U.S.  Some people believe they give a better idea of the strength of the economy because of this.  These small companies also have another tailwind from the new tax law, since they tend to pay higher tax rates than larger companies. 

Altogether, small cap stocks are in a pretty good place here. 

Switching gears, corporate earnings season for the first quarter is now largely complete.  Companies have reported earnings growth of 25% according to Factset, which is the best quarter since 2010.  This quarter was impressive, but more companies are warning that while the rest of the year looks solid, this was likely the best quarter of the year. 

Earnings reports are the past and investors are forward looking, so this news has added to the volatility in the market. 


Next Week

Next week will be fairly quiet.  Earnings season is nearly over, but we’ll get a trickle of earnings, mostly from retail companies.  It looks to be fairly quiet for economic data, too, where the only big reports will be info on housing and durable goods.
 

Investment Strategy

Stocks quickly moved from looking cheap to expensive on a short term basis last week, so it wasn’t surprising to see them stall out this week.  Markets still have more risk to the downside at this point – which doesn’t necessarily mean a decline is coming, but we would be cautious about adding new money here.  

The longer term direction of the market remains difficult to predict.  Fundamentals are still very good with pro-business policies out of Washington providing a solid tailwind.  However, rising interest rates are like Kryptonite to stocks and could pull markets lower.  It’s tough to say where we think the market will go the long run.   

Bonds are also volatile at this time.  Yields have broken out higher in the last few weeks (so prices moved lower), but we think they are near the high end of their range right now.

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 5-4-18

It’s that time of year again.  As you may be aware, our office is located at the entrance of TPC Sawgrass, home of the Players Championship. Tournament practice rounds begin Monday and we will be attending for much of the week. However, we will be in the office every day, though our hours will vary day-to-day. We will continue to monitor the market even though we may not be in the office.  Any phone calls not immediately answered will be returned the same day. We foresee little to no inconvenience to our clients and hope for your understanding. There will be no market commentary next week.  Thank you.

Stocks spent most of the week in negative territory though solid gains Friday erased some of the losses.  For the week, the Dow and S&P were both down 0.2% while the Nasdaq was higher by 1.3%.  Bonds saw little change on the week.  Gold lost ground again, down 0.4%.  Oil moved higher, up 2.5% to close at $69.79 per barrel.  The international Brent oil, which is used for much of our gas here in the East, rose slightly to $75.00.

Stocks saw a lot of action this week, pushed and pulled by a variety of different stories.  Market technicals played a part in some of the moves, but there was also news out on earnings, economic data, and the Fed that all had an impact. 

We don’t spend a lot of time talking about the technicals in this commentary (the technicals focus on the charts, where price and volume can indicate where an investment is likely to go), but they played an important part in the in the behavior of the market this week.

One widely-recognized technical indicator is the 200-day moving average, which is basically the average closing price over the last 200 days.  This level can often act as a floor or a ceiling for stock or market prices. 

As you can see in the chart below, this 200-day average is currently acting as a floor (or support) for market, where prices rarely go below this level.  The market hit the 200-day average briefly Thursday and Friday before rebounding sharply both times. 

This week was also busy for news moving the market.  We’ll start with corporate earnings, with just over half of the companies in the S&P 500 having reported results at this time. 

The earnings numbers still look good – earnings have risen more than 20% and revenue (what a company earned through sales) rose roughly half that. 

Much of the growth in earnings came from the corporate tax cut, which has been a big tailwind for companies.  Growth in earnings still looks good if we take out that tax impact, too.  According to Thompson Reuters, earnings have risen 12.1% on a pre-tax basis, which is solid. 

Still, companies that have seen the biggest reduction in tax rates have outperformed those that already had a lower tax rate:

There were several important economic reports released this week, too, and the results were disappointing.

The economy added 164,000 jobs last month, below the 190,000 expected. 

However, the unemployment rate hit 3.9%, its lowest level in 17 years. 

The strength of the manufacturing and service sectors also ticked lower over the last month.  They still show growth, just at not as strong of a pace as before. 

We also saw inflation tick higher according to the PCE inflation report (PCE stands for Personal Consumption Expenditure, which shows price changes in a fixed basket of items).  The PCE is important because it is the primary inflation indicator the Fed looks at for determining policy.  Inflation according to the PCE, inflation hit 2% over the past year, right at the level the Fed is targeting. 

Speaking of the Fed, they held a meeting this week to discuss their economic policy.  Investors have been worried that rising inflation and the growing economy would cause the Fed to further put the brakes on their economic stimulus policy.  However, their comments this week suggested they were unlikely to do so. 

The Fed placed an emphasis on the word “symmetric” when referring to inflation.  Their target is 2% inflation, but as you can see in the chart below, inflation has been below that level for many years.  By “symmetric,” they mean they want inflation to run above 2% for a while before they become aggressive in pulling back on stimulus. 

Frankly, we think their inflation target should be 0% as it was mandated by Congress.  Rising inflation is harmful to consumers who have to pay more and more every year.  High inflation only benefits those with high debt…like the government.  Interesting how that works out. 


Next Week

Next week will be another busy one.  We’re on the back half of earnings season, but there will still be a large number of companies releasing their results.  We’ll get another look at inflation with the CPI and PPI reports, plus small business optimism, and employment. 


Investment Strategy

Stocks are looking more attractive after the selloff over the last few weeks.  Prices need to move a little lower before they become a compelling buy, but they are near an interesting level.  We think it is unlikely the Fed will aggressively tighten their policy, especially after their comments this week on inflation and the mediocre economic data, so this will also help stocks higher. 

The longer term direction of the market is a little difficult to predict.  Fundamentals remain very good with pro-business policies out of Washington providing a solid tailwind.  However, rising interest rates (which are like Kryptonite to stocks) could pull markets lower.  It’s tough to say where we think the market will go the long run.   

Bonds are also volatile at this time.  Yields have broken out higher in the last few weeks (so prices moved lower), but we think they are near the high end of their range right now.

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.