Commentary for the week ending 6-22-18

It was another rough week for the markets.  Through Friday’s close, the Dow was off 2.0%, the S&P fell 0.9%, and the Nasdaq lost 0.7%.  Bonds prices saw slight increases as their yields moved lower.  Gold had a modest decline of 0.3%.  Oil prices rose sharply, up 6.4% to close at $69.28 per barrel.  The international Brent oil gained $2.50 to close at $75.53.

There was very little economic or corporate news this week, so topics like trade dominated headlines – hence all the volatility.

Remember, last week President Trump announced 25% tariffs on $50 billion worth of Chinese goods coming into the US.  China swiftly responded with tariffs on US products heading into China.

Over the weekend, President Trump responded with a new round of tariffs of 10% on an additional $200 billion in Chinese products.  China said they would respond with even more tariffs, too.

We are clearly inching towards a trade war, making investors nervous and sending stocks lower this week. 

While some indexes like the Dow were down significantly this week, other indexes like the Nasdaq have fared better.  The Nasdaq has a large amount of tech stocks, which investors like because they don’t have a lot of exposure to China (actually, many aren’t even allowed in China – which is part of the fight).

Investors are also moving to stocks in Russell 2000 index, which is made up of smaller stocks.  These smaller companies don’t have a lot of exposure to China, either, which makes them a safer play in the event of a trade war. 

While small caps and tech stocks have done well recently, we would advise caution.  All the money pouring into these sectors have made these stocks fairly expensive, so we would be careful of a sharp reversal here if the tide does change.

Also interesting to note, the Chinese stock market has seen a sharp sell-off amid these rising trade tensions.  The Chinese government often steps in to prop up the market if it falls too much, and it’s possible they will have to do so here (if they aren’t already).  This is very expensive for the Chinese and it could be seen as a win for the US. 

In other headlines, GE was in the news because the stock is being pulled out of the Dow index (the Dow is made up of only 30 stocks) and replaced by Walgreens.  This is notable because GE was one of the original Dow members all the way back in 1896. 

Some analysts didn’t like the move because the Dow is supposed to be a diversified measure of the broader market and economy, but it seems like the committee behind the decision was trying to get rid of a poorly performing stock (GE is down 55% in the past year). 

Regardless, this could be a good buying opportunity.  Past Dow members tend to get pulled out after they’ve had a large decline and often rebound after their removal.

According to Ned Davis Research dating back to 1972, the stocks that were removed from the Dow outperform the index by 9.2% over the next year.

Also, the WSJ Market Data group found that the last 10 companies removed from the Dow averaged a 6.4% return in the following year.  Conversely, the 10 companies that were added lost 4.6% over the same period. 

Here’s a look at the performance of the last nine stocks removed from the Dow (it would have been 10, but the GM bankruptcy wasn’t able to be charted).

Though GE is going through a lot of restructuring and is likely to remain volatile, history suggests this may be a good buying opportunity for a patient investor. 


Next Week

Trade is bound to remain in the headlines next week and will likely create more volatility.  Next week will be another fairly quiet one for economic data.  We’ll get more info on housing, plus retail sales and personal income and spending.


Investment Strategy

The overall stock market is sitting right between expensive and cheap levels.  We’re at an interesting point where parts of the market – like the small cap and tech sectors we talked about earlier – are overbought (expensive), while other areas like bigger multi-national Dow stocks are oversold (cheap).  More trade threats are likely to continue this trend, but a cooling-off may see it reverse. 

There is no change in our longer term forecast, which remains difficult to predict.  Fundamentals are still very good with pro-business policies out of Washington providing a solid tailwind.  However, rising interest rates have historically pulled 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 6-15-18

The major markets took divergent paths this week.  Through the Friday close, the Dow dropped 0.9%, the S&P rose just 0.01%, and the Nasdaq was up 1.3%.  Bonds prices saw slight increases as their yields moved lower.  Gold had a 1.2% decline.  Oil prices declined for the fourth straight week, losing 2.2% to close at $64.38 per barrel.  The international Brent oil, which is used to make much of the gas here on the east coast, moved down to $73.00.

This week was described by some news outlets as the most important week of the year for the markets (and we all know news outlets aren’t prone to hyperbole, right?).  But there really was a lot going on – the G-7 summit, the North Korean summit, and several central bank policy meetings. 

These news events didn’t always lead to action in the market, though.

The conclusion of G-7 summit – which was appropriately described as “bumpy” – saw the Dow rise a whopping 5 points, or just 0.02%.

Stocks also had a muted reaction after the North Korean talks, with the Dow falling just 1 point, or 0.006%. 

The lack of reaction in the markets was likely because the end result is what most investors expected.  Also, investors were waiting for the central bank meetings later in the week before making any big investment moves. 

It wasn’t until the Fed policy meeting Wednesday that we saw some action in the markets.  The Fed announced a pullback in their stimulus program by raising interest rates, which makes it more expensive to borrow money (for example, mortgage rates are at their highest level since 2013 at an average of 4.54%). 

The news of a rate hike was not unexpected.  However, the Fed indicated they were likely to raise rates another two times this year, for a total of four increases.  Markets sold off on the news since this is a little less stimulus than many expected. 

One interesting note on the Fed meeting was the way new Fed chief Jay Powell talked about Fed policy.  In his press conference, he made a point to note that their discussions would be in “plain English.” 

Past Fed chairs could be overly wonky in their discussions.  His predecessor, Janet Yellen, was almost unbearable to listen to.  The change in direction with Jay Powell is a breath of fresh air for the Fed. 

Switching gears to tariffs, where on Friday President Trump announced $50 billion in tariffs on Chinese goods coming into the US.  The news was met with an immediate response from the Chinese that they would apply tariffs on US products coming into China.  The threat of a trade war is increasing and the market sold off as a result. 

Lastly, economic data this week was mostly positive.  The big news was on inflation, which stands at its highest level since 2012.  Inflation at the consumer level has risen 2.8% over the past year and 3.1% at the producer level. 

These levels are important because the Fed has a goal of 2% inflation (event though they are mandated with stable prices – which would mean 0% inflation).  With inflation now well above 2%, there is the chance the Fed pulls back on its stimulus even further. 

In other economic data, retails sales rose, industrial production ticked lower, and small business optimism hit new record levels. 

The breakdown of problems facing small business owners is interesting.  Issues with the government continue to decline while rising wages and unqualified workers continue to be a problem. 

The economic data this week shows a further increase in the strength of the economy and estimates for this quarter’s GDP rose on the news. 

Next Week

Next week looks to be much quieter.  The focus will likely be on trade and tariffs and for economic reports we’ll get info on housing.  And that’s about it. 


Investment Strategy

Stocks took a breather this week as investors took some gains off the table.  Stocks may have room to move a bit lower from here, but we don’t expect any significant declines.  The market has economic and earnings tailwinds working for it and market internals (like the amount of stocks rising versus the ones falling) still look decent.  We wouldn’t put any new money in here, but don’t think the decline will last long.

There is no change in our longer term forecast, which remains difficult to predict.  Fundamentals are still very good with pro-business policies out of Washington providing a solid tailwind.  However, rising interest rates have historically pulled 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 6-8-18

It was a solid week for the markets.  Through the close Friday, the Dow gained a solid 2.8%, the S&P rose 1.6%, and the Nasdaq was higher by 1.2%.  Bonds were relatively unchanged.  Gold climbed 0.7% on the week.  Oil moved lower for the third straight week, losing 0.4% to close at $65.56 per barrel.  The international Brent oil, which is used to make much of the gas on the east coast, moved slightly lower to $76.34

The news cycle was fairly quiet most of the week.  Without that news pushing the markets, the tailwind from the solid economy and rising earnings helped send stocks higher. 

The S&P 500 stock index rose to its highest level in three months.

Meanwhile, a record high was hit in the tech-heavy Nasdaq market…

…and also in smaller stocks with the Russell 2000 index.

Markets briefly saw some pressure Friday when the G-7 summit began.  These summits are normally mundane events where these countries gather to coordinate policies.  As you’re probably well-aware, this meeting has generated a lot more buzz because of President Trump’s aggressive trade policies. 

President Trump showed no signs of backing down as this meeting approached, either.  The heads of Canada and France took to Twitter on Thursday to express their displeasure with the recently-announced tariffs, only to be met with a swift rebuke from the President. 

While we’re sure something needs to be done on trade, we aren’t sure how this will play out (really, no one is sure).  Either way, it could be a long process that can add some volatility to the market in the meantime.

Switching gears to economic data which was mostly positive this week.  The trade deficit narrowed as we exported a record amount of oil.  The strength of the service sector also moved a notch higher.  This, combined with the manufacturing sector, has trended higher since 2016. 

We also have an interesting development in the employment picture.  Announced in the Jolts report (which reports on the amount of job openings to turnover) was that in the first time since they began keeping records in 2000, the number of job openings (6.7 million) exceeds the number of people unemployed (6.3 million).

This is interesting because there are plenty of jobs available but there is something that is keeping them from being filled – which is part of a much larger discussion.  Some point to generous unemployment benefits, or a lack of qualified workers, or workers unable to meet the drug-test or criminal background requirements, or even employers offering too little pay.  Either way, this is something that eventually needs to be addressed for the long-term health of the economy.  

Finally, a new rule was passed this week that will likely affect everyone reading this newsletter.  Regulators with the SEC approved a request for shareholder reports to be distributed online and no longer by mail. 

You know these reports and probably receive several a quarter.  Fund companies have pushed for them to be delivered electronically since the costs in mailing them are not insignificant.

You won’t see any changes for several years, however.  The new rule goes into effect in 2021 and they will still mail you a notice that the report is available online while also giving you the option to receive it in the mail if you wish.


Next Week

Next week is bound to have a lot of headlines impacting the market.  The G-7 summit over the weekend will provide something for the markets as the week opens and Tuesday’s meeting with North Korea is likely to add to the volatility. 

There will also be a Fed policy meeting with more than a 90% chance the Fed pulls back further on their stimulus by raising interest rates.  Several other central banks around the world will also be holding their own policy meetings, which always have the potential to move our market markets here. 

As for economic reports, we’ll get info on inflation with the CPI and PPI, retail sales, and industrial production. 


Investment Strategy

The gains of the market this week put stocks into expensive territory in the short term.  We think there is more of a chance of seeing the market stall or move lower from here than there is in it rising, so we’d hesitate to put new money in at this time.

There is no change in our longer term forecast, which 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 6-1-18

It was another volatile week for the markets.  Through Friday’s close, the Dow lost 0.5%, the S&P was higher by 0.5%, and the Nasdaq rose 1.6%.  Bond prices saw sharp gains as their yields fell.  Gold moved lower, falling 0.6%.  Oil was off for another week, declining 3.2% to close at $65.71 per barrel.  The international Brent oil, which is used to make much of the gas on the east coast, added 40 cents to close at $76.71.

Geopolitics dominated headlines again this week and was responsible for big moves in the markets.  It wasn’t China and North Korea again – that was sooo last week.  This week the focus shifted to Italy.

Over the weekend, Italy’s President blocked the formation of a new government because the new majority parties wanted to appoint an anti-Euro economic minister.  The move was called a “political crisis” because it appeared the President was moving against the will of the people. 

The news rattled the markets because grievances against the Euro experiment were resurfacing.  Remember, we saw a similar story play out a few years ago with Greece and how it roiled the markets.  The Italy story could play out for months and would provide many anti-Euro headlines. 

Stocks sold off sharply on this news and investors fled to safe havens like bonds, which had their biggest price gains since the Brexit vote in 2016. 

The Italian concerns were short-lived, though, as it appeared progress had been made by the end of the week.  A tentative deal was made to revise the coalition that was blocked on Monday and would prevent the need for another election in several months that would inevitably be a referendum on the Euro.  However, there are still worries for the Euro as there will be an administration in power that does have its doubts. 

Also adding to the volatility this week was the resurrection of tariffs.  President Trump announced new tariffs on China after saying they were on hold just a week ago.  Other tariffs on steel and aluminum from Canada, Mexico, and Europe were also announced this week and swiftly prompted retaliatory tariffs from these countries.

These geopolitical events are having an effect on our policymakers.  Many investors believe they will prevent the Fed from pulling back further on their stimulus.  There was nearly 100% certainty the Fed would raise interest rates at their next meeting in June, but this week the odds fell to 70%.

The odds of four rate hikes this year also fell sharply. 

There were a lot of economic reports released this week, though many were drowned out amid all the other news. 

We’ll start with the monthly employment report, which is one of the few that always makes headlines.  Last month the economy added a solid 223,000 jobs, well above the 190,000 economists were estimating.  The unemployment rate fell to 3.8%, which is its lowest since 2000. 

Other economic reports were mostly positive, too.  GDP for the first quarter saw a slight revision down to 2.2% growth from 2.3%, though this is still a decent level.  Meanwhile, the Fed’s Beige Book, which is an anecdotal look at the strength of the economy, ticked higher.  Also, personal income and spending showed solid gains, the strength of the manufacturing sector increased, and consumer confidence was back at a 17-year high.

The amount of positive economic reports has raised estimates for GDP this quarter.  As it stands now, the estimate is north of 4.5% growth, which would be a great development.

Next Week

Economic data will be light, so trade will probably dominate investors’ attention.  There will be a meeting of G-7 leaders in Canada and trade is bound be the hot topic.  President Trump will head there Friday and it will be interesting to see the comments that will come from it. 

As for economic reports, there will be data on the strength of the service sector, factory orders, the trade balance, and more data on employment. 


Investment Strategy

The volatility of the markets over the last few weeks has put stocks at more modest price level from a short term perspective.  We’d like to see them move lower before we get too excited about adding new money, but we think the odds of a further pullback are lower than they were last week.   

There is no change in our longer term forecast, which 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.