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%.
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.
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.
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.
