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.
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.
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.
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.
