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.
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).
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.
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.
