There was a wide divergence in the performance of the markets this week. Through the Friday close, the Dow gained a solid 1.6%, the S&P rose 0.6%, and the Nasdaq was lower by 1.1%. Bonds yields moved sharply higher and prices lower as talks about stepping back from stimulus by global central banks hit the market. Gold closed lower for the third straight week, off 0.6%. Oil prices moved lower, too, down 2.0% to $69.04 per barrel. The international Brent oil actually rose to close at $74.39.
Also, let’s take a longer look at the market as the S&P is inching back towards its record high.
The focus turned to corporate earnings this week, causing stock fundamentals to play a large part in the direction of the market. It is also the reason why the three major markets performed so differently from each other.
This week was the busiest one for corporate earnings, with about 1/3rd of the companies in the S&P 500 reporting results. Earnings look solid, on pace to rise 21% over the past year according to Factset.
Many large technology companies reported their results so this sector got even more attention. Google turned in solid earnings. So did Amazon. However, the social media companies didn’t fare as well.
Facebook grabbed headlines with their results. They weren’t that bad, but the outlook for the future caused investors to worry. The amount of people using their service has flat-lined and they aren’t making as much revenue off those users.
This caused the stock to fall sharply, losing 19% in one day. The drop was historic because it is the largest one-day loss in market value – ever. Sure, many stocks have fallen more than 19% in a single day, but the key is market value. Facebook is such a large stock that a 19% loss is huge!
This week was the busiest one for corporate earnings, with about 1/3rd of the companies in the S&P 500 reporting results. Earnings look solid, on pace to rise 21% over the past year according to Factset.
Many large technology companies reported their results so this sector got even more attention. Google turned in solid earnings. So did Amazon. However, the social media companies didn’t fare as well.
Facebook grabbed headlines with their results. They weren’t that bad, but the outlook for the future caused investors to worry. The amount of people using their service has flat-lined and they aren’t making as much revenue off those users.
This caused the stock to fall sharply, losing 19% in one day. The drop was historic because it is the largest one-day loss in market value – ever. Sure, many stocks have fallen more than 19% in a single day, but the key is market value. Facebook is such a large stock that a 19% loss is huge!
The loss by Facebook is the reason for the divergence in the markets this week.
People often don’t realize the Dow index is only 30 stocks. Facebook is not one of them, so the Dow was not affected by its fall. However, the S&P 500 has about a 2% weighting and the Nasdaq is more than 6%. So the larger the exposure to Facebook, the worse that index did this week.
This also raises an important point. You may not hold Facebook stock directly in your account, but the indexes we use do.
The most popular holding in our accounts is the Vanguard Total Stock Market ETF, where Facebook is the 5th most popular stock.
People often don’t realize the Dow index is only 30 stocks. Facebook is not one of them, so the Dow was not affected by its fall. However, the S&P 500 has about a 2% weighting and the Nasdaq is more than 6%. So the larger the exposure to Facebook, the worse that index did this week.
This also raises an important point. You may not hold Facebook stock directly in your account, but the indexes we use do.
The most popular holding in our accounts is the Vanguard Total Stock Market ETF, where Facebook is the 5th most popular stock.
The S&P 500 Index ETF is also a popular holding and Facebook has a more than 2% weighting.
This is why even in an index fund, an individual stock can have a large impact to both the upside and downside.
Switching gears to tariffs, which again had an impact on the market this week. However, this week it wasn’t a negative impact.
On Wednesday, President Trump met with the head of the European Union to discuss trade. The result was an agreement to step back from tariffs and work towards a larger deal with no tariffs or subsidies. Europe also made concessions to buy more U.S. exports.
The market loved the news and rose sharply as a result, which you can see in the late-Wednesday pop in the markets.
Interesting to note, the financial news channels have had wall-to-wall coverage attacking the methods used to reach these trade agreements, often making these channels unbearable to watch. These positive results they have produced receive only brief attention before the attacks resumed. To gauge the success of these policies, pay attention to the market – not the hysterics from the press.
Lastly, economic data released this week was mixed. The big report came on Friday with second quarter GDP, which came in at 4.1%. The number was solid and the previous quarter was revised higher, but it was slightly below expectations.
Switching gears to tariffs, which again had an impact on the market this week. However, this week it wasn’t a negative impact.
On Wednesday, President Trump met with the head of the European Union to discuss trade. The result was an agreement to step back from tariffs and work towards a larger deal with no tariffs or subsidies. Europe also made concessions to buy more U.S. exports.
The market loved the news and rose sharply as a result, which you can see in the late-Wednesday pop in the markets.
Interesting to note, the financial news channels have had wall-to-wall coverage attacking the methods used to reach these trade agreements, often making these channels unbearable to watch. These positive results they have produced receive only brief attention before the attacks resumed. To gauge the success of these policies, pay attention to the market – not the hysterics from the press.
Lastly, economic data released this week was mixed. The big report came on Friday with second quarter GDP, which came in at 4.1%. The number was solid and the previous quarter was revised higher, but it was slightly below expectations.
It’s worth noting, these GDP number have been more consistent over the last two years, pointing to a healthier underlying economy.
In other economic news, durable goods (which are items with a longer life, like a phone or refrigerator or phone) moved higher. However, housing data continues to weaken. The pace of sales in both new and previously owned homes is slowing, which is coming on the back of other poor economic housing reports.
In other economic news, durable goods (which are items with a longer life, like a phone or refrigerator or phone) moved higher. However, housing data continues to weaken. The pace of sales in both new and previously owned homes is slowing, which is coming on the back of other poor economic housing reports.
We would have thought the reason for the slowdown was due to higher mortgage rates, but it turns out there are several reasons, with high prices being the number one concern:
Next Week
Next week looks to be another busy one. Corporate earnings will continue to be a big story as about one quarter of the companies in the S&P 500 report their results. For economic data, we’ll get info on the strength of the manufacturing and service sectors, personal income and spending, housing, and the big jobs report comes on Friday.
The Fed will also hold a policy meeting, but we aren’t expecting to hear anything new.
Investment Strategy
No change here. Stocks remain on the expensive side (or “overbought” in investment lingo) from a short term perspective and we would hesitate to put new money in to the broader index at this time. We aren’t selling here, though, and are not overly concerned with a large pullback. There are many oversold (cheap) stocks out there, too.
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 risen recently (and prices have fallen), but we don’t think prices will fall much further and continue to trade in the range they have been in for the last several months.
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 another busy one. Corporate earnings will continue to be a big story as about one quarter of the companies in the S&P 500 report their results. For economic data, we’ll get info on the strength of the manufacturing and service sectors, personal income and spending, housing, and the big jobs report comes on Friday.
The Fed will also hold a policy meeting, but we aren’t expecting to hear anything new.
Investment Strategy
No change here. Stocks remain on the expensive side (or “overbought” in investment lingo) from a short term perspective and we would hesitate to put new money in to the broader index at this time. We aren’t selling here, though, and are not overly concerned with a large pullback. There are many oversold (cheap) stocks out there, too.
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 risen recently (and prices have fallen), but we don’t think prices will fall much further and continue to trade in the range they have been in for the last several months.
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.
