Commentary for the week ending 8-24-18

A quiet week of trading saw stocks end firmly in positive territory.  Through the Friday close, the Dow was higher by 0.5%, the S&P rose 0.9%, and the Nasdaq was up a solid 1.7%.  Bond prices rose as their yields moved lower.  Gold turned in a solid week, climbing 3.0%.  Oil was up, too, gaining 4.0% to $68.52 per barrel.  The international Brent oil closed up to $75.43.

Stocks traded in a relatively tight range for most of the week on very light trading.  In fact, Wednesday had the least amount of trades we’ve seen all year.  Despite the light trading, several stock indexes hit record highs this week. 

Not only did stocks hit record highs, but the S&P 500 also marked its longest bull market in history. 

It has been 3,455 days since the S&P bottomed during the financial crisis.  In nearly 10 years, the index has not seen a decline of more than 20%, making it the longest bull market in history. 

That fact has many worried this rally is getting long in the tooth and due for a correction.  While it’s true this is the longest stretch without a 20% correction, we did see a drop of 19% in 2011 and 15% in 2015, so maybe the rally isn’t as long in the tooth as it seems.

Part of the reason for the rise in stocks recently has been the solid economy.  Last week we mentioned the head of Wal-Mart calling this the best economy he’s seen in 20 years.  This week the head of Target essentially saying the same thing as the company reported its best results in over a decade.

It wasn’t all good news this week, though.  Markets saw some volatility after news broke on President Trump’s former lawyer pleading guilty to criminal charges and former campaign manager was found guilty of fraud. 

Also, trade was in the news as the U.S. and China held mid-level talks on remedying the trade conflict.  However, it looks like very little came of the meeting and the two sides both enacted $16 billion in tariffs on goods entering their country.

Economic data this week was light, but also on the disappointing side.  Housing sales are continuing to slow and durable goods – which are items with a longer life – were also lower. 

While economic data as a whole has been positive recently, many reports have come in below expectations.  Stock prices are driven by expectations – they are forward looking – so if something comes in below expectations, stocks often decline. 

We can see these expectations in the Citi Economic Surprise Index, which we’ve often mentioned in the past.  This index tracks how economic data is faring relative to expectations.  The index rises when economic data is better than economist expectations and falls on the opposite.  It is also fairly correlated to the stock market.  

As you can see in the chart below, the index has moved lower while the stock market has not.  This doesn’t mean stocks are going to fall now, but maybe a little caution is warranted. 

Lastly, the Fed was in the news this week. 

First, the minutes from their latest meeting were released and they indicated the Fed was likely to pull back on their stimulus program next month by raising interest rates.  The odds of that rate hike now stand above 90%.

The Fed also held its annual Jackson Hole symposium, where central bankers from around the world gather to discuss economic conditions and policy.  

In the past, major new policies have been announced at this meeting and investors were anxious to see if that would be the case this year.  In the end, we didn’t really hear anything new and markets had little reaction to the speeches. 


Next Week

Next week again looks pretty similar to this one – corporate earnings are dwindling and there won’t be a lot of economic data.  For that economic data, we’ll get info on housing and personal income and spending. 

A Nafta deal with Mexico could be possible next week, too.  The two sides are reportedly close to an agreement and a deal here is likely to give stocks a boost. 



Investment Strategy

No change here.  The broader market appears neither cheap nor expensive in the short term at this level.  We aren’t actively buying the market here, but aren’t selling either.  There are a handful of individual stocks that appear to be on the cheap side, though. 

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.

Commentary for the week ending 8-17-18

Trading was a little more volatile this week as the markets closed with mixed results.  For the week, the Dow rose 1.4%, the S&P gained 0.3%, and the Nasdaq was lower by 0.3%.  Bonds were relatively unchanged.  Gold moved lower on the week, down 1.6%.  Oil was down, too, off 2.5% to $65.92 per barrel.  The international Brent oil closed down to $71.86.

There wasn’t a lot of info on economic or corporate data this week to distract investors from geopolitical issues, but the data that we did receive was strong and boosted the market.

First we’ll start with Turkey as the concerns from last week spilled into this week and pressured the markets. 

As we mentioned last week, the country faces sanctions over the U.S. pastor held as a prisoner for political reasons.  Their economy was already on shaky ground and these sanctions are pushing them to the brink.  This week their currency fell to a record low.

Turkey is a small player on the global stage, but investors are worried that these problems will spread throughout the region as defaults rise.  

While these issues did worry the market, the declines were relatively modest and volatility is still on the low side as measured by the VIX index (or volatility index, which rises as volatility increases). 

There is one metric that shows investors do have concerns, though – the Skew index.

Basically, the Skew index measures how much it costs to insure against a large downturn in the stock market.  It costs more to insure when there are clouds on the horizon and the cost falls when concerns recede.  It typically measures the moves of bigger, institutional investors. 

That Skew index – the cost of insuring against a large downturn – hit its highest level ever this week.  This shows there are some worried investors out there. 

As for the positive news this week, a thaw in the trade war with China sent stocks soaring on Thursday.  Lower level talks will officially take place later this month, which would be the first public talks since they broke down in May. 

The U.S. appears to be in a position of strength here.  The Chinese stock market hit two-year lows this week and discontent has been brewing within the Chinese government.  This could be a turning point in the negotiations.  

Corporate earnings were light this week, but reports from several retail companies showed solid growth. 

Wal-Mart made headlines with their results, which showed sales rose at their fastest level in over a decade.  They also had positive things to say about the economy:

Lastly, economic data this week was light, too, but there were some very positive reports. 

First, retail sales showed solid growth and a continuation of the uptrend we’ve seen the last few years.

Second, optimism with small businesses climbed to the second-highest level in the 45-year history of this metric. 

The economy looks to be doing very well at this time. 


Next Week

Next week looks pretty similar to this one – corporate earnings are dwindling and there won’t be a lot of economic data.  For that economic data, we’ll get info on housing and sales of durable goods (which are items with a longer life). 

We’ll also hear from the Fed, where we’ll get the minutes from their latest meeting which gives us more insight on the path of their stimulus program.  They will also hold their annual symposium in Jackson Hole, which always has the ability to impact the market as we hear more about their economic policies. 


Investment Strategy

The broader market appears neither cheap nor expensive in the short term at this level.  We aren’t actively buying the market here, but aren’t selling either.  There are many individual stocks that appear to be on the cheap side, though. 

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.

Commentary for the week ending 8-10-18

The week was mostly a quiet one, with the markets ending with mixed results.  Through the Friday close, the Dow was lower by 0.6%, the S&P was down 0.3%, and the Nasdaq was higher by 0.3%.  Bond prices rose as their yields moved lower.  Gold moved higher, up 0.4%.  Oil saw a loss, down 1.0% to $67.75 per barrel.  The international Brent oil closed down at $72.96.

We are officially in the dog days of summer, where there wasn’t a lot going on in the markets.  Corporate earnings are tapering off and there wasn’t much economic data to move the markets.  Geopolitical news did cause some movement late in the week, though. 

The week was so quiet, in fact, that Tuesday and Wednesday had the smallest two-day swings in the market so far this year according Dow Jones Market Data.  Wednesday and Thursday had the second-smallest swing. 

The lack of volatility is unusual this time of year.  August is typically a volatile month, mostly because there isn’t a lot of trading volume as investors take end-of-summer vacations.  Lack of trading volume causes the market to have bigger swings than it normally would, though, which is likely what added to the late-week selloff.

As for the news of the week, we’ll start with corporate earnings for the second quarter.  These reports are trailing off as 90% of companies in the S&P 500 have now reported their results.  According to Factset, earnings have grown 25% over the past year while sales are up nearly 10%.  This is well above expectations and has helped stocks rise recently.   

As for economic reports this week, the Jolts employment report showed that for the third-straight month, there are more jobs available then there are unemployed workers.

Also, inflation continues to move higher.  The Fed sees this as a positive, but we think forcing people to pay more for things isn’t the recipe for a healthy economy. 

With the week being so quiet, stories that normally wouldn’t get much attention made headlines.

For example, electric car maker Tesla got a lot of attention as its shares shot higher after a tweet from their chief, Elon Musk, stating that he was looking into taking the company private at $420 a share.  The stock was trading in the $350 range at that time so it immediately boosted the share price.

The question became, though, is this market manipulation?  It wasn’t clear that he had any funding secured, so it was possible that the tweet was just intended to boost the stock price.  That’s illegal.  The SEC is now investigating. 

Also, geopolitics affected the market late in the week.  First, China announced a retaliation to our latest round of tariffs with a matching tariff on U.S. goods heading to China.  

The news added some volatility to our market, but had little impact.  The Chinese market continues to be under pressure, though.  The trade battle has caused rifts in the Chinese government according to a Reuters article, with many in the Chinese government beginning to question their response. 

Showing that the most unlikely stories can move the markets when there is light trading volume, Turkey was in the news as their economy has come under pressure, too.

The country has faced sanctions due to the U.S. pastor being held as a prisoner there for political reasons.  Talks this week failed to secure his release and new sanctions were applied.  This has sent their markets and currency plunging.  The Turkish Lira lost 14% on Friday alone, and a weaker currency makes everything cost more for the Turkish people. 

Why do we care about Turkey?  Normally a story like this would probably have little impact on our market.  But stories like this get more attention when markets are quiet. 

Investors are now starting to worry that the problems in Turkey could affect the broader European region.  European banks with a lot of exposure to Turkey could be particularly at risk.  It is now more difficult for Turkey to pay back their loans, which would put pressure on those European banks, which could then ripple to the broader European economy. 

We don’t expect this story to hang around long, but it will likely cause more volatility the longer it stays in the headlines. 


Next Week

Next week looks to be a pretty quiet one in terms of earnings and economic data.  On the economy, we’ll get info on industrial production and retail sales, plus data on housing and import prices. 

Since it will be quiet for earnings and data, geopolitical issues like we saw this week with Turkey and China will probably get more attention.  August is normally a volatile month, so a little more action wouldn’t be surprising. 


Investment Strategy

Stocks have been on the expensive side from a short-term perspective as you can see by the indicators in the image below. 

In conditions like this, it isn’t surprising to see investors look for a reason to sell and lock in profits, which is what the story with Turkey provided.  We wouldn’t be surprised to see the market stall or move a bit lower from here, but we don’t see the warning signs of a large pullback coming. 

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.

Commentary for the week ending 8-3-18

An active week saw stocks end with mixed results.  For the week, the Dow was higher by just 0.05%, the S&P rose 0.8%, and the Nasdaq was higher by 1.0%.  Bonds saw a lot of movement but ended with little change.  Gold was flat, too, down just 0.02%.  Oil was also flat, down just 0.06% to $68.68 per barrel.  The international Brent oil was lower by about $1 to close at $73.42.

The week was a busy one on a variety of fronts.  There was another load of corporate earnings, a few important economic reports, several central banks holding policy meetings, and trade issues continued to grab headlines. 

We’ll start with corporate earnings, which have been a very good story.  About 80% of companies in the S&P 500 have reported their results for the second quarter and those earnings have been well above initial estimates.  According to Factset, earnings have risen 24% over the past year, above the 20% initial estimate. 

Companies have been rewarded with those beats, too.  Bank of America Merrill Lynch reports that companies who beat their expectations saw their stock prices rise 1.5% on average.  This is the best reward in two years. 

Apple’s earnings got a lot of attention as they turned in their best quarter for sales ever.  This pushed their stock price higher and caused their market cap (or market capitalization or market value) to cross the $1 trillion threshold.  That makes them the first company in history to be worth $1 trillion. 

The market value of a company is found by multiplying the share price by the amount of shares outstanding.  Apple has 4.83 billion shares, multiplied by over $207 per share bring you to that $1 trillion level.  We’d urge caution here, though, since historically stocks tend to fall after the hype of reaching big milestones. 

Switching gears to the central banks, where the Fed held a policy meeting this week.  They announced no changes to their economic policy that has been stimulating the economy.  However, they look poised to pull back on their stimulus by raising interest rates (which makes it more expensive to borrow money) at their next meeting in September. 

One interesting point to note, in their economic commentary, they referred to the economy as “strong.”  They haven’t called the economy strong since 2006. 

On the economy, the big economic report released this week came on Friday with the monthly jobs report.  The economy added 157,000 jobs last month, which isn’t bad but was well less than the 190,000 expected. 

However, much of the blame was attributed to the closing of Toys ‘R Us stores across the country which accounted for 31,000 job losses.  Also, the last two months were revised higher to add almost 60,000 new workers, so the jobs picture still looks solid.

Other economic data was mixed.  Existing home sales fell for the sixth-straight month while prices rose.  Incomes and spending both look solid.  The strength of the manufacturing and service sectors continues to expand, though at a slower pace.  Lastly, inflation continues to pick up.

Lastly, trade got a lot of attention as the Trump administration announced the possibility of raising the next round of tariffs from a 10% tax on Chinese imports to 25%.  Our markets wobbled on the announcement, but eventually rebounded.  China, on the other hand, has seen a large selloff in their market.  This something that is not talked about here in the US. 

The Trump administration cites the fact that the Chinese have devalued their currency significantly over the last two months as a reason for this decision.  This is done to make their exports cheaper, which is important if you are facing a tariff that will raise prices 10 or 25%. 

The falling currency may make your exports cheaper – but makes everything else in your country cost more.  The Chinese people are seeing their costs rise while their stock market falls and economy slows – which is putting pressure on their government.  This hasn’t gotten a lot of attention here, but it gives us the upper hand in these trade negotiations. 


Next Week

Next week looks a little quieter.  We’re getting closer to the end of earnings season and for economic data, we’ll get info on inflation and employment.  Tariffs will probably be in focus again as the tit-for-tat with China continues. 


Investment Strategy

Still no change here.  This doesn’t look like an attractive time to put new money in the broader market, though there are some opportunities in individual stocks especially in the tech and small-cap space.  We aren’t selling at this time, though, and don’t see the warning signs of a large pullback coming. 

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.