Commentary for the week ending 10-26-18

It was another rough week for the markets.  Through the Friday close, the Dow fell 3.0%, the S&P lost 3.9%, and the Nasdaq was down 3.8%.  Bonds prices rose (and yields fell) as investors moved into safer investments.  Gold continues to do well, up 0.8%.  Oil prices keep moving lower, off 2.2% to close at $67.62 per barrel.  The international Brent oil, which is used for much of the gas here on the East coast, closed down to $77.73.

Ah, October.  How we loathe thee.  Historically the most volatile month of the year, October continues to live up to its reputation as another rough week put stocks lower for the year.  Let’s take a look at a longer view of the market:

So what’s going on with the stock market?

There were a few things this week that we will get to, but everything now has to be looked at through the prism of the Fed and their stimulus program. 

For years they embarked on the biggest stimulus program in the history of the world.  They lowered interest rates to 0% and printed trillions to stimulate the economy.  This acted like a pain killer for the market, where bad news was ignored.

Now they are pulling back on that stimulus and the pain killer is wearing off.  Fed chairman Powell has pointed to the strong economy and indicated that it doesn’t need the pain killer anymore.  But like an addict, coming off a drug is painful.  Investors are essentially saying, “Why don’t you slow down a bit, we’re starting to feel a little pain?”  Chairman Powell, however, seems undeterred. 

This was a problem of getting into such a massive stimulus in the first place – it is very difficult to get out cleanly.  We’ve shared this concern in our investment strategy section below for years now.  The economy may be on solid footing, but since the stimulus pushed up stock prices, will its removal cause stock prices to fall?  We’re starting to see that now. 

With that pain killer wearing off, investors are getting more jittery and looking for a reason to sell after the tremendous run we’ve seen over the years.  Bad news over the last few weeks has provided that opportunity, did a few stories this week.  

First, geopolitical issues remain as our trade fight with China doesn’t show any signs of letting up.  This week, a Chinese official said that their country doesn’t fear a trade war.  That was enough to rattle the market. 

Also, this week was the busiest for corporate earnings this quarter and some red flags were raised. 

Earnings actually look pretty solid.  According to Factset, almost half of the companies in the S&P 500 have reported results and earnings are growing 22.5%.  Revenue, what a company earned through sales, is on pace to rise 7.6%. 

These are solid numbers.  However, they aren’t as solid as the last several quarters – revenue is at the lowest level in the last four quarters.   

The forecasts for next year from several large companies also worried investors.  Companies will continue to grow – that’s not a concern – just at a pace that is a bit slower than we are currently experiencing.  Plus they are facing higher costs, which will also eat into earnings. 

This bit of bad news gave investors a reason to sell. 

Switching gears, economic data continues to look solid (and reinforces the idea that the Fed will keep pulling back on its stimulus).  The big report came on Friday with the GDP figure, which came in a bit stronger than expected.

Note that since 2016, the GDP has been steadily higher instead of wide fluctuations like before.  This indicates a healthy economy. 

We also had good news on durable goods, which showed a nice gain over the previous month.  Pending home sales were higher although the pace of new home sales was lower.  Home prices continue to rise and outpace incomes, which could be a problem down the road. 

Next Week

Next week will be another busy one.  Corporate earnings are past their peak, but we’ll still get a lot of reports.  As for economic data, we’ll get info on the strength of employment this month, the manufacturing sector, and personal income and spending.  The volatility doesn’t show any signs of letting up. 


Investment Strategy

Stocks are very oversold (or cheap) here on a short term basis.  We aren’t jumping in with both feet, but it looks like a good time for some nibbling.  We aren’t seeing many of our indicators improve and we’d like to see that change before we get too excited on the market.   

There is no change in our longer term forecast, which remains difficult to predict.  As mentioned above, fundamentals are still very good with pro-business policies out of Washington providing a solid tailwind.  However, as we also mentioned above, rising interest rates have historically pulled markets lower.  It’s tough to say where we think the market will go in the long run.   

Bonds are also volatile at this time.  Yields are on the high side (and prices on the low side), 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 10-12-18

Please note: there will be no market commentary next week. 

It was a rough week for the markets.  Through Friday’s close, the Dow fell 4.2%, the S&P lost 4.1%, and the Nasdaq was down 3.7%.  Bonds prices rose (and yields fell) as investors moved into safer investments.  Gold had another nice week, up 1.7%.  Oil prices finally turned lower, down 3.9% to close at $71.51 per barrel.  The international Brent oil, which is used for much of the gas here on the East coast, lost $4 to close at $80.60.

Well that escalated quickly.  Stocks sold off strongly, leading to the worst week since March.  After such a strong decline, let’s take a longer view of the stock market to get some perspective.  We’re back at levels hit at the beginning of the year:

Clearly, October is living up to its reputation as the most volatile month for stocks!

So what caused the sharp declines we saw this week?  As is often the case, there isn’t one specific thing we can point to. 

Getting the most fingers pointed at it, however, was the Fed and their higher interest rates. 

In the previous week, Fed chairman Powell made comments that they would likely keep raising interest rates beyond what the market expects.  This was surprising to investors and got them a little worried.  Higher rates make borrowing money more expensive – like mortgage rates that are now at their highest level in seven years – and cools down the economy. 

It has also been one of our long term concerns.  For the last decade, these historically low rates have helped push stock prices higher.  Now that the rates are rising again, would that mean stock prices will fall?  Sure, we have a much better economy and robust corporate earnings, but that doesn’t always mean the stock market will rise.  This is a concern for investors. 

News from China also played a part in the market declines though it did not get a lot of attention.  The news wasn’t related to the tariffs, but did nothing to decrease increase tensions.

Bloomberg News recently published an article showing how China inserted chips into U.S. electronic devices as a way to spy (LINK).  There were some doubts on the story, but an outside source provided evidence that it was true (LINK).  As you can see in the chart below, these Chinese headlines caused some movement in the market. 

Worries over corporate earnings also weighed on markets this week.  Some companies are warning that higher costs, whether it’s from higher wages or higher commodity prices like oil or from tariffs, are cutting into profits.  Earnings were forecasted to be pretty solid this quarter, so this unnerved investors, too. 

We saw evidence of these higher prices in the economic data out this week.  Though the inflation figures of the CPI and PPI were a bit lower than expected, take a look at the lighter pink line in the chart below.  That rising line is the PPI excluding food and energy.  These are the costs that businesses early in the supply chain face and they are clearly rising.   

On the somewhat positive side, small business optimism moved a notch lower over the last month, but it still stands at a historically high number. 

Lastly, there are signs that the decline this week went too far and markets are poised for a rebound.  Nearly all of our indicators suggest the market is very oversold here.  One of the more interesting indicators comes from SentimentTrader, which shows that when CNBC claims that the “markets are in turmoil,” it’s usually near the end of the decline. 

Next Week

Next week will be a busy one.  Corporate earnings really start coming in next week.  Plus we’ll get economic info on retail sales, industrial production, and housing. 

The Fed will also be in the news as several regional presidents will be making speeches, plus the minutes from their latest meeting will be released.  They will get a lot of attention after chairman Powell’s comments on raising rates helped send markets lower. 


Investment Strategy

As we mentioned above, the market is very oversold (or cheap) here (on a short term basis).  We aren’t jumping in with both feet, but it looks like a good time for some nibbling if it can hold these levels.   

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, as we also mentioned above, 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 are on the high side (and prices on the low side), 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 10-5-18

A volatile week on Wall Street saw stocks end in negative territory.  Through the Friday close, the Dow was lower by a slight 0.04%, the S&P fell 1.0%, and the Nasdaq lost 3.2%.  Bonds were a big story this week as their yields (on the 10-year bond) hit their highest level since 2011 as their prices fell.  Gold had a nice week, up 1.3%.  Oil prices hit a four-year high, gaining 1.4% to close at $74.29 per barrel.  The international Brent oil, which is used for much of the gas here on the east coast, also hit four-year highs to close at $84.11.

There was a lot going on this week impacting the markets.  The news was all good – but the market reaction was often negative. 

Some cracks have been forming recently that probably contributed to those large daily declines we saw this week.  The markets are reaching record highs, but the amount of individual stocks hitting new highs is falling and the number of stocks hitting new lows is rising sharply. 

Think of this like building a house – you want a solid foundation.  A record high in the market with more stocks hitting new lows is like building a house on sand, making it very susceptible to collapse.   

Another indicator we look at is the market of small cap stocks.  They’re often a leading indicator for the broader market.  As you can see in chart below, this market has fallen throughout September.  Some of this may be due to the improving trade picture, since investors moved into this sector because these smaller companies are not as impacted by the tariffs.  It’s still something to keep an eye on.  

We also got a glimpse of how jittery investors are after stocks sold off immediately on the Presidential text alert everyone received on Wednesday.  Although it was just a test, it looks like some computer-programmed trading systems saw this as a reason to sell the market. 

As for the events of the week, stocks opened sharply higher Monday after news the Canada would be on board the “new Nafta” agreement with the U.S. and Mexico. 

Economic data this week was also solid.  The strength of the service sector hit its best level in 10 years and while the strength of the manufacturing sector weakened over the last month, it remains at a high level.  Combined, these two are at their best level ever. 

The monthly jobs report came out on Friday and at a print of 134,000 jobs added, it was well below the 180,000 expected.  There is a possibility the hurricane in the Carolinas earlier this month had some impact on this number.  The previous two months were revised higher by 87,000 jobs, so the overall result was positive. 

Also, the unemployment rate fell to 3.7%, which is the best number since 1969.

All this good news has investors wondering if it will force the Fed to pull back on its stimulus even further.  Chairman Powell even said this week that they might raise interest rates by more than what the market expects, though it could be several years from now.

This played a large part in the pullback in stocks this week.  The market has depended on the easy money from the Fed to prop up stocks for more than a decade now, so the removal of the stimulus may make the markets a little more volatile – even if economic data is positive. 


Next Week
Corporate earnings will be back in the headlines as results for the third quarter begin rolling in next week.  The week will also be a little quieter for economic data.  We’ll get info on inflation, import prices (which also gives us a look at inflation), and the optimism in small businesses.   


Investment Strategy

No change here.  As we talked about above, we’re keeping an eye on some indicators that can signal the direction of the broader market.  We’d like to see them improve before committing any new money.  We don’t think a sharp decline is on the horizon, but remain on the cautious side.  Individual stocks look like a better play for new money here. 

There is no change in our longer term forecast, either, 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 are on the high side (and prices on the low side), 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.