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.
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.
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.
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.
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.
