Commentary for the week ending 11-16-18

Please note:  Due to the Thanksgiving holiday next week, there will be no market commentary.  Thank you.

The markets turned in a very volatile week.  Through Friday’s close, the Dow lost 2.2%, the S&P fell 1.6%, and the Nasdaq was also down 2.2%.  Bond prices rose and their yields fell as investors moved into safer investments.  Gold was higher, rising 1.3%.  Oil prices were lower for another week, declining 5.6% to close at $56.83 per barrel.  The international Brent oil, which is used for much of the gas here on the East coast, closed down to $67.10.

The week was a rough one for investors as volatility remained high, with several different stories playing a part in the activity.

The one common thread, though, is a worry about the Fed pulling back on its stimulus.  For years, little affected the market because their stimulative policies kept pushing stocks higher.  But as the pain killer wears off, headlines like the ones this week had more of an impact than they would have in the past. 

One concern weighing on the market this week remains the tech sector.  They have been the leaders in the market’s rise over the last few years, but now many companies are warning that they might not do as well in the quarters ahead.  Investors sold tech stocks and the selling spread to bring down the broader market. 

These earnings warnings are leading to concerns about slowing global growth and some investors are looking to the falling oil prices as evidence of a weaker economy (if the economy is weaker, fewer people need gas and therefore prices fall). 

Oil prices have fallen sharply over the last few weeks and through Tuesday, they were down 12 days in a row – the longest stretch of declines ever.  The lower oil prices hurt energy stocks this week. 

However, oil prices appear to be falling due to too much supply as more oil is coming on the market, not because of too little demand.  While the globe may be starting to see slowing economic growth, the U.S. still appears to be a bright spot.

Another area of concern weighing on the market this week is the banking sector.  The likely new head of the House Financial Services committee, Maxine Waters, appears to be taking a very tough stance on the banking sector. 

The last area of concern this week came from our friends across the pond – the Brits and their Brexit situation.

British PM Theresa May introduced her plan for their split with the EU.  The plan received approval of her cabinet but it received backlash as many people believe the British side gave away too much in order to make a deal.   The British are still connected to the EU for many years thereafter, so EU bureaucrats would still control things like taxes and trade. 

Parliament still has to vote on the deal and there is a lot of disapproval, which may result in Theresa May losing her leadership position.  It also complicates the whole Brexit situation – remember, the market doesn’t like uncertainty.

It wasn’t all bad news this week as there were some positive days, too. 

One development comes from China as there appears to (again) be movement on a trade deal.  News reports indicated the next round of tariffs on Chinese goods has been put on hold as talks continue.  Any positive news on this front will be warmly welcomed by the market. 

Economic data showed mostly positive signs this week, too.   Retails sales came in solid and industrial production (which measures the output of the manufacturing, mining, and utilities sectors) ticked slightly higher. 

The amount of people applying from unemployment remains close to a 50-year low.

Small business optimism was lower than last month, but remains close to record highs.

Lastly, inflation still appears to be running hot, causing investors to believe the Fed will keep pulling back on their stimulus.  Inflation at the consumer level (what we as shoppers pay) rose by 0.3% from last month and is higher by 2.5% over the past year.  Much of this has been driven by higher gas prices and there is the hope that lower gas prices will bring this inflation level down in the months ahead. 

Next Week

Next week will be a lot quieter with the Thanksgiving holiday.  We’ll get a few economic reports worth watching, including durable goods and some housing reports.  Many retail companies will also report their earnings. 


Investment Strategy

Last week markets looked a little pricey on a short term basis and quickly fell to a more attractive level this week.  We believe the market will close higher into the end of the year though it might be a little rocky along the way, so a little nibbling around this level probably isn’t a bad idea. 

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, higher interest rates have historically pulled markets lower.  It’s tough to say where we think the market will go in the longer 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 will 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 11-9-18

It was another solid week for the market.  Through the close Friday, the Dow rose 2.8%, the S&P gained 2.1%, and the Nasdaq added 0.8%.  Bond prices and yields saw a lot of action this week, but closed with a slight gain in prices.  Gold turned lower, off 1.7%.  Oil prices were down yet again, declining 5.2% to close at $59.87 per barrel.  The international Brent oil, which is used for much of the gas here on the East coast, closed down to $69.88.

Stocks continued their rebound off the lows of late-October and have risen over 6% since that time.  Here’s a longer look at the market:

Well, the campaigns for the 2020 elections are now officially underway.  We say this in jest, but it’s probably not incorrect given the nature of campaigns these days. 

Yes, the midterm elections concluded this week and were the big story for investors.   We’re sure you know the election results by now, where the Dems took the House while the Reps keep the Senate.  The possibility of gridlock was given the thumbs up by the stock market, which had its best post-election rally since 1982. 

The divided congress has its benefits and drawbacks.  There is less uncertainty for companies over potential changes in rules, regulations, or policies.  However, there is also less chance for new pro-business policies, too. 

There are winners and losers among the different sectors in this situation.  The manufacturing and construction sectors have the potential to do well as there is a greater chance for an infrastructure deal.

On the other hand, heavily-regulated industries like the banks have the potential to do poorly.  Much of this comes from the Democrats penchant for tougher regulations. 

A big worry for banks is the new head of the House Financial Services Committee.  Democrat Maxine Waters looks to hold the top spot on this committee and favors strict regulations.  She even once recommended shutting down Wells Fargo over some of their negative headlines. 

We don’t often call out individual politicians in these commentaries, but the fact that an extreme ideologue like Mrs. Waters could hold such a prominent position is troubling.

For years we’ve watched House hearings on various financial matters and could always count on Mrs. Waters making some of the most nonsensical, incompetent, and head-scratching remarks we’ve ever seen.  Her grasp on basic economic matters is nonexistent.  Yet she is now the head of the banking committee?  It’s enough to make you cringe. 

Thankfully, there is little chance of the banking committee actually implementing any new policies.  However, they do have the ability to block agenda items which we believe have been progressing in the right direction. 

The banks are likely to see new headline risks, too, as the nonsensical comments from Mrs. Waters is bound to shine a bright spotlight on the industry – regardless of the merit or accuracy of those comments. 

Switching gears – while the market rose on the election results, it fell after a Fed policy meeting this week. 

The Fed reported no change in their economic policy and would continue raising interest rates at a steady pace.  Investors were hoping the declines and volatility of the market over the last several weeks would prompt the Fed to suggest at least a slight chance they wouldn’t keep raising interest rates.  The Fed’s comments indicated this was unlikely and markets fell as a result.

Economic data this week did little to stay the Fed’s hand, either, as economic data looks solid.  Inflation at the producer level (PPI) rose at the fastest pace last month in six years.  Further, there are more job openings than there are unemployed workers.

Also, the strength of the service sector was released this week and ticked slightly lower from last month, though it remains very high.  Combined, the strength of the manufacturing and service sectors are still on the high side.

With economic data on the Fed’s side, it seems unlikely they will pause on their pullback in stimulus.  While it means the economy is solid, it also means we are likely to see a more volatile market in the months ahead. 


Next Week

Next week looks like it will be a little less volatile.  Corporate earnings are winding down, though some big names will report results.  We’ll get a handful of important economic reports, including the CPI report, retail sales, and industrial production.


Investment Strategy

The swift rebound in the markets has us less enthusiastic on putting new money in here.  We still believe stocks will rise through the end of the year, but it may be a rockier path from here. 

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, higher interest rates have historically pulled markets lower.  It’s tough to say where we think the market will go in the longer 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 will 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 11-2-18

After a month of falling stock prices, markets turned higher this week.  Through Friday’s close, the Dow and S&P both rose 2.4% while the Nasdaq added 2.7%.  Bonds prices fell as their yields moved higher.  Gold saw another week of gains, up 0.2%.  Oil prices were down again, off 7.0% to close at $62.86 per barrel.  The international Brent oil, which is used for much of the gas here on the East coast, closed down to $72.62.

Investors were happy to close the books on a rough October this week.  With a drop of 6.9% in the S&P 500, this month was its worst since 2011. 

Several culprits were cited as the reason for the declines in October.  The big one was the Fed as it pulls back on its stimulus, plus there was a worry about corporate earnings and the trade issues with China remained.  

So with the strong rebound in stocks this week, were these issues resolved?  Nope, although there was a thawing in the China story which we’ll get to shortly.

No, we think the main reason for the rise in the markets this week were just that they were too oversold, or had gone down too far, too fast. 

Markets often trade on momentum – they might go up just because they’ve been going up (investors see a rising stock or market and put new money in, pushing it higher), and vice-versa.  The indicators we follow suggested the momentum had reached an extreme level which often indicates a reversal was likely – and it did, as we saw this week.

Getting into the events this week, first we’ll start with that news on the trade war with China.  President Trump tweeted that he had a good conversation with China’s president on trade issues.  Progress on trade looked pretty grim for so long, so this potential thawing was warmly greeted by investors.

Markets also saw some gains after it was reported that a possible trade agreement draft was being worked up by the administration. 

Corporate earnings were another big story this week as their results look solid.  They actually looked solid throughout the decline of the last month, too, but a few warnings from some big companies made investors pause. 

With over 350 companies in the S&P 500 having released their results, Factset reports that earnings are on pace to rise 24% over the past year, which is above the 20% growth analysts initially predicted. 

Lastly, economic data this week was mixed.

The big report came on Friday with the monthly employment figures.  Over the last month we added 250,000 jobs, which was well above the 188,000 estimated.  The unemployment rate stands at 3.7%, which is the lowest in 49 years. 

The wage level for workers was also released in that employment report.  According to the data, wages have risen 3.1% over the past year, which is the highest since 2009.  While this is good news, investors are worried that it will prompt the Fed to keep pulling back on its stimulus.  This contributed to the decline we saw in stocks on Friday.

The productivity of those workers moved slightly lower over the past quarter, although it still looks decent. 

As for other economic data, personal income and spending were both higher.  The strength of the manufacturing ticked lower.  Home prices were higher, although the pace of those gains is starting to slow. 

Lastly, consumer confidence hit its highest level in 18 years. 

Next Week

Next week will be another busy one.  While corporate earnings are slowing, we’ll still get a decent amount of results.  For economic data, we’ll get info on the strength of the service sector, inflation at the producer level, and another report on employment. 

The Fed will be in the news, too, as they hold a policy meeting.  No changes are expected, but it will be interesting to see if we hear anything new after the decline we saw in stocks last month.   


Investment Strategy

Even with the gains in the market this week, stocks still appear to be on the cheap side in the short term.  Markets are still volatile, but we think the trajectory is higher possibly through the end of the year.    

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, higher interest rates have historically pulled markets lower.  It’s tough to say where we think the market will go in the longer 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 will 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.