Commentary for the week ending 12-28-18

Please note: This will be our very last of these weekly newsletters.  Unfortunately it’s getting increasingly difficult to find the time to put these reports together. We’ll still send out notes when market conditions warrant a commentary, but they will not be on a weekly basis.  We hope you’ve enjoyed reading these commentaries and we look forward to still communicating with you in the future.

Stocks reversed course this week and closed higher.  Through Friday’s close, the Dow rose 2.8%, the S&P gained 2.9%, and the Nasdaq added 4.0%.  Bond prices were volatile but closed with little change.  Gold hit a six-month high on a 2.0% rise.  Oil prices moved lower, down 1.0% this week to close at $45.12 per barrel.  The international Brent oil, which is used for much of the gas here on the East coast, moved down to $52.23.

After the rebound this week, here’s how the market looks with a longer perspective:

With it being such a short week, there wasn’t a lot of news to impact stocks.  But that didn’t stop the market from making some big moves.

The moves were record setting, too.  On Wednesday, the Dow rose 1086 points, which is its highest point gain ever.  In percentage terms, that’s a rise of over 5%, which is the biggest daily percentage gain in nine years. 

Then Thursday the Dow was down over 600 points, only to sharply reverse course late in the day to close 260 points higher.  That’s the biggest point rebound ever. 

As we mentioned, there really wasn’t any news driving the market.  Sure, concerns over the government shutdown and lowered corporate earnings estimates created some volatility, but that wouldn’t cause such dramatic swings. 

No, the reason for the large moves may be at least partially attributable to the subject of a Wall Street Journal article this week (LINK). 

They found that 85% of all trading is done on what they call “autopilot” – where trading is done by machines, models, or passive funds.  Further, trading by “quantitative” hedge funds – which rely on computer programs to trade – is now larger than the amount of trades from individual investors. 

These “autopilot” traders tend to move in one direction like a herd and can cause exaggerated moves in the market – especially when there is lighter trading volume like we had this week.  This is because these computer programs often factor in momentum, where basically they will buy more when the market rises and sell more when it falls.  

With no news this week, this is very likely the culprit of the massive swings in stocks. 

Switching gears – we did have a couple economic reports worth noting this week. 

First, this Christmas shopping season was the best in six years according to Mastercard SpendingPulse.  However, consumer confidence took a turn lower this month.  While it still remains on the high side, some worries are starting to creep into the economy. 

Next Week

It’s a short week next week, but it will still be an important one as we close out 2018.  Stocks are on pace for the first negative year since 2008 – unless the market rises more than 7% on Monday, of course. 

As for economic data, we’ll get data on manufacturing and the always important monthly employment report. 


Investment Strategy

Stocks have been significantly oversold (or cheap) on a short term basis for a couple weeks now.  Here’s a look at some of our indicators – and since it’s our last regularly-scheduled report, we threw a whole bunch of indicators in there:

With such oversold conditions, it isn’t surprising to see a rebound – although the size of the rebound this week was certainly surprising.  The start of the new year has historically traded higher, so it will be important to see if stocks can hold these levels.  It will be a bad sign if they do not. 

As for the longer term direction of the market, we’re currently seeing some of our long term concerns play out.  We’ve consistently written that the economy is on solid footing, but the removal of stimulus has historically pulled markets lower.  As you can tell by the events of recent months, that battle is currently playing out.  Hopefully some equilibrium between the strong economy and falling market will form, but it’s anyone’s guess as to if or when that will be. 

Bonds are also volatile at this time.  Bond prices are extremely high and yields low on a short term basis and we don’t think they have much room to run from here.  We think they’ll remain stuck in the range they’ve seen over the last few months, with higher yields and lower prices, and we wouldn’t be surprised to see the volatility continue.   

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 12-21-18

Please note: Next week will be our very last of these weekly newsletters.  Unfortunately it’s getting increasingly difficult to find the time to put these reports together. We’ll still send out notes when market conditions warrant a commentary, but they will not be on a weekly basis.  We hope you’ve enjoyed reading these commentaries and we look forward to still communicating with you in the future.

It was an awful week for investors as stocks turned in their worst week since at least 2011, depending on the market.  Through the close Friday, the Dow dropped 6.9%, the S&P lost 7.1%, and the Nasdaq plunged 8.4%.  Bond prices rose sharply (and yields fell) as investors moved into safer investments.  Gold was a refuge as it rose 1.4%.  Oil prices hit their lowest level in 17 months with a drop of 11.3% to close at $45.42 per barrel.  The international Brent oil, which is used for much of the gas here on the East coast, moved down to $53.50.

It looks like investors got a lump of coal for Christmas (how’s that for a clever Christmas pun?). After a sharply lower week, stocks are back to levels last seen in 2017…

…And volatility continues to rise…

…With this December shaping up to be the worst one since 1931.

So what is going on?

As we’ve often discussed, the removal of stimulus by the Fed is like getting off a pain killer after being on it for a decade.  Things are starting to hurt more and cracks from the malinvestments made during that period are beginning to form (like rising debt levels). 

With that in mind, the Fed policy meeting this week received the most attention.  Last meeting, Fed chief Jay Powell made comments that suggested he was willing to not pull back on the stimulus as much and markets rose on the news. 

This meeting his comments were similar.  While they raised interest rates this month (which makes it more expensive to borrow money), they forecasted fewer rate hikes next year.  They acknowledged some weaknesses in the economy, but noted that it was strong overall. 

That doesn’t sound too bad, does it?  Apparently it did to many investors and stocks sold off sharply.

Some news reports indicated that many investors thought they would forecast zero rate hikes next year instead of the two.  We saw that as completely unrealistic – economic growth is over 3% and corporate earnings are solid.  While there are some areas of weakness – which they acknowledged – there has to be some rate hikes to get back to a more “normal” level. 

One area we did find questionable was their comments on the Fed’s balance sheet.  This is all the money the Fed printed to buy government bonds over the last decade and it stood at an astronomical $4.5 trillion at one point (keep in mind, a trillion is a massive number.  It would take almost 32,000 years to count to one trillion by seconds). 

The Fed is “un-printing” money now and shrinking that balance sheet.  The balance now stands just over $4 trillion. 

We found questionable the Fed’s comments that the unwind of this balance sheet is not a cause of instability and they will continue to “un-print” $50 billion a month.  As you can see in the picture below, the periods of instability in the market have been when the Fed paused their printing.  Now they are shrinking the balance sheet. 

We think this is a major source of instability and also proves how difficult it will be to get out of the world’s biggest stimulus program without any casualties. 

Also adding to the volatility this week was the threat of a government shutdown.  As it stands now, Congress is still working on a deal to prevent the shutdown but a deal still seems unlikely.  A shutdown isn’t the worst thing in the world for investors as markets have historically been flat during past shutdowns. 

Lastly, economic data was good, though maybe not as good as estimated.  Housing is improving after having a rough patch due to higher borrowing costs, but those costs have fallen recently due to the market volatility. 

Durable goods figures also showed growth, though not as much as economists were predicting.  The last look at third quarter GDP was also released this week, showing the economy growing at 3.4%, which is respectable. 

Next Week

It’s a short week next week, with the market closing early on Monday and closed for Christmas on Tuesday.  It will also be light for trading volumes, which often results in a more volatile market, so there might not be much relief.

Next week looks to be fairly quiet for economic data, where we’ll get more reports on housing and little else of note. 


Investment Strategy

Stocks were oversold (cheap) on a short term basis last week, so they look super-cheap right now – but that doesn’t mean they can’t get cheaper.  We’re not trying to catch a falling knife here so we would wait for some strength before doing any buying. 

It will be interesting to see if there is any buying into the end of the year.  There is something called the “Santa Clause rally,” where stocks historically rise the 5 days before the New Year and two days after. 

We won’t get into “why” this occurs, but will note that the market could be in for a rough ride if there is no Santa Clause rally.  The last six times there was no Santa Clause rally, the next year the market was either flat or down sharply. 

As for the longer term direction of the market, we’re currently seeing some of our long term concerns play out.  We’ve constantly written that the economy looks promising, but the removal of stimulus has historically pulled markets lower.  As you can tell by the events of recent months, that battle is currently playing out.  Hopefully some equilibrium between the strong economy and falling market will form, but it’s anyone’s guess as to if or when that will be. 

Bonds are also volatile at this time.  Bond prices are extremely high and yields low on a short term basis and we don’t think they have much room to run from here.  We think they’ll remain stuck in the range they’ve seen over the last few months, with higher yields and lower prices, and we wouldn’t be surprised to see the volatility continue.   

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 12-14-18

It was another very volatile week with the markets closing modestly lower.  Through the Friday close, the Dow fell 1.2%, the S&P lost 1.3%, and the Nasdaq returned -0.8%.  Bond prices fell slightly as their yields moved higher.  Commodities were down, too, as gold lost 0.8%.  Oil prices fell 2.6% to close at $51.23 per barrel.  The international Brent oil, which is used for much of the gas here on the East coast, moved down to $60.25.

Let’s take a longer-term look at the market, where you can see we’ve been in a volatile range since October:

The markets were remarkably active this week, with the Dow seeing several-hundred point swings every day.  A lot of the movement came from news on trade and China, which we’ll get to shortly. 

Amid all this volatility, it looks like investors are pulling money out of the market at a near-record pace.  According to Bank of America and Lipper Funds data, this past week (Wednesday through Wednesday) saw the second-largest ever outflows from stock funds.  Bond funds saw outflows, too.  This money is moving to cash and some foreign markets.  

It’s worth noting that the largest weekly outflow came in February of this year.  As you can see in the chart earlier in this commentary, markets rebounded from that low, so this large amount of selling could be a positive sign. 

In fact, stock valuations (as measured by the price-to-earnings ratio) are at their lowest level in three years.  Investors who have been looking for deals can find them out there now. 

As for the events of the week, it was the trade fight with China that received the most attention. 

We opened Monday with the market under pressure as U.S. Trade Representative Lighthizer made comments over the weekend that the tariffs would be applied after the 90-day truce if no deal is reached in that time.  A Chinese ban on Apple selling older iPhone models due to patent infringements added to the selling. 

On to Tuesday, where markets moved higher on a tweet from President Trump that “productive conversations” were being made on trade. 

A vow by the Chinese on Wednesday for more openness and access to their economy, as well as eliminating tariffs on cars, saw markets go higher.  But reports that they detained two Canadians caused investors to pause. 

Lastly, economic data from the country on Friday showed their economy taking a downturn also caused our markets to fall.  From a U.S. perspective, though, this could be seen as giving us the upper hand in the negotiations. 

While China had the most impact on our markets this week, news out of Washington also played a role.  President Trump had a few negative stories impacting his administration, causing markets to react lower.   

Economic data this week was mostly positive.  The Jolts employment report showed the amount of jobs available still outnumbers the amount of people out of work.  Retail sales were higher and industrial production came in well above estimates.  

On the downside, small businesses are becoming less confident on the economy after seeing record highs earlier this year. 

Also, inflation looks to be moderating.  PPI and CPI were relatively flat from last month and the year-over-year numbers are declining.  Import prices released this week also showed a decline.  This is good news for the market since lower inflation makes it less likely the Fed will pull back on its stimulus. 

Next Week

China will probably be a factor again in the markets next week, but the main focus is likely to be on the Fed as they hold their last policy meeting of the year.  The odds are for a rate increase at this meeting, but those odds have slipped recently.  Investors will also be watching for clues on the pace of rate hikes next year.  This has the potential to move the market. 

Economic data will be quieter.  We’ll get info on housing and personal income and spending, but nothing that will have much impact on the market. 


Investment Strategy

Stocks are definitely on the oversold (cheap) side in the short term.  They’ve been oversold several times in the last few months, too, only to quickly rebound then collapse even further.  Will this time be any different?  No one knows, but maybe a little nibbling on stability would be a good 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.  Bond prices are extremely high and yields low on a short term basis and we don’t think they have much room to run from here.  We think they’ll remain stuck in the range they’ve seen over the last few months, with higher yields and lower prices, and we wouldn’t be surprised to see the volatility continue.   

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 12-7-18

It was a pretty brutal week for investors.  Posting their worst results since March, the Dow fell 4.5%, the S&P lost 4.6%, and the Nasdaq was down by 4.9%.  Bond prices rose as their yields again fell.  Commodities had a good week, with gold up 2.3%.  Oil prices are rebounding from their recent lows, up 2.4% to close at $52.13 per barrel.  The international Brent oil, which is used for much of the gas here on the East coast, rose to $61.40.

Well the week ended poorly, but at least it got off to a good start. 

The G-20 meeting was held last weekend and investors were relieved to see progress being made on the trade spat between the U.S. and China.  The U.S. would hold off on tariff increases while negotiations continued as China promised to buy more U.S. products. 

That excitement didn’t last long, however, as Tuesday saw strong selling.  The selling started modestly, with the lack of specifics on the tariff truce cited as the culprit behind the decline.

Around noon, though, the S&P 500 crossed below its 200-day moving average (which is just the average price of the index over the last 200 days – it is an important indicator for technical traders).  As you can see in the chart below, the markets took a nose-dive that time. 

That sudden burst of selling at that 200-day moving average tells us that the selling was triggered by computer programs.  These algorithms were programmed to sell at this level and the selling fed on itself to prompt more selling, resulting in the worst day in two months. 

The market fell further again Thursday as the trade concerns persisted.  First, we had a tweet from President Trump that got more attention as he is clearly taking a hard line on the trade negotiations:

Then we had the arrest of the CFO of Huawei Technologies, which is a cell phone giant in China.  Reports indicated the arrest was for violating sanctions with Iran, but it threw into question the how well the trade negotiations would progress after that. 

As investors sell stocks, they often use that money to go into the bond market.  This week we saw a phenomenon occur that has occurred before every recession since 1950 – an inverted yield curve. 

So what is a yield curve?  Without getting too wonky, bonds expire (or mature) at different times.  A bond might be for only 30 days or 30 years, with a handful of periods in-between. 

As you can see in the chart below, we can plot what these bonds are yielding all along the different maturities.  A healthy “yield curve” will see lower yields for shorter-term bonds and higher yields for longer-term bonds.  An unhealthy yield curve will “invert” or see higher bond yields at shorter maturities (we won’t get into the “why” at this time). 

That’s what happened this week, though only in a small part of the curve – the yield on 5-year bond was less than the 2-year (seen in the yellow line on the chart below).  Big deal, you say.  It is only a small part of the curve – but it has also happened before every recession so it is noteworthy.   

This caused some of the selling this week, too, as investors got a little panicked.  We aren’t overly concerned about the market right now as the last three times this happened (2005, 1998, and 1988), the market kept rising for another two years.  It is something to keep an eye on though, especially if more of the yield curve inverts. 

Lastly, economic data this week was pretty good.  The strength of the manufacturing and services sectors looks very solid.

The monthly jobs report was a little soft – though not bad.  155,000 jobs were added last month, well below the almost 200,000 expected.  The news was enough to give the markets a lift Friday (albeit briefly), since weaker employment means less chance of the Fed continuing its removal of stimulus. 

Next Week

Economic data will be in focus next week.  We’ll get reports on inflation, retail sales, industrial production, small business optimism, and another look at employment. 

Trade and the Fed will remain in the background and any news from either will have a large impact on the market, especially with investors on edge after last week. 


Investment Strategy

Stocks are getting cheaper after this selloff, but not yet at a level we find attractive for new money.  We’d also like to see the market internals (like market breadth, etc.) improve before we get too enthusiastic on the market.  We thought the market would be higher into year-end, but it’s becoming less likely with every passing week. 

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.  Bond prices are extremely high and yields low on a short term basis and we don’t think they have much room to run from here.  We think they’ll remain stuck in the range they’ve seen over the last few months, with higher yields and lower prices, but we wouldn’t be surprised to see more volatility.   

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 11-30-18

Markets turned a corner and moved solidly higher this week.  Through the Friday close, the Dow rose 5.2%, the S&P gained 4.8%, and the Nasdaq was higher by 5.6%.  Bond prices rose slightly and their yields fell.  Gold was lower, off a slight 0.1%.  Oil prices moved slightly higher, up 0.6% to close at $50.72 per barrel.  The international Brent oil, which is used for much of the gas here on the East coast, rose to $58.68.

After the market rise this week, let’s take a look at where the market stands from a longer term perspective:

The market was impacted by a little bit of everything this week.  We had news from the Fed, the trade dispute with China, and some economic data.

Coming off the Thanksgiving holiday, investors also got a glimpse of how strong the Christmas shopping season was looking.  According to reports from the National Retail Federation, the black Friday and cyber Monday shopping days saw slightly slower traffic in the stores, but strong sales online more than made up for this. 

Overall, they cite this year as being nearly 5% better than last year, which is great news for retail companies.   

The Fed was also in the news this week.  We’ve long talked about how much impact their policies have had on the markets over the years.  Their stimulus was probably the biggest factor in pushing markets higher and the market has stuttered as it’s been pulled back. 

This recent volatility in the market started in early October (which can be seen in the chart above) after Fed chair Powell made comments that they were a “long way” to their rate hike target – meaning they had a long path of pulling back on stimulus until they were comfortable. 

This week, however, the chairman said they were “just below” that target, suggesting they won’t be pulling back on stimulus much further.  Stocks turned in their best day since March on the news, showing that Fed policies remain the number one factor in the direction of the markets. 

The Fed also put out a “financial stability” report this week which shows the vulnerabilities facing the U.S. financial system.  Their top concern was the high debt levels that have accrued over the years.  This is interesting, since it was their very policies that encouraged taking on more debt to stimulate the economy.  It appears that taking on more debt after a debt crisis might be a bad idea – who’d have guessed?

Switching gears, the trade fight with China got a lot of attention this week as the G-20 summit takes place in Argentina this weekend. 

Reports and comments from government officials suggested a possible trade breakthrough.  It’s rumored that the U.S. could hold off on January tariff increases as talks progress.

We’ve heard similar comments before and even President Trump tapped the brakes on this, but investors are eager for something positive here and the markets rose as a result.

Lastly, economic data this week was mixed.  Most of the bad news came from housing, where the gains in home prices are slowing.  The pace of new and existing home sales is also slowing as higher mortgage rates scare away buyers. 

Also on the negative side, consumer confidence ticked lower over the past month, but still remains near all-time highs.

On the positive side, consumer income and spending both saw solid gains from last month.  The revision to third quarter GDP came in at 3.5%, unchanged from the first look. 

Lastly, an inflation report (the PCE report) showed inflation ticking slightly lower over the last month, largely due to lower gas prices. 

Next Week

Next week looks to be a busy one.  Trade will be a major focus due to the G-20 meeting this weekend.  The Fed will also be in the news as Fed chief Powell makes an appearance before Congress. 

We’ll get a few important economic reports, including the strength of the manufacturing and service sectors, data on trade, and the monthly employment report.  The Fed’s Beige Book report, which is an anecdotal look at the strength of the economy, will also be released.   


Investment Strategy

After turning the corner this week, stocks don’t look very attractive for new money here.  We’ll see if they can hold this level as the end of the year is typically a good period for stocks. 

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 on the 10-year have dropped back down near 3%, which may be on the low side in the short term.  We think they’ll remain stuck in the range they’ve seen over the last few months, but we wouldn’t be surprised to see yields rise and prices fall a bit from here. 

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.