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.
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).
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:
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.
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.
