Commentary for the period ending 1-31-20

Hello all – we hope your new year has gotten off to a good start. 

It was a bit of a mixed picture for the markets as they started the year off strong, but selling late in the month erased the gains.  So far, the S&P 500 has returned exactly… 0.0% for the year.  The Dow is off 0.9%, while the Nasdaq is up 2.0%. 

The selling was triggered during the first reports of the Coronavirus out of China. 

Yes, the virus will put a damper on a lot of economic activity and will have an impact on the global economy.  However, we think the decline in the market was more due to investors looking for an excuse to sell.  The market had been very overbought (or expensive) after the strong run the market has had.  The virus gave investors an opportunity to sell and lock in gains. 

Here’s a look at some of the past epidemics.  The font may be a little small, but you get the idea that any impact on the market is temporary. 

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Aside from the Coronavirus, what was impacting the market this month?

First was the signing of the trade deal.  While it’s not perfect, it is a positive first step in the right direction and better than the status quo. 

The deal isn’t just about the Chinese buying more of our soybeans.  The details haven’t been discussed much (mostly because we didn’t learn about them until late in the process), but the Chinese will be buying a lot more American items.  In return, we gave up nothing.  That’s a pretty good deal. 

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The Fed also had an impact on the market, but to the downside. 

It probably didn’t help that the Fed held their policy meeting this month during the height of the virus concerns.  Their tone was measured, warning that the virus would weigh on global growth and sounding more pessimistic in general.  Markets moved lower as a result.

However, the bad news is often good news from the Fed because it means they will continue to stimulate the economy.  Right now they are printing money to buy bonds, which has helped prop up the market the last several months.  Investors are also predicting the Fed will lower interest rates two times this year, which is another form of stimulus.  These two items are likely to keep stocks elevated for the foreseeable future. 

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Earnings haven’t gotten a lot of attention, but the results for fourth quarter earnings are underway. 

So far, earnings are coming in about where analysts expected, down 2.1% over the past year according to Factset.  It looks like this is the bottom, though, as earnings are forecasted to rise from here. 

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Lastly, economic data this month was mixed, but leaned to the positive side. 

GDP from the fourth quarter came in at a decent 2.1% growth.

Job growth remains solid.

It’s manufacturing that has shown weakness, lower again in December.  However, an update to this manufacturing data was released this morning and showed a return to growth. 

When we combine the manufacturing and service sectors of the economy, the picture looks to be improving, too. 

The consumer side has been particularly strong.  Sentiment indicators show considerable strength. 

Small business optimism ticked slightly lower last month, but it still remains at a fairly high level.

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Where does the market go from here? 

The selloff has put the market near attractive levels.  That doesn’t mean the market can’t keep moving lower, but the odds of a rise are better than a decline. 

As always, unpredictable events like comments from government officials on the trade war or from the Fed have the ability to push the market either way, so some caution is warranted.


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 period ending 12-31-19

Hello all – we hope you had a nice December and 2019!

Stocks saw another record-setting month, with the year ending just off record highs.  The S&P 500 and the Nasdaq both had their best years since 2013 while the Dow had its best year since 2017. 

Here’s a look at the three major indexes for 2019:

Here’s a little more granular look at the S&P 500, showing the index over the past year, the performance of every day, and performance by the day of the week.  If anything, it shows us we can safely take Monday’s off from now on…

Also, this year had the highest percentage of ‘up’ days in the market since 1996, showing just how strong the market was.

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Getting back to December, what was behind the gains this month? 

There are probably a few things we can point to.  One is just the fact that it’s December – the last month of the year has historically been one of the best and least-volatile months of the year.  A lot of new money coming in and chasing top performing stocks tends to boost the market. 

Another factor is the Fed.  They recently restarted a stimulus program that ended in 2014 where they printed money to juice the markets.  They say the reason for the latest round of stimulus is not to juice the market but to stabilize it.  Either way, the effect is still the same and stocks have gone up.   

The China trade war was another factor in the market performance this month where a “Phase 1” agreement was officially announced (it was un-officially announced weeks earlier).  We still don’t know exactly what is in the deal, but a de-escalation in tensions was welcomed by the markets. 

Lastly, the market has been helped by decent economic data, with consumer data looking particularly strong. 

Recent manufacturing data hasn’t been great, but it may be starting to turn the corner.

Employment remains solid:

Sentiment surveys haven’t changed much, but remain at a high level:

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Where does the market go from here? 

The market is definitely overbought (or expensive) at its current level.  But it’s been overbought for some time and has continued to push higher.  We don’t see any of the signs that a significant pullback is near, but wouldn’t be surprised to at least see a pause. 

One indicator to keep an eye on is market breadth, which compares the amount of stocks rising vs. falling.  It has been very strong recently and remains so, signaling a healthy rise in the market.  Any change showing fewer stocks advancing would be a sign to be more cautious.  We’re not at that point yet, but it is one of the red flags to watch for. 

As always, unpredictable events like comments from government officials on the trade war or from the Fed have the ability to push the market either way, so some caution is warranted.



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 period ending 11-29-19

Hello all – we hope you had a nice November.

It was another uneventful month for the markets as stocks continued to reach new record highs.   

With gains of more than 3% for all major indexes, November was the best month for the markets since June.

The November gains came with very little volatility as stocks slowly and steadily chugged higher.  In fact, the level of volatility reached its lowest point in over a year. 

The lack of volatility can continue, too.  As you can see in the chart below, volatility has historically fallen at the end of the year. 

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We think the Fed is responsible for at least some of the reduction in volatility.  As we reported last month, they remain very stimulative and signaled no change from that. 

They also recently restarted another stimulus program that ended in 2014.  At that time, they printed money to buy bonds to lower interest rates to make it easier for people to borrow.  This round of money-printing they say isn’t to lower interest rates, but to “stabilize the banking sector.”  Either way, the effect is still the same on the market. 

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The volatility we did have this month mostly came on announcements over the trade deal with China. 

First, remember the “Trade War Cycle” we have seen over and over in this saga: 

This month we saw pretty much the whole trade war cycle. 

A “Phase 1” deal was recently announced and the market rallied on the news.  Then the Chinese hit the brakes and the deal was put on hold.  As the month ended, we appear to be on track for a deal, but we’ve been in this position many times before have nothing to show. 

One of the holdups has been on the transfer of intellectual property (if a business wants to operate in China, the business must hand over its trade secrets to a Chinese partner who then inevitably steals them and cuts out the U.S. business).  The Chinese have balked at this request to stop stealing company secrets since this is more of a way of life for them. 

It reminds me of an event in China from 2013, where the Chinese high-school aged children must take a rigorous standardized test for college and career placement.  Cheating on the test was a common occurrence and the Chinese government tried to crack down on the cheating.  However, the students and their parents were outraged, leading to riots and chants of “We want fairness.  There is no fairness if you do not let us cheat.”  Here’s a LINK to an article. 

This is the culture these businesses operate in.  We think that even if the Chinese government implements protections for the U.S. businesses, they will never be completely safe. 

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Switching gears, economic data released over the last month leaned to the downside, continuing the trend of poor manufacturing and industrial data, but decent on the consumer side. 

A month ago, many economists believed manufacturing was turning a corner and should be heading higher.  However, that hasn’t been the case.  News out this morning shows manufacturing continuing to decline. 

Industrial production was down sharply:

And productivity also turned lower:

However, the consumer side still looks good.  Consumer spending remains very strong, wages are up, and employment has been solid.   Here’s a look at retail sales:

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Where does the market go from here?  Our outlook remains unchanged from last month where we were cautious, but stocks turned in a terrific performance.  While we currently see no red flags that often precede a large decline, we think stocks are on the overbought (or expensive) side from a short term perspective.  We would hesitate to put new money in the broader market here and prefer to find individual undervalued names. 

As always, unpredictable events like comments from government officials on the trade war or from the Fed have the ability to push the market either way, so some caution is warranted.


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 period ending 10-31-19

Hello all – we hope you had a nice October.

It was a very uneventful month for the markets, which saw stocks make new record highs. 

October is a famous month for sharp drops in stocks and very volatile trading, but this October was very tame.  Volatility even dropped as the month progressed. 

The market was boosted by improvements in many of the items investors were previously concerned with.  The China trade fight abated and the Brexit issue was pushed back a few months.  Corporate earnings have been better than expected and interest rates are moving lower.  All-in-all, the backdrop looks pretty good.

However, there remains a lot of worry amongst investors.  Barron’s put out a poll showing that investment managers are at their least optimistic level in 20 years.  While this is worth noting, we also consider the old saying that bull markets die on euphoria – clearly there is no euphoria in the markets even at these record highs. 

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As for the main stories of the month, we’ll start with the Fed. 

They held another policy meeting this month and announced a cut in interest rates, as expected (lower interest rates make it cheaper to borrow money and theoretically boost the economy).  The market likes lower rates and rose on the news. 

Also helping the market were comments from Fed Chairman Powell that suggested the Fed will lower rates further if the economy weakens and will not raise rates if the economy improves – only if inflation picks up.   Inflation has been below their target for many years now and shows few signs of increasing, suggesting the Fed is unlikely to raise rates any time soon (although we argue the Fed should be aiming for 0% inflation, which is their legally prescribed mandate from Congress, not 2%.  But we digress…).

Investors see little chance of the Fed cutting rates again this year:

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Corporate earnings were another big story this month. 

A little more than half of the companies in the S&P 500 have reported results and the earnings have been better than expected.  Of course, the bar was set very low and the -3.2% earnings growth (or earnings decrease, actually) is better than the -4.7% analysts were initially estimating. 

Another good sign is that 75% of companies have beaten their estimates, as well.  The chart below shows just how rare that is.

Lastly, it’s worth noting that analysts are predicting this to be the bottom in earnings and they will improve going forward.  Next quarter is expected to be flat while growth picks up in 2020.  The stock market tends to be forward-looking, so we believe that is playing a part in its current rise. 

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Finally, economic data remains mixed, but overall we’d say a little better than last month. 

Economic growth is still a little sluggish, but positive.  The most recent report shows the economy growing at 1.9% in the third quarter.

Manufacturing has been the main drag and a lot of that can probably be attributed to the trade war.  More economists are predicting manufacturing will start improving soon, which should help the economic data.

This weakness has hurt consumer sentiment as both consumer and small business confidence has fallen.

Despite these negatives, the consumer data actually looks pretty decent. 

Consumer spending remains very strong, wages are up, and the employment report out this morning shows a strong job market.  

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Where does the market go from here?  Stocks look to be a little on the expensive side in the short term.  We think they probably have a little room to run higher, but the odds of a decline are growing.  We would hesitate to put new money in the broader market here and prefer to find individual undervalued names. 

Of course, unpredictable items like comments from government officials on the trade war or from the Fed have the ability to push the market either way, so some caution is warranted. 



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.