The Week That Was

August 28, 2017

First and foremost our hearts and prayers go out to all of the victims of hurricane Harvey.

Amid a devastating hurricane hitting Texas, a solar eclipse that hasn’t happened in 99 ½ years and the potential shutdown of our government as early as October 2nd, the markets last week were very tame: the number of shares traded on Wednesday fell to their lowest level so far this year.

The resiliency of the US stock market is impressive. Last week the DJIA increased 0.71%, the S&P 500 rose 0.75% and the Nasdaq composite gained 0.80%. The insatiable appetite of companies’ repurchasing their own shares, fed by easy monetary policy, has decreased the capitalization of the US stock market by 17.5% over the past six years. Companies are beginning to pair back purchases, buying $100 billion less in the past 12 months than in the prior year.

On the positive side, GDP growth has been improving and our labor market is expanding which will undoubtedly create stronger wage growth. Second-quarter earnings rose by 10.2% y/y, the second consecutive quarter of double-digit growth.

We are concerned, however, with pockets of equity overvaluation, such as some Large Cap Tech and Utility stocks. The Federal Reserve kept interest rates the same at their Jackson Hole meeting but reminded that they will be paring back their $4.5 trillion bond portfolio. The US budget showdown is now at the forefront of investors minds.

International equities continue to benefit from a weaker dollar with EAFE gaining 0.61% and EM surging 2.46% for the week.

The bond market barely budged after Fed Chair Janet Yellen and ECB President Mario Draghi made rather defensive and dovish comments.

With summer winding down we caution investors not to be too complacent and to keep in mind their long-term investment goals.

“Even if you’re on the right track, you’ll get run over if you just sit there.”-Will Rogers

 

Enough is Enough

August 21, 2017

Markets were volatile last week as investor focus shifted from geopolitics to aftershocks from the tragic events in Charlottesville, VA and Europe. The markets jumped higher to start the week as North Korea pulled back on threats against Guam easing tensions from the previous week. Disapproval to President Trump’s response prompted a number of CEOs to resign from advisory councils which he ultimately disbanded as the week wore on. Another ISIS inspired terrorist attack, this time in Barcelona, Spain added to the market’s uneasiness on Thursday. Additionally a knife attack in Turku, Finland occurred on Friday killing 2 and injuring several others. Enough is Enough

For the week, the DJIA closed down 0.77% while the broader-based S&P 500 was off 0.58%. Smaller US companies represented by the Russell 2000 shed 1.17%. Despite the terrorist events in Spain and Finland, international equities finished the week in the green with both Developing and Emerging Markets closing higher by 0.07% and 1.64% respectively. Yields were generally flat for the week as investors weighed the latest comments from FOMC and ECB. In minutes from recent policy discussions, both central banks had concerns with tepid inflation while Fed officials remain split over the next course of action.

Economic news for the week was a mixed bag: retail sales rose 0.6% in July ahead of expectations; housing starts fell to 1.115 million (seasonally adjusted annual rate) missing expectations of 1.122m; industrial production increased 0.2% month over month which was slightly below estimates of 0.3%; the labor market remained strong as initial jobless claims came in at 232k beating estimates.

Global equities should remain volatile given recent events around the world. Investors should continue to adhere to their long-term plan amongst all the noise!

“A single sunbeam is enough to drive away many shadows.” – Francis of Assisi

 

Fire and Fury

August 14, 2017

Complacency evaporated last week, as geopolitical uncertainty along with earnings disappointments [retail, upstart social media] and the fraying of the OPEC “production limitation” deal. A useful way to quantify investors’ mood is the CBOE Volatility Index (VIX). This year we have experienced a long-lived period of slowly advancing stock prices, which made the “short-volatility” trade one of the most popular [hence dangerous] trades. The VIX jumped 44% this week to 16.04, far above the previous ~10 complacency level. Since the VIX is a trading vehicle as well as well as an indicator, it can easily be part of a vicious circle. The following chart speaks volumes:

Fire and Fury

For the week, the DJIA closed down 0.91% while the broader-based S&P 500 was off 1.37%. International equities were even worse with developed international equites and emerging market equities lower by 1.48% and 2.24% respectively. As expected, money flowed into US Treasuries (along with gold) pushing yields lower across the board. The 10yr Treasury closed the week at a yield of 2.19% which was down from 2.27% the week prior.

In the week ahead, look for economic readings on retail sales, industrial production, consumer sentiment and the release of the FOMC minutes from July’s meeting. Volatility should remain heightened due to geopolitics, but any serious decline will likely be buffered by an improving US economy and earnings backdrop.

“Act as if what you do makes a difference. It does.” – William James

Moderate Growth to Continue

August 7, 2017

Last week, equity markets continued their advance driven by strong corporate earnings and better-than-expected job numbers. In the U.S., the S&P 500 was up 0.23% and the DJIA 1.22% while the NASDAQ declined -0.34%. Internationally MSCI EAFE and MSCI EM were up 0.88% and 0.45% respectively. For the week, value outperformed slightly but YTD growth continues to be a strong outperformer.

The July employment report was a better-than-expected 209,000 and the unemployment rate fell to 4.3%, the lowest level in 16 years. Employment numbers as well as corporate earnings and other economic numbers should provide support for moderate economic growth in the second half of 2017. This week, CPI and PPI inflation reports should show that inflation continues to be in check. We believe this will allow the Fed room to start reducing their balance sheet in the 4th quarter and raise short term rates for a third time in December.

This steady stock-market advance has taken it into fully-valued territory, which perforce raises bull market durability questions. Geopolitical disaster is currently the most likely bear-market catalyst, and the UN’s North Korean sanctions bring Pyongyang’s ongoing nuclear ambitions into sharp focus. Diplomacy will not be enough to prevent that rogue regime from acquiring deliverable [ICBM mounted] nuclear weapons, and the possibility of physical intervention [kinetic warfare?] is increasing. Please stay tuned.

“Without labor nothing prospers.”Sophocles

No Summertime Blues…

July 31, 2017

For the week, the DJIA rose 1.17% while the S&P 500 finished unchanged. Developed international markets finished the week slightly ahead by 0.23% while their year-to-date performance remains stellar as the MSCI EAFE index is up a healthy 17%. Emerging markets continued their strong advance as the MSCI EM index finished higher by 0.29% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week down 0.21% as bonds yields moved higher off last week’s overpriced level. As a result, the 10 YR US Treasury closed at a yield of 2.30% (up 6 bp from the previous week’s closing yield of 2.24%). Gold rose $13.50 to close at $1,268.40/oz. Oil prices moved higher (up $3.94) on the week to close at $49.71/bbl as Saudi Arabia urged OPEC members to stick to recent production cuts. Cheap oil prices are a boon to businesses and consumers. Cheaper oil prices and tame inflation contributed to the Fed’s decision last week to leave rates unchanged for July.

In economic news released last week, existing and new homes sales were mixed as existing home sales fell a bit while new home sales were steady at 610,000. July PMIs came in at 54.2 … providing further evidence of an economy gaining growth momentum. Durable goods orders, always an important harbinger of future growth, rose 6.5% marking the largest one month advance since July 2014. Lastly, the first reading of 2nd quarter GDP came in at 2.6% (in-line with expectations).

The week ahead looks to be pretty quiet. 2nd quarter earnings releases continue, and we expect most companies to report in-line or better-than-expected numbers. Along with more earnings reports, expect to see the following economics releases this week – ISM manufacturing, jobless claims, ADP employment report, BLS employment update and personal income and outlays.

Investors have not experienced any summertime blues, at least not yet. As always, we plan to look through the day-to-day news and focus on longer-term objectives. Investors should stay the course and stick close to their long-term asset allocation targets.

Let’s make it a good week and enjoy the summer!

“The best way to cheer yourself up is to try to cheer somebody else up.”   –   Mark Twain

 

To Russia with Love

July 24, 2017

Last week, financial markets shrugged off the ongoing D.C. circus, geopolitical risks and monetary policy shifts. The S&P 500 index rose 0.56% while the NASDAQ added 1.20%, both extending gains for the third straight week. Second quarter earnings have been slightly better-than-expected with 20% of companies reporting and tracking at an estimated 7.2% growth rate. However, several reports caused concern, like past historical market barometers IBM and General Electric, which issued cautious revenue and earnings guidance. In addition to higher growth expectations, the US dollar weakness continues to benefit the international equity markets, with EAFE up 1.35% and EM adding 1.35% for a YTD gain of 25% – not too bad!

Inflation continues to remain subdued relative to the Federal Reserve’s stated target. This has put a lid on long-term rates which have actually gravitated lower so far this year. The trend continued last week with the 10 year US Treasury yield down 9 basis points to 2.24%.

This week all eyes are on corporate earnings reporting, including GOOG, AMZN and FB. On Wednesday, the Fed meeting will be uneventful and is expected not to increase short-term interest rates. The second quarter GDP will be reported on Friday.

Assuming we have a solid earnings season the rest of the way, and supportative commentary from the Federal Reserve, this bull market in stocks should keep going. Nevertheless, there are geopolitical and monetary policy headwinds which add to an already uncertain economic environment and outlook. Investors should remain diversified and avoid any emotional overreactions.

“The power of accurate observation is commonly called cynicism by those who have not got it.” -George Bernard Shaw

The Fed’s Latest Inflation Pronouncements Lead the Market Higher

July 17, 2017

Markets moved higher last week, with the DJIA and S&P 500 ending Friday at record highs. Things really picked up on Wednesday when FOMC Chairperson Janet Yellen testified before Congress. During her testimony, Yellen appeared to speak with a more cautious tone regarding further tightening in policy. Her biggest concern is inflation which has consistently run below their target of 2% during the current expansion. On Friday, the Department of Labor reported CPI was unchanged for the month of June, missing expectations of month over month rise of 0.2%. Over the past year, consumer prices have increased 1.6% while Core CPI (excludes food and energy) rose 1.7% well below its stated goal.

For the week, the DJIA finished up by 1.04% while the broader-based S&P 500 closed higher by 1.42%. International markets were also strong with both the MSCI EAFE and MSCI EM jumping up 2.38% and 4.60% respectively. Treasury yields moved lower as expectations of monetary tightening were reduced due to inflation concerns. The 10yr Treasury closed at a yield of 2.33% which was down from 2.39% the week prior. Gold and Oil both closed higher on the week.

In the week ahead, look for economic reports on Manufacturing and June housing starts. 26 companies in the S&P 500 will report this week which includes GE, JNJ, BAC, MSFT, and V just to name a few.

“When you arrive at a fork in the road, take it.”Yogi Berra

 

Good News

July 10, 2017

U.S. equity markets finished on the plus side for the week as the monthly jobs report surprised to the upside with 220,000 new jobs vs expectations of about 180,000. In addition to the healthy June estimate, the figures for the prior 2 months were revised upwards. The S&P 500, DJIA and NASDAQ all were up fractionally for the week led by the financial sector. Financials have been strong since all major U.S. banks easily passed their stress tests and announced dividend increases. Growth outperformed value for the week in spite of continued volatility in the technology sector. International equities gave some back last week with both developed (-0.47%) and emerging (-0.58%) markets finishing in the red.

Bond prices were again under pressure as the strong jobs report increased the odds that the FOMC will raise short-term rates one more time this year. Yields increased across the board with the rate for the 10YR Treasury closing at a yield of 2.39%, an increase from 2.31% the week prior. In addition to potential rate hikes, the Fed continues to indicate that they will begin reducing their balance sheet (well in excess of $4T – see chart below) starting in September of this year.

Fed Balance Sheet

Source: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

This week, look for economic reports on inflation, retail sales and industrial production. 2nd quarter earnings season shifts into gear with reports from PEP, C, JPM, and WFC to name a few.

“Less is only more where more is no good.” – Frank Lloyd Wright

Opportunities [as well as Challenges] Ahead

July 3, 2017

The stock market ended the quarter on a profit-taking note, with the S&P falling 0.6% while the Nasdaq declined 2.0%. Economic data was fine, with 1Q GDP expanding 1.4% and consumer confidence increasing to 118.9. The lower inflation reports [core PCI only 1.2% v. the Fed’s stated target of 2%] is pushing markets to forecast a pause in the fed fends increase activity until the 4Q [FF are currently 1.0%+ after two successive quarters of ¼ point increases].

The equity markets have performed admirably YTD [to the point where some are worried about excess enthusiasm]. The S&P is up 8.2% [9.3% including income], bonds are up 2.6% [High Yield up 4.9%]. International markets, with their lower valuations, are up even more, with EM up 18.6% YTD. Markets rarely advance in a straight line, but any upcoming corrections should be viewed as opportunities.

The “fight for $15”, as the concerted push for higher minimum wages is now known, has made significant headway in some locales, and objective data is starting to come in. Seattle has boosted its minimum wage from $9.47 in 2014 to $13 in 2016 [on its way to $15]. Now, the University of Washington has published a detailed study showing that the workers who were supposed to benefit from the higher minimum wage have actually experienced a decline of $125/month in their income because of fewer available hours. Other “unintended consequences” include fewer [none?] openings in fast food for unskilled entry-level workers. Let the buyer beware.

“Liberty without learning is always in peril; learning without liberty is always in vain.” – JFK

Stay the Course

June 26, 2017

For the week, both the DJIA and the S&P 500 finished slightly higher – the DJIA inched higher by 0.05% while the S&P 500 advanced 0.22%. Developed international markets finished down by just 0.17%. Emerging markets continued their strong advance as the MSCI EM index finished higher by 0.99% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week ahead by 0.17% as bonds yields moved lower amid muted inflation expectations. As a result, the 10 YR US Treasury closed at a yield of 2.15% (down 1 bp from the previous week’s closing yield of 2.16%). Gold rose $2.20 to close at $1,256.20/oz. Oil prices dropped (down up $1.96) on the week to close at $43.01/bbl on increased supply and tepid demand. Oil prices are officially in bear market territory as prices have fallen greater than 25% from this year’s $58.30 high reached on the first trading day of the year. Cheap oil prices are a boon to businesses and consumers. Cheaper oil prices and tame inflation could temper the Fed’s enthusiasm for raising rates later this year … we’ll see.

In economic news released last week, existing and new homes sales both exceeded expectations. The current low unemployment rate along with low interest rates is supportive of a healthy housing market. Supply continues to be somewhat constrained with just 4.2 months of inventory at today’s sales pace.

The week ahead looks to be pretty quiet. Economic news this week includes durable goods orders, June consumer confidence, personal income data, and the final tally of first quarter GDP.

As always, we plan to look through the day-to-day news and focus on longer-term objectives. Investors should stay the course and stick close to their long-term asset allocation targets.

Let’s make it a good week and enjoy the summer!

“The individual investor should act consistently as an investor and not as a speculator”Ben Graham