Onward and Upward

February 23, 2017

The markets continue to climb a wall of worry, with the S&P up 1.5% last week and 5% YTD. Fed Chair Janet Yellen testified before Congress midweek, and it is now clear that interest rates will likely be rising this year by 50-75 basis points. The markets are handling this prospect well, no doubt assuming that economic growth will be increasing simultaneously.

The new administration has promised less regulation [Dodd-Frank, ACA {repeal and replace?}, EPA, etc.], marginal tax cuts and reinvigorated domestic manufacturing [bully pulpit and protectionism?]. Some of these promises are starting to come into focus, and so far they are mostly on the positive side of the register. Markets appear to be pricing in a lot of economic progress … lets hope Congress cooperates.

The Telecommunications Industry’s so-called “Net Neutrality” burden, for example, is sure to be repealed. Ajit Pai as the new FCC chairman will reverse the classification of internet-service providers as common carriers [the anachronistic 20th century telephone regulatory scheme that stifled innovation for so many years]. This will, among other things, restore incentives for the ISPs [current and prospective] to maintain and upgrade internet infrastructure [wired and wireless].

The week ahead continues with earnings reports … so far so good. Bottom-line: the economy is improving and stocks are moving higher despite some lofty valuations.

“You must be the change you wish to see in the world” – Mahatma Gandhi

Earnings Boost

February 14, 2017

Equities continued to rally on the strength of corporate earnings and the prospect of tax cuts to be proposed shortly by President Trump. So far, 360 companies in the S&P 500 having reported fourth quarter earnings which are set to rise 5% from the year-earlier period, according to FactSet. Expectations had been for earnings to increase 3.2%. For the week, the DJIA was up 1.13%, the S&P 500 rose 0.87% and the NASDAQ 1.24%. International stocks were mixed the EAFE index was down slightly (-0.02%) but emerging markets continued their strong performance by advancing 1.25% and are the best performing equity group up 7.93% YTD. Fixed income also was positive as the yield on the 10 year US Treasury fell from 2.49% to 2.41%.

This week, look for reports on inflation, retail sales and housing starts but the big news this week may come as Fed Chairwoman Janet Yellen testifies before Congress on Tuesday and Wednesday. Investors will be looking for hints as to when the FOMC will raise rates.

“If you fell down yesterday, stand up today.”  –  H.G. Wells

How Sweet It Is

February 7, 2017

Markets closed the week roughly flat as a flurry of earnings, political hoopla, and macro-economic data gave investors much to ponder. While earnings have been mostly positive, the new administration’s unconventional approach and geopolitical events are certainly in the background. Last week’s economic reports included: Pending home sales rose 1.6% for December beating estimates of 1.1%; ISM Manufacturing Indexes came in at a reading of 56.0 in January; The Federal Reserve left the Federal Funds rate unchanged at a range of 0.5% to 0.75%; The U.S. economy added 227,000 jobs in January which beat expectations of 175,000 while the unemployment rate came in at 4.8%.

A Friday rally couldn’t save the DJIA from closing the week in the red (-0.09%) while the broader-based S&P 500 closed up a meager 0.16%. The Russell 2000 closed the week up 0.54% while international equities also moved higher. For the week, the MSCI EAFE closed up 0.04% while the MSCI EM finished up 0.33%. Treasury yields were volatile in reaction to the Fed statement and last week’s job report but ultimately finished the week roughly where they started with the 10yr Treasury closing the week at a yield of 2.49%.

For the week ahead, look for reports on Trade Balance on Tuesday, Job openings on Thursday, and a reading on Consumer sentiment on Friday. 101 companies that make up the S&P 500 will report earnings this week.

HOW ABOUT THOSE PATRIOTS?!?!?!?!

“… a lot has transpired over the last two years … and I don’t think that needs any explanation. But I want to say to our fans, to our brilliant coaching staff, our amazing players who were so spectacular: this is unequivocally the sweetest!” – Robert Kraft

Going, Going, Gone!

January 30, 2017

The Dow, S&P 500 and Nasdaq all set record highs last week with the Dow closing above the historic milestone of 20,000 on Wednesday. The S&P 500 trades at 17.2 times expected earnings, which is well above its 5yr average (15.1x) and 10yr average (14.4x) according to Fact Set. The MSCI Developed International Equity Index, EAFE, was up 1.30% while the MSCI Emerging Market Index was the best performing major stock index, generating 2.55%. We should keep in mind that EM is still 32% behind its peak in dollar terms of 1,338.30 reached in 2007.

Political outcry about the Trump administration’s immigration policies and Friday’s report of tepid growth as measured by the US gross domestic product, will undoubtedly weigh on the stock market this week.

On Wednesday, the Fed will conclude its policy meeting, although another rate hike isn’t expected, their statement could provide some guidance for further increases in 2017. In addition the Fed, the manufacturing purchasing managers index (PMI) for January will also be reported on Wednesday while the monthly job report will also be released on Friday. Corporate earnings continue to move markets, with 103 US multinationals, including Apple, Facebook, UPS and Exxon Mobil reporting this week.

“I have just one superstition. Whenever I hit a homerun, I make sure I touch all four bases.” -Babe Ruth

Inauguration Week in Review

January 23, 2017

Markets finished slightly down for the week as eyes were focused on Friday’s inauguration of our 45th President and corresponding protests around the country. For the week, the DJIA closed lower by 0.24% while the broader-based S&P500 finished off 0.13%. Smaller US companies representing the Russell 2000 closed the week down 1.46%. International equities representing the MSCI EAFE and MSCI EM were off 0.47% and 0.30% respectively. Treasury yields trended higher last week with the 10YR US Treasury closing at a yield of 2.48% while the Barclays US Aggregate finished the week in the red (-0.34%).

Economic data last week was relatively positive with the consumer price index (CPI) coming in a 2.1% y/y while core CPI came in at 2.2%. While the labor markets have been strong, inflation has been somewhat muted allowing the Fed to keep a lid on rates. In a speech delivered Wednesday, FOMC chairwomen Janet Yellen mentioned that “inflation is moving toward our goal”. At this point, last week’s inflation number should keep the Fed on target to raise rates a “few times” in 2017. Other reports last week included industrial production of 0.8% m/m beating estimates of 0.6%, housing starts at 1.23m beating expectations, and weekly jobless claims of 234,000 which was lower than estimates of 254,000.

Earnings season is underway with a number of companies reporting results last week. It is early but so far earnings have been somewhat favorable compared with expectations. This week, 100 companies in the S&P 500 will report earnings; among those include JNJ, GOOGL, VZ, MSFT, and CVX to name a few.

Buckle Up … as our president enters his first week in office which will likely bring a few surprises along with it. Have a great week!

“Intense feeling too often obscures the truth.” – Harry S. Truman

The Pause that Refreshes

January 18, 2017

The post-election rally took a breather last week, with the S&P falling 0.1% while the tech sector helped the Nasdaq advance by an additional 1.0%. Cyclical, growth-sensitive sectors continued to outperform, with only energy lagging the 500. The 500 is now up 1.6% YTD, while the Nasdaq has advanced by an even more impressive 3.5%.
Weekly Returns
The earnings season is underway, with several of our major banks falling short on revenue but exceeding earnings expectations. The markets chose to react positively on Friday, but these banks mostly closed off their intraday highs. Notable reports this week include CSX, Citigroup, IBM, American Express and Schlumberger.

The Fed is adding some uncertainty into the investment equation by incrementally abandoning its Fiscal Stimulus advocacy. For example, Chair Yellen said in December that fiscal policy changes are no longer needed to achieve full employment. This follows its measured December increase in its Fed Funds rate [the 2nd annual quarter-point FF increase, which may be followed by more ~ 3 more this year]. However, the new administration will probably stick with its version of fiscal stimulus [simpler, lower marginal tax changes and regulatory reforms]. Higher interest rates are the probable result.

On a positive note, Elon Musk’s SpaceX restarted its commercial launch schedule by successfully launching [and later recovering] a Falcon 9 rocket and its 11 satellite cluster of communications satellites. This follows a 14 month hiatus caused by two accidental explosions, the first mid-flight and the second during subsequent launch-pad testing. Let’s hope that this is the start of another string of 28 [or more] successful launches.

“…Watch the stars, and see yourself running with them.” – Marcus Aurelius

Trump Rally Continues

January 9, 2017

Last week, equity markets rose across the board. The S&P 500 increased by 1.76%, the DJIA and NASDAQ were up 1.07% and 2.58% respectively. In international markets, the MSCI EAFE finished up 1.78% while emerging markets rose 2.20% for the week. Domestically large cap growth stocks were the best performers up 2.4% for the week led by healthcare and technology sectors.

The bond market took a breather last week as rates in the U.S. leveled off with the 10 year Treasury finishing the week at 2.42% compared to 2.45% the prior week.

The major economic news last week was the monthly jobs report. 156,000 new jobs were added … slightly disappointing compared to estimates and below the prior month’s level. The unemployment rate ticked up to 4.7% from 4.6% as more Americans re-entered the labor force. Looking a bit deeper into the report, the 10-cent increase (2.9% gain) in hourly wages to $26 marks the strongest growth since 2009 and is a major positive development. However, the combination of steady hiring and rising wages is likely to keep the Fed on the path of increasing short term rates in 2017. This week we get a report on retail sales and earnings season kicks off with a number of banks scheduled to report.

“If you wish to reach the highest, begin at the lowest.” – Publilius Syrus

Weekly Commentary (1/3/2017) – Happy New Year!

January 3, 2017

Best wishes to all of our clients and friends for a happy, healthy and peaceful New Year! 2016 was certainly full of its ups and downs, and we suspect that 2017 will bring more of the same; so buckle-up for another enjoyable ride.

For 2016, the DJIA overcame a miserable start to the year (dropped over 1000 points in the worst-ever five-day start to a year) to finally finish the year up 13.4%. The broader based S&P 500 closed higher for the year by 9.5%. International equities struggled for most of the year (despite their low valuations) as the Dow Jones Global ex-US Index finished the year ahead by 1.8%. Bond returns were also meager as the Bloomberg/Barclays Aggregate Bond Index returned 2.65% for the year.

2016 provided yet another example of sticking with the market despite the inevitable setbacks – the worst-ever start to a year, markets being down roughly 11% through mid-February, a two-day 5% correction after the Brexit vote. Despite all of these challenges, markets rewarded patient investors. That is indeed the history of our markets – every market correction has been temporary while the market’s advance is permanent.

As always, we plan to look through the day-to-day news and focus on longer-term objectives.

Let’s make it a good year!

“Character is the ability to carry out a good resolution long after the excitement of the moment has passed.” – Cavett Robert

The Stockings Were Hung

December 27, 2016

It was a sluggish and short holiday week for US stocks, finishing with slight weekly gains with light trading volume. The S&P 500 gained 0.3%, the DJIA rose 0.46%, and NASDAQ was up 0.48% for the week. The bubbly was close to popping as the DJIA nearly hit the historical (meaningless in the long run) threshold of 20,000. Developed international markets rebounded this week with the MSCI EAFE up 0.38% while emerging markets again slipped 1.67%. Hurting international stocks has been the strength in the US dollar which has extended its rise post-election. The dollar recently hit its 14 year high with increasing demand for the currency, making US assets more attractive. Buyers beware … a strengthening dollar is a headwind for the earnings of large US companies with significant international exposure. Bond funds continue to see outflows; however, the US Aggregate Index rebounded slightly last week closing higher by 0.45%. Treasury yields moved lower across the board as the 10 YR Treasury closed at 2.55%.

The US economy is showing strength as 3rd quarter GDP was revised upwards to 3.55% from the 3.2% estimate last month. Consumer sentiment also came in at the highest level since January 2004 reading a sharp uptick from November.
Investors have to be questioning the valuations of US stocks especially those that have benefited the most since the election: small/mid caps, financials, energy and industrials. The S&P 500 is trading at 22.3x the preceding four quarter earnings, which is higher than 92% of readings since 1929. The yield on the S&P 500 is at 2.08%, compared to the 10yr Treasury at 2.55%. Just last July, the S&P 500 yielded 2.21% to the 10yr Treasury at 1.37%.

Though we are optimistic about US economic growth prospects and enticing valuations of foreign stocks and bonds, the heat will be back on companies to show revenue and earnings growth to justify the increased valuations. Enjoy the holiday shortened week!

“Hope smiles from the threshold of the year to come, whispering it will be happier.” – Alfred Tennyson

Fed Hikes Rate 25BPs

December 19, 2016

Equities took a breather last week. The Federal Reserve increased its short-term benchmark interest rate by 25BPs, marking the first rate hike they have made since roughly one year ago. As we have mentioned in previous weekly comments, markets had priced in a rate hike for their December meeting. Commentary from Janet Yellen following the committee’s decision referred to the economy as “remarkably resilient” and noted progress towards their dual mandate of 2% inflation and full employment. The fed now anticipates raising rates in 2017 slightly faster than previous projections, and is forecasting 3 hikes in 2017.

For the week, the S&P 500 closed the week slightly in red down 0.3% while the DJIA finished higher by .45%. The Russell 2000 gave some back last week as it closed down 1.68% for the week. International markets also closed lower with the MSCI EAFE down 0.55% and EM down 2.43%. The dollar index touched a 14 year high while gold and oil struggled for the week. Yields continued higher last week with the 10yr Treasury closing at a yield of 2.60%.

The post-election stock market revival is forecasting an improved the outlook for GDP growth [from under 2% to 2.5%+?], and this includes the manufacturing sector. Manufacturing output is almost back to its prerecession level, although ongoing productivity improvements mean that factory jobs are still ~20% below previous levels.

gdp-12-19

In fact, the number of open manufacturing jobs is at a 15 year high, but most of these positions require skills that many laid-off blue-collar workers do not [yet?] possess.

Economic reports scheduled this week include GDP, existing and new home sales, and personal income & outlays. Enjoy the Holiday Season!

“Time is something that cannot be bought, it cannot be wagered with God, and it is not in endless supply. Time is simply how you live your life.” – Craig Sager