Market Recap 4/3/2017

April 3, 2017

The DJIA closed the week higher by 0.32% while the broader-based S&P 500 finished up 0.82%. Representing smaller US companies, the Russell 2000 was the best performer last week as it closed higher by 2.37%. International markets finished flat to down as the MSCI EAFE finished up 0.06% and the MSCI EM finished the week down 1.05%. Yields across the board closed the week right about where they started as the 10 Yr. Treasury closed at a yield of 2.4%. Last week’s rebound closed a positive first quarter for risk assets with all major equity assets in the green … S&P 500 +6.07%, Russell 2000 +2.47%, MSCI EAFE +7.25%, MSCI EM +11.45%.

Economic data released last week were fairly positive – Consumer Confidence came in at 125.6 as it continued its upward trend since the election and marked the highest level since December 2000; Home prices increased 5.7% y/y beating estimates; The Commerce Department released their 3rd and final estimate of fourth-quarter GDP, which came in at 2.1%. On the geopolitical front, the United Kingdom formally began the process of withdrawing its European Union membership by triggering Article 50 of the Lisbon Treaty. The news was expected, and they will now enter into a two-year negotiation on a formal divorce from the European Union.

Economic data this week will include a report on Global manufacturing PMIs, minutes from the March FOMC meeting and the March employment report. Now that the calendar has flipped to April, investors will be looking to earnings season which begins to unfold over the next few weeks.

Enjoy the Spring!

“Here cometh April again, and as far as I can see the world hath more fools in it than ever.” – Charles Lamb

The “Belthway Swamp” Wins a Round

March 28, 2017

Concern over the Trump economic agenda pressured stocks last week, with the S&P 500 declining by 1.4%, the largest weekly decline since the election. The Russell 2000 also fell by -2.6%, thus turning negative for the year by -0.1% [note that the 500 is still up 4.7% YTD].

The prospects for the “Ryan health care” bill [to replace the ACA] dimmed as the week went on, finally getting cancelled [postponed?] Friday afternoon. The markets’ responses included weaker economic growth assumptions, lower interest rates and a flatter yield curve. Equity markets cut prices in every sector except utilities [+1.3%] and Real Estate [+0.8%], with the Financials dropping by -3.8% [see nearby bar chart].

Sector 3.28.17

Finally, it is important to note that asset allocation portfolios, in spite of their many benefits [reduced volatility, lower risk, often higher income] will under-perform the S&P 500 from time to time. This has been the case lately. According to JP Morgan, an asset-allocation portfolio has under-performed the 500 by an annualized 8.8% over the last 5 years [ending 2/28/17]. However, using history as our guide, such under-performance will be followed by out-performance [by ~4.4%] over subsequent 5-year periods.

AA 1AA 1
Source: Barclays, Bloomberg, MSCI, NAREIT, Russell, Standard and Poor’s, FactSet, J.P. Morgan Asset Mgt. (link)

“Good habits are the basic tools that will determine whether you are a tortoise or hare in life!”Lucas Remmerswaal

Fed Raises Rates

March 20, 2017

Both equity and fixed income markets advanced last week. International equity markets were the best performers with the EAFE index up 2.1% and emerging markets advancing 4.3%. In the U.S., the S&P 500, the DJIA and the NASDAQ were up 0.29%, .01% and 0.7%, respectively. Growth stocks continued to slightly outperform value for the week. Year-to-date large cap growth stocks are up 9.1% vs. value up only 4.3%. Fixed income markets also finished the week higher as the yield on the 10 year U.S. Treasury Note dropped from 2.58% to 2.50%.

As expected, the FOMC raised its target for short term interest rates by .25% last week. Indications from the Fed, however, were less enthusiastic regarding the economy than the financial markets have been. The Fed continues to expect “gradual” rate hike movement through the end of the year with two more rate hikes expected. Their median forecast for economic growth this year is 2.1% – unchanged from December. As a result, interest sensitive stocks were the best performers in the S&P 500 last week with real estate stocks up 1.9% and utilities and telecom up 1.3%.

This is a light week for economic news with reports on housing and durable goods expected. Welcome to Spring!

“Spring is nature’s way of saying: Let’s Party!” – Robin Williams

March Madness is Here!

March 13, 2017

So March Madness is finally here … basketball, crazy weather, Fed meeting, daylight savings time, political intrigue, daily tweets … you name it; March promises to be full of surprises. Markets, however, have been generally behaving themselves, at least so far.

Last week saw a number of positive economic releases. On Monday, the Commerce Department reported that new orders for manufactured goods increased 1.2% in January (ahead of expectations for a 1% increase). On Friday, the Labor Department reported a 235,000 increase in jobs in the month of February while consensus was an increase of 200,000 jobs. Average hourly earnings rose 2.8% year-over-year … a sign that the labor market is beginning to tighten. Unemployment dipped in February to 4.7%.

For the week, the DJIA and the S&P 500 each finished lower by 0.40%. Developed international markets were stronger as the EAFE Index advanced 0.42% for the week while emerging markets gave back 0.50%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week down 0.56%. As a result, the 10 YR US Treasury closed at a yield of 2.58% (up 9 bps from the previous week’s closing yield of 2.49%). Gold dropped $24.80 to close at $1,200.70/oz. Oil prices were also lower (down $4.84) on the week to close at $48.49/bbl.

Expect a fairly volatile week ahead as recent hawkish comments from various Fed officials point to a rate hike this week (the Fed will make an announcement on Wednesday). Figuring out where the market finishes this week is like picking the right bracket for March Madness … nearly impossible.

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

“Don’t let making a living prevent you from making a life.” – John Wooden

The Momentum Continues

March 6, 2017

The positive momentum continued in major indexes last week. Wednesday’s rally saw major indexes cross some psychological barriers with the DJIA closing above 21,000 and the S&P500 brushing 2,400 intra-day … these barriers are meaningless in the long-run but gives talking-heads something to get excited about. The advance was in response to our Commander In Chief striking a “presidential” tone in his address to Congress on Tuesday night as well as several Federal Reserve officials speaking last week and giving a positive outlook for the economy.

The DJIA closed the week at 21,006 for a weekly gain of 0.94%. The broader-based S&P 500 finished up 0.71% while smaller US companies representing the Russell 2000 closed the week flat. International equities were mixed as the MSCI EAFE was up 0.47% while the MSCI EM moved lower by 1.28%. Bonds were extremely volatile as prices sold off as expectations of a March rate hike increased. The yield of the 10yr Treasury closed at 2.49% which is up from 2.31% the week prior.

Markets were pricing in a 27% probability of a hike in the federal funds rate at March’s FOMC meeting as recently as Feb 24th. The week began with roughly a 50% probability of a hike while ending the week almost a near certainty. Fed Chair Janet Yellen, Vice Chair Stanley Fischer and New York president William Dudley seem to be in agreement as their comments were consistent and the case for raising rates is “a lot more compelling”.

The VIX remains surprisingly subdued (11.50) as investors seem to be getting more complacent. Experience shows us that volatility can spike without notice or warning. As always, we recommend investors stick diligently to their strategic allocations and resist the temptation to market time.

“Plans are nothing; planning is everything.” – Dwight D. Eisenhower

up, up and away my beautiful, my beautiful …

February 27, 2017

Major indexes notched another record as equities ground higher despite hitting some turbulence on Friday. For the week, the DJIA closed higher by 0.99% notching its 11th straight closing high … the longest such streak since in 1987. The broader-based S&P 500 closed at 2367, posting a weekly gain of 0.73%. Smaller US companies didn’t fare as well with the Russell 2000 edging lower by 0.36%. International equities were mixed with developed international down 0.13% and emerging markets finishing higher by 0.51%. Treasury yields moved lower across the board with the 10Yr US Treasury closing at a yield of 2.31%.

Investors have bought into the Trump administration’s promises of lower regulations (especially for banks), tax reform and infrastructure spending. Additionally, fourth-quarter company earnings are winding down and most have been better-than-expected. Earnings growth is 5.2% year over year; 66% of companies have beat expectations, 22% missing the mark, and 12% reporting in-line. Valuations are stretched with the S&P 500 selling above 25x trailing 12mth earnings which is close to twice its median level.

Housing continues to chug along as existing home sales were up to 5.69 million units in January, marking the highest level since February 2007. Inventory has not been able to keep up with demand sending prices higher even as mortgage rates have surged in the past 6 months … underpinning this is the Fed’s desire to increase its benchmark Federal Funds rate. On Wednesday, the Federal Reserve released its minutes from January’s meeting noting that they could raise rates “fairly soon” while also mentioning that potential spending and reduced taxation proposed by the Trump administration could force the FOMC to act more aggressively to combat inflation. Federal Funds futures contracts are pricing in about a 22% probability of a hike at March’s meeting.

This week, look for reports on durable goods and light vehicle sales, consumer confidence, Markit US Manufacturing PMI, ISM Services index, and the 2nd estimate of fourth-quarter 2016 GDP. The talk of the town will be on Tuesday; Trump is scheduled to address Congress for the first time and will likely highlight his tax plan and repealing of the ACA. Enjoy the week!

“A good hand and a good heart are always a formidable combination.” – Nelson Mandela

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