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.


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

The Post-Election Stock Market Rally continues

December 13, 2016

The stock market powered higher again last week, as the prospect of lower marginal tax rates, less regulation, restoration of the rule-of-law and a smaller public sector offset the [hopefully remote] possibility of a trade war and mercantilist economic micromanagement. The S&P advanced 3.1% while the Russell 2000 was up 5.6%. Trump tweets on drug pricing and Air Force One’s “$4B price” proved to be only temporary detours for the “Trump train”.

This week’s Fed meeting will likely produce a 25BP interest rate increase, the first since last December [at one time the markets were digesting the possibility of four 2016 rate increases]. The market will be looking for any change in the Fed’s 2017 intentions for ~2 rate hikes, which is unlikely.

The energy sector has proven to be the surprise winner in 2016. Low and declining January crude oil prices [$20 oil was bandied about] have been replaced by recent agreement by OPEC and non-OPEC producers to reduce oil production in 2017.


It should be noted that this oil price exuberance may be short-lived, since OPEC has historically had difficulty staying within its production limits. This chart from Monday’s Wall Street Journal says it all:
“There is many a slip between the cup and the lip” – ancient Asian proverb

Equities Take A Breather

December 5, 2016

The post election equity rally faltered a little last week as the S&P 500 fell 0.91%, small cap stocks as measured by the Russell 2000 were off 2.4%, the NASDAQ was down 2.62% and international equities were also down with the MSCI EAFE index declining 0.22%. For the week, the best performing sector in the S&P 500 was the energy sector which rose 2.6% on news that OPEC had reached an agreement to limit production for 6 months. U.S. crude prices spiked as a result of the news with oil closing the week up 12%.

In economic news, the U.S. jobs report added 178,000 jobs for the month of November with the unemployment rate falling to 4.6%. This marks the lowest reading since August 2007. Although the number is encouraging, the percentage drop also benefited from 400,000 people dropping out of the workforce. Also, GDP revised upward to 3.2% annualized from a prior estimate of 2.9%. This news combined with the employment report is enough to ensure that the FOMC will raise interest rates next week as anticipated.

In Italy on Sunday, voters rejected the referendum on constitutional reform which will add to volatility in EU markets. Political uncertainty in Italy could put further pressure on Italian banks which are already down 50% this year while rate spreads on Italian bonds have widened versus their Spanish and German counterparts.

“I always wanted to be somebody, but now I realize I should have been more specific.” – Lily Tomlin

Post Thanksgiving Left Overs

November 28, 2016

Global equities rose for the week as investors continue to bet on better growth and the new administration. The weekly economic reports all pointed towards continued growth. Economic data included: October existing home sales of 5.6M units, a 2% increase from September; Initial jobless claims for the week ending Nov. 19 were 251,000; Durable goods orders were up a healthy 4.8% in October. All of this data continues to point towards a fed funds rate increase at the December FOMC meeting.

All four major U.S. indices set records on the same day with the DJIA, S&P 500, NASDAQ, and Russell 2000 all setting record highs on Tuesday, surpassing the December 31, 1999 record. The S&P 500 finished higher by 1.45% while the DJIA closed up 1.51%. The Russell 2000 finished the week up 2.41%. International is finally catching the “post trump” fever as both MSCI EAFE and the MSCI EM closed in the green, up 1.29% and 1.34% respectively. Bonds, represented by the Barclays Aggregate closed lower by 0.20% and the 10yr US Treasury closing at a yield of 2.36%, which is dramatically higher than the 1.37% close on July 8th.

We hope everyone was able to enjoy a great Thanksgiving with family and friends!

“The purpose of our lives is to be happy.” – Dalai Lama

Are We There Yet?

November 21, 2016

Last week, the S&P500 was up 0.89% and is approaching the new threshold of 2200, while the NASDAQ set an all-time high. Wow!

Talk about a switch hitter, the speculative bets made before the election on the Hillary trade have quickly changed to the “Trump rotation”. Trump’s win has greatly increased expectations for US economic growth and potential inflation. As a result, the Russell 2000 last week jumped 2.62% while the MSCI EAFE, the international developed market equity index, declined 1.52%. The emerging equity market index, MSCI EM, was down 0.52% for the week.

US Federal Reserve chair, Janet Yellen, stated that an improving economy suggests that there will be a rate hike “relatively soon”. We expect a 25 basis point hike in the federal funds rate at the next FOMC meeting in December, roughly one year from their previous rate hike. The US Aggregate Bond Index lost 1.02% last week while non-US developed international bonds sank 3.2%. With the expectation of increased interest rates, the US dollar index hit a 14-year high, which continues to pressure fixed income assets, along with foreign currencies and bonds.

With a short holiday week, there will be a report on existing home sales tomorrow and on new home sales, durable goods orders and weekly jobless claims on Wednesday. All reports are expected to show a slight improvement adding to the Fed’s likelihood of raising rates.

Happy Thanksgiving!

“Be thankful for what you have; you’ll end up having more. If you concentrate on what you don’t have, you will never, ever have enough.” – Oprah Winfrey

Results Are in …

November 14, 2016

Equity markets rallied higher last week, breaking a 9 day downtrend (longest since 1980). The week kicked off on a positive note on Monday with investors banking on a Clinton victory after FBI was unable to find additional evidence to bring charges against her. The consensus from market pundits leading into election would be to sell U.S. and Global equities and buy treasuries and other safe haven assets in the event of a Trump win. The markets had other ideas … funny how that works. What resulted was roughly 5.2% overnight drop in S&P futures (see chart below) which quickly reversed with the market eventually opening 8pts below its Tuesday close. Beleaguered sectors such as industrials, financials, materials, and health care suddenly became in vogue while this year’s winners big tech, utilities, real estate, and staples were hit. With a Trump victory, expectations for the new administration are to bring increased spending on infrastructure (helping cyclicals) and defense, and less onerous regulations thus buoying beaten down companies in health care, financials, and segments of energy.
Source: Bloomberg, CME, Standard & Poor’s, J.P. Morgan Asset Management, Market Recap 11/14/16.
For the week, the DJIA closed at a record high of 18848 and a weekly gain of 5.52%. The broader-based S&P 500 closed the week higher by 3.87%. One area investors rushed into post-election was smaller US companies, which on the surface would be somewhat insulated from the President-elect’s more protectionist campaign rhetoric. International markets were mixed as the MSCI EAFE closed slightly higher and MSCI EM closing down by 3.51%. Bonds had a difficult week with the Barclays Aggregate down 1.48% as yields shot up on inflation fears and FOMC policy moving forward. The 10yr US Treasury closed at a yield of 2.15%, up significantly from 1.79% the week prior.

As we look ahead, uncertainty still largely remains. Civil unrest aside, question marks surrounding the President-elect’s Cabinet selections, protectionist views on trade, increasing inflation (who would have predicted that a few months ago? …), stronger dollar ($), and potential FOMC rate hikes remain in the back ground. Positives are corporate tax reform along with companies’ ability to repatriate cash held overseas (which both have bipartisan support), infrastructure spending (barring we don’t build bridges to nowhere), and less burdensome regulations which some economists predict are a 1%-2% drag on GDP. As long-term investors, we recommend staying globally diversified as it will take a long time for some policies to take shape.

No matter where one stands regarding the outcome of the election, let us all come together as one nation. As President Obama stated at the White House during the transition meeting with President-elect Trump, ”I believe that it is important for all of us, regardless of party and regardless of political preferences, to now come together, work together, to deal with the many challenges that we face,”

“With malice toward none, with charity for all” – Abraham Lincoln

Pre-Election Volatility

November 7, 2016

The stock market fell for the second consecutive week, with the S&P 500 down 1.9% and the tech-heavy NASDAQ lower by 2.8%. Markets dislike uncertainty, so the decline in Clinton’s once-comfortable lead over Trump is no doubt the proximate cause [better the devil you know than the one you don’t?].  The latest weekend comment by FBI Director James Comey reaffirms Mrs. Clinton’s July exoneration, which has produced notable Monday morning strength.

These political fireworks overshadowed the last heavy batch of third-quarter earnings, which was mostly greeted with caution. Facebook, for example, reported stellar results but its stock fell because of lower growth prospects [the law of large numbers makes this inevitable]. Note that S&P earnings will show growth for the first quarter since December 2014, and that the global economy is also picking up steam.

Finally, no matter who is our next president, they should address our sub-par economic growth [GDP is growing at only half of its postwar rate].  John Cochrane summarizes our counterproductive tax [we need lower marginal rates], regulatory [restore the rule of law], and social programs [remove disincentives to climb the economic ladder]. Health care, finance, labor and trade are among the other hot-button issues that Cochrane discusses. He doesn’t pretend that this will be easy … there are powerful entrenched interests in favor of the status quo. That’s probably why so many voters have been attracted to outsiders during this political season.

“No man should see how laws or sausages are made” – Bismarck

Growth Picking Up

October 31, 2016

Last week, both equity and fixed income markets were generally weak. The DJIA was slightly positive, up .09% for the week, while the broader-based S&P 500 closed down 0.67%. International markets were also off with international indexes finishing the week in the red (MSCI EAFE -0.38% and MSCI EM -0.84%). Fixed income markets also declined with the 10 year U.S. Treasury yield moving from 1.74% to 1.86%. With rates migrating higher, the Barclays U.S. bond aggregate index finished down 0.50% for the week.

Markets were down despite a good headline GDP number of 2.9% growth reported for the 3rd quarter, beating expectations of 2.3%. This marks the strongest growth rate since the third quarter of 2014. Looking into the report, growth was boosted by a rise in inventory levels (breaking a string of 5 quarters of shrinking inventories) and a narrower trade deficit (exports increased 10% in the quarter led by a giant move in soybean shipments). Consumer spending increased at a 2.1% clip, slower than the second quarter’s 4.3% rise but still positive. With the economic news we have been getting, it would appear the FOMC is still on track to lift rates in December.

We expect volatility to remain elevated this week due to political backdrop and company earnings reports with 129 companies in the S&P 500 set to report. In addition, look for economic reports on manufacturing, productivity and the monthly jobs report on Friday which is estimated to be for 173,000 new jobs. Stronger numbers will only strengthen the case for a rate increase.

“I can live for two months on a good compliment.” – Mark Twain