France Reduces Euro Uncertainty

May 1, 2017

Equity markets responded euphorically last week to the Sunday French election, which chose Emmanuel Macron as the leading, EU-defending candidate. The May 7th run-off will feature Macron against Marine Le Pen, the EU-skeptical populist.  Positive earnings reports from the likes of DD, CAT and MCD added to the euphoria on Tuesday, enabling the S&P to end the week with a 1.5% advance. This occurred in spite of midweek emergence of possible DC tax-cut gridlock and international tension from North Korea. The Nasdaq registered an even better 1.9% increase.

Rising equity markets [up 11.6% since 11/08] has resulted in higher valuations. The S&P’s forward PE ratio has risen from 16.4x to 18.1x over the same time period. This is very close to a 13 year high. Robert Shiller’s CAPE ratio suggests that the market “hasn’t been this overvalued except for a couple times in history—around 1929, around 2000″:

Cape 5.1

However, Jeremy Siegel is still bullish, citing low interest rates, the anomalous lack of any profits during the second half of 2008 thru March of 2009, and the increasingly conservative GAAP earnings. Moreover, he points out that returns available elsewhere in the asset markets should also be taken into consideration.

These Bull and Bear debates rarely have a clear-cut “winner”. However both agree that although valuation is a poor tool for trying to determine market turning points, it may offer rebalancing opportunities.

“Any man who is bearish on the United States will go broke” – J P Morgan

Earnings Reports Continue

April 24, 2017

Last week, equity markets rallied with the DJIA, S&P 500 and the NASDAQ advancing 0.51%, 0.87% and 1.82% respectively. Small caps were the best performers for the week as measured by the Russell 2000 index which was up 2.58%. The best performing stock sectors were industrials, consumer discretionary and technology. Growth stocks continue to outperform value stocks. International equities were also positive with the MSCI EAFE up 0.23% and the MSCI EM up 0.17%.

This week the flood of earnings reports continues but the big news over the weekend was the results of the voting in France. The centrist candidate Emmanuel Macron bested populist candidate Marine Le Pen in the 14 person initial round of voting. This is calming fears about the possibility of France leaving the EU. On Friday, we will get the 1st quarter advanced estimate for GDP which is expected to come in at around 1% which would be substantially below estimates for 2.1% at the beginning of the year.

French Election


So far this year, “soft data” on the economy such as consumer and business confidence has been strong, but “hard data” like car sales, consumer spending and production have not matched expectations. Hopefully economic numbers will start to match expectations otherwise company earnings may be impacted.

“Success is where preparation and opportunity meet.” – Bobby Unser

Weekly Commentary (4/17/17) – Geopolitical Tensions are Back

April 17, 2017

Stocks lost ground last week as geopolitical tensions rattled investors’ nerves. Ongoing tensions between the United States and Russia along with escalating tensions between the United States and North Korea pushed stocks lower and bonds higher.

For the week, the DJIA finished lower by 0.98% while the S&P 500 fell by 1.11%. Developed international markets were also off, but by much less than U.S. markets as the DJ Global ex-US index gave back 0.12%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week ahead by 0.76%. As a result, the 10 YR US Treasury closed at a yield of 2.237% (down 11 bps from the previous week’s closing yield of 2.343%). Gold jumped $31.60 to close at $1,285.90/oz. Oil prices ticked higher (up $0.94) on the week to close at $53.18/bbl.

In economic news released last week, the Labor Department reported that import prices fell 0.2% in March … further reinforcing moderate inflation expectations and keeping bond yields lower. Earnings season kicked-off last week with JP Morgan and Citigroup reporting better-than-expected earnings.

Expect to see a slew of blue chip companies reporting earnings this week. Among the companies reporting are Johnson & Johnson, General Electric, Morgan Stanley and United Health Care. Economic releases this week include Empire Manufacturing, Industrial Production, Initial Jobless Claims and March Leading Index.

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

Let’s make it a good week!

“Always do your best. What you plant now, you will harvest later.” – Og Mandino


Shots Fired

April 10, 2017

Equity markets saw lots of volatility but ended mostly flat last week, with geopolitical developments being the prime driver. The week kicked off on Monday with President Trump saying he is ready to act alone on North Korea if China does not change the current situation … the comments came days before a scheduled meeting with Chinese President Xi Jinping. Wednesday produced a roundtrip by the markets, morning optimism prompted by the ADP employment report was offset by the afternoon release of the Fed minutes (“stocks are quite high”) combined with Paul Ryan’s comments that tax cuts would take even longer than health care insurance reform. On Friday, responding to a chemical attack in Syria on rebel forces and civilians, the US conducted an overnight strike against the Shayrat airbase and the Assad regime. Although the strike was condemned by Russian and Iran (allies of Syria President Bashar al-Assad), it garnered bi-partisan support domestically and around the globe.

For the week, the DJIA closed at 20656 for a slight gain of 0.02%. The broader-based S&P500 closed lower by 0.24. Smaller US companies measured by the Russell 2000 finished the week down by 1.52%. International equities were mixed with the MSCI EAFE closing lower by 0.65 and emerging markets closing higher by 0.38%. Yields were flat for the week as the 10yr US Treasury closed the week at 2.38. As expected, gold and commodities caught a bid and finished the week higher due to the uncertain geopolitics around the world.

If last week is any indication, any unexpected political event will not currently cause investor panic. This holiday shortened week is light on market moving news with only reports on retail sales and consumer price data set for Friday. It appears that investors have their eyes on the impending earnings season which a number of banks set to report this week.

“I never had a policy; I have just tried to do my very best each and every day.” Abraham Lincoln

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