This was another positive week in the markets with the S+P gaining just under one percent and the Dow Jones gaining just over one percent. The ten year treasury bond gained price and the yield lowered to 1.83%. Hope for a China trade deal raised investors’ optimism.
Economically, the news wasn’t too shocking, but there was slightly higher than expected October inflation in both the consumer and the producer price index. This could be a problem if it continues, handcuffing the Fed’s ability to lower rates. Retail sales were a bit stronger than expected, and they are a strong driver of the economy.
Next week we get several indicators of the health of the housing market and will see if there is any further action on the China trade deal. Additionally, we will hear from the Fed on Wednesday and see if they have any growing concerns.
The broad markets rose again this week with the S+P gaining about 0.85% and the Dow gaining a bit over 1%. The 10 year treasury yield grew to 1.93%, the highest it has been since August.
Economically, we had a mixed bag, with factory orders disappointing, but nonmanufacturing and the trade deficit coming in better than expected. Third quarter productivity was below expectations and over the same period, unit labor costs rose more than expected. That could be concerning if it leads to inflation. We did get some good rumors on a possible China trade deal, with China supposedly backing off on their tariffs. Corporate earnings this week seemed more of a wash with some companies beating and some missing.
Most companies have reported earnings, so next week we are mostly focused on economic data and China. A couple of measures of October inflation come out next week and they will hopefully remain low, while retail sales grow.
It was a solid week in the markets this week with the S+P gaining almost a percent and a quarter. The Dow Jones gained just under three quarters of a percent and the 10 year treasury note fell in price to a yield of 1.8%.
Interestingly enough, many of the economic indicators that came out this week missed estimates, with home sales, durable goods orders, core capex orders, and the consumer sentiment index all coming in below expectations. That didn’t seem to upset the market though, since earnings results were very positive across the board with a few exceptions like Boeing and Amazon. The guidance Amazon put out pointed to a slower than expected holiday shopping season which upset investors.
Next week we are looking forward to the Case-Shiller home price change, pending home sales, Q3 GDP and a slew of other data on the economic front. Additionally it’s a huge week for earnings with roughly 1,000 companies reporting.
This was a pretty flat week in the markets with both the Dow and the S+P changing less than a quarter percent. Likewise the 10 year treasury also hardly moved and stayed at about 1.75%.
On the economic front, both retail sales and housing starts came in lower than expected, showing some signs of slowing. Additionally, China’s GDP growth was lower than expected. None of this really shook the market, and it would have been a nice up week for the Dow if not for bad news on the 737 MAX 8 front pulling Boeing significantly downward. Corporate earnings were mostly in line with estimates with a few standouts such as Alcoa and Netflix.
Next week we have consumer sentiment and new home sales data to look forward to along with about 600 publicly traded companies reporting earnings as earnings season goes into full swing.
~ Alex Parrs
This was the first positive week in the stock market in several weeks. The S+P logged just over a half a percent gain and the Dow Jones gained almost 1%. The bond market fell as the yield on the 10 year treasury rose by almost a quarter percent to 1.75%
Most of the economic news that came in this week was in line with expectations, doing little to move the market. The big news was the lower than expected core inflation rate. This paves the way for more Fed rate cuts if things slow. The market has begun to price in another rate cut soon. Additionally we got a positive surprise with consumer confidence being much higher than expected, and hopes of a China deal.
Next week we get some retail sales data as well as housing starts. More importantly, earnings season kicks off in earnest with about 170 companies reporting earnings next week, giving us a better view of corporate profitability over the last three months and also giving guidance on future profits.
The markets this week were much more volatile, with a bad start to the week being mostly erased by a good finish. The S+P 500 dropped a little less than 0.5% this week and the Dow Jones was off about 1%. The big mover was the bond market with the 10 year treasury dropping 1.68% to 1.52%.
The week started poorly with a bad reading on the manufacturing index. The expectation was for neither growth nor decline, but the actual reading came in showing the worst reading in about ten years, signaling a shrinkage of new orders. The mid-week unemployment data was slightly lower than expected, but not too dire. The big news came on Friday when the unemployment rate unexpectedly dropped to 3.5%, the lowest rate since 1969.
Next week we are looking forward to job opening data, wholesale inventories, inflation data, and the consumer sentiment index. Those data will let us keep an eye on the general state of the economy, and my big fear, that of inflation. With such a low unemployment rate, inflation could show up, and that would mean the likelihood of further fed rate cuts would shrink significantly.
~ Alex Parrs
Dear clients and friends,
The yield curve for corporate bonds has become almost completely flat. What this means is that a 5 year bond is yielding (paying) almost exactly what a 1 year bond is yielding. Normally, you would earn more interest for longer bonds than for shorter ones. Right now, this is not the case, at least on the bonds that we are using. This has happened because the longer bonds have gone up in price, driving the yield lower which is of course a good thing.
We will be selling these longer bonds and moving to shorter bonds. Ideally the yield curve will regain its normal shape or interest rates will go up, at which point we will buy those longer bonds back at a lower price and a higher yield. Since they are currently all earning the same amount, we won’t be giving up potential interest while we wait for this to happen. If interest rates fall farther, then we could miss out on some potential interest, but in our opinion that risk is low.
In the high yield portion of our portfolios, we will be likewise shortening our bond ladders both for this reason, as well as because of potential price risk if recession fears increase.
Overall this is NOT a big move, but we believe it will be a bit safer, as well as hopefully earn a bit more on the fixed income portion of our portfolio once this weird pricing corrects.
As always, please don’t hesitate to contact us with any specific questions or concerns you may have.
Dear clients and friends,
The stock market was shaken by an indicator called a yield curve inversion. What this means is that 2 year government bonds were paying a higher interest rate than 10 year bonds. This is unusual and fundamentally shouldn’t be. The theory is that there is more demand for long term bonds because of perceived short term weakness in the economy. This makes the price of the long term bonds go up, and therefore the yield go down.
The reason the market is concerned by this is that there is a high correlation between this indicator and a coming recession. This indicator does not have a 100% track record, however, and the coming recession that it has predicted in the past has taken as long as 2 years or more to come to pass. Historically, after one of these signals, the market drops about 5% and on average rallies about 17% after that, before falling due to recession. To me, that reads as if this is a bullish indicator at least in the medium term.
Another point to take into consideration is that the Fed is playing a huge role in artificially controlling interest rates. This makes any indicator based on these rates suspect.
Our plan at the moment is to wait and see how the market reacts until there’s a larger overall move. There have been some big days, but the overall move from the peak isn’t that big in terms of percentage points. If the drop continues, we intend to purchase more stocks, and keep a close eye on profits to see if a recession actually is looming. On the bond side, our bonds have gone up in value, so we will start leaning more towards the short end of our bond ladder and when interest rates climb once again, we will once again go longer.
As always, please don’t hesitate to contact us with any specific concerns or questions.