The Week in Review
Markets Rebound Following Storms
- Hurricane Rebuilding Underway
- Fed Chair Yellen to Opine
- Market Highs and Euphoria
- Looking Ahead
Overnight, just as North Korea-related nervousness was dissipating, the country launched another missile over Japan, and for a few market heartbeats global stocks lost ground. Ultimately, an inconsequential splashdown in the Pacific Ocean was cause for a rebound as traders relaxed—for the time being.
While the launch was the coda on the week, a whopping data breach at credit-reporting firm Equifax had consumers up in arms. However, hurricane-related market concerns were replaced by relief: The Dow Jones Industrial Average, the S&P 500 index and the NASDAQ Composite all moved into record territory again. And oil shares staged a comeback as Texas refiners came back online and demand picked up.
For the year through Thursday, the Dow has returned 14.4%, while the broader S&P 500 has gained 13.1%. The MSCI EAFE index, a measure of developed international stock markets, is up 18.8%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has fallen to 2.48% from 2.61% at 2016’s end. On a total return basis, the U.S. bond market has gained 3.4% for the year.
Hurricane Rebuilding Underway
With Hurricane Irma’s advance quelled, the process of assessing damages and initial rebuilding can begin. It’s undeniable that the massive scope and scale of Harvey and Irma will disrupt lives for weeks and months to come. The hurricanes’ effects will also likely muddy economic data. One example: Unemployment claims jumped to a two-year high for the post-Harvey week ending September 2. And while the massive reconstruction and repair of Florida’s and Texas’ infrastructure—roads, bridges, the power grid—could temporarily spur economic activity, the toll of disruption may make such gains a wash. We’ll be carefully picking our way through the next few months of economic data to sort out storm-related noise from longer-term investment trends.
Fed Chair Yellen to Opine
Next week, all eyes (and ears) will be on the Federal Reserve’s scheduled two-day meeting and Chair Janet Yellen’s press conference after its Wednesday wrap. We’ve been saying for a while now that we don’t think another interest-rate hike is in the offing and, post-hurricanes, we believe this more strongly than ever. The Fed doesn’t need to hike short-term rates so much as it needs to begin paring down the bond-stuffed balance sheet it built during the financial crisis. From where we sit, this could prompt a rise in long-term-bond yields that, in moderation, we think would be a good thing.
We simply don’t see enough evidence of an overheating economy to justify an interest-rate hike at this meeting. And there’s adequate concern about the economy cooling that we expect policymakers to continue to take the path of prudence and wait for actual signs of inflation rather than raise rates on the assumption that inflation will come.
Market Highs and Euphoria
When stock market indexes are at or near record highs, it’s common for investors to wonder whether now is the time to cash in our chips and get out of the market. We don’t think so. First, since stock market indexes began their rise from the depths of the financial crisis, eventually regaining their all-time highs and then surpassing them beginning in 2013, investors have had 159 opportunities to sell at an all-time high… and 158 opportunities to have been wrong to do so.
Take the Dow, for instance, which hit more new highs in 2013 than in any subsequent calendar year. Had an investor sold at the last high of 2013, which happened to fall on the final day of the year, they’d have missed out on participating in a stock market that has gained an additional 33.9% before dividends, and racked up a total return of 47.6% with dividends.
That’s not to say that market highs will always hold and stocks will continue to climb, but simply evidence of how hard it is to time the market. That’s why we’ve carefully constructed our tactical and fundamental strategies with a long-term investment view in mind, with a goal of participating when markets are trending up and protecting during downtrends.
In fact, despite these multiple new highs, we are not detecting much in the way of euphoria amongst stock investors. While the economy continues its upward march, earnings keep rising, jobs are plentiful, inflation seems to have disappeared for the moment and the Fed is on hold—all are ingredients for further gains. Bonds play an essential shock absorption role in many portfolios, and we continue to use them as such, but 2.20% yields provide little competition for investor dollars.
Speaking to the lack of euphoria or bullishness, over the 12 months through August, investors have added $315 billion to municipal and taxable bond funds, compared to the $231 billion they’ve added to U.S. and international stock funds. On top of that, fund managers are holding historically high levels of cash; money invested in U.S. equities dropped to decade-lows this month; and as of last week, U.S. stock funds were showing net outflows for the year.
As the great investor and statesman Sir John Templeton once said, “Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria.” We’d hate to think we’re still at the skepticism stage, but it’s pretty clear to us that market sentiment is nowhere near euphoria.
Our investment view: We remain on a solid slow-growth, not no-growth, road. Until we see material evidence for a sustained economic downturn in the data (rather than the daily slew of headline blather and pundit caterwauling), we’ll remain cautiously optimistic about the prospects for a rational marketplace—and for reasonable gains over reasonable time frames.
Next week, we’ll get a lot of home-related data (all of it prone to hurricane noise), including homebuilders’ confidence, new construction, building permit applications and existing home sales (new home sales come out the following week). Markit’s purchasing managers’ indexes will allow us to measure confidence in future sales by gauging the level of spending on goods required to build what is sold. Leading economic indicators will summarize the reports and data we will have already seen. And, as we referred to above, we will listen attentively to Chair Yellen’s press conference.
Please feel free to contact Andrea Johnson at 617-559-3413 if you'd like to learn more about our tactical or fundamental strategies.
Please note: This update was prepared on Friday, September 15, 2017, prior to the market’s close.
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