The Week in Review
Markets Maintain Momentum
- Confident Fed Sees Sustainable Growth
- Investors Not Irrationally Exuberant
- Looking Ahead
Investor fatigue may be setting in as, after a nine-day winning streak for the Dow Jones Industrial Average, stocks finally turned down on Thursday. We don’t believe this is anything more than a bit of short-term profit-taking, and see no evidence of any change to the slow-growth, not no-growth economy that has powered earnings and stock prices higher.
For the year through Thursday, the Dow Jones Industrial Average has returned 15.2%, while the broader S&P 500 has gained 13.4%. The MSCI EAFE index, a measure of developed international stock markets, is up 19.5%.
As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index is, at 2.54%, very close to its 2016 year-end yield of 2.61% after trading as low as 2.38% earlier this month in response to geopolitical fears and concerns about potential damage from Hurricane Irma. On a total return basis, the U.S. bond market has gained 3.2% for the year.
Confident Fed Sees Sustainable Growth
As we expected, the Federal Reserve did not raise short-term interest rates at their two-day meeting this week. (Policymakers did hint at the possibility of another rate hike in December and possibly three more increases in 2018 so long as economic data supports such a move.)
The bigger newsflash was a well-telegraphed confirmation that the Fed will proceed with its plan to begin reducing (“normalizing,” in Fed speak) its $4.5 trillion balance sheet. Starting in October, the policymaking body will unload $10 billion worth of Treasury bonds and mortgage-backed securities a month, gradually ramping up to shedding $50 billion a month by October 2018.
During the Great Recession, the Fed purchased trillions of dollars of high-quality bonds as part of its “Quantitative Easing” stimulus policy in order to shore up our struggling economy and investor confidence by dramatically and artificially lowering interest rates to incentivize business and investor action. The move aimed to force interest rates low enough to encourage additional corporate borrowing in order to build more plants and hire workers to run them, thus spurring further economic activity. While the debate continues as to whether this goal was achieved, one thing is certain—prices of many assets, including stocks and homes, have risen following the Fed’s actions.
Our takeaway from Federal Reserve Chair Janet Yellen’s statement and press conference: The Fed continues to be deliberative and data-dependent, and believes our economy is strong enough to sustain growth with less stimulus. “The basic message here,” Yellen said, “is U.S. economic performance has been good.” We agree.
Investors Not Irrationally Exuberant
Amid the hyperbolic headlines and geopolitical bombast, most investors have rightly focused on the factors that matter: Earnings, economic data and interest rates. Third-quarter earnings won’t be publicly reported for about a month but that hasn’t stopped analysts from predicting 4.4% year-over-year earnings growth for S&P 500 companies. (Given profit growth of 10% in Q1 and 14% in Q2, it wouldn’t surprise us if that 4.4% estimate is low.) Economic data—while impacted by temporary hurricane-related blips in places—reflect an economy that remains on an expansionary course. Even as the Fed prepares to further raise borrowing costs, interest rates are, and will remain, historically low.
From our vantage point: Investors are not panicked, but many are panicky—more nervous than irrationally exuberant about recent gains being prone to sudden losses. The Dow has gained 25.0% since Election Day, while the S&P 500 is up 19.4% and the MSCI EAFE has returned 22.8%. As noted above, the fact that the major market indexes have taken a breather from their record-setting pace is not a sign of an exhausted bull market but may in fact be a pause that refreshes before further ascent.
Still, we are not building portfolios with the expectation that stock prices will never decline. Our disciplined, risk-aware diversification approach is one way we can mitigate the inevitable downward pressure on the markets.
Next week brings key reads on home prices, consumer confidence, pending and new-home sales, inflation, manufacturing and the third and final estimate of second-quarter GDP (consensus expectations are for a slight uptick to 3.1% from 3.0% when last calculated). Most meaningful, we’ll get reports on personal income, spending, savings and sentiment.
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 22, 2017, prior to the market’s close.
This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
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