The Week in Review
- Good Times
- Consumers Remain Upbeat
- Bond Market Concerns
- Looking Ahead
It's been one of the happiest of happy New Years so far in 2018 (at least for investors). Most major stock market indexes have continued to set records, with the S&P 500 index gaining ground on seven of the year's first eight trading days.
Energy stocks have been leading the charge as oil prices resumed their climb. On the flip side, with interest rates rising, bond alternatives like real estate investment trusts and utility stocks have been the laggards so far in 2018. In fact, the gap between winning and losing sectors is quite broad given how few trading days we've had.
For the year through Thursday, the Dow Jones Industrial Average has returned 3.5%, while the broader S&P 500 has gained 3.6%. The MSCI EAFE index, a measure of developed international stock markets, is up 3.0%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 2.81% from 2.71% at 2017's end. On a total return basis, the U.S. bond market is down 0.5% for the year.
The fundamental facts of growing earnings, relatively low interest rates and steady economic growth tell us that economic times are good. But we also know that good times are made to be interrupted. We constantly ask, what could upend this long expansion? The list is lengthy: Nuclear North Korea and Iran; a government shutdown; withdrawal from the North American Free Trade Agreement (NAFTA); a changing of the guard at the Federal Reserve; rising interest rates; mid-term elections; elevated stock market valuations; and the potential for inflation among others. Clearly, fear is not in short supply.
Stocks' one-way move up will eventually come to an end and may be driven by one of those concerns or by something else entirely. That doesn't mean prices have to plunge, merely that gains won't be earned in such steady fashion. In the coming weeks, we'll get meaningful evidence of the health of both our economy and the global one by means of fourth quarter earnings reports, which began to trickle in today and will be streaming in next week.
Over time, earnings and interest rates drive the markets. We're watching closely for signs of how successfully companies built on their third-quarter profits. But maybe more important to hear is how business leaders say they will rise to the challenges they see ahead as well as their plans for incorporating significantly lower tax rates into their strategies.
Consumers Remain Upbeat
Consumer confidence surveys show people's economic outlook is as rosy as it's been since the turn of the century. Consumer discretionary stocks have been one of the stronger performing sectors so far in 2018. While we believe that what people do is more important than what people say--- in this case, actions are matching the answers.
To wit, 2017 retail sales grew at the fastest pace since 2014, capped by fourth-quarter sales that increased 5.5% from the same time last year. Consumer borrowing grew more rapidly than it had in 16 years in November (revolving credit, which is mostly credit card purchases, a key element of this measure, rose 5.7% year-over-year). This level of spending projects a picture of a consumer that's confident about their employment, the economy and their position in it.
Bond Market Concerns
While stocks are off to a hot start this year, bond prices have declined as yields have risen. Unease over China buying fewer U.S. Treasury bonds and heightened concerns about inflation jumping higher have investors demanding more yield when they lend to the government. Higher bond yields could finally provide some competition to stocks, sparking stock investors' disquiet, but we are not there yet. A jump in the 10-year Treasury's yield to 2.55% doesn't represent a significant move up from where it was in late October 2017. This is not a wholesale repudiation of the bond market by any means.
As for the China question, consider this: If China was a large and eager buyer of our debt when it was yielding 2.25%, which they were, wouldn't they be even more interested in buying when the price has fallen and bonds are yielding 2.55%? What other sovereign debt is going to offer that balance of risk and return? Plus, there's no sign that China is selling its massive reserves of Treasurys. We think all the tongue-wagging and handwringing over China's intentions is just idle chatter.
The inflation picture remains mixed. In December, business costs (producer price inflation) fell for the first time since August 2016. At the same time, prices paid by consumers on the goods they shop for each month rose by the most in almost a year. We have to wait several weeks for the Federal Reserve's preferred inflation gauge, which looks at spending by households and the companies that serve them. Stay tuned on the inflation front.
Markets will be closed Monday in observance of Martin Luther King Jr. Day as will Braver Capital's offices. We'll be back at our desks Tuesday morning ready to help you with all of your investment needs.
The report-light week ahead brings reads on regional manufacturing, housing-related data (builders' confidence, new construction, building permits), the Federal Reserve's Beige Book of anecdotal reports from around the country and consumer sentiment. Plus, as we mentioned, quarterly earnings reporting season is underway.
If you'd like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or email@example.com.
Please note: This update was prepared on Friday, January 12, 2018, prior to the market's close.
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