Market Review

Stocks continued their climb on Friday following strong earnings from the Technology sector. The Nasdaq (tech heavy index) climbed 0.7%, while the S&P 500 added 0.3% and the Dow Jones Industrial Average followed with a 0.1% gain. Another healthy earnings season is winding down and Q4 is underway. If we use history as our guide, November and December tend to be good months for investors.  Nevertheless, 2017 has already provided noteworthy performance. Year-to-date gains are now 25.7% for the Nasdaq, 19.1% for the Dow and 15.6% for the S&P 500.

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This Halloween, when you open the door, you may find Thor, Captain America, Green Lantern, or the X-Men standing outside looking for tasty treats. Or, you may find characters you don’t recognize at all! Keeping up with pop culture is no easy task. This year, watch for:

  • Anime characters: If you’re not a fan of Japanese anime comic books, graphic novels, or video games, you may not recognize Chibi Moon or Uzumaki when they appear at your door.
  • Steampunk characters: Steampunk culture shows what the digital age would look like if it had happened 100 years ago.

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Markets reacted positively last week to the long awaited outline of President Trump’s tax reform. Affectionately known as the “reflation trade”, risk-on sectors reengaged and outperformed, but small cap stocks and the technology sector were the brightest stars. Reaching the close on Friday, the Nasdaq Composite gained 1.1% and S&P 500 moved up 0.4%. Based on investor optimism, tax reform may be the key to a continuing bull market.

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Looking back, August brought little change to markets. Beneath seemingly quiescent waters, dramatic and momentous events took center stage. First, Charlottesville gripped the nation, a total eclipse captivated every age, and the month gave its farewell with a deluge of rain and misfortune in Texas. During all that, geopolitical tensions intensified as North Korea continued its repugnant behavior. We now head into arguably the worst market month, September.

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Stocks were mixed on Friday as the Dow Jones Industrial Average managed a 0.2% rise, but the Nasdaq Composite and S&P 500 both fell fractionally by 0.1%. Everyday can’t be one of growth and, frankly, we don’t think that is healthy for a sustainable market. Looking past daily market movement, second-quarter GDP was in line with the consensus at 2.6%, more than double first-quarter results. This data presents a solid rebound but remains short of President Trump’s target of 3 to 4%. Year-to-date, things are still looking good and stocks remain stronger relative to bonds.

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The S&P CoreLogic Case-Shiller Indices, the leading measure of U.S. home prices, was recently released for April 2017; nationwide home prices continue their rise over the trailing 12 months. The Case-Shiller Index covers all nine U.S. census divisions which reported a 5.5% annual gain in April, down from 5.6% in March. The 10-City Composite showed a slight decrease of 4.9%, down from 5.2% the previous month and the 20-City Composite posted a 5.7% year-over-year gain, down from 5.9% in March.

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Political headlines are coming at an alarming pace. In spite of this, markets were relatively quiet last week which left U.S. equity prices little changed. Treasury yields moved slightly lower as the dollar weakened; our dynamic yield curve is beginning to flatten. Oil prices also declined for a fourth straight week. Nevertheless, the Federal Reserve remained on track to slowly normalize monetary policy. As expected, the Fed funds rate rose by 25 basis points to 1.0%. Additionally, the Fed hinted at the likelihood of one more increases before year-end. Normalizing the country’s balance sheet should be viewed as a positive. However, it wasn’t long ago that our Fed vowed to raise rates only when inflation reach higher levels. To date, that has not happened.

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Last week, stocks started the abbreviated trading week on a down note, but things turned around heading into Thursday and Friday, pushing the major benchmarks to record highs. Equity prices closed higher on Friday, June 2, following a non-farm payrolls report that showed a weaker-than-expected 138,000 jobs were created in May (versus consensus of 185,000). Logic holds that stock prices would move lower on such news. However, the (negative) new jobs portion of the report was counterbalanced by lower unemployment and (almost undetectable) wage inflation. In essence, news is mixed and markets are maintaining their resilience.

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Last Friday, stocks reached record highs (again) on a better-than-expected nonfarm payrolls report. The 10-year Treasury yield also rose for most of the week following reassurance by the Federal Reserve that it remains on pace with planned interest rate hikes. Friday’s employment report was expected to show 185,000 new jobs added in the month of April but, surprisingly, the numbers came in at 211,000 jobs for the period. This favorable outcome was enough to offset economic concerns prompted by a weaker than expected GDP report. Washington was in on the action with an agreement to fund the Federal Government through September, and a victory in the House to repeal-and-replace the Affordable Care Act. Other items on President Trump’s agenda seem to be gaining traction; market-friendly tax reform and infrastructure spending could bolster the economy and begin adding to the GDP.

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No matter where you turn, everyone is predicting the next market top. So-called ‘experts’, CNBC, cab drivers and the list goes on.  Particularly, when watching pundits who report on market conditions, you hear the banal repetition of “we’ve run too far, too fast” and “valuations are too high” or the ever popular, “rising interest rates will end the equity party”.  When it comes to gaining listeners and selling advertising, the media knows that fear sells. As an investor, you must have a healthy skepticism, because occasionally, some good information can be gleaned from the media.  Nevertheless, their job is making money for the networks at your expense.  Suppose we remove the noise (media) and consider what the market is saying; interest rates relative to stock prices and what indications (if any) alert us to a market top.

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