The Bull Lives
- Details
The stock and bond markets both produced gains during the third quarter as investors continue to be optimistic about the U.S. economy. Corporate earnings remain strong and inflation remains low. Both factors combine to produce a good economic environment for the capital markets.
The third quarter was notable for producing two devastating hurricanes, Harvey and Irma. Combined, these two storms caused an estimated $290 billion in damage to Texas and Florida. Lost economic activity is likely much more than this. This is the first time in history that two category 4 or higher hurricanes have hit the U.S. mainland in the same year. One in every seven cars in the Houston area was destroyed by Harvey and 25% of all homes in the Florida Keys were destroyed by Irma. The damage done and the lives affected by these two storms is truly remarkable. We have many clients in both Texas and Florida. Fortunately, all made it through the storms with no physical injuries and relatively minor property damage
Economy Good; Markets Expensive
- Details
The stock and bond markets continued their winning ways this year as the U.S. equity markets set multiple record highs during the second quarter. The bond market rose during the quarter, pushing yields lower. We are seeing mixed, although mostly favorable economic data, which is providing the fuel for stocks to rise.
Falling interest rates are usually a sign the bond market is forecasting a slowing economy, while rising stock prices are a sign the equity markets are forecasting a growing economy. It is interesting to look at the factors that are giving us these seemingly opposite outlooks. Stocks, in the short run, are very volatile as investors discount the likelihood of various things happening. Our economy has been growing since 2009 and optimism has been growing for eight years. It is worth noting, however, that 40% of the gain this year in the S&P 500 is due to just four companies. This latest uptick does not have broad market breadth, which is usually a warning sign that the rally is not sustainable. As we have stated in our past few letters to you, we are also seeing signs that are typical of a late bull market run. Bond yields have been dropping as we are seeing little evidence that the tight labor markets are leading to rising wages, which suggests that inflation remains in check.
2017 Economic Growth Continues
- Details
The stock market stormed out of the gate during the first two months of 2017 as hopes regarding fewer business regulations and increased consumer confidence fueled investor’s optimism for equities. The bond market was flat during the first quarter as increased inflation expectations and higher interest rates were a drag on bond prices.
The Federal Reserve raised interest rates during the first quarter for the first of what is expected to be multiple rate increases during this year. The economy continued the expansion that has been underway since 2009, allowing the Fed the ability to hike rates. Most analysts are projecting a pickup in inflation over the next two years and this is the primary catalyst for increasing interest rates. Another factor is the very low unemployment rate, which can be inflationary with a growing economy. As we have said before, the Fed has the very difficult job of keeping the economy growing but preventing it from growing so fast we have high inflation. This can be a difficult job to manage.
Economic Growth Continues
- Details
The stock market stormed out of the gate during the first two months of 2017 as hopes regarding fewer business regulations and increased consumer confidence fueled investor’s optimism for equities. The bond market was flat during the first quarter as increased inflation expectations and higher interest rates were a drag on bond prices.
The Federal Reserve raised interest rates during the first quarter for the first of what is expected to be multiple rate increases during this year. The economy continued the expansion that has been underway since 2009, allowing the Fed the ability to hike rates. Most analysts are projecting a pickup in inflation over the next two years and this is the primary catalyst for increasing interest rates. Another factor is the very low unemployment rate, which can be inflationary with a growing economy. As we have said before, the Fed has the very difficult job of keeping the economy growing but preventing it from growing so fast we have high inflation. This can be a difficult job to manage.
Forgotten But Not Gone
- Details
When we wrote our last quarterly letter to you at the end of June, capital markets around the world were in panic mode due to the British voting to leave the European Union. When was the last time you heard anything about the Brexit? It is probably safe to say that once the U.S. stock market rebounded after a week, most people moved on and forgot this even happened. With election dominated news, our normal financial reporting has been replaced with political propaganda. Fortunately, by the time we write our next letter to you at the end of the year, the election will be behind us and we can (hopefully) get back to financial reports that are more meaningful.
Brexit
- Details
It had been a relatively uneventful quarter for investors until the last week of June, when British voters voted to leave the European Union. Markets around the world plummeted on the surprise vote. The Dow dropped 900 points in the first two trading days after the vote; then regained almost the entire amount over the next three trading days. There is little to do when the markets react like this, and in reality, the Brexit will likely have little impact in the U.S. It is also worth noting that this was a non-binding referendum, so we do not know what the ultimate outcome of the vote will be.
Comeback
- Details
It may not feel like it, but the U.S. stock market made an historic comeback during the first quarter of 2016. From its low on February 11th the stock market has rallied more than 11%, wiping out the losses for the year. This is the biggest quarterly comeback for the market since 1933. The bond market has continued to be volatile but ended the first quarter with modest gains as interest rates fell during the quarter.
2015 Year End Review
- Details
2015 was a frustrating year for investors. Both stocks and bonds experienced lots of ups and downs, but ended the year with very little to show for it. Continued economic growth gave us the gains, while questions regarding future growth rates, particularly around the world, gave us the losses.
Economic growth in the U.S. grew roughly 2.1% during the past year. While positive, GDP growth slowed late in the year. Strong employment gains throughout the year lowered the unemployment rate to 5%. Also in the U.S., strong consumer spending and continued debt reduction added to our economic growth. The other big economic news during the year was the FOMC raising the Fed Funds rate for the first time in nine years.
Where Do We Go from Here?
- Details
The third quarter of this year was an unpleasant one for investors. The stock market had its worst quarter’s performance in four years. The bond market was very volatile during the quarter as speculation regarding the Federal Reserve’s intentions ran wild. Bonds ended the quarter with small gains. The Fed’s decision to keep rates unchanged caused renewed fears that worldwide economic growth is slowing.
More of the Same
- Details
The heightened volatility the markets experienced during the first quarter continued during the second quarter. The stock market was very choppy as fears of an interest rate hike by the Fed combined with mixed economic data to leave investors unsure of what the future holds. Once again, problems in Greece are causing anxiety around the world as the European Union tries to hammer out a compromise to bail them out of their extreme debt. With a Fed rate hike looking more likely, bonds sold off across the board causing interest rates to move markedly higher.
