Stock Market Analysis
Last week large stocks were flat while smaller stocks were up slightly. The Healthcare and Consumer Goods sectors were up the most while Basic Materials and Conglomerates fell.
Stock market volatility as measured by the Volatility Index (VIX) briefly declined to 2014 levels on Wednesday. Non-Commercial Speculators could be contributing to this drop as contracts shorting the VIX index reached all-time highs this past week. Typically, the Non-Commercial Speculators are not the group you want to follow with your investments.
The Investors Intelligence Sentiment Survey showed 62 percent were bullish last week. This survey has not been this high since 2014. In 2016, a low in sentiment was reached in February, around 25%, which turned out to be a good buying opportunity. Warren Buffett likes to say he is, “Greedy when others are fearful and fearful when others are greedy.” According to Investors Intelligence it seems investors are getting greedy.
U.S. Factory Orders for December were up 1.3 percent for the month. Unfortunately, even with the rebound, Factory Orders have fallen since mid-2014 and are at levels last seen in 2006. This corresponds with the period when the U.S. dollar began to strengthen. The U.S. dollar is up over 20% since then and is likely contributing to the overall weakness of U.S. goods.
The Dow Jones Industrial Average ended the week just below its all-time high and is up 23 percent over the past year. Even better, the Dow Jones Transportation Index is up over 35 percent over the past year. However, the lesser known Dow Jones Utilities Average has been about flat since the election and is only up about 6 percent over the past year. Usually, when these three indices move together it shows market strength. The good news is the Utilities index outperformed last week, which somewhat reduced the gap.
Our leading indicators remain slightly unfavorable but continue to improve. A market setback may be a good buying opportunity, especially if our leading indicators turn positive. We would not take an aggressive stance toward stocks at this time, but we would maintain a moderate position in bargain stocks.
Matt Watson, CFA, CPA
Bond Market Analysis
It was a disappointing week for longer term bonds. Long-term Treasuries and Corporates both lost 0.7%. However intermediate-term bonds advanced 0.1%, so our suggestion to shorten maturities in portfolios has been helpful.
Looking to the future of bonds, one must consider the future of the economy. This is because bond yields and the economy often move in the same direction. An improving economy may suggest higher yields and thus lower bond prices.
One piece of the economic puzzle is employment. The February Employment Report was released on Friday and there were 227,000 jobs created. The markets reacted positively to this news. The labor force participation rate rose to 62.9%, its highest since September 2016. When we analyzed the numbers further we found some encouraging news.
The ratio between full time and part time jobs increased to its highest level since 2008. Another bright spot was the increase of 45,000 new higher income jobs, the best level since September 2014. Put simply, it was not just the higher-than-expected job totals but the quality of these jobs which was so encouraging.
Of course there is other good economic news. Consumers make up roughly two-thirds of our economy. Examining Personal Income and Personal Spending reports we find both made healthy increases last month. Additionally, we now have three consecutive months where the regional FED manufacturing reports from New York, Philadelphia, Richmond (Virginia), Kansas City and Dallas are all positive.
One of the few negatives comes from future expectations. The Conference Board surveys approximately 3,000 households about their expectations for the future. Right before the election their index was at 86 and then boomed to 106.4 by the end of the year. In January we saw a pullback with the index now standing at 99.8. Obviously this is still better than during the election cycle but the recent downtick may suggest citizens want to see more proof on lower taxes and regulations before they get overly excited.
Overall our bond indicators are unfavorable and suggest caution. We would continue to recommend shortening durations where appropriate. Furthermore, we continue to like floating rate bonds and TIPS where appropriate. We would recommend maintaining a moderate exposure in bonds.
David W. James, CFA
Brian Culpepper, Portfolio Manager
