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Weekly Commentary

June 26, 2017

The Markets

It has been a very good year, so far.

Through the end of last week, the Standard & Poor’s 500 Index posted 24 record highs and delivered returns in the high single digits. The MSCI World ex USA Index was up more than 11 percent, and the MSCI Emerging Markets Index gained more than 17 percent.

After reading those numbers, many people would assume bond markets are down for the year. After all, stock and bond markets tend to move in different directions. Zacks explained,

“Stock and bond prices usually move in opposite directions. When the stock market is not doing well and becomes risky for investors, investors withdraw their money and put it into bonds, which they consider safer. This increased demand raises bond prices. When stocks rally and the risk seems justified, investors may move out of bonds and into stocks, driving stock prices up further.”

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June 19, 2017

The Markets

All eyes on inflation!

Inflation is the way economists measure changes in the prices of goods and services. The United States has enjoyed relatively low inflation for a significant period of time. Last week, the consumer price index indicated inflation had moved lower in May.

Inflation is our focus because it is at the core of two very different opinions that currently are influencing markets and investors. A commentary on the Kitco Blog explained:

“One of the most important economic debates today is whether the economy will experience reflation or deflation (or low inflation) in the upcoming months. Has the recent reflation been only a temporary jump? Or has it marked the beginning of a new trend? Is the global economy accelerating or are we heading into the next recession?”

Another key factor is employment. Traditional economic theory holds when unemployment falls (i.e., when more people are employed) inflation will rise because demand for workers will push wages higher. That hasn’t happened yet in the United States even though unemployment has fallen significantly.

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June 12, 2017

The Markets

Stock market historians may dub 2017 the Xanax year. Traditional historians will probably choose a different moniker.

Stock markets in many advanced economies have been unusually calm during 2017, reported Schwab’s Jeffrey Kleintop in a May 15, 2017 commentary. The CBOE Volatility Index, a.k.a. the Fear Gauge, which measures how volatile investors believe the S&P 500 Index will be over the next few months, has fallen below 10 on just 15 days since the index was introduced in 1990. Six of the 15 occurred during 2017. The average daily closing value for the VIX was 19.7 from 1990 through 2016. For 2017, the average has been 11.8.

Investors’ calm is remarkable because 2017 has not been a particularly calm year. We’ve experienced significant geopolitical events. For example, the U.S. launched a military strike on Syria, and dropped its biggest non-nuclear bomb on Afghanistan. There have been terrorist attacks in Europe, along with discord in the Middle East. The European Union has been unraveling. The U.S. government has shown unusual levels of disarray, and the U.S. President’s passion for Tweets has stirred the pot.

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June 5, 2017

The Markets

The bull market in U.S. stocks is getting really old!

In fact, this bull has been charging, standing, or sitting for more than eight years. In April, it became the second longest bull market in American history, according to CNN Money.

There are some good reasons the stock market in the United States has continued to trend higher. For one, companies have become more profitable. During the first quarter of 2017, companies in the Standard & Poor’s 500 Index reported earnings increased by 14 percent, year-over-year. That was the highest earnings growth rate since 2011, according to FactSet.

In addition, the economy in the United States has been chugging along at a steady pace. CIO Charles Lieberman wrote in Bloomberg View:

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May 30, 2017

The Markets

Is preparing for the future more important than enjoying the present?

There is a lot to enjoy today. Last week, Financial Times wrote:

“Wall Street ended an impressive week on a steady note – eking out a tiny gain to a fresh record close – as oil prices recouped some of the previous day’s steep losses and the latest U.S. Gross Domestic Product data reinforced expectations for a June rate rise.”

In fact, U.S. equities have been performing well for some time. The Standard & Poor’s (S&P) 500 Index achieved new highs 18 times during 2016 and, so far in 2017, we’ve scored 20 closing highs, including three last week.

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May 22, 2017

The Markets

How much is too much?

There has been no shortage of drama since the new administration took office – legislative setbacks, controversial hiring and firing, and fiery tweets on various topics. Regardless, U.S. investors and markets remained stalwart until last week when the CBOE Volatility Index (a.k.a. the fear gauge) jumped 46 percent higher and markets declined.

Financial Times explained:

“…a range of stock benchmarks made their biggest single-day fall since November, as the political controversy over Donald Trump ties with Russia undermined investors’ faith in the administration’s ability to enact its pro-growth policies. Markets subsequently steadied, but investors are primed for further volatility as the White House faces the distraction of a lengthy inquiry led by an independent special counsel.”

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May 15, 2017

The Markets

Does performance tell the whole story?

American stock markets have delivered some exceptional performance in recent years. Just look at the Standard & Poor’s 500 (S&P 500) Index. Barron’s reported the S&P 500, including reinvested dividends, has returned 215 percent since April 30, 2009. The index is currently trading 50 percent above its 2007 high.

The rest of the world’s stocks, as measured by the MSCI EAFE Index, which includes stocks from developed countries in Europe, Australia, and the Far East, returned 97 percent in U.S. dollars during the same period. At the end of April, the MSCI EAFE Index was 20 percent below its 2007 high.

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May 8, 2017

The Markets

Is it complacency? Exuberance? Uncertainty? Exhaustion? Insight? Intuition?

Last week, all three major U.S. stock markets gained value and two reached new record highs. On the face of it, that’s great news for stock investors. However, if you look below the surface, the markets’ upward trend may have you scratching your head.

Barron’s reported:

“That the S&P would hit a new high was all the more surprising given the lack of reaction to major headlines throughout the week. On the plus side of the ledger, Congress managed to avoid a shutdown, while on the downside, President Donald Trump tweeted that the U.S. ‘needs a good shutdown,’ and the Federal Reserve appeared more hawkish than prognosticators had been prognosticating. Nothing. Then there’s the prospect of a shocker in the French election over the weekend, though the pro-Europe candidate Emmanuel Macron is widely expected to beat the more-radical Marine Le Pen. Yet here we are. 'It’s like the market took Novocain and is numb to everything,’ says Thomas Lee, head of research at Fundstrat Global Advisors.”

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May 1, 2017

The Markets

It was a good week to own stocks.

Not all financial news was good news last week, but that didn’t prevent U.S. stock markets from moving higher. Barron’s reported on the good news:

“This past week, welcome political news from Europe, a batch of stellar corporate-earnings reports, and a concrete tax proposal to cut corporate and some personal rates sharply gave the bull even more reasons to rally. By Friday’s close, the Dow Jones industrials and other market measures were standing near all-time highs.”

Overall, corporate earnings were quite strong during the first quarter of 2017, according to FactSet. With 58 percent of the companies in the Standard & Poor’s 500 Index reporting in, earnings are showing double-digit growth for the first time since 2011.

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April 24, 2017

The Markets

Last week, investors multi-tasked, pushing both U.S. bond and stock markets higher.

In March, the Federal Reserve raised the Fed funds rates for the second time in three months. Typically, we would expect interest rates to rise and bond prices to fall, but interest rates have been falling and bond prices have been moving higher. Barron’s reported yields on 10-year Treasuries hit their lowest levels since the election last week.

Reuters explained there has been a shift in expectations:

“Bonds prices have been boosted in recent weeks by reduced expectations that the Federal Reserve will raise interest rates two more times this year, following disappointing economic data releases. Still, Fed Vice Chair Stanley Fischer said on Friday that two more U.S. rate increases this year remain an appropriate plan for the Federal Reserve despite some weak recent economic data.”

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April 17, 2017

The Markets

And the survey said...

In late 2016, Natixis Global surveyed 500 institutional decision makers representing corporate pension plans, public pension plans, sovereign wealth funds, insurance companies, foundations, and endowments. Survey participants said market volatility, geopolitics, and interest rates were their top risk concerns for 2017.

So far, U.S. stock markets haven’t proven to be very volatile, but geopolitics caused some disruption last week. Barron’s reported:

“Stocks fell 1 percent last week in quiet trading, with many market participants out for religious observances. Worries about the war in Syria, North Korean saber-rattling, and the coming French elections had investors reining in riskier positions and heading for safe havens.

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April 10, 2017

The Markets

U.S. stock markets are sending mixed signals.

If you look at the performance of the CBOE Volatility Index (a.k.a. the VIX or fear gauge), which is a measure of market expectations for volatility in the near future, it appears all is well and investors expect no unexpected events. Barron’s explained:

“…which brings us back to a central fact: the absence of volatility. The first quarter was historic for the CBOE Volatility Index...It ranged from 10.6 to 13.1, and its average level was 11.69, the lowest in an initial quarter since the VIX was born in 1990 and the second-lowest quarterly average since the 11.3 of 2006’s final three months...”

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April 3, 2017

The Markets

Happy birthday!

Toward the end of the first quarter, the bull market celebrated its eighth birthday. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management wrote:

“Eight years ago, on March 9, 2009, the S&P 500 closed at 677, down 57 percent from where it had been just 18 months earlier. 10-year Treasury yields had fallen from 3.6 percent to 2.9 percent over the previous year…Investors were depressed and scared. However, good long-term returns from stocks were almost inevitable at that point since economic and market fundamentals were at unsustainably low levels…Eight years later, the financial landscape has changed completely…it still makes sense to be in long-term investments including both domestic stocks and bonds. However, it is time to adopt a more diversified and thoughtful approach that recognizes the importance of valuations…”

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Pinnacle Wealth Management, Financial Planning Consultants, Sioux Falls, SD