AdvisorShares Weekly Market Review – Week Ending 2/2/2018
Highlights of the Prior Week
The Ides Of February!
Although the Tour de France is still a few months away, it feels right to invoke race commentator Paul Sherwen in noting that Alan Greenspan threw a cat amongst the pigeons mid-week, proclaiming that both equities and bonds are in a bubble. He was referring to equity valuations and historically low yields (up some from those lows) that persisted for many years. The equity market over the last month has arguably traded in a blow off pattern and there is no doubt that that equities by just about any measure are expensive. The other side of the argument comes from many places including Hedgeye who notes that stocks can stay expensive and get more expensive “when both the GDP and US corporate profit cycles are accelerating” which is what they say is occurring now. A bubble or a top are only knowable with certainty in hindsight. Guessing about either is a poor substitute for a disciplined investment strategy.
The employment data was generally strong but with a couple of flies in the ointment. There were 200,000 new jobs created, the headline unemployment rate was steady at 4.1% but the broader U6 jumped up three tenths to 8.2%. Labor force participation has remained at 62.7%. The wage growth was stronger than it has been at 0.3% and 2.9% year over year which was taken as inflationary, which it is, but judging the markets’ initial reaction, it was not taken as the good kind of inflation. Revisions showed a net decline of 24,000 jobs for the last two months.
The wage data and the possibility that rising interest rates also indicate inflation may have contributed to what was a rough week for domestic equities. The Dow Jones Industrial Average fell 4.16%, the S&P 500 dropped 3.89%, the NASDAQ gave up 3.52% and the Russell 2000 slid 3.74%. Still though, the Russell 2000 is the only one of the four up less than 3% for the year.
We would take a moment to remind investors that as of Friday, the S&P 500 has traded back to where it was in mid-January and is still up on the year. As noted, it is up more than 3% in 2018. At Friday’s close, it was 3.9% from its all-time high. At that level, it is down a little and although it has been a while since it went down at all it is worth remembering that down a little goes with the territory of engaging in markets. All advisors have some sort of strategy they implement for their clients. That strategy is less important when the market is going higher causing no emotional concern, days like Friday is when that strategy becomes crucial for clients’ long-term financial success. It is unlikely that too many advisors’ plan calls for dumping large amounts of stock after a bad week and while you know that, clients might need the reminder.
The Ten Year US Treasury Note had a big week, taking out 2.70% then 2.80% before closing at 2.85%, a level last touched in early 2014. It could be an inflation story (the 0.1% decline in non-farm productivity might argue otherwise), it could be the market not fighting the Fed, it could be anticipation of better growth, a combo of the three or something else but it bears watching. One observation is that typically, higher rates are accompanied by a higher dollar (essentially the carry trade) but other than Friday, rates have been moving up while the dollar has gone down which makes us wonder whether this spike in rates turns out to be the real thing. Also in fixed income, high yield spreads have compressed in the last few weeks, down below 330 basis points as of Friday per Bespoke Investment Group’s Morning Lineup report. The narrowing is more about treasury yields having gone up than investors bidding down high yield issues.
With everything else going on, Bitcoin had a “bear market” last week, falling 20% which leaves it down 33% year to date (as of Friday). Ethereum is down 27% from its high in mid-January and Ripple is down 67% from its early January high. Bitcoin has endured several 80% declines in its lifetime so the current action shouldn’t be a surprise. We stick to the idea that cryptocurrencies could end up being transformative for more secure and more efficient transactions but we are not there yet and that outcome does not need to include any of the big players now, the internet is alive and well today without Netscape or AOL.
Harry Markowitz was interviewed in Barron’s and uses ETFs. The following quote captures what the portfolio looked like a few months ago, he’s since made some changes.
Markowitz put one third of his liquid assets into large-cap stocks, one third into an iShares fund tracking small-caps, and one third into an iShares fund tracking emerging markets.
“Burning Man but with less drugs and fancy people” in the Arizona desert:
Organized by Bob Wells, a 62-year-old van-dwelling evangelist who has been living on the road for over two decades, the RTR drew just 45 people when it began in 2010. This year, Mr. Wells said, rangers estimated the crowd at over 3,000. Often called a Burning Man for retirees, the RTR is starting to skew younger, at least by anecdotal measures.
Former Major League Baseball player Oscar Gamble has taken on something of a legendary status due to some amazing pictures on his baseball cards from back in the 1970’s. Sadly, Gamble passed away last week at the age of 68:
With a large Afro that could barely be confined by a baseball cap or helmet, Oscar Gamble became a cult baseball hero. His memorable hair made him popular long after his playing days and among those who weren’t even born when he played for seven teams over 17 years. But while he was best known for his hair, Gamble could play a little too. And he wasn’t afraid to speak about inequality, either, giving a Yogi Berraesque quote when asked about racism in baseball. “They don’t think it be like it is, but it do,” he said.
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Zerohedge, Bespoke Investment Group, CME Group, BBC, Dazzy Vance Chronicles