After a three-week run where all major U.S. indexes posted significant gains, we saw more mixed results last week. The Dow was up 0.10%, but the S&P 500 lost 0.97% and the NASDAQ was down 2.65%. The MSCI EAFE's measure of international developed markets also dropped 0.24%.
Rallies such as the one we've experienced since Donald Trump's election can't go on forever, so we aren't too concerned about these minor pullbacks. In fact, as we've recently said, when you look more deeply at the data, we see many reasons to believe that our economy is moving in the right direction.
Good News This Week
Positive economic news for the U.S. continued to come in this week, including reports that:
- Unemployment dropped again to 4.6% - hitting its lowest level since August 2007.
- Manufacturing increased for the third straight month.
- Personal income increased 0.6% in October.
- Q3 GDP was 10% higher than previously thought.
Of course, despite the ongoing indications that our economy is doing well, everything isn't perfect in the U.S. We'd like to see the economy growing even faster than it is. And while unemployment is low, the measure of people who are underemployed is still too high at 9.3%.
Overall, we continue to see signs that our plow-horse economy may be picking up speed and building greater strength in the process.
Potential Risk: Italian Referendum
From our perspective, the most immediate risk to market performance could be the Italian Referendum. On December 4, Italians voted against Prime Minister Matteo Renzi's constitutional amendment that would have reduced their Senate's size and power while limiting the regional governments' strength. From Renzi's perspective, this move would stop the gridlock so common in Italy's government while helping to stabilize the country, improve investor confidence, and speed economic recovery.
As 2016 has shown us with the unexpected victories of Brexit and Donald Trump, populist sentiments are on the rise worldwide. The Italian "No" vote not only represents a concern with concentrating power in the federal government but also a general pushback against the ruling party and status quo.
Now that "No" has prevailed, we may see additional instability in Europe. Prime Minister Renzi has promised to step down, leaving big questions about who will lead Italy and how they will find a new leader. In addition, some of Italy's largest banks may now be at risk of insolvency, as they have fewer tools for lifting the $380 billion of bad loans that weigh them down.
No one knows what the long-term outcomes of this vote will be for Italy or Europe. We anticipate that some ripples of volatility may wash up on our shores in the process. We hope that, similar to Brexit, the initial market reaction will not last for long and that investors will quickly return to a focus on growth and fundamentals.
How to Move Forward With Confidence
From the first quarter's stock-market volatility to a number of surprising votes, this year has presented many opportunities for emotions to enter investing. We understand how tempting it may be to sell when equities aren't performing well -and to pursue greater growth when they are. Ultimately, emotions have no place in investing.
Recently, we've spoken to some clients who want to ride the post-election growth train. Just as we're here to help you from despairing when stocks tumble, we also want to help control euphoria when the markets rally. Rallies can't continue forever, and impulsive choices can challenge your security. As always, we want you to take the right amount of risk for your unique circumstances and stay focused on the long-term goals that we're pursuing together.
If you have any questions about how current events are affecting your financial life, we are here to talk. Contact us any time.
Monday: ISM Non-Manufacturing Index
Tuesday: International Trade, Productivity and Costs
Wednesday: Gallup U.S. Job Creation Index
Friday: Consumer Sentiment
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance, S&P Dow Jones Indices and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the SPUSCIG. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
These are the views of 4th River Financial Group, and not necessarily those of the named representative, and should not be construed as investment advice. Neither the named representative nor the Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Diversification does not guarantee profit nor is it guaranteed to protect assets.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia and Southeast Asia.
The S&P U.S. Investment Grade Corporate Bond Index contains U.S.- and foreign-issued investment-grade corporate bonds denominated in U.S. dollars.
The SPUSCIG launched on April 09, 2013. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index.
Actual returns may differ from, and be lower than, back-tested returns.
The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
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