Unless you’ve been on a seemingly routine spacewalk and your shuttle was destroyed, you’re probably aware that the Dow Jones Industrial Average just closed above 20000. Who on earth isn’t? That’s because the ageless index attracts an outsized level of attention whenever it clears a thousand-point hurdle. Fact is, though, there’s really nothing magical about the event. You know, like certain badly-acted movies about spiraling into the blackness,

Gravity: Grave consequence; seriousness or importance

Truth be known, the DJIA matters little for the Wall Street community these days. Market diviners almost always set their predictions in terms of the S&P 500 and fund managers seldom measure their performance against the 30-stock, price-weighted Dow. To that point, the $36 billion in assets indexed directly to the Dow is a measly 2% of the $2.1 trillion tied the big S&P benchmark

Gravity: Solemnity or dignity of manner

Still, the venerable old blue-chip average remains a vital conduit for relaying financial market activity to everyday investors. Indeed, there’s a deep, ingrained memory of the Dow on Main Street that’s a big part of the nomenclature of the markets. Even if those snobby professionals don’t manage money against it, retail folks still rely on the Dow to be their barometer of the stock market

Gravity: The natural attraction between physical bodies

Who, then, but the most high-minded Wall Street type is surprised that investors have been pumping a disproportionately large amount of new money into their favorite Dow-tracking fund? Far be it for us to be taken aback by the $811 million of new money flowing in to the SPDR Dow Jones Industrial Average ETF (DIA) just last week – more than every one of the nearly 2,000 exchange-traded products on the market. Can’t argue the laws of investor physics.

What the markets have been doing…

While most investment eyes were on the Dow Industrials Average and its successful efforts to break through 20000, virtually all the market’s major benchmarks reached new highs last week. Amid a slew of good earnings reports and hopes for faster economic growth, the technology-heavy NASDAQ actually performed best.

The period was one of the busiest of the earnings season, with over 100 S&P 500 companies reporting fourth-quarter results. Better-than-expected numbers from several prominent firms, including DuPont, Boeing, and Rockwell Automation, seemed to boost sentiment. On the economic front, the Commerce Department announced that overall growth slowed again in the fourth quarter, with GDP rising at a 1.9% annual pace compared to 3.5% in the third quarter. Durable goods orders also declined in December.

 

Index Friday’s Close Two-Week Point Change Year-to-Date Change
DJIA 20093.78 +208.05 +1.68%
S&P 500 2294.69 +20.05 +2.50%
NASDAQ 5660.78 +86.66 +5.16%

With the poor GDP report reversing a rise in Treasury bond yields earlier in the week, the Government market closed the period with a slight decline in prices. The investment-grade corporate market again saw good demand, particularly among new issuance financials. The positive momentum among banks spilled over into the broader market, and credit spreads narrowed across most sectors. Municipal bonds lagged Treasuries though volume moved higher on positive cash flows.

 

Fixed Income Yield Two-Week Yield Change
2-Year Treasury
1.21%
+0.02%
10-Year Treasury 2.48% +0.08%
30-Year Treasury 3.08% +0.13%
30-Year Municipals 3.12% +0.17%

 

Quote of the Week…

“We can no longer justify the organizational complexity and resources necessary to support the investing activities of these portfolios.” 

N.P. “Narv” Narvekar, endowment chief for Harvard Management Co., on the University’s decision to outsource investment management and lay off staff

Number of the Week…

9

The number of companies that pitched initial public offerings to investors last week, the most in a single week since June 2015

What Fund Architects has been doing…

U.S. equity indexes hit new highs last week as corporate earnings came in ahead of expectations and economic data were generally sound. While political optimism has also been a factor in the market’s run-up, we’re inclined to agree with those who think global economic strength is the real driving force.

Coming in to month’s end, Global Industrials (EXI) remains the top-ranked sector for our Global ETF Portfolio. Barring something extraordinary over the next couple of days, it’s likely we’ll maintain our position. Meanwhile, Global Materials (MXI) has moved up in our rankings to a point we’ll consider it alongside our current position in U.S. Large Caps (IVV).

In the Global Conservative ETF Portfolio, it appears we’ll be moving out of Bank Loans (BKLN), and in to Convertible Bonds (CWB). Once done, the Portfolio will be fairly aggressively positioned with Convertibles and High Yields (JNK).

From here, it’s clear the global economy has downside risks, but the environment should remain supportive for certain sectors. While valuations across financial markets look less attractive than a few years ago, it continues to make sense to stick with a pro-growth investment stance and to overweight the appropriate sectors in investor portfolios.


The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional.  The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.

 

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