The volatility continued as the markets closed lower for the third straight week. At the Friday close, the Dow lost 1.5%, the S&P fell 1.9%, and the Nasdaq had another rough week, down 2.6%. Oil remained a hot topic this week as it saw some big moves, only to end the week relatively unchanged, losing just nine cents to $101.07 (Brent crude closed just below $114 again). It was a similar story for gold, as it lost just 0.4% for the week.
Source: MSN Moneycentral
The markets have felt like they have a one track mind lately. They focus on one problem so intensely while seeming to ignore others. For the last several weeks, the focus was on the countries in the Middle East and North Africa, starting with the uprisings in Egypt. European debt problems dominated headlines not long before that. And China before that. This week, the sole focus was on Japan.
Beginning on Monday, the destruction found in Japan continued to worry investors as the Dow fell nearly 150 points before rebounding late in the day. Radiation scares picked up on Tuesday, leading to a sharp drop at the open. The Dow was off almost 300 points before rallying for the rest of the day.
Those radiation fears lingered into Wednesday, but negative economic data out of the U.S. really helped push the markets lower. Housing starts (which measures new homes that began construction) came in at the lowest level in 27 years, reminding us that the economic recovery is still very fragile.
The Producer Price Index (it measures the price changes a business pays to produce goods) was also released on Wednesday and came in rather tame when excluding food and energy (which the Fed likes to do). When they are included, though, the PPI was much higher than expected. This was caused by a 3.3% rise in energy costs and 3.9% increase in food costs in February. The rise in food prices was the biggest gain seen since 1974. This news, combined with the housing numbers and Japan troubles lead to a large drop in the market Wednesday.
The outlook changed for the latter part of the week, though. Many investors felt that the sell-off may have been overdone, so investors stepped back in and began buying (including us). The fears about Japan still lingered, but have probably been adequately priced into the market with that large sell-off.
Released on Thursday, the Consumer Price Index (which measures the change in prices that consumers pay for items) for February came in slightly higher than expected, but also still rather tame. We have discussed in the past how we feel this index does not accurately reflect U.S. inflation. It is the metric the government uses, though, so it is still the most important. Similar to the PPI, the CPI had a spike in food and energy prices, but not to the same levels as the PPI. Food was up just 0.6% and energy higher by 3.4% in February.
We feel that the CPI underestimates the amount of inflation in the economy. Another metric we like to look at for inflation is called the “Billion Price Project” and it was created by MIT (and can be found HERE). The most recent chart is on the right. It is rater ingenious in that it scans the internet every day for the prices of items (the Fed sends people out to stores to find prices of items to calculate their indexes). Millions of items. You can see how the MIT numbers (the red line) have followed the CPI (the blue line) rather closely, but the gap has widened in recent months. We feel that the MIT numbers are much more accurate and this graph just shows the discrepancy that exists.
Next Week
Next week will be important to see if the rally that started late this week will continue. The nuclear situation in Japan will be very important, but we feel that headlines coming out of Libya and the Middle East will again be the main focus. At the moment, the situation in Libya seems to be escalating and any negative news will likely send the markets lower.
The week will be quieter in terms of economic and corporate earnings reports. There will be more data on housing numbers, so that will be important to watch after the poor housing numbers from this week.
Where are we investing now?
Like we mentioned above, we did a little buying this week. The non-stop gains of the last six months had investors anxious for an overdue correction. The fears created by the Middle East and Japan provided investors a nice opportunity to take some gains. The selling created a nice correction, which is entirely healthy, and produced a nice opportunity for new buyers to step in.
We still have serious concerns over the economy, with inflation running strong, unemployment high, and home prices falling. We strongly believe a stagflation scenario is brewing. There is also a worry that first quarter corporate earnings will begin coming out in the next couple weeks and they will be disappointing. Like we saw in the PPI, businesses are getting hit with higher costs that they have not yet passed along to consumers. This will negatively impact their earnings and send stocks lower.
Even with this negative outlook on the economy, we still believe that Fed Chief Ben Bernanke will keep flooding the market with money to push the market higher. The QE2 bond buying program is set to expire this summer and without the Fed intervention, the market will likely fall. We feel that the Fed has too much invested for that to happen, so they will probably double down and try another quantitative easing program. This will keep the markets higher, in the short term anyway.
If we were to put new money to work, in equities we are focused on large cap higher-quality and multi-national stocks. Large cap has lagged Mid and Small, so there could be more room to run in this area. We continue to avoid banking and healthcare-related stocks. TIPs are important as we expect inflation to increase in the future, while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time.
Commodities remain a long term favorite and any weakness could present buying opportunities since they are rather expensive at the moment. Municipal bonds are still important despite the recent drop in prices. There are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks have had a significant run already and are facing many headwinds for the future, especially inflation. Still, if we had to put new money in, we are favoring developed international markets as opposed to emerging.
Our short and medium term investments are the only ones affected by these weekly and monthly changes. These weekly fluctuations have little impact on positions we intend to hold for several years or more.
Source: MSN MoneycentralThe markets have felt like they have a one track mind lately. They focus on one problem so intensely while seeming to ignore others. For the last several weeks, the focus was on the countries in the Middle East and North Africa, starting with the uprisings in Egypt. European debt problems dominated headlines not long before that. And China before that. This week, the sole focus was on Japan.
Beginning on Monday, the destruction found in Japan continued to worry investors as the Dow fell nearly 150 points before rebounding late in the day. Radiation scares picked up on Tuesday, leading to a sharp drop at the open. The Dow was off almost 300 points before rallying for the rest of the day.
Those radiation fears lingered into Wednesday, but negative economic data out of the U.S. really helped push the markets lower. Housing starts (which measures new homes that began construction) came in at the lowest level in 27 years, reminding us that the economic recovery is still very fragile.
The Producer Price Index (it measures the price changes a business pays to produce goods) was also released on Wednesday and came in rather tame when excluding food and energy (which the Fed likes to do). When they are included, though, the PPI was much higher than expected. This was caused by a 3.3% rise in energy costs and 3.9% increase in food costs in February. The rise in food prices was the biggest gain seen since 1974. This news, combined with the housing numbers and Japan troubles lead to a large drop in the market Wednesday.
The outlook changed for the latter part of the week, though. Many investors felt that the sell-off may have been overdone, so investors stepped back in and began buying (including us). The fears about Japan still lingered, but have probably been adequately priced into the market with that large sell-off.
Released on Thursday, the Consumer Price Index (which measures the change in prices that consumers pay for items) for February came in slightly higher than expected, but also still rather tame. We have discussed in the past how we feel this index does not accurately reflect U.S. inflation. It is the metric the government uses, though, so it is still the most important. Similar to the PPI, the CPI had a spike in food and energy prices, but not to the same levels as the PPI. Food was up just 0.6% and energy higher by 3.4% in February.
We feel that the CPI underestimates the amount of inflation in the economy. Another metric we like to look at for inflation is called the “Billion Price Project” and it was created by MIT (and can be found HERE). The most recent chart is on the right. It is rater ingenious in that it scans the internet every day for the prices of items (the Fed sends people out to stores to find prices of items to calculate their indexes). Millions of items. You can see how the MIT numbers (the red line) have followed the CPI (the blue line) rather closely, but the gap has widened in recent months. We feel that the MIT numbers are much more accurate and this graph just shows the discrepancy that exists.Next Week
Next week will be important to see if the rally that started late this week will continue. The nuclear situation in Japan will be very important, but we feel that headlines coming out of Libya and the Middle East will again be the main focus. At the moment, the situation in Libya seems to be escalating and any negative news will likely send the markets lower.
The week will be quieter in terms of economic and corporate earnings reports. There will be more data on housing numbers, so that will be important to watch after the poor housing numbers from this week.
Where are we investing now?
Like we mentioned above, we did a little buying this week. The non-stop gains of the last six months had investors anxious for an overdue correction. The fears created by the Middle East and Japan provided investors a nice opportunity to take some gains. The selling created a nice correction, which is entirely healthy, and produced a nice opportunity for new buyers to step in.
We still have serious concerns over the economy, with inflation running strong, unemployment high, and home prices falling. We strongly believe a stagflation scenario is brewing. There is also a worry that first quarter corporate earnings will begin coming out in the next couple weeks and they will be disappointing. Like we saw in the PPI, businesses are getting hit with higher costs that they have not yet passed along to consumers. This will negatively impact their earnings and send stocks lower.
Even with this negative outlook on the economy, we still believe that Fed Chief Ben Bernanke will keep flooding the market with money to push the market higher. The QE2 bond buying program is set to expire this summer and without the Fed intervention, the market will likely fall. We feel that the Fed has too much invested for that to happen, so they will probably double down and try another quantitative easing program. This will keep the markets higher, in the short term anyway.
If we were to put new money to work, in equities we are focused on large cap higher-quality and multi-national stocks. Large cap has lagged Mid and Small, so there could be more room to run in this area. We continue to avoid banking and healthcare-related stocks. TIPs are important as we expect inflation to increase in the future, while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time.
Commodities remain a long term favorite and any weakness could present buying opportunities since they are rather expensive at the moment. Municipal bonds are still important despite the recent drop in prices. There are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks have had a significant run already and are facing many headwinds for the future, especially inflation. Still, if we had to put new money in, we are favoring developed international markets as opposed to emerging.
Our short and medium term investments are the only ones affected by these weekly and monthly changes. These weekly fluctuations have little impact on positions we intend to hold for several years or more.
