Volatility picked up in the markets this week as some large moves ultimately resulted in an unchanged market. For the week, the Dow gained 0.3% while the S&P and Nasdaq rose just 0.1%. Gold reached new highs, rising 1.4% this week. Oil continues to climb, with the crude (WTI) crossing $104 a barrel and Brent crude nearing $116.
Source: MSN Moneycentral
This week was characterized by big swings in the market and the price of oil played a significant factor. Starting on Tuesday, oil prices climbed towards $100 per barrel on further unrest in the Middle East and North Africa, which sent the markets sharply lower.
The interesting part of that drop was that it came on the first of the month. As you may recall, we mentioned that the market tends to be higher on the first due to strong buying with new cash inflows. The up trend tends to occur some 70-odd percent of the time and has happened the last seven months straight. Making things worse, the market wasn’t just a little lower, but nearly 170 points lower. Thankfully we don’t actively follow this strategy of seeking gains on the first, but we know there were some traders hurting Tuesday evening.
On to Thursday, which saw the best single-day performance of the year. Some optimistic reports on employment and retail sales helped set the mood, while a drop in oil prices sealed the deal. Oil prices were lower on the perception of moderating tensions in the Mid East, stemming from rumors of peace talks in Libya. If this tells us anything, though, its how desperate people are for good news, as the peace talks were the creation of Hugo Chavez. Of all people!
Anyway, a terrific Thursday saw the tide turn on Friday as the Dow lost over 160 points before recovering slightly late in the day. A rise in oil prices was a factor again once people remembered that Chavez was nuts, but we believe the February employment report was the main reason for the drop.
The employment report showed that the U.S. added 192,000 jobs in February, just shy of the 200,000 most economists were expecting. The press has touted this gain and the drop in the unemployment rate to 8.9%. However, this is misleading. While the gain was welcomed, the amount of people in the labor force (the amount of people working or looking for work) remains at 25 year lows. If the labor force was the same level as before the recession, the current unemployment rate would be 11.5%. This weak level of employment is a major reason for our cautious outlook.
Along that line, this week we set another record for food stamp usage, with 14.3% of Americans now on the government dole. This comes as the UN released a report indicating that global food prices have hit yet another all-time high. This report covered a period before the recent spike in oil prices, so future reports will likely be higher still.
Also showing us higher prices, the Fed released its beige book survey this week (which measures anecdotal information on the strength of the economy), and it showed strong growth. However, higher input prices due to high commodity prices are impacting businesses. They are beginning to raise prices for their products, after months of being reluctant to pass along costs. The beige book also warns that prices will be higher still in the coming months. Another reason for us to remain cautious.
Next Week
Oil prices will be very important to watch next week, as it was an important factor on the markets this week. We will get more economic data next week, but nothing as important as this week. Consumer credit, wholesale and business inventories, the trade balance, and retail sales, to name a few. There will also be a few corporate earnings reports, but again, nothing major.
Where are we investing now?
With all this volatility, we are not looking to make any changes. It is too early to tell if the upward trending market we have had is changing course. It has had a heck of a run the last several months, so a correction is always possible.
The QE2 program, which has been pumping up stocks, is set to expire this summer but will probably keep fueling the market higher in the meantime. We see a brewing stagflation scenario ultimately wearing on the markets once the stimulus wears off. However, there are rumors of a QE3 program, which would try to pump up stocks even further. It is too early to tell if this will happen but we really hope it does not, for it will create even more long term problems.
Also, any further shocks out of the Middle East could impact the markets like it did the last two weeks, so this is something to pay close attention to.
If we did decide 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. 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.
Source: MSN MoneycentralThis week was characterized by big swings in the market and the price of oil played a significant factor. Starting on Tuesday, oil prices climbed towards $100 per barrel on further unrest in the Middle East and North Africa, which sent the markets sharply lower.
The interesting part of that drop was that it came on the first of the month. As you may recall, we mentioned that the market tends to be higher on the first due to strong buying with new cash inflows. The up trend tends to occur some 70-odd percent of the time and has happened the last seven months straight. Making things worse, the market wasn’t just a little lower, but nearly 170 points lower. Thankfully we don’t actively follow this strategy of seeking gains on the first, but we know there were some traders hurting Tuesday evening.
On to Thursday, which saw the best single-day performance of the year. Some optimistic reports on employment and retail sales helped set the mood, while a drop in oil prices sealed the deal. Oil prices were lower on the perception of moderating tensions in the Mid East, stemming from rumors of peace talks in Libya. If this tells us anything, though, its how desperate people are for good news, as the peace talks were the creation of Hugo Chavez. Of all people!
Anyway, a terrific Thursday saw the tide turn on Friday as the Dow lost over 160 points before recovering slightly late in the day. A rise in oil prices was a factor again once people remembered that Chavez was nuts, but we believe the February employment report was the main reason for the drop.
The employment report showed that the U.S. added 192,000 jobs in February, just shy of the 200,000 most economists were expecting. The press has touted this gain and the drop in the unemployment rate to 8.9%. However, this is misleading. While the gain was welcomed, the amount of people in the labor force (the amount of people working or looking for work) remains at 25 year lows. If the labor force was the same level as before the recession, the current unemployment rate would be 11.5%. This weak level of employment is a major reason for our cautious outlook.
Along that line, this week we set another record for food stamp usage, with 14.3% of Americans now on the government dole. This comes as the UN released a report indicating that global food prices have hit yet another all-time high. This report covered a period before the recent spike in oil prices, so future reports will likely be higher still.
Also showing us higher prices, the Fed released its beige book survey this week (which measures anecdotal information on the strength of the economy), and it showed strong growth. However, higher input prices due to high commodity prices are impacting businesses. They are beginning to raise prices for their products, after months of being reluctant to pass along costs. The beige book also warns that prices will be higher still in the coming months. Another reason for us to remain cautious.
Next Week
Oil prices will be very important to watch next week, as it was an important factor on the markets this week. We will get more economic data next week, but nothing as important as this week. Consumer credit, wholesale and business inventories, the trade balance, and retail sales, to name a few. There will also be a few corporate earnings reports, but again, nothing major.
Where are we investing now?
With all this volatility, we are not looking to make any changes. It is too early to tell if the upward trending market we have had is changing course. It has had a heck of a run the last several months, so a correction is always possible.
The QE2 program, which has been pumping up stocks, is set to expire this summer but will probably keep fueling the market higher in the meantime. We see a brewing stagflation scenario ultimately wearing on the markets once the stimulus wears off. However, there are rumors of a QE3 program, which would try to pump up stocks even further. It is too early to tell if this will happen but we really hope it does not, for it will create even more long term problems.
Also, any further shocks out of the Middle East could impact the markets like it did the last two weeks, so this is something to pay close attention to.
If we did decide 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. 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.
