Historically high volatility was the story this week on Wall Street. By the end of the week the damage wasn’t that bad, with the Dow off 1.5%, the S&P down 1.7%, and the Nasdaq lower by 1.0%. Treasury bond yields continue to hover around historical lows. Gold keeps chugging higher, at one point crossing the $1,800 an ounce level but settling lower for a gain of 5.5%. Oil continues to move the other way, at one point crossing below $80 per barrel but settled in the mid $80’s, down 1.7%.
Source: MSN Moneycentral
The level of volatility in the markets this week was one for the record books. The first four days of the week had moves of 4% or more. It is extremely rare to see such massive moves and it is very frustrating for investors.
What was behind all the volatility? Sure, we came off a very bad week and the hangover could still be felt. This week we had some disappointing economic news. So did Europe. We also had some good news, too. However, the news was nothing significant enough to move the markets that much.
It looks like we are seeing a tug-of-war between investors who think the market will go higher and ones who believe it will go lower (the bulls vs. the bears). It is a market dynamic that often happens after big moves like we saw in the previous weeks. Sometimes the bulls win and it marks the bottom of the market. Other times, the bears are right and the market heads lower. We fall in the bullish camp, at least for the time being, and we will discuss this more in the Investment Strategy section below. For now, though, a brief recap of the events of the week.
We started out on a pessimistic note due to the S&P ratings downgrade. Granted, it was one ratings agency who has had made questionable calls in the past, but it is a serious wake-up call.
True to form, government players came out and blasted S&P while showing little sense of responsibility for getting us to this position in the first place. Midday Monday, President Obama took to the podium in an attempt to calm the plunging markets and anxious Americans. Instead it was the typical bash the rich and corporations speech we’ve heard many times over. It didn’t sit well with the markets and the rhetoric exacerbated the selling.
Even with the downgrade, investors flocked to the Treasury market, which is the opposite of what you would think would happen in a credit downgrade. Really, though, most investors don’t look to ratings agencies when making investment decisions. They are only important because the law requires them to be used in many cases. Most investors look to other markets like the CDS market (which can be technical, but is like an insurance rate in case of a default) to get a better sense of risk.
The Federal Reserve was in the news again this week as they were out with their decision on interest rates. In an unusually blunt statement, they decided to leave interest rates at these historic lows until mid-2013. It was odd enough that they would give a specific date, but more odd that they were (rightfully) harsh in criticizing the poor economy.
That bluntness initially worried investors and markets dropped. Typical of the week, they rebounded sharply when they figured the Fed would continue to support the market (likely with a quantitative easing/stimulus program). Past stimulus programs gave a quick sugar high, but those gains are temporary. This week the market fell back to levels from before the QE2 program, wiping out any benefits we saw in stocks.
Also making news, these problems in Europe never seem to go away. Now France is in the spotlight as the strength of their banks came into question. Also, a ratings downgrade of their country was rumored to be in the works. It lead to a poor week for the entire Euro block.
Apparently things are so bad that many countries have banned short selling (short selling is where investors profit when the investments lose value). Politicians think that banning these shorts will keep their markets from falling. History has shown that these bans never work. Often they make things worse since intervention in the markets can be very hazardous.
No matter, though. Politicians think they should appear to be doing something and shorts make a great scapegoat. It wouldn’t surprise us if they decided to make it illegal for the market to go down. Maybe we shouldn’t give them any ideas.
Next Week
After such a volatile week, it will be interesting to see what happens next week. We think the volatility should begin subsiding, absent of any surprises.
There will be several more earnings reports we will be watching, with some big names like Wal-Mart, Home Depot, Lowes, HP, and Sears, to name a few. There will be an increase in economic data as we get results on housing, imports and exports (which will be important after the recently announced widening trade deficit), and industrial production. Inflation data will also be available as the PPI and CPI (producer and consumer price indexes) are announced.
Investment Strategy
Amid all the volatility, we did a little buying and selling this week. We sold off some losers in taxable accounts so a loss can be taken for tax purposes. When buying, we are dipping our toes in, focusing on safer investment opportunities (while not buying substantially similar investments if we made sales in taxable accounts). Markets are still very volatile and can turn on a dime, as we saw this week. Things may be cheap now, but it is easy for them to become even cheaper.
We were comforted as one of our favorite indicators rose sharply this week. Insider buying has risen sharply after this selloff, hitting levels not seen since 2009. This is one of the ways investments get on our radar screen. We like it when our strategies stay out of the limelight but unfortunately this got a lot of press this week. Nothing seems to work as well after the press draws attention to it. Either way, insiders tend to buy when they feel their shares our cheap, so we feel this is a good sign.
On the worrisome side, talk of a double dip recession picked up this week. These worries have been growing as the slowdown increases. We have talked about the weak economy for some time now, but good corporate earnings took the focus off the economy. Now, the focus is on the economy and the good earnings have been pushed to the back burner. It is another reason for investors to be on their toes.
When putting new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. We are buying commodities for the long term on weakness.
TIPs are important as we expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time, especially since our credit rating has been downgraded. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these weekly and monthly changes.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
Source: MSN Moneycentral
The level of volatility in the markets this week was one for the record books. The first four days of the week had moves of 4% or more. It is extremely rare to see such massive moves and it is very frustrating for investors.
What was behind all the volatility? Sure, we came off a very bad week and the hangover could still be felt. This week we had some disappointing economic news. So did Europe. We also had some good news, too. However, the news was nothing significant enough to move the markets that much.
It looks like we are seeing a tug-of-war between investors who think the market will go higher and ones who believe it will go lower (the bulls vs. the bears). It is a market dynamic that often happens after big moves like we saw in the previous weeks. Sometimes the bulls win and it marks the bottom of the market. Other times, the bears are right and the market heads lower. We fall in the bullish camp, at least for the time being, and we will discuss this more in the Investment Strategy section below. For now, though, a brief recap of the events of the week.
We started out on a pessimistic note due to the S&P ratings downgrade. Granted, it was one ratings agency who has had made questionable calls in the past, but it is a serious wake-up call.
True to form, government players came out and blasted S&P while showing little sense of responsibility for getting us to this position in the first place. Midday Monday, President Obama took to the podium in an attempt to calm the plunging markets and anxious Americans. Instead it was the typical bash the rich and corporations speech we’ve heard many times over. It didn’t sit well with the markets and the rhetoric exacerbated the selling.
Even with the downgrade, investors flocked to the Treasury market, which is the opposite of what you would think would happen in a credit downgrade. Really, though, most investors don’t look to ratings agencies when making investment decisions. They are only important because the law requires them to be used in many cases. Most investors look to other markets like the CDS market (which can be technical, but is like an insurance rate in case of a default) to get a better sense of risk.
The Federal Reserve was in the news again this week as they were out with their decision on interest rates. In an unusually blunt statement, they decided to leave interest rates at these historic lows until mid-2013. It was odd enough that they would give a specific date, but more odd that they were (rightfully) harsh in criticizing the poor economy.
That bluntness initially worried investors and markets dropped. Typical of the week, they rebounded sharply when they figured the Fed would continue to support the market (likely with a quantitative easing/stimulus program). Past stimulus programs gave a quick sugar high, but those gains are temporary. This week the market fell back to levels from before the QE2 program, wiping out any benefits we saw in stocks.
Also making news, these problems in Europe never seem to go away. Now France is in the spotlight as the strength of their banks came into question. Also, a ratings downgrade of their country was rumored to be in the works. It lead to a poor week for the entire Euro block.
Apparently things are so bad that many countries have banned short selling (short selling is where investors profit when the investments lose value). Politicians think that banning these shorts will keep their markets from falling. History has shown that these bans never work. Often they make things worse since intervention in the markets can be very hazardous.
No matter, though. Politicians think they should appear to be doing something and shorts make a great scapegoat. It wouldn’t surprise us if they decided to make it illegal for the market to go down. Maybe we shouldn’t give them any ideas.
Next Week
After such a volatile week, it will be interesting to see what happens next week. We think the volatility should begin subsiding, absent of any surprises.
There will be several more earnings reports we will be watching, with some big names like Wal-Mart, Home Depot, Lowes, HP, and Sears, to name a few. There will be an increase in economic data as we get results on housing, imports and exports (which will be important after the recently announced widening trade deficit), and industrial production. Inflation data will also be available as the PPI and CPI (producer and consumer price indexes) are announced.
Investment Strategy
Amid all the volatility, we did a little buying and selling this week. We sold off some losers in taxable accounts so a loss can be taken for tax purposes. When buying, we are dipping our toes in, focusing on safer investment opportunities (while not buying substantially similar investments if we made sales in taxable accounts). Markets are still very volatile and can turn on a dime, as we saw this week. Things may be cheap now, but it is easy for them to become even cheaper.
We were comforted as one of our favorite indicators rose sharply this week. Insider buying has risen sharply after this selloff, hitting levels not seen since 2009. This is one of the ways investments get on our radar screen. We like it when our strategies stay out of the limelight but unfortunately this got a lot of press this week. Nothing seems to work as well after the press draws attention to it. Either way, insiders tend to buy when they feel their shares our cheap, so we feel this is a good sign.
On the worrisome side, talk of a double dip recession picked up this week. These worries have been growing as the slowdown increases. We have talked about the weak economy for some time now, but good corporate earnings took the focus off the economy. Now, the focus is on the economy and the good earnings have been pushed to the back burner. It is another reason for investors to be on their toes.
When putting new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. We are buying commodities for the long term on weakness.
TIPs are important as we expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time, especially since our credit rating has been downgraded. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these weekly and monthly changes.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
