There’s no way to sugarcoat it, this week was brutal. By the close Friday, the Dow dropped almost 700 points or 5.8%, the S&P was fell 7.2%, and the Nasdaq plunged 8.1%. In the last two weeks, the indices are off nearly 10%. Investors fled to the safety of Treasury bonds, resulting in the best performance in two years (prices rose, so yields fell). Gold reached new all time highs, but fell off late in the week, resulting in a 1.3% gain. The good news? Oil sold off significantly, 9.2% to the mid $80’s per barrel range, so there may be some relief at the pump.
Source: MSN Moneycentral
This week was very rough and our investments performed poorly, plain and simple. In our portfolios, there was a solid drop in our broad market index positions and even worse drop in our individual stock picks. Commodities also sold off. Bond holdings performed nicely, though. We wish we held more gold, as it also had a nice week, but we haven’t significantly added to our positions since it was in the $1,200-1,300 an ounce level. Our accounts have been 20-50% cash, helping mitigate the losses, and we are comfortable at that level for the time being.
So what happened?
The week started out on a bright note with the resolution of the debt ceiling issue and the markets popped higher. That lasted for about 30 minutes and it was all downhill from there.
At 10am, we got economic data showing weakness in the manufacturing sector and that set the theme for the week, economic weakness. As the week progressed, we also got poor data on consumer spending and the service sector. When combined with other poor economic data like the troubling GDP numbers, the fear of a worsening economy has accelerated.
That set the stage for the massive sell-off on Thursday. The economic problems have been bad enough, but renewed European fears (Italy and Spain this time) exacerbated the selling. At the end of the day, the Dow sold off more than 500 points.
After a scary Thursday, investors were anxious to see what Friday held. The much anticipated employment report was seen as the guide for what was in store for the market. In a welcomed relief, the U.S. added 117k jobs in July according to the non-farm payroll report, a number much higher than expected. The unemployment rate fell from 9.2 to 9.1%. The markets opened higher as a result.
As investors were given time to dig deeper into the numbers, the employment report didn’t look that great and the selling intensified. Keep in mind, we still need about 120k new jobs a month to keep up with population increases. Plus the labor participation rate reached new lows and length of unemployment reached new record highs.
Also adding to the sell off was a rumor that the ratings agency, S&P, was set to downgrade the U.S. credit rating. At the time, it didn’t hold up, but now we know this true.
Late Friday night, the S&P downgraded our debt from the highest rating of AAA. There has been some debate on how important that actually is, as ratings agencies have had there fair share of criticism due to ineffectiveness. However, their analysis looks very credible and convincing. We feel this is a HUGE deal, since this is the first S&P downgrade in our history.
It’s not unexpected, either. In the debt ceiling discussions, S&P said they were looking for at least $3, and preferably $4 trillion in spending cuts over the next decade. The $2 trillion agreed to in the debt ceiling resolution falls woefully short of that figure (and even that $2 figure is very questionable). We have a serious debt and spending problem and unless addressed, more credit downgrades could be in our future.
Next Week
The market held up on Friday after selling off all week, so next week will show if that was a new floor or was just a pause on the way down. Thankfully, there won’t be a whole lot of economic data to spook the markets further. Corporate earnings will continue to come in at a steady pace, but earnings have carried less weight as the economic story moved to the front burner. Also, any news out of Europe could also have an impact on our markets.
It will be interesting to see the reaction to the credit downgrade from S&P. We would normally anticipate a sell off, but the downgrade wasn’t unexpected. We aren’t sure what the outcome will be and are anxious to see how it plays out next week.
The Fed will be meeting next week and recent events have increased the importance of this meeting. Investors will be looking for any clues on another quantitative easing (stimulus) program. We sure hope not, but it is possible. A year ago, the concept of QE2 was introduced, marking the bottom of the most recent market run. Depending on the size of a new QE program, a similar result in the markets could be possible. As we have recently seen recently, does nothing to help the economy.
Investment Strategy
With the market drop this week, the first question on the mind of most is whether this is a buying opportunity. This is a quote on the tack board in our office:
That comes from the famous investor Sir John Templeton, founder of what is now Franklin Templeton (interestingly enough, Sir John renounced his US citizenship and moved to the Bahamas to avoid US income and investment taxes. Another reason why we like the guy).
Obviously things are very pessimistic right now. But does that mean it’s a good time to buy? With a long enough time horizon, it might not hurt much to dip your toe in, but with all the volatility, we are comfortable on the sidelines. Yes, stocks have become cheaper, but we feel they are more in line with their fair value, meaning they are not yet cheap. We would exercise caution, especially with new economic problems popping up.
We’ve worried about the weak economy for some time now, but good corporate earnings were the main focus that kept the markets higher. Now, the focus is on the economy and the good earnings have been pushed to the back burner.
If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. We like commodities for the long term this weakness could present a buying opportunity.
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.
How about another optimistic quote to end on? This time from Warren Buffet:
There is plenty of fear to go around right now.
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 MoneycentralThis week was very rough and our investments performed poorly, plain and simple. In our portfolios, there was a solid drop in our broad market index positions and even worse drop in our individual stock picks. Commodities also sold off. Bond holdings performed nicely, though. We wish we held more gold, as it also had a nice week, but we haven’t significantly added to our positions since it was in the $1,200-1,300 an ounce level. Our accounts have been 20-50% cash, helping mitigate the losses, and we are comfortable at that level for the time being.
So what happened?
The week started out on a bright note with the resolution of the debt ceiling issue and the markets popped higher. That lasted for about 30 minutes and it was all downhill from there.
At 10am, we got economic data showing weakness in the manufacturing sector and that set the theme for the week, economic weakness. As the week progressed, we also got poor data on consumer spending and the service sector. When combined with other poor economic data like the troubling GDP numbers, the fear of a worsening economy has accelerated.
That set the stage for the massive sell-off on Thursday. The economic problems have been bad enough, but renewed European fears (Italy and Spain this time) exacerbated the selling. At the end of the day, the Dow sold off more than 500 points.
After a scary Thursday, investors were anxious to see what Friday held. The much anticipated employment report was seen as the guide for what was in store for the market. In a welcomed relief, the U.S. added 117k jobs in July according to the non-farm payroll report, a number much higher than expected. The unemployment rate fell from 9.2 to 9.1%. The markets opened higher as a result.
As investors were given time to dig deeper into the numbers, the employment report didn’t look that great and the selling intensified. Keep in mind, we still need about 120k new jobs a month to keep up with population increases. Plus the labor participation rate reached new lows and length of unemployment reached new record highs.
Also adding to the sell off was a rumor that the ratings agency, S&P, was set to downgrade the U.S. credit rating. At the time, it didn’t hold up, but now we know this true.
Late Friday night, the S&P downgraded our debt from the highest rating of AAA. There has been some debate on how important that actually is, as ratings agencies have had there fair share of criticism due to ineffectiveness. However, their analysis looks very credible and convincing. We feel this is a HUGE deal, since this is the first S&P downgrade in our history.
It’s not unexpected, either. In the debt ceiling discussions, S&P said they were looking for at least $3, and preferably $4 trillion in spending cuts over the next decade. The $2 trillion agreed to in the debt ceiling resolution falls woefully short of that figure (and even that $2 figure is very questionable). We have a serious debt and spending problem and unless addressed, more credit downgrades could be in our future.
Next Week
The market held up on Friday after selling off all week, so next week will show if that was a new floor or was just a pause on the way down. Thankfully, there won’t be a whole lot of economic data to spook the markets further. Corporate earnings will continue to come in at a steady pace, but earnings have carried less weight as the economic story moved to the front burner. Also, any news out of Europe could also have an impact on our markets.
It will be interesting to see the reaction to the credit downgrade from S&P. We would normally anticipate a sell off, but the downgrade wasn’t unexpected. We aren’t sure what the outcome will be and are anxious to see how it plays out next week.
The Fed will be meeting next week and recent events have increased the importance of this meeting. Investors will be looking for any clues on another quantitative easing (stimulus) program. We sure hope not, but it is possible. A year ago, the concept of QE2 was introduced, marking the bottom of the most recent market run. Depending on the size of a new QE program, a similar result in the markets could be possible. As we have recently seen recently, does nothing to help the economy.
Investment Strategy
With the market drop this week, the first question on the mind of most is whether this is a buying opportunity. This is a quote on the tack board in our office:
Bull markets are born on pessimism,
Grow on skepticism,
Mature on optimism,
And die on euphoria.
Grow on skepticism,
Mature on optimism,
And die on euphoria.
That comes from the famous investor Sir John Templeton, founder of what is now Franklin Templeton (interestingly enough, Sir John renounced his US citizenship and moved to the Bahamas to avoid US income and investment taxes. Another reason why we like the guy).
Obviously things are very pessimistic right now. But does that mean it’s a good time to buy? With a long enough time horizon, it might not hurt much to dip your toe in, but with all the volatility, we are comfortable on the sidelines. Yes, stocks have become cheaper, but we feel they are more in line with their fair value, meaning they are not yet cheap. We would exercise caution, especially with new economic problems popping up.
We’ve worried about the weak economy for some time now, but good corporate earnings were the main focus that kept the markets higher. Now, the focus is on the economy and the good earnings have been pushed to the back burner.
If we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. We like commodities for the long term this weakness could present a buying opportunity.
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.
How about another optimistic quote to end on? This time from Warren Buffet:
Be fearful when others are greedy
And greedy when others are fearful.
And greedy when others are fearful.
There is plenty of fear to go around right now.
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.
