The markets saw some big moves this week but ultimately closed with little change. The Dow was off just 0.4%, the S&P down 0.2%, and the Nasdaq had the slightest of gains, up 0.02%. Yields on Treasury bonds continue to hover around historic lows. After selling off in the prior week, gold crept back towards its all time high, rising 4.4% to $1,873 an ounce. Oil continues to climb, also, up 1.3% to $86.5 a barrel.
Source: MSN Moneycentral
The markets opened the week higher on some economic strength, as well as a relief that the hurricane was not as destructive as originally thought. Bargain hunters are also stepping in to buy up stocks perceived as underpriced. Minutes from the latest Fed meeting showed a group divided on future stimulus, but the potential of another round also gave the markets a boost. The volume of trades was very light, though, so it doesn’t really show a conviction in the direction of the market.
This week we also closed out the worst August in ten years and entered the historically weakest month, September.
As the week progressed, we got several reminders of how fragile the economy actually is. Consumer confidence stands at the weakest level in two years. Manufacturing showed very little growth. Worst of all, the August employment report showed a net of absolutely zero jobs last month.
The report showed that the unemployment rate stayed flat at 9.1%, but when counting discouraged workers, the number ticked higher to 16.2%. Also, the labor participation rate remains around a 30-year low. If that 9.1% unemployment rate was measured with the same labor participation as at the beginning of the recession, our unemployment rate would actually be around 12%.
The weak employment number really spooked the markets. It was the first time in a year that there were no jobs added, so investors are worried that conditions are deteriorating.
This makes the speech President Obama will give next week on employment even more important. While investors are anticipating what will be said, early reports show there is nothing new being announced. There are calls for more infrastructure spending, some targeted tax breaks, maybe an extension in unemployment benefits, etc. None of this has worked in the past, so it is not likely that it will work in the future.
As the last two years have shown, government doesn’t create jobs. All it can do is create a favorable business environment and get out of the way. That is what has been missing.
It doesn’t help much when we get stories that the government is suing banks over mortgage problems (story). What on earth will that accomplish? Or it is raiding a company like Gibson Guitar over ridiculous regulations (story). Plus it has added scores of new laws, fees, and regulations like Dodd-Frank and the new healthcare program. We currently have a very hostile business environment and it must improve before the economy recovers. No amount of stimulus can solve these structural problems.
To his credit, though, when the poor jobs report was released, Obama called for an end to the new burdensome EPA regulations. These would have significantly raised energy rates further, as recently implemented policies have already raised energy rates the last several years. It is a major detriment to the economy and the benefits are questionable, at best. This is a good start and more steps like this would be encouraging.
Next Week
Besides being a short week, next week will be quieter than usual for economic data and corporate earnings. However, a variety of Fed officials will be making speeches and traders will be watching closely as any of them have the potential to move the market.
Investment Strategy
Like we’ve said the past couple weeks, we’ve been dipping our toes in on weakness, but are still very cautious. The poor employment report and subsequent drop in the market is a reminder of how fragile the market is. Also, it is important to note that the volume of trades on the down days is much higher than on the up days. There is still a strong bias to the downside, so additional caution is warranted.
We have talked about the weak economy for some time now, but good corporate earnings took the focus off the poor economy. Now, the focus is on the economy and the good earnings have been pushed to the back burner. Some quality companies can be found at these prices, but it is easy for them to become even cheaper in this environment.
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 and any weakness is an opportunity to invest.
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, but we have been getting killed on this position recently. 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 daily and weekly fluctuations.
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.
