We’re back at it for 2012, hoping you had a pleasant Christmas and New Year’s. Stocks jumped right out of the gate to open 2012, with the Dow rising 1.1%, the S&P climbed 1.6%, and the Nasdaq popped higher by 2.6%. Commodities also rebounded, with gold higher by 3.2% to $1,616 an ounce. Gas prices rose as the threat from Iran increased, with oil rising above $100 a barrel and closing the week up 2.8%.
Source: MSN Moneycentral
The year kicked off with much welcomed gains in a relatively uneventful week on Wall Street. We even had a rare period without European problems dominating headlines.
The gains for the week all came on the first day, Tuesday, likely due to new money being put back in the market for the new year. Referred to as the January effect, money generally enters the first month of the year as investors get back into the market after selling out of losers last year for tax purposes.
The beginning of the year is also when investors like to break out the old stock traders almanac and make predictions based on historical patterns. For example, if the market rises on the first day of the year, the average gain for the year is just north of 10% according to investment firm Birinyi and Associates.
Also, if the first month closes higher, there is about a 3 out of 4 chance that the market will be higher for the year. These predictions didn’t work out last year, so we wouldn’t go making investment decisions based on these patterns.
Now is time of year when analysts get on TV to make predictions for the year, too. The average of all these predictions stands at about a 6% return for 2012. Last year the average was 8% and the market returned 0%, just for some historical context. We would love to see a track record of their past calls to see how accurate they really are, but we are pretty sure there is a reason why this is not done.
We have no idea what the market will do next year and neither does anyone else, frankly. We can say with certainty that large amounts of debt around the world will create headwinds for the future. Unfortunately, we are living in a world where policy makers and macro events are having more of an impact on the markets than more traditional metrics like business earnings and sales. The uncertainty this creates requires caution.
Getting back to the week, we did receive some encouraging economic data. Manufacturing showed growth, rising slightly from its very slow pace.
The top story was the employment report, showing a surprising gain in December. The economy created 200,000 jobs and the unemployment rate crept lower to 8.5%. There is no doubting this is a good number, but as we’ve said in the past, there is more to this picture than is usually reported.
When digging deeper, we find that the size of the labor force currently stands at a 27 year low. If we were to measure the unemployment rate using the size of the labor force at the beginning of the recession, that rate would be around 11-12%. The worst statistic of all, the average length of unemployment stands at 40.8 weeks. The means the average person is unemployed for around 10 months! So while the numbers are improving, the labor picture is still very poor.
Next Week
Not much time to rest as next week will be very busy. Earnings season gets underway on Monday as the aluminum producer, Alcoa, is set to report. With commodities weakening over the last quarter, their report is not likely to be very good, setting a sour tone for earnings season.
Economic data will also be fairly strong as we get info from the Fed in their Beige Book report (which is a report on current economic conditions), info on inventories, and details on trade. Retail sales are also set to report, but early reports show little strength there as the Christmas shopping season wasn’t as strong as expected.
While we have enjoyed not hearing about Europe, they may be back in the headlines next week. German leader Merkel and French leader Sarkozy are set to meet, laying groundwork for a European-wide meeting at the end of the month. So this will be a meeting about a meeting, if you will. The strength of the Euro currently stands at a 16-month low against the dollar and bond yields are rising, so the importance of this meeting is increasing.
Investment Strategy
In the short term, the market is beginning to look expensive here. Bearish (negative) sentiment is extremely low, meaning investors are becoming overly optimistic. That is usually a predictor of a coming sell-off. Volatility is low at the moment, but a negative story out of Europe can change that in an instant.
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. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is still very high.
We like commodities for the long term but a slowdown in China, who has been a major driver of commodity prices, has made us more cautious. Like we mentioned above, debt problems and continuous bailouts around the world should be favorable to commodities like gold in the long term. We have increased our position here after the recent sell-off, but would be hesitant to add more at higher prices.
TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this level is proving a good time to short again. 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.
Source: MSN MoneycentralThe year kicked off with much welcomed gains in a relatively uneventful week on Wall Street. We even had a rare period without European problems dominating headlines.
The gains for the week all came on the first day, Tuesday, likely due to new money being put back in the market for the new year. Referred to as the January effect, money generally enters the first month of the year as investors get back into the market after selling out of losers last year for tax purposes.
The beginning of the year is also when investors like to break out the old stock traders almanac and make predictions based on historical patterns. For example, if the market rises on the first day of the year, the average gain for the year is just north of 10% according to investment firm Birinyi and Associates.
Also, if the first month closes higher, there is about a 3 out of 4 chance that the market will be higher for the year. These predictions didn’t work out last year, so we wouldn’t go making investment decisions based on these patterns.
Now is time of year when analysts get on TV to make predictions for the year, too. The average of all these predictions stands at about a 6% return for 2012. Last year the average was 8% and the market returned 0%, just for some historical context. We would love to see a track record of their past calls to see how accurate they really are, but we are pretty sure there is a reason why this is not done.
We have no idea what the market will do next year and neither does anyone else, frankly. We can say with certainty that large amounts of debt around the world will create headwinds for the future. Unfortunately, we are living in a world where policy makers and macro events are having more of an impact on the markets than more traditional metrics like business earnings and sales. The uncertainty this creates requires caution.
Getting back to the week, we did receive some encouraging economic data. Manufacturing showed growth, rising slightly from its very slow pace.
The top story was the employment report, showing a surprising gain in December. The economy created 200,000 jobs and the unemployment rate crept lower to 8.5%. There is no doubting this is a good number, but as we’ve said in the past, there is more to this picture than is usually reported.
When digging deeper, we find that the size of the labor force currently stands at a 27 year low. If we were to measure the unemployment rate using the size of the labor force at the beginning of the recession, that rate would be around 11-12%. The worst statistic of all, the average length of unemployment stands at 40.8 weeks. The means the average person is unemployed for around 10 months! So while the numbers are improving, the labor picture is still very poor.
Next Week
Not much time to rest as next week will be very busy. Earnings season gets underway on Monday as the aluminum producer, Alcoa, is set to report. With commodities weakening over the last quarter, their report is not likely to be very good, setting a sour tone for earnings season.
Economic data will also be fairly strong as we get info from the Fed in their Beige Book report (which is a report on current economic conditions), info on inventories, and details on trade. Retail sales are also set to report, but early reports show little strength there as the Christmas shopping season wasn’t as strong as expected.
While we have enjoyed not hearing about Europe, they may be back in the headlines next week. German leader Merkel and French leader Sarkozy are set to meet, laying groundwork for a European-wide meeting at the end of the month. So this will be a meeting about a meeting, if you will. The strength of the Euro currently stands at a 16-month low against the dollar and bond yields are rising, so the importance of this meeting is increasing.
Investment Strategy
In the short term, the market is beginning to look expensive here. Bearish (negative) sentiment is extremely low, meaning investors are becoming overly optimistic. That is usually a predictor of a coming sell-off. Volatility is low at the moment, but a negative story out of Europe can change that in an instant.
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. Smaller and little-known stocks with low correlation to the market are also promising, since correlation is still very high.
We like commodities for the long term but a slowdown in China, who has been a major driver of commodity prices, has made us more cautious. Like we mentioned above, debt problems and continuous bailouts around the world should be favorable to commodities like gold in the long term. We have increased our position here after the recent sell-off, but would be hesitant to add more at higher prices.
TIPs are important as we still expect inflation to increase while U.S. Treasuries are a sector we are very bearish (pessimistic) on. We think yields will increase over time, but that has yet to happen due to the unprecedented intervention from the Fed. However, we feel that this level is proving a good time to short again. 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.
