Negative economic data around the world sent the markets lower for yet another week. Though shortened by the holiday, the Dow lost 2.7%, the S&P fell 3.0%, and the Nasdaq dropped 3.2%. A large gain on Friday sent gold higher for the week, up 3.3%. Providing some relief at the gas pump, oil prices plunged fantastically this week, falling 8.4% to $82 per barrel. Brent oil fell below the $100 mark, closing at $98 per barrel, its lowest level in a year-and-a-half.
One of the worst weeks of the year also saw the close to the worst month in two years. In May, the Dow lost more than 6%, the biggest monthly drop since May of 2010. When combined with the biggest daily drop of the year on Friday, the Dow crossed into negative territory for the year.
Negative and worsening economic data around the globe has been responsible for the recent moves lower.
The employment report released Friday showed a much slower growth than was expected, with the U.S. only adding 69,000 jobs last month. The unemployment rate ticked higher to 8.2% and when including discouraged workers (the U-6), the rate stands at 14.8%.
Other economic data this week didn’t help much either. Manufacturing reports supported the slowing growth theme. First quarter GDP growth was also lower than expected. An earlier report showed a gain of 2.2%, but the most recent figure points to just a 1.9% growth.
Though you are likely tired of hearing about Europe, their problems are worsening with Spain getting the spotlight this week. Banks in Spain have experienced significant withdrawals and their solvency has become a concern.
This week, the government of Spain announced they will bail out their largest bank, Bankia, to the tune of $24 billion dollars. The problem is, the Spanish government doesn’t have the money to cover this.
Their cash shortfall has led to calls for a “banking union” in Europe, where all countries would share the losses if a bank went under. Obviously this continues the battle of the rich-vs.-poor among European countries. Countries in poor financial shape want the wealthier (respectively) ones to share in the burden as the divide worsens.
The drama in Europe has taken its toll on Asian countries, as well. Europe is the top destination for Chinese exports. A slowdown there, as well as in the U.S., has had a negative impact on their economy. New data on manufacturing shows a very, very slow growth in China. Those who have been calling China a bubble are calling this the start of the decline.
These global problems put the spotlight on the bond market this week. While bond yields have risen in countries with debt problems (meaning it is harder and more expensive for them to borrow), yields are at historic lows for “safe-haven” countries.
Investors are looking for a safe place to put their money and there are few alternatives. That benefits the bond market as new money pours in. Here in the U.S., bond yields are at the lowest levels of all time. If you were to give your money to the government for 10 years, they will pay you just 1.44% per year. 30 years? They’ll pay just 2.5% (which means mortgage rates are also at rock bottom levels).
While bond yields have moved steadily lower the past 30 years, we have to wonder how much lower they can go. Yet every time we ask that, they move even further lower. At least we know they can’t go below 0%, right?
Next Week
A lighter amount of economic data will come in next week. We will get info on productivity of the service sector, as well as info on consumer credit, the trade deficit, and the Fed’s Beige Book (which gives a broad view of the health of the economy).
The disappointing data this week has put the focus back on the Fed and the outlook for their stimulus programs. Several Fed Presidents will be speaking, while Fed Chief Ben Bernanke will appear in front of Congress. Investors will be closely watching for any clues on further stimulus.
Investment Strategy
No change here. Normally we like to buy when the outlook is bleak, but we are reluctant to add any significant amounts at this time and hold a large amount of cash. Our worry is for June, when the current round of stimulus from the Fed ends. Problems in Europe and slowing global growth adds to our caution.
The big question is whether there will be further stimulus. Economic data shows that slowest recovery since WWII keeps getting slower, which gives the Fed a reason for stimulus. In our great Keynesian experiment of spending trillions in stimulus and printing trillions more by the Fed, we should be further ahead by now.
But perhaps that was not the right prescription, as many critics argued? Even though the evidence shows these policies have failed, there are calls for even more of the same medicine. We don’t see further stimulus helping anything, only boosting the stock market temporarily.
If we were to get a buying opportunity, we like large cap higher-quality and dividend paying stocks. Smaller and little-known stocks with low correlation to the market (and Europe) are also promising. There is always the opportunity to find an undervalued individual stock at any time.
Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. Gold prices had a nice spike higher this week on the potential for more stimulus (more money printing is favorable to gold). If the price were to move lower we may add more but would not at these higher prices.
We like other commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), who are major drivers of commodity prices.
Although Treasury bond yields are near historic lows (so prices are near historic highs) and keep moving lower, a short position (bet on a decline in value) only provides a nice hedge here. We think the potential for profit is low at this time.
On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, in international stocks, 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 Moneycentral
One of the worst weeks of the year also saw the close to the worst month in two years. In May, the Dow lost more than 6%, the biggest monthly drop since May of 2010. When combined with the biggest daily drop of the year on Friday, the Dow crossed into negative territory for the year.
Negative and worsening economic data around the globe has been responsible for the recent moves lower.
The employment report released Friday showed a much slower growth than was expected, with the U.S. only adding 69,000 jobs last month. The unemployment rate ticked higher to 8.2% and when including discouraged workers (the U-6), the rate stands at 14.8%.
Other economic data this week didn’t help much either. Manufacturing reports supported the slowing growth theme. First quarter GDP growth was also lower than expected. An earlier report showed a gain of 2.2%, but the most recent figure points to just a 1.9% growth.
Though you are likely tired of hearing about Europe, their problems are worsening with Spain getting the spotlight this week. Banks in Spain have experienced significant withdrawals and their solvency has become a concern.
This week, the government of Spain announced they will bail out their largest bank, Bankia, to the tune of $24 billion dollars. The problem is, the Spanish government doesn’t have the money to cover this.
Their cash shortfall has led to calls for a “banking union” in Europe, where all countries would share the losses if a bank went under. Obviously this continues the battle of the rich-vs.-poor among European countries. Countries in poor financial shape want the wealthier (respectively) ones to share in the burden as the divide worsens.
The drama in Europe has taken its toll on Asian countries, as well. Europe is the top destination for Chinese exports. A slowdown there, as well as in the U.S., has had a negative impact on their economy. New data on manufacturing shows a very, very slow growth in China. Those who have been calling China a bubble are calling this the start of the decline.
These global problems put the spotlight on the bond market this week. While bond yields have risen in countries with debt problems (meaning it is harder and more expensive for them to borrow), yields are at historic lows for “safe-haven” countries.
Investors are looking for a safe place to put their money and there are few alternatives. That benefits the bond market as new money pours in. Here in the U.S., bond yields are at the lowest levels of all time. If you were to give your money to the government for 10 years, they will pay you just 1.44% per year. 30 years? They’ll pay just 2.5% (which means mortgage rates are also at rock bottom levels).
While bond yields have moved steadily lower the past 30 years, we have to wonder how much lower they can go. Yet every time we ask that, they move even further lower. At least we know they can’t go below 0%, right?
Next Week
A lighter amount of economic data will come in next week. We will get info on productivity of the service sector, as well as info on consumer credit, the trade deficit, and the Fed’s Beige Book (which gives a broad view of the health of the economy).
The disappointing data this week has put the focus back on the Fed and the outlook for their stimulus programs. Several Fed Presidents will be speaking, while Fed Chief Ben Bernanke will appear in front of Congress. Investors will be closely watching for any clues on further stimulus.
Investment Strategy
No change here. Normally we like to buy when the outlook is bleak, but we are reluctant to add any significant amounts at this time and hold a large amount of cash. Our worry is for June, when the current round of stimulus from the Fed ends. Problems in Europe and slowing global growth adds to our caution.
The big question is whether there will be further stimulus. Economic data shows that slowest recovery since WWII keeps getting slower, which gives the Fed a reason for stimulus. In our great Keynesian experiment of spending trillions in stimulus and printing trillions more by the Fed, we should be further ahead by now.
But perhaps that was not the right prescription, as many critics argued? Even though the evidence shows these policies have failed, there are calls for even more of the same medicine. We don’t see further stimulus helping anything, only boosting the stock market temporarily.
If we were to get a buying opportunity, we like large cap higher-quality and dividend paying stocks. Smaller and little-known stocks with low correlation to the market (and Europe) are also promising. There is always the opportunity to find an undervalued individual stock at any time.
Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. Gold prices had a nice spike higher this week on the potential for more stimulus (more money printing is favorable to gold). If the price were to move lower we may add more but would not at these higher prices.
We like other commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), who are major drivers of commodity prices.
Although Treasury bond yields are near historic lows (so prices are near historic highs) and keep moving lower, a short position (bet on a decline in value) only provides a nice hedge here. We think the potential for profit is low at this time.
On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, in international stocks, 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.
