The market trended lower all week before popping higher Friday, resulting in the slightest of gains for the week. Through the close Friday, the Dow returned 0.04%, the S&P gained 0.16%, but the Nasdaq lost 0.98%. Gold followed a similar path, gaining 0.8% for the week. Oil bounced around and ended with a 3.1% gain at $87 per barrel. Brent oil hovered near the $100 level much of the week and closed right at $100. Finally, US Treasury bonds hit new lows again this week as investors around the globe look for a safe place to park their cash.
Source: MSN Moneycentral
A lack of good news from Europe, lackluster earnings, poor economic data, and a China slowdown produced a sour mood on Wall Street, resulting in the market moving steadily lower for much of the week.
There wasn’t much news out of Europe this week as they continued to work on their banking union. While there wasn’t necessarily any bad news, little was done to impress the market.
With China, the slowdown in growth continues to accelerate as the country released its report on second quarter growth. Though they are still growing, the rate of growth is at its lowest level in three years.
Since the Chinese government is very secretive about how they compute these numbers, many believe the true rate of growth is much lower than they say. Economists like to look at other factors like electricity levels, amount of freight shipped by rail, or housing construction to get a better idea. Metrics like these show a much lower level of growth than reported.
Corporate earnings season got under way here in the US this week. While earnings were not great, they weren’t bad, though the bar has been steadily lowered heading into earnings season.
Economic data was discouraging, too. Small business surveys show the lowest confidence level since October, 2011. Consumer sentiment reached lows not seen in seven months. Plus, inflation on the producer level showed a slight gain last month when a drop was expected due to lower gas prices.
Adding to the misery, corn prices were a hot topic this week (pun intended). High temperatures and a lack of rain are hurting corn crops and as a result, prices reached new highs. The price for corn has risen nearly 30% in the last three weeks. This is important because it also affects the price of other items like livestock, since corn is used as feed. Higher prices at the grocery store are right around the corner.
With all this bad news weighing on the market, why the pop higher Friday? There were a couple reasons.
One was strength in bank stocks, where earnings released that morning for JP Morgan and Wells Fargo were better than expected.
The other was the slowdown in China. Here is an example when bad news was good news. With the slowing economy, it increases the chance of stimulus in that country, as well as here in the US. Though the Fed shows no signs of an imminent stimulus, every negative data point increases its chances.
Due to the depressing tone of this week’s commentary, we’ll conclude with some positive information. For those of you who like seeing historical trends, a report on Bloomberg TV this week discussed the market reaction in the fourth year of a Presidential cycle.
According to research done by the Ned Davis research group, historically the market rises from late June until September in an election year. Once September comes, though, the path diverges depending on who is elected.
If the incumbent party is reelected, the market had continued to rise. However, if the incumbent is defeated, the market had begun to move lower at that point. The stock market favors certainty, which an incumbent provides (perhaps even if that certainty is not business friendly). We would have liked to have found a suitable image to display here, but it appears to have been solely a segment on TV without a corresponding print article and image.
Next Week
Next week will be a very busy one. The pace of corporate earnings picks up significantly and will contain many important names.
There will be several economic data releases, as well. Beginning Monday, we will get info on retail sales, the consumer price index (CPI), housing data, the Feds Beige Book (which gives a broad view on the strength of the economy), and leading economic indicators.
Lastly, Fed Chairman Ben Bernanke will be appearing before Congress for his semi-annual testimony. Investors will be closely watching for any signs of potential stimulus, since that’s about all the market cares for these days.
Investment Strategy
Economic data around the world is weak and earnings are expected to disappoint, which is something we would normally be pessimistic on. With the bar set so low, though, a surprise to the upside becomes easier. Not to mention, the Fed and other central banks around the world are poised for more stimulus if conditions worsen. While stimulus doesn’t help the economy and is a long term negative, it does boost the market.
There wasn’t much news out of Europe this week as they continued to work on their banking union. While there wasn’t necessarily any bad news, little was done to impress the market.
With China, the slowdown in growth continues to accelerate as the country released its report on second quarter growth. Though they are still growing, the rate of growth is at its lowest level in three years.
Since the Chinese government is very secretive about how they compute these numbers, many believe the true rate of growth is much lower than they say. Economists like to look at other factors like electricity levels, amount of freight shipped by rail, or housing construction to get a better idea. Metrics like these show a much lower level of growth than reported.
Corporate earnings season got under way here in the US this week. While earnings were not great, they weren’t bad, though the bar has been steadily lowered heading into earnings season.
Economic data was discouraging, too. Small business surveys show the lowest confidence level since October, 2011. Consumer sentiment reached lows not seen in seven months. Plus, inflation on the producer level showed a slight gain last month when a drop was expected due to lower gas prices.
Adding to the misery, corn prices were a hot topic this week (pun intended). High temperatures and a lack of rain are hurting corn crops and as a result, prices reached new highs. The price for corn has risen nearly 30% in the last three weeks. This is important because it also affects the price of other items like livestock, since corn is used as feed. Higher prices at the grocery store are right around the corner.
With all this bad news weighing on the market, why the pop higher Friday? There were a couple reasons.
One was strength in bank stocks, where earnings released that morning for JP Morgan and Wells Fargo were better than expected.
The other was the slowdown in China. Here is an example when bad news was good news. With the slowing economy, it increases the chance of stimulus in that country, as well as here in the US. Though the Fed shows no signs of an imminent stimulus, every negative data point increases its chances.
Due to the depressing tone of this week’s commentary, we’ll conclude with some positive information. For those of you who like seeing historical trends, a report on Bloomberg TV this week discussed the market reaction in the fourth year of a Presidential cycle.
According to research done by the Ned Davis research group, historically the market rises from late June until September in an election year. Once September comes, though, the path diverges depending on who is elected.
If the incumbent party is reelected, the market had continued to rise. However, if the incumbent is defeated, the market had begun to move lower at that point. The stock market favors certainty, which an incumbent provides (perhaps even if that certainty is not business friendly). We would have liked to have found a suitable image to display here, but it appears to have been solely a segment on TV without a corresponding print article and image.
Next Week
Next week will be a very busy one. The pace of corporate earnings picks up significantly and will contain many important names.
There will be several economic data releases, as well. Beginning Monday, we will get info on retail sales, the consumer price index (CPI), housing data, the Feds Beige Book (which gives a broad view on the strength of the economy), and leading economic indicators.
Lastly, Fed Chairman Ben Bernanke will be appearing before Congress for his semi-annual testimony. Investors will be closely watching for any signs of potential stimulus, since that’s about all the market cares for these days.
Investment Strategy
Economic data around the world is weak and earnings are expected to disappoint, which is something we would normally be pessimistic on. With the bar set so low, though, a surprise to the upside becomes easier. Not to mention, the Fed and other central banks around the world are poised for more stimulus if conditions worsen. While stimulus doesn’t help the economy and is a long term negative, it does boost the market.
The Fed even reminded us of its importance this week. In a report by the New York Fed, data shows that the S&P 500 would be at half its current level if the day before a Fed announcement was excluded from the computation (LINK). More simply, the market rises before a Fed announcement and missing out on that day would give you half the value you otherwise would have.
Sadly, the data appears credible and shows how much power the Fed has. Perhaps it is even more important for the market than traditional metrics like the earnings of stocks or the strength of the economy.
With the market making big moves based on unpredictable news out of Europe or the Fed, agility is important here.
If we were to get a buying opportunity, we still 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, as well.
We like gold for the long term, as it will do well with debt and economic problems, and further bailouts and stimulus programs. We would look to add to our positions if prices move much lower from here.
We like other commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), will result in lower prices in the short term.
Although Treasury bond yields are near historic lows (so prices are near historic highs) and keep trending lower, a short position (bet on a decline in price) 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). Additionally, higher taxes from the health care law will increase the attractiveness of these bonds.
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.
With the market making big moves based on unpredictable news out of Europe or the Fed, agility is important here.
If we were to get a buying opportunity, we still 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, as well.
We like gold for the long term, as it will do well with debt and economic problems, and further bailouts and stimulus programs. We would look to add to our positions if prices move much lower from here.
We like other commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), will result in lower prices in the short term.
Although Treasury bond yields are near historic lows (so prices are near historic highs) and keep trending lower, a short position (bet on a decline in price) 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). Additionally, higher taxes from the health care law will increase the attractiveness of these bonds.
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.
