Stocks moved lower for the week with activity picking up towards the end. Through the Friday close, the Dow was off 0.5%, the S&P lost 0.3%, and the Nasdaq had a slight loss of 0.1%. Gold rose sharply on Friday with stimulus talks, pushing it to a five-month high and a gain of 0.9% this week. The story was the same with oil, rising 0.3% for the week and closing at $96.47 per barrel, while prices at the pump continue to rise. The other major type of oil, Brent, closed at $114.68 per barrel.
Source: MSN Moneycentral
The markets were quiet early as investors were reluctant to place any big bets before the Fed conference in Jackson Hole on Friday. Expectations were high for an announcement on new stimulus, or at least clues pointing that direction, though many investors had doubts. That uncertainty kept many investors on the sidelines for fear of ending up on the wrong side of the trade.
Volatility picked up as we neared the Friday speech. The market fell on Thursday in part due to an increasing worry that there might not be any more stimulus, at least in the immediate future.
The reactions were mixed when the speech from Fed chief Bernanke was finally released. Basically Ben Bernanke closed the door on any stimulus right now, but upgraded the likelihood of action if needed.
We saw this as little change from previous statements, but as you can see in the chart above, it got a big reaction. Nothing concrete was learned and the QE (stimulus) question remains.
A major part of the speech was a defense of the Fed’s recent untraditional actions. The Fed has printed over $2 trillion conducting these stimulus programs and many (including us) are questioning whether this will cause unintended consequences. Interest rates at these exceptionally low levels for such a long period also raises concerns.
But Bernanke was adamant that their actions were necessary and the benefits outweigh the costs (what benefits?). Additionally, he believes any side effects will be manageable.
This was encouraging to investors since it was interpreted as openness to further stimulus.
Europe was (once again) the other major story this week. It should come as little surprise that conditions in Europe continue to deteriorate. This week the unemployment rate for the Eurozone countries hit a new all-time high while inflation ticked higher.
More debt worries in Spain surfaced as another region asked for a bailout, bringing the total to three broke regions at the moment. This leads many to wonder where the money for these bailouts will come from. Or if a bailout will even come at all.
To try to boost revenue to the Spanish government, they are looking to raise taxes and have proposed a sharp increase in the value-added tax. Unfortunately this is the wrong medicine as increasing taxes stifles the economy and never results in the tax revenues politicians predict.
England joined in the tax hike debate as politicians proposed a new, one-time “wealth tax” to raise revenues. Unfortunately their 50% tax rate on the rich has not worked out so well, so they have proposed another similarly brilliant plan whose fate will likely be the same. As more countries fall further into debt, look for more desperate tax raising ideas in the future.
As the Presidential race heats up, we’ll conclude this section with something we touched on several weeks ago. In July we wrote about the market trends in an election year (LINK). Today we’ll revisit that.
According to research done by the Ned Davis group, the market has historically risen in the June to August period in an election year. This year followed that same pattern.
September is where the direction differs. In years where the incumbent wins, the market has historically continued to rise from here. However, the market started to move lower around this point when the incumbent loses. Below is a chart from Ned Davis and T. Rose Price illustrating this trend.
This is just an interesting market stat to keep in mind as we head into the fall. Still, there’s no telling what will happen in this unprecedented period where the Fed lurks in the background with their printing presses ready.
Volatility picked up as we neared the Friday speech. The market fell on Thursday in part due to an increasing worry that there might not be any more stimulus, at least in the immediate future.
The reactions were mixed when the speech from Fed chief Bernanke was finally released. Basically Ben Bernanke closed the door on any stimulus right now, but upgraded the likelihood of action if needed.
We saw this as little change from previous statements, but as you can see in the chart above, it got a big reaction. Nothing concrete was learned and the QE (stimulus) question remains.
A major part of the speech was a defense of the Fed’s recent untraditional actions. The Fed has printed over $2 trillion conducting these stimulus programs and many (including us) are questioning whether this will cause unintended consequences. Interest rates at these exceptionally low levels for such a long period also raises concerns.
But Bernanke was adamant that their actions were necessary and the benefits outweigh the costs (what benefits?). Additionally, he believes any side effects will be manageable.
This was encouraging to investors since it was interpreted as openness to further stimulus.
Europe was (once again) the other major story this week. It should come as little surprise that conditions in Europe continue to deteriorate. This week the unemployment rate for the Eurozone countries hit a new all-time high while inflation ticked higher.
More debt worries in Spain surfaced as another region asked for a bailout, bringing the total to three broke regions at the moment. This leads many to wonder where the money for these bailouts will come from. Or if a bailout will even come at all.
To try to boost revenue to the Spanish government, they are looking to raise taxes and have proposed a sharp increase in the value-added tax. Unfortunately this is the wrong medicine as increasing taxes stifles the economy and never results in the tax revenues politicians predict.
England joined in the tax hike debate as politicians proposed a new, one-time “wealth tax” to raise revenues. Unfortunately their 50% tax rate on the rich has not worked out so well, so they have proposed another similarly brilliant plan whose fate will likely be the same. As more countries fall further into debt, look for more desperate tax raising ideas in the future.
As the Presidential race heats up, we’ll conclude this section with something we touched on several weeks ago. In July we wrote about the market trends in an election year (LINK). Today we’ll revisit that.
According to research done by the Ned Davis group, the market has historically risen in the June to August period in an election year. This year followed that same pattern.
September is where the direction differs. In years where the incumbent wins, the market has historically continued to rise from here. However, the market started to move lower around this point when the incumbent loses. Below is a chart from Ned Davis and T. Rose Price illustrating this trend.
This is just an interesting market stat to keep in mind as we head into the fall. Still, there’s no telling what will happen in this unprecedented period where the Fed lurks in the background with their printing presses ready.
Next Week
Next week looks to be a busy one, even though the markets are closed on Monday. We will get several new economic reports for the month just ended. Of the notable releases, there will be info on the strength of the manufacturing and service sectors, plus the all-important employment report.
The week will also be a busy one for data from Europe. There will be a meeting of the European Central Bank (or ECB, which is basically the European version of our Fed), where the bailouts will likely be the main topic. Many are looking for new bond buying programs, similar to the actions taken by our Fed.
However, not everyone is on board. The German court will be ruling on the constitutionality of a bailout in the following week, so the ECB meeting will probably be unlikely to make any major announcements before that outcome is known.
Investment Strategy
It is difficult to have strong convictions either way here as the unpredictable nature of the Fed’s central planning and the European debt responses have the most impact on the market. The focus on the election should increase and as we see in the chart above, the market can take a very different path depending on the outcome.
We still lean towards the cautious side, especially heading into September, which is historically the worst month for market performance. Expectations of Fed (and ECB) stimulus have buoyed the markets to this point and will continue to hang on every word from these organizations. Agility remains important.
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 problems, further bailouts, and stimulus programs. The rise this week decreased our chances of adding to our position (and we aren’t looking to sell), but we would add 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 have moved higher recently, they are still near historic lows (so prices are near historic highs). A short position (bet on a decline in price) only provides a nice hedge here and we believe 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), though our concern has increased as the pace of distressed municipalities is increasing. Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future.
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.
Next week looks to be a busy one, even though the markets are closed on Monday. We will get several new economic reports for the month just ended. Of the notable releases, there will be info on the strength of the manufacturing and service sectors, plus the all-important employment report.
The week will also be a busy one for data from Europe. There will be a meeting of the European Central Bank (or ECB, which is basically the European version of our Fed), where the bailouts will likely be the main topic. Many are looking for new bond buying programs, similar to the actions taken by our Fed.
However, not everyone is on board. The German court will be ruling on the constitutionality of a bailout in the following week, so the ECB meeting will probably be unlikely to make any major announcements before that outcome is known.
Investment Strategy
It is difficult to have strong convictions either way here as the unpredictable nature of the Fed’s central planning and the European debt responses have the most impact on the market. The focus on the election should increase and as we see in the chart above, the market can take a very different path depending on the outcome.
We still lean towards the cautious side, especially heading into September, which is historically the worst month for market performance. Expectations of Fed (and ECB) stimulus have buoyed the markets to this point and will continue to hang on every word from these organizations. Agility remains important.
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 problems, further bailouts, and stimulus programs. The rise this week decreased our chances of adding to our position (and we aren’t looking to sell), but we would add 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 have moved higher recently, they are still near historic lows (so prices are near historic highs). A short position (bet on a decline in price) only provides a nice hedge here and we believe 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), though our concern has increased as the pace of distressed municipalities is increasing. Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future.
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.
