It was a relatively quiet week on Wall Street, resulting in the slightest of losses for the market. For the week, the Dow was lower by just 0.1%, the S&P fell 0.4%, and the Nasdaq also returned -0.1%. Gold hovered around its recent highs, gaining 0.3%. Surprising many, oil dropped sharply by 6.5% to below $93 per barrel. The story was the same with the other major type of oil, Brent, closing down around $111 per barrel. We will discuss the move in oil more below.
Source: MSN Moneycentral
After several active weeks, the markets finally enjoyed a much quieter one. It was almost “normal” in that the market did not make excessive moves on speculation over central bank actions and stimulus or the European debt responses. Though that doesn’t mean we didn’t have news on either.
Market fundamentals were more of a story this week and slowing global growth was the common theme.
FedEx supported that theme as they discussed their outlook on future earnings. They made news on this subject a couple weeks ago, but repeated their view again this week. FedEx expects a slowdown in the Asia and European regions, and even a noticeable slowdown in the US. The nature of their business gives then a good grasp on global trends, making their outlook very valuable.
Data released this week validated the FedEx view. China released weak economic data while business activity in Europe fell by the largest amount in over three years. The European story is interesting in that it showed that Germany, the largest and strongest economy, was relatively strong.
The other European heavyweight, France, had one of the biggest business activity drops in their history. It should be noted that the French have recently installed a new Socialist government, whose impact should not be overlooked.
With weakness around the globe, many more countries are looking to stimulate their economies, similar to the recent steps taken by the US, Europe, and to some extent, China.
Brazil and Turkey both announced stimulate programs, intended to weaken their currencies in order to boost exports. A weaker currency makes exports cost less, so that good looks more attractive if another country’s goods cost more.
In the race to debase currencies, Japan also announced a new round of stimulus, or QE (quantitative easing), making this the eighth round of stimulus since 2000. If ever there was a great example to show that stimulus does not work, Japan is it. Japan has been stuck in an economic funk for more than two decades and shows no signs of getting out, despite constant stimulus.
On to a positive story for supporters of the European bailouts, reports claim progress has been made in the Spanish bailout. Spain has to implement reforms before accepting any future bailout money and appear to be doing so.
As part of the reforms, Spain looks to be freezing pensions while increasing the retirement age from 65 to 67 over the next 15 years. Though the reforms are necessary, we aren’t sure how permanent those changes will be. We have seen these governments cave when faced with a hostile populace and it’s not clear how steadfast they will be.
One interesting note on the European debt situation, don’t look for any negative surprises from the region before early November. According to a Reuters report (LINK), President Obama has been in contact with European leaders, pleading for no negative surprises that will affect the economy before the election. And apparently, European leaders are willing to work towards that, seeing Obama as someone more likely to support future bailouts and central bank involvement than a President Romney would.
Finally, we’ll touch on the story in oil. With the Fed’s stimulus program, most anticipated a rise in commodity prices, including oil. However, oil dropped sharply and surprisingly, leaving many to wonder why.
Though the reason for the drop is still not entirely clear (and rarely ever is in these events), reports indicated the Saudi Arabia is looking to boost production to keep prices from rising more from here. Also, refineries and production facilities are getting back to normal after being idled when hurricane Isaac moved into the Gulf.
Still, the size of the drop in oil was unusual, though will be very welcomed at the gas pump.
Next week
Next week looks similar to this past week. Again there will be a few regional Fed Presidents speaking, plus several economic data releases, though nothing major. There will be more data on housing, durable goods (which are bigger ticket items, like a refrigerator or TV), personal income and spending, and a revision to last quarters GDP.
Investment Strategy
Coming off two big weeks with new stimulus announced, many were looking for another big week this week. Though they were disappointed, past stimulus programs saw a similar market reaction.
Market fundamentals were more of a story this week and slowing global growth was the common theme.
FedEx supported that theme as they discussed their outlook on future earnings. They made news on this subject a couple weeks ago, but repeated their view again this week. FedEx expects a slowdown in the Asia and European regions, and even a noticeable slowdown in the US. The nature of their business gives then a good grasp on global trends, making their outlook very valuable.
Data released this week validated the FedEx view. China released weak economic data while business activity in Europe fell by the largest amount in over three years. The European story is interesting in that it showed that Germany, the largest and strongest economy, was relatively strong.
The other European heavyweight, France, had one of the biggest business activity drops in their history. It should be noted that the French have recently installed a new Socialist government, whose impact should not be overlooked.
With weakness around the globe, many more countries are looking to stimulate their economies, similar to the recent steps taken by the US, Europe, and to some extent, China.
Brazil and Turkey both announced stimulate programs, intended to weaken their currencies in order to boost exports. A weaker currency makes exports cost less, so that good looks more attractive if another country’s goods cost more.
In the race to debase currencies, Japan also announced a new round of stimulus, or QE (quantitative easing), making this the eighth round of stimulus since 2000. If ever there was a great example to show that stimulus does not work, Japan is it. Japan has been stuck in an economic funk for more than two decades and shows no signs of getting out, despite constant stimulus.
On to a positive story for supporters of the European bailouts, reports claim progress has been made in the Spanish bailout. Spain has to implement reforms before accepting any future bailout money and appear to be doing so.
As part of the reforms, Spain looks to be freezing pensions while increasing the retirement age from 65 to 67 over the next 15 years. Though the reforms are necessary, we aren’t sure how permanent those changes will be. We have seen these governments cave when faced with a hostile populace and it’s not clear how steadfast they will be.
One interesting note on the European debt situation, don’t look for any negative surprises from the region before early November. According to a Reuters report (LINK), President Obama has been in contact with European leaders, pleading for no negative surprises that will affect the economy before the election. And apparently, European leaders are willing to work towards that, seeing Obama as someone more likely to support future bailouts and central bank involvement than a President Romney would.
Finally, we’ll touch on the story in oil. With the Fed’s stimulus program, most anticipated a rise in commodity prices, including oil. However, oil dropped sharply and surprisingly, leaving many to wonder why.
Though the reason for the drop is still not entirely clear (and rarely ever is in these events), reports indicated the Saudi Arabia is looking to boost production to keep prices from rising more from here. Also, refineries and production facilities are getting back to normal after being idled when hurricane Isaac moved into the Gulf.
Still, the size of the drop in oil was unusual, though will be very welcomed at the gas pump.
Next week
Next week looks similar to this past week. Again there will be a few regional Fed Presidents speaking, plus several economic data releases, though nothing major. There will be more data on housing, durable goods (which are bigger ticket items, like a refrigerator or TV), personal income and spending, and a revision to last quarters GDP.
Investment Strategy
Coming off two big weeks with new stimulus announced, many were looking for another big week this week. Though they were disappointed, past stimulus programs saw a similar market reaction.
Periods of stimulus can be seen in the shaded regions of the nearby chart (courtesy of LPL Financial and Bloomberg, and though only through March, serves to illustrate our point). Periods of stimulus did not always start smoothly for the market. Though once in gear, a steady, sustained rise in the market with little volatility can be seen.
So at this point, we have the Fed pledging to continue stimulus for an indefinite period and Europe promising to not produce any negative stories until at least November. In recent months, negative news from both these subjects caused the largest market drops. Now any negatives from them are off the table.
This is reassuring for the market and likely indicates a continued move higher. But what if the market turns its focus to the fundamentals of the stock market: corporate earnings and economic data? Both subjects have disappointed and are forecasted to continue to do so. While the market currently has the wind at its back, a cautious outlook is still warranted. Again, agility remains important here.
In stocks, 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.
Gold is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs. We wouldn’t add to positions at this point, but would not look to sell, either.
We like other commodities for the long term and had feared a slowdown in China and the other BRIC countries (Brazil, Russia, and India), pushing commodity prices lower in the short run. However, the Fed has pumped this sector up and prices may continue to rise from here.
Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds. We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely. A short position (bet on a decline in price) provides a nice hedge here but 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.
So at this point, we have the Fed pledging to continue stimulus for an indefinite period and Europe promising to not produce any negative stories until at least November. In recent months, negative news from both these subjects caused the largest market drops. Now any negatives from them are off the table.
This is reassuring for the market and likely indicates a continued move higher. But what if the market turns its focus to the fundamentals of the stock market: corporate earnings and economic data? Both subjects have disappointed and are forecasted to continue to do so. While the market currently has the wind at its back, a cautious outlook is still warranted. Again, agility remains important here.
In stocks, 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.
Gold is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs. We wouldn’t add to positions at this point, but would not look to sell, either.
We like other commodities for the long term and had feared a slowdown in China and the other BRIC countries (Brazil, Russia, and India), pushing commodity prices lower in the short run. However, the Fed has pumped this sector up and prices may continue to rise from here.
Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds. We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely. A short position (bet on a decline in price) provides a nice hedge here but 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.
