We saw another week with large daily swings in the market, only to end not far from where we started. Through the close Friday, the Dow gained 0.6%, the S&P rose 0.2%, and the Nasdaq was higher by 0.3%. Gold also closed the week with little change, falling a miniscule 0.03%. Oil sold off again this week, dropping 2.6% to just over $90 per barrel, its lowest level of the year. The international Brent oil, used for much of the gas here in the east, continued its strong decline to close at $110. It looks like some relief is finally coming to the gas pump.
Source: Yahoo Finance
This week we saw more of a bi-polar market. Stocks turned in their worst day of the year Monday and doom and gloom forecasts dominated the news programs. The markets promptly reversed course and the Dow rocketed to within inches of an all-time high, and headlines were dominated with optimistic outlooks. If anything, it was an entertaining dynamic that played out over the week.
Negative news out of Europe was the cause for our woes early in the week. Elections in Italy over the weekend saw no clear winner, adding a new uncertainty for the region.
The worrisome part of the election was that it favored candidates who promised to roll back the austerity programs of the last several months. These programs were a requirement to receive aid (bailouts) and the rejection could raise tensions between the countries doing the bailing out, like Germany. Not to mention the chance that other countries, like Spain, could follow Italy’s lead and reject their austerity measures (worth noting, overall government spending continues to rise in these countries. It is the stiff tax increases seem to be doing the damage).
After plunging Monday, stocks turned their attention to what has been driving the market recently – no, not fundamentals like earnings or the economy – the Fed.
Fed chairman Ben Bernanke made an appearance before Congress and discussed his stimulus program. He defended the bond buying program and believes it must be continued. The benefits outweigh any risks, he claims, though he sees no risks at this time. After all, we see no problem curing a debt crisis with even more debt.
We’ve mentioned that the actions of the Fed have been the main driver of the market. It sells off sharply when investors worry the stimulus program could be scaled back. Now it rallies strongly as Bernanke reaffirms his commitment to the program. He even intimated the bond buying could extend into 2016, frankly a terrifying thought due to the amount of money that will be printed.
The sequester was also a popular topic this week, though it had very little, if any, impact on the market. While some cuts in spending will be made (particularly to the military), government spending as a whole will still increase going forward. The main drivers of our debt, Medicare, Medicaid, and Social Security, remain untouched.
The hysteria surrounding these “cuts” makes us realize how difficult it will be to get any real spending cuts in this country, a worrisome sign for the future.
One thing it does do is provide an excuse to politicians for any bad economic data, whether it was the cause or not, since the counterfactual cannot be proved. Much like storms in the wintertime, we look forward to hearing this as an excuse for underwhelming data points for some time to come.
As for economic data this week, the results were mixed. New home sales showed a solid gain, though the seasonal adjustment probably should be given the credit. Manufacturing expanded by a greater pace than was expected, while consumer sentiment (somehow) stands at the best level since November.
On the negative side, the most important data point of the week was the GDP revision. The first reading showed a decline of 0.1%, but was written off on the expectation that the revisions would come in much higher. Well, that wasn’t exactly the case.
The revision showed growth increasing a scant 0.1%, a pathetic growth number especially when considering the amount of money spent (or printed) in stimulus to boost the economy. A reduction in government spending got much of the blame, but as we discussed previously, government spending actually rose by $98 billion over the quarter.
Other negative data on the week included a drop in durable goods (which are items with a longer life like appliances or electronics) of 5.2%. Also, personal income dropped by the largest amount in 20 years, falling 3.6% over the last month. With that lower income, somehow personal spending managed to increase slightly; meaning people are taking on more debt.
Next Week
Next week doesn’t look to be as busy, but we will get some important economic data points. There will be a report on the strength of the service sector over the past month, factory orders, trade, the Fed’s Beige Book (which provides an anecdotal account on the strength of the economy), and most importantly, the unemployment report on Friday.
Investment Strategy
No change here. The market still looks expensive, though it inched away from its highly overbought level this week, giving it more room to potentially move to the upside. We are extremely reluctant to add any money to the broader indices at this point, though.
In our view, the one thing the market has going for it is the Fed and other central banks around the world. While their stimulus (money printing) has been of little help to the economy as the last several years have shown, it does send stocks higher. And these central banks have reaffirmed their commitment to printing more money for many years.
As for the negatives, we see economies either growing slightly or contracting, corporate earnings barely beating inflation, and higher gas prices which weigh on the economy. Washington got through the sequester fight, but a bigger battle is likely to emerge later this month with the continuing resolution. Also, the negative stories out of Europe are gaining attention.
While the broader macro picture isn’t great, the data has been largely overlooked anyway. It’s the money printing that has been making the big moves in the market.
While we aren’t looking to do any buying in the broader stock indexes at this point, we are always looking for opportunities. We still like higher-quality and dividend paying individual stocks. Companies with operations overseas have seen better earnings than those who don’t. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
Gold halted its decline this week, but may need to move a little lower before it looks attractive to buy again. We still like it for the long term with central banks continuing to print money to stimulate their economies and weaken their currencies.
We like other commodities for the long term, especially due to weaker currencies around the globe. A slowdown in global growth may weigh on commodity prices in the short run, though.
As for bonds, Treasury bond yields moved a little lower this week (so prices have risen). A short position (bet on a decline in price) has provided a nice hedge, but we think the potential for longer term profit is low at this time.
We also think TIPs are important as we still expect inflation to increase. Municipal bonds provide a nice way to reduce taxes, though new itemization laws may reduce their benefits in some cases.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
Please note, 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.
Negative news out of Europe was the cause for our woes early in the week. Elections in Italy over the weekend saw no clear winner, adding a new uncertainty for the region.
The worrisome part of the election was that it favored candidates who promised to roll back the austerity programs of the last several months. These programs were a requirement to receive aid (bailouts) and the rejection could raise tensions between the countries doing the bailing out, like Germany. Not to mention the chance that other countries, like Spain, could follow Italy’s lead and reject their austerity measures (worth noting, overall government spending continues to rise in these countries. It is the stiff tax increases seem to be doing the damage).
After plunging Monday, stocks turned their attention to what has been driving the market recently – no, not fundamentals like earnings or the economy – the Fed.
Fed chairman Ben Bernanke made an appearance before Congress and discussed his stimulus program. He defended the bond buying program and believes it must be continued. The benefits outweigh any risks, he claims, though he sees no risks at this time. After all, we see no problem curing a debt crisis with even more debt.
We’ve mentioned that the actions of the Fed have been the main driver of the market. It sells off sharply when investors worry the stimulus program could be scaled back. Now it rallies strongly as Bernanke reaffirms his commitment to the program. He even intimated the bond buying could extend into 2016, frankly a terrifying thought due to the amount of money that will be printed.
The sequester was also a popular topic this week, though it had very little, if any, impact on the market. While some cuts in spending will be made (particularly to the military), government spending as a whole will still increase going forward. The main drivers of our debt, Medicare, Medicaid, and Social Security, remain untouched.
The hysteria surrounding these “cuts” makes us realize how difficult it will be to get any real spending cuts in this country, a worrisome sign for the future.
One thing it does do is provide an excuse to politicians for any bad economic data, whether it was the cause or not, since the counterfactual cannot be proved. Much like storms in the wintertime, we look forward to hearing this as an excuse for underwhelming data points for some time to come.
As for economic data this week, the results were mixed. New home sales showed a solid gain, though the seasonal adjustment probably should be given the credit. Manufacturing expanded by a greater pace than was expected, while consumer sentiment (somehow) stands at the best level since November.
On the negative side, the most important data point of the week was the GDP revision. The first reading showed a decline of 0.1%, but was written off on the expectation that the revisions would come in much higher. Well, that wasn’t exactly the case.
The revision showed growth increasing a scant 0.1%, a pathetic growth number especially when considering the amount of money spent (or printed) in stimulus to boost the economy. A reduction in government spending got much of the blame, but as we discussed previously, government spending actually rose by $98 billion over the quarter.
Other negative data on the week included a drop in durable goods (which are items with a longer life like appliances or electronics) of 5.2%. Also, personal income dropped by the largest amount in 20 years, falling 3.6% over the last month. With that lower income, somehow personal spending managed to increase slightly; meaning people are taking on more debt.
Next Week
Next week doesn’t look to be as busy, but we will get some important economic data points. There will be a report on the strength of the service sector over the past month, factory orders, trade, the Fed’s Beige Book (which provides an anecdotal account on the strength of the economy), and most importantly, the unemployment report on Friday.
Investment Strategy
No change here. The market still looks expensive, though it inched away from its highly overbought level this week, giving it more room to potentially move to the upside. We are extremely reluctant to add any money to the broader indices at this point, though.
In our view, the one thing the market has going for it is the Fed and other central banks around the world. While their stimulus (money printing) has been of little help to the economy as the last several years have shown, it does send stocks higher. And these central banks have reaffirmed their commitment to printing more money for many years.
As for the negatives, we see economies either growing slightly or contracting, corporate earnings barely beating inflation, and higher gas prices which weigh on the economy. Washington got through the sequester fight, but a bigger battle is likely to emerge later this month with the continuing resolution. Also, the negative stories out of Europe are gaining attention.
While the broader macro picture isn’t great, the data has been largely overlooked anyway. It’s the money printing that has been making the big moves in the market.
While we aren’t looking to do any buying in the broader stock indexes at this point, we are always looking for opportunities. We still like higher-quality and dividend paying individual stocks. Companies with operations overseas have seen better earnings than those who don’t. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
Gold halted its decline this week, but may need to move a little lower before it looks attractive to buy again. We still like it for the long term with central banks continuing to print money to stimulate their economies and weaken their currencies.
We like other commodities for the long term, especially due to weaker currencies around the globe. A slowdown in global growth may weigh on commodity prices in the short run, though.
As for bonds, Treasury bond yields moved a little lower this week (so prices have risen). A short position (bet on a decline in price) has provided a nice hedge, but we think the potential for longer term profit is low at this time.
We also think TIPs are important as we still expect inflation to increase. Municipal bonds provide a nice way to reduce taxes, though new itemization laws may reduce their benefits in some cases.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
Please note, 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.
