Record highs continued into this week as stocks kept marching higher. For the week, the Dow gained 0.8%, the S&P rose 0.6% while the Nasdaq was higher by just 0.1%. Gold saw some life and climbed 1.0%. Oil moved higher with a gain of 1.6% on the week to $93.45 per barrel. On the other hand, Brent oil moved slightly lower to $110 on the week.
Source: Yahoo Finance
Though the week was as uneventful as we’ve seen in some time, stocks kept ticking higher. Through Thursday, the Dow had risen 10 straight days, a feat not accomplished since 1996. The S&P 500 came within inches of reaching a new high, too.
Worth noting, last year the markets got off to a similar start. The S&P 500 was up 11% by this time last year (it is currently up 9.4% YTD), but stalled near that level. The index moved higher later in the year, but closed out the year only a couple percentage points above that March 2012 level.
Bonds also continue to move higher (so the yield, or the interest you receive, has fallen). The yield on the riskiest type of bonds, junk bonds (or high-yield), reached a record low this week (meaning you receive less interest for riskier investments). This shows how desperate investors are for yield. It is also a red flag for dangers ahead. When investors are eager to buy bonds of sketchy companies, or even random countries like Zambia, the end of this trend can’t be too far behind.
While the market has crept to new highs, the volume of trades has been steadily falling. CNBC noted that we are seeing the lowest trading volume since 1999. In fact, we’re 13% lower than a year ago and roughly 10% below the level seen just in January. Higher volume shows a conviction behind the move in the market, and we’re just not seeing that now.
Aside from the new highs in the market, there was very little other news on the week. One economic data point that received much attention was retail sales, which were much higher than expected. Sales grew 1.1% over the last month, better than the 0.5% expected. Economists had worried that the recent tax increases would be a drag on retail sales, and the results were an encouraging sign for the market.
However (isn’t there always a “however”?), a 5% gain in the sale of gas from gas stations (due to the higher prices) is responsible for much of the rise. Also, retail sales were actually lower on the month if the seasonal adjustment is excluded.
We also received inflation data with the producer and consumer price indexes (PPI and CPI). Both showed a notable increase, with the CPI posting its largest gain in four years. Inflation now stands at an annualized 2% rate, a level that used to be the Fed’s target rate (even though the Federal Reserve Act specified stable prices as an objective). That level was recently raised to 2.5%, so they are aiming for even higher inflation.
Feel like 2% inflation is lower than what you’re actually experiencing? According to shadowstats.com (LINK), if we were to measure inflation using the methodology of 1990, the rate would be closer to 6%. Using the 1980 methodology, the rate would be near 10%. Since 1980, the inflation methodology has been “adjusted” to be tamer than it actually is.
Next Week
Next week looks to be fairly quiet in terms of data. We will get a couple reports on the strength of the housing sector, as well as the leading economic indicators. A few larger companies like General Mills, Oracle, and Nike will be reporting their earnings, too.
The Fed will also be in the news as they hold their meeting on interest rates. No change is expected here, but the market will react if any changes are announced.
A surprise bailout of Cyprus this weekend, and a very troubling wealth confiscation, could put European troubles back on the map next week.
Investment Strategy
With little changing in the market this week, there is no change in our investment strategy. The roulette wheel of the market has constantly landed on black (positive), and it makes us increasingly nervous. Granted, we’ve been nervous for much of this rise but the market kept chugging higher.
As we’ve discussed in the past, we don’t think the fundamentals in the economy justify the current market level. The wild card fueling this run is the Fed and its printing press, which may aid stocks higher in the near term. History has shown that this increase in central planning spells failure in the long run, but in the short term the market continues to rally.
We think the risk outweighs the potential returns at this point and are not looking to do any buying in the broader stock indexes, but are holding off on doing any more selling. Finding undervalued individual companies seems to be a better play for new money, even though many stocks are expensive at this time.
As for what we are looking for, we like higher-quality and dividend paying 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.
Only time will tell, but gold may be bottoming for the near-term. We like it for the long run as central banks around the world devalue their currencies and would add to our positions if it moves further from here.
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, we think yields on Treasury bonds will rise in the long run (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge. However, the short run is a more difficult story to figure out.
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.
Worth noting, last year the markets got off to a similar start. The S&P 500 was up 11% by this time last year (it is currently up 9.4% YTD), but stalled near that level. The index moved higher later in the year, but closed out the year only a couple percentage points above that March 2012 level.
Bonds also continue to move higher (so the yield, or the interest you receive, has fallen). The yield on the riskiest type of bonds, junk bonds (or high-yield), reached a record low this week (meaning you receive less interest for riskier investments). This shows how desperate investors are for yield. It is also a red flag for dangers ahead. When investors are eager to buy bonds of sketchy companies, or even random countries like Zambia, the end of this trend can’t be too far behind.
While the market has crept to new highs, the volume of trades has been steadily falling. CNBC noted that we are seeing the lowest trading volume since 1999. In fact, we’re 13% lower than a year ago and roughly 10% below the level seen just in January. Higher volume shows a conviction behind the move in the market, and we’re just not seeing that now.
Aside from the new highs in the market, there was very little other news on the week. One economic data point that received much attention was retail sales, which were much higher than expected. Sales grew 1.1% over the last month, better than the 0.5% expected. Economists had worried that the recent tax increases would be a drag on retail sales, and the results were an encouraging sign for the market.
However (isn’t there always a “however”?), a 5% gain in the sale of gas from gas stations (due to the higher prices) is responsible for much of the rise. Also, retail sales were actually lower on the month if the seasonal adjustment is excluded.
We also received inflation data with the producer and consumer price indexes (PPI and CPI). Both showed a notable increase, with the CPI posting its largest gain in four years. Inflation now stands at an annualized 2% rate, a level that used to be the Fed’s target rate (even though the Federal Reserve Act specified stable prices as an objective). That level was recently raised to 2.5%, so they are aiming for even higher inflation.
Feel like 2% inflation is lower than what you’re actually experiencing? According to shadowstats.com (LINK), if we were to measure inflation using the methodology of 1990, the rate would be closer to 6%. Using the 1980 methodology, the rate would be near 10%. Since 1980, the inflation methodology has been “adjusted” to be tamer than it actually is.
Next Week
Next week looks to be fairly quiet in terms of data. We will get a couple reports on the strength of the housing sector, as well as the leading economic indicators. A few larger companies like General Mills, Oracle, and Nike will be reporting their earnings, too.
The Fed will also be in the news as they hold their meeting on interest rates. No change is expected here, but the market will react if any changes are announced.
A surprise bailout of Cyprus this weekend, and a very troubling wealth confiscation, could put European troubles back on the map next week.
Investment Strategy
With little changing in the market this week, there is no change in our investment strategy. The roulette wheel of the market has constantly landed on black (positive), and it makes us increasingly nervous. Granted, we’ve been nervous for much of this rise but the market kept chugging higher.
As we’ve discussed in the past, we don’t think the fundamentals in the economy justify the current market level. The wild card fueling this run is the Fed and its printing press, which may aid stocks higher in the near term. History has shown that this increase in central planning spells failure in the long run, but in the short term the market continues to rally.
We think the risk outweighs the potential returns at this point and are not looking to do any buying in the broader stock indexes, but are holding off on doing any more selling. Finding undervalued individual companies seems to be a better play for new money, even though many stocks are expensive at this time.
As for what we are looking for, we like higher-quality and dividend paying 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.
Only time will tell, but gold may be bottoming for the near-term. We like it for the long run as central banks around the world devalue their currencies and would add to our positions if it moves further from here.
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, we think yields on Treasury bonds will rise in the long run (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge. However, the short run is a more difficult story to figure out.
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.
