Another week, another round of new highs. Through the close Friday, the Dow rose 1.6%, the S&P climbed 2.1%, both to all-time highs. The Nasdaq was up 1.8%, its highest level in 12 years. Gold continues to have a rough time, falling 5.0% this week as it approaches the lows set last month. Oil bounced around, but closed the week with little change on a drop of just 0.02% to $96 per barrel. The other major type of oil, Brent, moved slightly higher to $104.72 per barrel.
Source: Yahoo Finance
The story just doesn’t seem to change. Stocks continued to rise this week, again pushing to new highs. As can be seen in the nearby chart of the Dow, this has been the story for the last six months. The S&P was the same, rising 22% over that period without much of a pullback. This is a highly unusual time we are in.
The market didn’t have much going for it this week to contribute to the gains. Economic data leaned to the negative side while corporate earnings were lackluster.
The good news first, retail sales saw a surprising increase, which was even better when considering gas prices have fallen. Small business optimism rose, although from a very low level, while consumer confidence stood at the highest level since 2007. Additionally, inflation with the CPI and PPI both showed declines, largely due to lower gas prices (though the Fed doesn’t like to see declining prices).
On the other hand, manufacturing activity in the New York and Philadelphia contracted, industrial production was also negative, weekly jobless claims showed a sharp increase, and housing starts were down, though permits were up (an article by Bloomberg this week sees the housing sector becoming bubbly again, especially as the homeownership rate declines while investors drive prices higher. LINK).
What did drive markets higher? Central banks around the globe and their money printing. We again saw evidence that the market is dependent on Fed as it dropped sharply on reports of a pullback in stimulus.
It began last week with rumors of an article on the Fed scaling back its printing of $85 billion per month. The article appeared over the weekend and we learned nothing new, frankly, but it did dampen enthusiasm on Monday.
The other occurrence came late Thursday when a regional Fed president (Williams) mentioned he thought the stimulus program would begin winding down this summer and conclude by year-end. The reaction from his comments can be seen in the weekly chart above.
Still, many if not most don’t see the Fed tapering any time soon, so the market shrugged off these reports and resumed its rise.
In our opinion, we don’t see the Fed winding down its stimulus program any time soon. The Fed firmly believes its stimulus policies are the way to improve the economy. As the economy languishes, the employment picture remains poor, and inflation is below their target (although deflation is often not a bad thing), they will not pull back on the stimulus. One might think this would be evidence that their response is incorrect, but we only have to look at Japan and their decade-long stimulus programs to realize how stubborn these economists can be.
Another topic we’d like to touch on is Europe. We’ve seen an increase in discussion on investors warming to European bonds. A higher bond yield indicates a riskier country and investment (like your credit card – riskier borrowers pay a higher interest rate), but the yields have been steadily improving, drawing in more investors.
Indeed, we aren’t seeing the apocalyptic stories coming out of the region we saw a year ago. No countries are on the verge of leaving the Eurozone. But that doesn’t mean risk isn’t there. The fundamental problems have not been addressed, merely papered over with cheap money.
We learned this week that the Eurozone again saw a contraction in GDP over the last quarter. This is the sixth straight quarter of declines, the worst stretch since WWII. The Eurozone is clearly in recession, while the worst-off countries are certainly in a depression. Regardless, their stock markets are up, with the performance of the broader European index (FTSE Europe) rising very similarly to our own stock market.
Greece was also highlighted due to the amount of investors warming to the country. Bond yields are plunging (which indicates less perceived risk) and are now yielding 8% when they were yielding 30% a year ago. Stocks are rising, too, with their stock market up 80% over the past year. This is worrisome, especially since their economy is 20% smaller than when the crisis began, plus unemployment stands at 27% and youth unemployment is over 60%.
We are truly living in unprecedented times. Though stocks continue to rise around the globe, we don’t see this ending well in the long run.
Next Week
Next week looks to be fairly quiet. Over 90% of S&P 500 companies have reported first quarter earnings so far, so the remaining releases will only trickle in. For economic data, we will see some reports on housing, plus the growth of durable goods. Several Fed presidents will be speaking, notably with Fed chief Bernanke on the Hill, plus they will release the minutes from their latest meeting.
Investment Strategy
It would be highly irresponsible to recommend putting money into the broader stock market at this time. Could stocks continue to rise from here? Absolutely. But the risk outweighs the return, in our opinion.
Finding undervalued individual stocks seems to be a better play at this time, though they are increasingly hard to find. We like to have a shorter-term horizon, too, so we can keep one foot out the door in case the market turns abruptly.
There is no change in what we are looking for. We still like higher-quality and dividend paying stocks, though those have seen the biggest gains so far. Companies with operations overseas have seen better earnings than those who do not. We also like smaller and mid-sized stocks that don’t have a strong correlation to the broader market and Europe.
Conditions continue to deteriorate for gold. While demand for physical gold is still very strong, gold investments have been very poor. We like it for the long run as a good hedge, but caution is still warranted.
We like other commodities for the long term, especially due to weaker currencies around the globe. A slowdown in global growth seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon.
As for bonds, the money-printing has kept the yields artificially low, which doesn’t show signs of changing any time soon. Eventually we think yields on Treasury bonds will rise (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge, but it may be further down the road before it becomes profitable.
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.
The market didn’t have much going for it this week to contribute to the gains. Economic data leaned to the negative side while corporate earnings were lackluster.
The good news first, retail sales saw a surprising increase, which was even better when considering gas prices have fallen. Small business optimism rose, although from a very low level, while consumer confidence stood at the highest level since 2007. Additionally, inflation with the CPI and PPI both showed declines, largely due to lower gas prices (though the Fed doesn’t like to see declining prices).
On the other hand, manufacturing activity in the New York and Philadelphia contracted, industrial production was also negative, weekly jobless claims showed a sharp increase, and housing starts were down, though permits were up (an article by Bloomberg this week sees the housing sector becoming bubbly again, especially as the homeownership rate declines while investors drive prices higher. LINK).
What did drive markets higher? Central banks around the globe and their money printing. We again saw evidence that the market is dependent on Fed as it dropped sharply on reports of a pullback in stimulus.
It began last week with rumors of an article on the Fed scaling back its printing of $85 billion per month. The article appeared over the weekend and we learned nothing new, frankly, but it did dampen enthusiasm on Monday.
The other occurrence came late Thursday when a regional Fed president (Williams) mentioned he thought the stimulus program would begin winding down this summer and conclude by year-end. The reaction from his comments can be seen in the weekly chart above.
Still, many if not most don’t see the Fed tapering any time soon, so the market shrugged off these reports and resumed its rise.
In our opinion, we don’t see the Fed winding down its stimulus program any time soon. The Fed firmly believes its stimulus policies are the way to improve the economy. As the economy languishes, the employment picture remains poor, and inflation is below their target (although deflation is often not a bad thing), they will not pull back on the stimulus. One might think this would be evidence that their response is incorrect, but we only have to look at Japan and their decade-long stimulus programs to realize how stubborn these economists can be.
Another topic we’d like to touch on is Europe. We’ve seen an increase in discussion on investors warming to European bonds. A higher bond yield indicates a riskier country and investment (like your credit card – riskier borrowers pay a higher interest rate), but the yields have been steadily improving, drawing in more investors.
Indeed, we aren’t seeing the apocalyptic stories coming out of the region we saw a year ago. No countries are on the verge of leaving the Eurozone. But that doesn’t mean risk isn’t there. The fundamental problems have not been addressed, merely papered over with cheap money.
We learned this week that the Eurozone again saw a contraction in GDP over the last quarter. This is the sixth straight quarter of declines, the worst stretch since WWII. The Eurozone is clearly in recession, while the worst-off countries are certainly in a depression. Regardless, their stock markets are up, with the performance of the broader European index (FTSE Europe) rising very similarly to our own stock market.
Greece was also highlighted due to the amount of investors warming to the country. Bond yields are plunging (which indicates less perceived risk) and are now yielding 8% when they were yielding 30% a year ago. Stocks are rising, too, with their stock market up 80% over the past year. This is worrisome, especially since their economy is 20% smaller than when the crisis began, plus unemployment stands at 27% and youth unemployment is over 60%.
We are truly living in unprecedented times. Though stocks continue to rise around the globe, we don’t see this ending well in the long run.
Next Week
Next week looks to be fairly quiet. Over 90% of S&P 500 companies have reported first quarter earnings so far, so the remaining releases will only trickle in. For economic data, we will see some reports on housing, plus the growth of durable goods. Several Fed presidents will be speaking, notably with Fed chief Bernanke on the Hill, plus they will release the minutes from their latest meeting.
Investment Strategy
It would be highly irresponsible to recommend putting money into the broader stock market at this time. Could stocks continue to rise from here? Absolutely. But the risk outweighs the return, in our opinion.
Finding undervalued individual stocks seems to be a better play at this time, though they are increasingly hard to find. We like to have a shorter-term horizon, too, so we can keep one foot out the door in case the market turns abruptly.
There is no change in what we are looking for. We still like higher-quality and dividend paying stocks, though those have seen the biggest gains so far. Companies with operations overseas have seen better earnings than those who do not. We also like smaller and mid-sized stocks that don’t have a strong correlation to the broader market and Europe.
Conditions continue to deteriorate for gold. While demand for physical gold is still very strong, gold investments have been very poor. We like it for the long run as a good hedge, but caution is still warranted.
We like other commodities for the long term, especially due to weaker currencies around the globe. A slowdown in global growth seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon.
As for bonds, the money-printing has kept the yields artificially low, which doesn’t show signs of changing any time soon. Eventually we think yields on Treasury bonds will rise (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge, but it may be further down the road before it becomes profitable.
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.
