Stocks turned in their first negative week after four straight weeks of gains. Through the close Friday, the Dow was lower by 0.3%, the S&P fell 1.1%, and the Nasdaq also returned -1.1%. Gold closed the week with a gain of 1.6%. Oil ticked lower by 2.2% to just above $94 per barrel. The other major type of oil, Brent, fell to just shy of $103.
Source: Yahoo Finance
While it’s been some time since we’ve had a negative week for stocks, it’s also been a long time since we’ve seen three straight negative days for the Dow. In fact, it hasn’t happened yet this year. A last minute gain on Friday narrowly saved the Dow from accomplishing that feat. Regardless, we saw some heavy volume and volatility this week that we haven’t seen in a while.
Keeping with the recent trend, this week was again all about the Fed. There was very little in terms of economic data or earnings to move the markets, but there was an abundance of news from the central bank to keep markets moving.
The money printing and bond buying from the Fed has driven markets higher and investors are beginning to worry that a reduction in this stimulus may be coming. They have been closely watching for any clues from the Fed, as it would be a sell signal for stocks. The word “taper” has become a very popular term in recent weeks.
The week started out with a mixed picture from the Fed. One regional President (Evans) expressed caution with how large the Fed’s balance sheet is becoming through all their money printing, which indicates a taper in the stimulus would be necessary. Others (Dudley and Bullard) seemed to indicate satisfaction with the stimulus and support for its continuation.
It was Wednesday, however, that the real activity began.
Fed chief Ben Bernanke was on the Hill for one of his periodic testimonies before Congress. His discussions indicated a support for the continuation of the stimulus program, sending stocks sharply higher.
However, minutes from the latest Fed meeting were released later that day, pouring cold water on the enthusiasm. “A number” of regional Fed Presidents expressed concerns over the stimulus and advocated for a “taper” as early as June. They also cited the bubbly nature of the markets as a concern (buoyancy was actually the term they used. If the Fed were to use the term “bubble,” it would probably start a panic).
By the end of the day, the Dow had moved almost 280 points and closed solidly in the red.
The worries spilled into Thursday, aided by negative news out of Asia. As can be seen in the weekly chart above, the worries didn’t last long. It’s becoming clearer that the Fed will not pull back on stimulus any time soon. They have boxed themselves into a corner where they know markets will react negatively to any reduction in the stimulus. The Fed is holding out until economic conditions improve enough that markets will stand on their own, but after several years of stimulus and little in the way of results, it is unclear if that day will ever come.
As for the worries in Asia, the Japanese stock market also saw some volatility this week. Their market has been on a tear since they embarked on their radical new stimulus. For the year, their market was up almost 50% through Wednesday (and over 80% since November). A surprisingly negative report on business sentiment in China, combined with the jitters here caused by the Fed, caused their market to drop over 7%, their worst one-day drop since the earthquake and tsunami over two years ago.
It serves as a reminder to us that these markets can turn very quickly, especially from these artificially inflated levels.
Next Week
Next week again looks to be quiet. We will get info on consumer confidence, a revision to first quarter GDP, personal income and spending, and manufacturing info for the mid-Atlantic and Texas regions. There doesn’t appear to be much info that will come from the Fed, but the market will probably still be on edge from comments made this week.
Investment Strategy
No change here. If anything, this week showed that the markets will keep going higher, as long as the central banks continue to print money at the current pace. And the pace does not show signs of letting up any time soon.
Still, we don’t recommend putting money into the broader stock market at this time. 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.
We 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.
Gold managed to stabilize (again) this week, but its short-term prospects look poor. While demand for physical gold is still very strong, gold as an investment has shown signs of weakness. 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.
Keeping with the recent trend, this week was again all about the Fed. There was very little in terms of economic data or earnings to move the markets, but there was an abundance of news from the central bank to keep markets moving.
The money printing and bond buying from the Fed has driven markets higher and investors are beginning to worry that a reduction in this stimulus may be coming. They have been closely watching for any clues from the Fed, as it would be a sell signal for stocks. The word “taper” has become a very popular term in recent weeks.
The week started out with a mixed picture from the Fed. One regional President (Evans) expressed caution with how large the Fed’s balance sheet is becoming through all their money printing, which indicates a taper in the stimulus would be necessary. Others (Dudley and Bullard) seemed to indicate satisfaction with the stimulus and support for its continuation.
It was Wednesday, however, that the real activity began.
Fed chief Ben Bernanke was on the Hill for one of his periodic testimonies before Congress. His discussions indicated a support for the continuation of the stimulus program, sending stocks sharply higher.
However, minutes from the latest Fed meeting were released later that day, pouring cold water on the enthusiasm. “A number” of regional Fed Presidents expressed concerns over the stimulus and advocated for a “taper” as early as June. They also cited the bubbly nature of the markets as a concern (buoyancy was actually the term they used. If the Fed were to use the term “bubble,” it would probably start a panic).
By the end of the day, the Dow had moved almost 280 points and closed solidly in the red.
The worries spilled into Thursday, aided by negative news out of Asia. As can be seen in the weekly chart above, the worries didn’t last long. It’s becoming clearer that the Fed will not pull back on stimulus any time soon. They have boxed themselves into a corner where they know markets will react negatively to any reduction in the stimulus. The Fed is holding out until economic conditions improve enough that markets will stand on their own, but after several years of stimulus and little in the way of results, it is unclear if that day will ever come.
As for the worries in Asia, the Japanese stock market also saw some volatility this week. Their market has been on a tear since they embarked on their radical new stimulus. For the year, their market was up almost 50% through Wednesday (and over 80% since November). A surprisingly negative report on business sentiment in China, combined with the jitters here caused by the Fed, caused their market to drop over 7%, their worst one-day drop since the earthquake and tsunami over two years ago.
It serves as a reminder to us that these markets can turn very quickly, especially from these artificially inflated levels.
Next Week
Next week again looks to be quiet. We will get info on consumer confidence, a revision to first quarter GDP, personal income and spending, and manufacturing info for the mid-Atlantic and Texas regions. There doesn’t appear to be much info that will come from the Fed, but the market will probably still be on edge from comments made this week.
Investment Strategy
No change here. If anything, this week showed that the markets will keep going higher, as long as the central banks continue to print money at the current pace. And the pace does not show signs of letting up any time soon.
Still, we don’t recommend putting money into the broader stock market at this time. 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.
We 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.
Gold managed to stabilize (again) this week, but its short-term prospects look poor. While demand for physical gold is still very strong, gold as an investment has shown signs of weakness. 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.
