Please note: As many of you know, our office is located at the entrance to the TPC Sawgrass, home of the Players Championship. Tournament practice rounds begin Monday and we will be attending much of the week. However, we will be in the office every day next week, though our hours will vary day-to-day. We will continue to monitor the market even though we may not be in the office. Any phone calls not immediately answered will be returned the same day. We foresee little to no inconvenience to our clients and hope for your understanding. Additionally, there will be no weekly market commentary next week. Thank you.
Markets again pushed through new highs this week. Through the close Friday, the Dow gained a solid 1.8%, the S&P rose by 2.0%, and the Nasdaq popped 3.0% higher. Gold showed a slight increase, posting a 0.7% rise on the week. Late-week gains sent oil higher by 2.8% to close at $95.61 per barrel. The international Brent crude, used for much of our gas here in the east, moved up to $104 per barrel.
Markets again pushed through new highs this week. Through the close Friday, the Dow gained a solid 1.8%, the S&P rose by 2.0%, and the Nasdaq popped 3.0% higher. Gold showed a slight increase, posting a 0.7% rise on the week. Late-week gains sent oil higher by 2.8% to close at $95.61 per barrel. The international Brent crude, used for much of our gas here in the east, moved up to $104 per barrel.
Source: Yahoo Finance
In reaching new highs this week, the Dow and S&P both crossed notable milestones. The Dow rose above the 15,000 level while the S&P passed the 1,600 level. Since November, these indices have both risen nearly 20%, practically in a straight line (the Dow is seen right).
We saw some good employment reports this week that contributed to the optimism, but the rest of the economic data was rather poor.
The employment figures showed a modest gain of 165,000 jobs over the last month, right in line with the average over the past year. Also, the previous two months saw solid upward revisions. The unemployment rate moved lower from 7.6% to 7.5%, the lowest level since 2008, while a broader measure of unemployment ticked higher to 13.9% from 13.8%.
The response to this report bordered on giddiness, though we failed to see why. While the figures were better than expected, they were hardly worth getting excited over. The job gains don’t keep up with population growth, part-time employment was very high, and more workers are leaving the labor force.
The employment figures showed a modest gain of 165,000 jobs over the last month, right in line with the average over the past year. Also, the previous two months saw solid upward revisions. The unemployment rate moved lower from 7.6% to 7.5%, the lowest level since 2008, while a broader measure of unemployment ticked higher to 13.9% from 13.8%.
The response to this report bordered on giddiness, though we failed to see why. While the figures were better than expected, they were hardly worth getting excited over. The job gains don’t keep up with population growth, part-time employment was very high, and more workers are leaving the labor force.
A different employment report we like to look at is the employment-to-population ratio. It’s as straightforward as it sounds, measuring the amount of people working to the overall population. As seen in the chart to the right dating back to 2008, little improvement can be seen (link to data). It was a different story for other economic data this week. Reports on the manufacturing and the service sectors showed weakening over the past month, while data out of the Dallas and Chicago regions showed contraction.
A large amount of corporate earnings were released this week, though they failed to gain much attention. Over 80% of companies in the S&P 500 have reported so far and the results are slightly above average. According to Factset, over two-thirds have beaten earnings estimates, but more than half were worse than expected in regards to revenue growth (revenue is the money the company actually earned through sales. Earnings, or profits, are what are left after subtracting costs).
Overall, earnings have grown 3.2% over the past year while revenues declined 0.1%. We would like to see better revenue growth before we get too excited on the earnings picture.
Global central banks were also in the headlines this week (though it is rare for them not to be these days).
Here in the U.S., the Fed held one of its periodic meetings and little changed in their outlook. There was one slight difference, however. In the past, the Fed discussed pulling back on their $85 billion in monthly money printing if conditions warranted. New this month was language indicating increases in their program was possible, too.
We see an expansion of their stimulus program as a far more likely scenario than any reduction. Economic data has been lackluster and inflation as they measure it is below their target.
Unwilling to admit that printing money simply hasn’t worked, they will double down on this policy in hopes that it does, similar to the recent actions of the Japanese. Virtually every other central bank in the world is following suit.
History has shown that fundamental growth policies are effective for true economic growth – lower taxes and lower government spending. History has also shown that the current policies are ineffective. Until this endless stimulus cycle ends, we will create more asset bubbles that will ultimately burst, only to be reflated again as the boom and bust cycle continues.
Next Week
Earnings season is winding down and only a couple economic data points will be released next week, so the week looks fairly quiet. More likely to have an impact on the market is several regional Fed presidents making speeches, including Ben Bernanke. These speeches will be closely watched for any hints on further stimulus.
Investment Strategy
Economic data over the last several weeks has shown a weakening economy. The celebrated employment report was not great, either. Poor economic fundamentals and mediocre earnings with declining revenues don’t usually result in record highs for stocks.
Instead, the market has been so heavily influenced by the actions of the central banks and the new money flooding in, which has propelled the market higher. Under this increasingly centrally-planned economy, it is difficult to make predictions on the direction of the market.
With a cloudier macro picture and already high stock prices, we don’t like putting new money into the broader indexes at this point. Finding undervalued individual stocks (which can be tricky around earnings time) seems like a better play. 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.
Gold has found some footing after its recent drop, but hasn’t really moved much. We like it for the long run due to the massive amounts of money being printed around the world, 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 may weigh on commodity prices in the short run, though, 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 this occurs.
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.
