The holiday-shortened week saw a rather volatile market. For the week, the Dow rose 0.8%, the S&P was higher by 1.4% and the Nasdaq climbed a solid 2.0%. Bonds (as measured by the 10-year Treasury) saw yields hit the highest level in over two years (so prices hit the lowest level). Gold lost some ground, falling 0.7%. Oil again rose sharply on the news over Syria, gaining 2.7% on the week to a 28-month high of $110.53 per barrel. The other major type of oil, Brent, rose above $116.
Source: Yahoo Finance
Two main factors were responsible for the rocky market this week: Syria and the Fed.
Stocks opened the week to the upside on news that President Obama would be taking the Syria strike to Congress for approval. That move pushed back any immediate military action in the region. Since the market does not like the uncertainty created by war, stocks rose on the news.
The rally was short lived, however, as Speaker Boehner indicated his initial support for the President’s plan, making immediate military action more likely. The market drop on Tuesday from the news can be clearly seen in the chart above.
This back and forth continued for the rest of the week. Stocks were higher on Wednesday when John McCain came out against the Senate draft proposal. They then plunged early Friday when Vladimir Putin indicated he would support Syria if attacked.
As for the Fed, later this month they are holding a policy meeting where an announcement on the stimulus program is expected. This makes economic data releases even more important since it would influence the Fed’s stance on the direction of the stimulus program. Positive economic reports would give the Fed a reason to pull back on their stimulus while negative info would give a green light for more stimulus.
The most watched data release this week came on Friday with the monthly employment report. We added 169,000 jobs last month, an unimpressive number and much less than expected. Additionally, the previous two months were revised lower.
The unemployment rate did move lower to 7.3% from 7.4%. However, that improvement is solely due to people leaving the labor force. In fact, the size of the labor force (the amount of people working or looking for work compared to the overall population) stands at the lowest level since 1978. If we were to use the labor force size from the beginning of the recession to calculate the unemployment rate, we would be standing closer to 11%.
Since this report was weaker than expected, stocks moved higher because it makes the Fed less likely to reduce its stimulus program.
Other economic data this week was mostly positive, however, with the service and manufacturing sectors both showed an impressive gain over the past month. Construction activity came in higher than expected, though on the other hand, the trade balance worsened on higher imports and fewer exports.
Next Week
Next week looks much quieter for economic data, but will be far busier for news about Syria and the Fed. On economic data, we’ll get info on inflation at the producer level, consumer sentiment, and business inventories.
Also, we are moving closer to the Fed’s policy meeting starting September 17th. This meeting is widely anticipated for an announcement on whether the stimulus program will be reduced, so investors have been closely watching for any hints on which direction they might move.
Investment Strategy
The stock market has come off its recent lows and we would not add to any positions in the broader market at this point. We see a more volatile investing market in the weeks and months ahead, so caution is warranted. Just looking at this week, we can see how volatile the market is depending on the news releases.
In the near term, the situation in Syria is obviously a concern, as well as the stimulus story from the Fed. If it looks like a reduction in stimulus is likely, stocks and bonds will fall. An immediate reduction in stimulus is looking less likely and since the stimulus has fueled the market higher, stocks may have some room to run. Again, this is in the short term.
As for the longer term, the market is still expensive from a longer-term perspective. Plus margin levels are at all-time highs, fights in Washington are approaching, and corporate earnings and economic fundamentals have been unimpressive. Plus we are in September, historically the worst month for stocks.
As mentioned above, we would not put any new money into stock market indexes; instead we’d look to find undervalued individual names to invest in. Fundamental analysis tells us how good a company is while the technical (chart) side gives us a good idea of when to buy. We would avoid stocks in sectors with a strong correlation to interest rates. Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly.
Gold has done well recently, despite the declines over the last two weeks. If the Fed does announce a pullback in this money-printing program, gold may move lower. With the recent rise in prices, we would be hesitant to add any more at these levels.
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, this area continues to receive much attention as yields keep rising (so prices are falling). A short position (bet on the decline in prices) has done very well here but serves only as a nice hedge, not intended to be a loner term investment.
TIPs have performed poorly recently, but are an important hedge as we still expect inflation to increase down the road. Municipal bonds are in the same boat, but will work for the right client. We keep a longer term focus with these investments.
Finally, in international stocks, we are still not interested in developed markets and 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.
Stocks opened the week to the upside on news that President Obama would be taking the Syria strike to Congress for approval. That move pushed back any immediate military action in the region. Since the market does not like the uncertainty created by war, stocks rose on the news.
The rally was short lived, however, as Speaker Boehner indicated his initial support for the President’s plan, making immediate military action more likely. The market drop on Tuesday from the news can be clearly seen in the chart above.
This back and forth continued for the rest of the week. Stocks were higher on Wednesday when John McCain came out against the Senate draft proposal. They then plunged early Friday when Vladimir Putin indicated he would support Syria if attacked.
As for the Fed, later this month they are holding a policy meeting where an announcement on the stimulus program is expected. This makes economic data releases even more important since it would influence the Fed’s stance on the direction of the stimulus program. Positive economic reports would give the Fed a reason to pull back on their stimulus while negative info would give a green light for more stimulus.
The most watched data release this week came on Friday with the monthly employment report. We added 169,000 jobs last month, an unimpressive number and much less than expected. Additionally, the previous two months were revised lower.
The unemployment rate did move lower to 7.3% from 7.4%. However, that improvement is solely due to people leaving the labor force. In fact, the size of the labor force (the amount of people working or looking for work compared to the overall population) stands at the lowest level since 1978. If we were to use the labor force size from the beginning of the recession to calculate the unemployment rate, we would be standing closer to 11%.
Since this report was weaker than expected, stocks moved higher because it makes the Fed less likely to reduce its stimulus program.
Other economic data this week was mostly positive, however, with the service and manufacturing sectors both showed an impressive gain over the past month. Construction activity came in higher than expected, though on the other hand, the trade balance worsened on higher imports and fewer exports.
Next Week
Next week looks much quieter for economic data, but will be far busier for news about Syria and the Fed. On economic data, we’ll get info on inflation at the producer level, consumer sentiment, and business inventories.
Also, we are moving closer to the Fed’s policy meeting starting September 17th. This meeting is widely anticipated for an announcement on whether the stimulus program will be reduced, so investors have been closely watching for any hints on which direction they might move.
Investment Strategy
The stock market has come off its recent lows and we would not add to any positions in the broader market at this point. We see a more volatile investing market in the weeks and months ahead, so caution is warranted. Just looking at this week, we can see how volatile the market is depending on the news releases.
In the near term, the situation in Syria is obviously a concern, as well as the stimulus story from the Fed. If it looks like a reduction in stimulus is likely, stocks and bonds will fall. An immediate reduction in stimulus is looking less likely and since the stimulus has fueled the market higher, stocks may have some room to run. Again, this is in the short term.
As for the longer term, the market is still expensive from a longer-term perspective. Plus margin levels are at all-time highs, fights in Washington are approaching, and corporate earnings and economic fundamentals have been unimpressive. Plus we are in September, historically the worst month for stocks.
As mentioned above, we would not put any new money into stock market indexes; instead we’d look to find undervalued individual names to invest in. Fundamental analysis tells us how good a company is while the technical (chart) side gives us a good idea of when to buy. We would avoid stocks in sectors with a strong correlation to interest rates. Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly.
Gold has done well recently, despite the declines over the last two weeks. If the Fed does announce a pullback in this money-printing program, gold may move lower. With the recent rise in prices, we would be hesitant to add any more at these levels.
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, this area continues to receive much attention as yields keep rising (so prices are falling). A short position (bet on the decline in prices) has done very well here but serves only as a nice hedge, not intended to be a loner term investment.
TIPs have performed poorly recently, but are an important hedge as we still expect inflation to increase down the road. Municipal bonds are in the same boat, but will work for the right client. We keep a longer term focus with these investments.
Finally, in international stocks, we are still not interested in developed markets and 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.
