Events in Washington were again the main driver of the markets this week. For the week, the Dow rose 1.1%, the S&P gained 0.8%, while the Nasdaq was lower by 0.4%. Gold continued to move lower, falling 3.2% this week. The two different types of oil moved different directions, with the domestic oil falling 1.8% to $102 per barrel. The international oil, Brent, rose to $110.29.
Source: Yahoo Finance
The worries in Washington carried into this week as stocks moved firmly lower through Wednesday. An op-ed in the Wall Street Journal by Paul Ryan (LINK) provided a path to compromise and the olive branch halted the market decline of the last three weeks. Stocks soared for their second biggest gain of the year when it appeared the stalemate in Washington was over.
Though the details are still being worked out, the deal appears to be a six week extension of the debt ceiling in exchange for a long-term entitlement and spending reform. It seems like we just went through similar negotiations in 2011 and 2012 that ultimately failed, resulting in the sequester. We see these upcoming talks failing just as before and adding uncertainty back to the markets.
The markets were also helped by news out of the Fed this week. Janet Yellen, currently second-in-charge at the Fed, will be named chairman when Ben Bernanke steps down in January. She provides some continuity that is a relief to the markets. She is also likely to continue the current stimulus programs, as she is seen favoring stimulus and intervention even more than Bernanke. We don’t like this for the long term, but the markets like this stimulus right now.
An article in the Wall Street Journal (LINK) showed us the back and forth of policy discussions that has gone on at the Fed in recent months. It showed us that the Fed is not as sophisticated as it seems in determining policy (in fact, they seem pretty clueless) and are making policy decisions on the fly.
They are stuck with no way to orderly wind down the stimulus program, correctly fearing that any pullback would rattle markets. This shows us that a reduction in the stimulus program may drag out for monger than many currently estimate.
Switching gears, corporate earnings for the third quarter started rolling in this week. According to research firm Thompson Reuters, analysts are expecting a 4.2% earnings growth for the quarter. This is a higher number than we’ve seen in recent quarters, but it was also less than half of the 8.5% growth they expected back in July.
Anyway, Alcoa usually gets the earnings ball rolling to much fanfare, since it was the first of the 30 Dow stocks to report. It was recently removed from the Dow, though, so its earnings lacked as much interest. Still, it continued the trend of beating lowered estimates.
Two big banks, Wells Fargo and JPMorgan, also reported their earnings. Their results were lackluster (and were aided by loan loss reserves), but the kicker was the massive drop in mortgage originations. It wasn’t entirely surprising given the rise in mortgage rates, but confirms a slowdown in this sector.
Economic data has been a casualty of the government shutdown, as several reports were not released this week. The two major reports that were, were very poor. Consumer confidence fell to the lowest level of the year. Similarly, weekly jobless claims hit their second-worst level of the year. The results were blamed on faulty computer programs, but this was also the culprit in jobless claims hitting the best levels of the year in previous weeks. It looks like the latest figure may have added back those missed over previous weeks.
Next Week
The government shutdown will continue to affect economic data releases scheduled for next week, so it looks like we won’t get info on inflation at the consumer level, industrial production, or housing. However, we will get info on manufacturing in the New York and Philadelphia regions and the leading economic indicators.
Corporate earnings will start being released at a stronger pace next week. While we will get results from a wide variety of firms, banking companies will be the biggest sector releasing results.
Investment Strategy
Stocks were looking oversold (cheap) for the short run this week, which helped them spring back higher when positive news was announced on Thursday. Markets are likely to rise from here as long as Washington cooperates and the Fed continues its stimulus. The drama is sure to return when the two parties can’t find an agreement on the longer-term financial matters.
Like always, we still have a cautious outlook for the longer run. A new item adding to our caution this week was a report (LINK) that 68% of the companies who had initial public offerings (IPO) this year lost money in the 12 months before coming to market. This indicates a high tolerance to risk. What’s more important, the last two times the level was this high was in 2001 and 2007, prior to serious market declines.
Our other concerns include a slowing momentum of this bull market as stock prices become more expensive. Additionally, even though the Fed is still active in their stimulus measures and are unlikely to pull back soon, they are doing operations to pull some liquidity out of the economy. They cite these operations simply as tests, but there has to be a reason for the testing.
While we are hesitant to add any new money into stock market indexes at this point, we would instead look for 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 the broader stock market and 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 continues to have a rocky road. It may move higher if a continuation in stimulus is expected, but eventually that stimulus will be removed. If the market begins to anticipate a pullback, gold could move lower again like it did the last several weeks. It’s good for a hedge here, but caution is 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, 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 well recently but serves only as a nice hedge. It isn’t 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.
Though the details are still being worked out, the deal appears to be a six week extension of the debt ceiling in exchange for a long-term entitlement and spending reform. It seems like we just went through similar negotiations in 2011 and 2012 that ultimately failed, resulting in the sequester. We see these upcoming talks failing just as before and adding uncertainty back to the markets.
The markets were also helped by news out of the Fed this week. Janet Yellen, currently second-in-charge at the Fed, will be named chairman when Ben Bernanke steps down in January. She provides some continuity that is a relief to the markets. She is also likely to continue the current stimulus programs, as she is seen favoring stimulus and intervention even more than Bernanke. We don’t like this for the long term, but the markets like this stimulus right now.
An article in the Wall Street Journal (LINK) showed us the back and forth of policy discussions that has gone on at the Fed in recent months. It showed us that the Fed is not as sophisticated as it seems in determining policy (in fact, they seem pretty clueless) and are making policy decisions on the fly.
They are stuck with no way to orderly wind down the stimulus program, correctly fearing that any pullback would rattle markets. This shows us that a reduction in the stimulus program may drag out for monger than many currently estimate.
Switching gears, corporate earnings for the third quarter started rolling in this week. According to research firm Thompson Reuters, analysts are expecting a 4.2% earnings growth for the quarter. This is a higher number than we’ve seen in recent quarters, but it was also less than half of the 8.5% growth they expected back in July.
Anyway, Alcoa usually gets the earnings ball rolling to much fanfare, since it was the first of the 30 Dow stocks to report. It was recently removed from the Dow, though, so its earnings lacked as much interest. Still, it continued the trend of beating lowered estimates.
Two big banks, Wells Fargo and JPMorgan, also reported their earnings. Their results were lackluster (and were aided by loan loss reserves), but the kicker was the massive drop in mortgage originations. It wasn’t entirely surprising given the rise in mortgage rates, but confirms a slowdown in this sector.
Economic data has been a casualty of the government shutdown, as several reports were not released this week. The two major reports that were, were very poor. Consumer confidence fell to the lowest level of the year. Similarly, weekly jobless claims hit their second-worst level of the year. The results were blamed on faulty computer programs, but this was also the culprit in jobless claims hitting the best levels of the year in previous weeks. It looks like the latest figure may have added back those missed over previous weeks.
Next Week
The government shutdown will continue to affect economic data releases scheduled for next week, so it looks like we won’t get info on inflation at the consumer level, industrial production, or housing. However, we will get info on manufacturing in the New York and Philadelphia regions and the leading economic indicators.
Corporate earnings will start being released at a stronger pace next week. While we will get results from a wide variety of firms, banking companies will be the biggest sector releasing results.
Investment Strategy
Stocks were looking oversold (cheap) for the short run this week, which helped them spring back higher when positive news was announced on Thursday. Markets are likely to rise from here as long as Washington cooperates and the Fed continues its stimulus. The drama is sure to return when the two parties can’t find an agreement on the longer-term financial matters.
Like always, we still have a cautious outlook for the longer run. A new item adding to our caution this week was a report (LINK) that 68% of the companies who had initial public offerings (IPO) this year lost money in the 12 months before coming to market. This indicates a high tolerance to risk. What’s more important, the last two times the level was this high was in 2001 and 2007, prior to serious market declines.
Our other concerns include a slowing momentum of this bull market as stock prices become more expensive. Additionally, even though the Fed is still active in their stimulus measures and are unlikely to pull back soon, they are doing operations to pull some liquidity out of the economy. They cite these operations simply as tests, but there has to be a reason for the testing.
While we are hesitant to add any new money into stock market indexes at this point, we would instead look for 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 the broader stock market and 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 continues to have a rocky road. It may move higher if a continuation in stimulus is expected, but eventually that stimulus will be removed. If the market begins to anticipate a pullback, gold could move lower again like it did the last several weeks. It’s good for a hedge here, but caution is 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, 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 well recently but serves only as a nice hedge. It isn’t 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.
