Stocks reached new all-time highs this week as the debt ceiling agreement was finalized in Washington. For the week, the Dow returned 1.1%, the S&P rose 2.4%, and the Nasdaq gained a nice 3.2%. Bond yields hit their lowest level in three months (so prices hit a three-month high). Gold also rose on the news, up a solid 3.7%. Oil moved lower, falling 1.2% to $101 per barrel. The international oil, Brent, fell to just below $110.
Source: Yahoo Finance
The S&P 500 notched a new record high, its 27th record high this year, on the agreement to raise the debt ceiling and reopen the government. The news was a relief to the market for the short term, but has kept the status quo and pushed the fight out a few months.
We’ll be seeing the same fight – and same volatility in the market – again in early 2014, the new deadline that the spending and debt levels have been punted to. A deadline for the broader budget agreement is set for December 13th, but since they imposed no consequences if an agreement is not reached, we’re fairly confident nothing will come of it.
This whole fight shows how hard it is to achieve any real reforms in Washington, long-term reforms that are badly needed due to our country’s spending trajectory. Gold rose and the dollar weakened when the agreement was announced, both of which signaled longer term concerns.
Another impact of the shutdown was to make the Fed less likely to reduce its stimulus program later this month, and likely even this year. The shutdown has prevented several economic reports from being released, with the Fed members commenting that the lack of data has limited their ability to make decisions. The reports that were released haven’t shown much improvement, so a reduction in stimulus probably wouldn’t occur, anyway.
One thing the shutdown has done is provide an excuse if earnings or economic growth is poor. If the weather is too cold or rainy over a certain period, companies often claim it kept people from coming to the stores. If it was too warm, it kept people from buying cold-weather clothing. It’s laughable, but not uncommon. Now we’re seeing companies warn that the shutdown will have an effect on their earnings.
The government is also warning that economic growth would have been greater without the shutdown (never mind that the money the government spends is sucked out of the private sector in the first place). In reality, the impact from the government shutdown is extremely small, but we expect to be hearing this excuse for several months.
On to corporate earnings, where Factset has reported that 20% of S&P 500 companies have reported third quarter earnings thus far. Almost 70% have beaten earnings estimates and 53% have beaten revenue estimates (revenue is what the company actually earned through sales; its earnings, or profit, is what is left over after costs are considered). Remember, though, that estimates have been steadily lowered going into earnings period. Thompson Reuters reported recent estimates of 4.2% this quarter, when they had estimates of 8.5% growth back in July.
When looking at earnings on a year-over-year basis, earnings have grown only 1.3% and revenue is up 1.9%.
While we worry that earnings won’t be as solid as expected, they really haven’t really mattered much to the overall direction of the market. Instead the focus has been on the Fed and its stimulus, along with the fights in Washington like we’ve seen the last couple weeks. We don’t expect that to change in the coming weeks.
Next Week
Next week will be extremely busy. Now that the government is back in action, several reports not released during the shutdown will begin rolling in. The big employment report will come on Tuesday and durable goods will come on Friday. We will also get info on housing and import prices. Corporate earnings will continue to come in at a strong pace, too.
Investment Strategy
The lack of conflict in Washington and the printing of money by the Fed are likely to help stocks move higher in the short run. Over the longer term we remain cautious as stocks look more expensive and investors appear overly optimistic. We only need to look at the reaction of Google stock this week as evidence, whose share price jumped $122, or 14%, on good earnings.
Other concerns include fights returning to Washington in the coming months and the Fed either pulling back on its stimulus or we start to feel the consequences of massive money printing.
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.
In bonds, yields have fallen recently (so prices have risen). We see yields rising (so prices fall) when it looks as though the Fed will pull back on its stimulus, but that doesn’t seem likely in the near term. A short position (bet on the decline in prices) will do well at that point, but serves only as a nice hedge now. It isn’t intended to be a longer 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.
Gold had a nice week this week, but has had a shaky stretch. 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.
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.
We’ll be seeing the same fight – and same volatility in the market – again in early 2014, the new deadline that the spending and debt levels have been punted to. A deadline for the broader budget agreement is set for December 13th, but since they imposed no consequences if an agreement is not reached, we’re fairly confident nothing will come of it.
This whole fight shows how hard it is to achieve any real reforms in Washington, long-term reforms that are badly needed due to our country’s spending trajectory. Gold rose and the dollar weakened when the agreement was announced, both of which signaled longer term concerns.
Another impact of the shutdown was to make the Fed less likely to reduce its stimulus program later this month, and likely even this year. The shutdown has prevented several economic reports from being released, with the Fed members commenting that the lack of data has limited their ability to make decisions. The reports that were released haven’t shown much improvement, so a reduction in stimulus probably wouldn’t occur, anyway.
One thing the shutdown has done is provide an excuse if earnings or economic growth is poor. If the weather is too cold or rainy over a certain period, companies often claim it kept people from coming to the stores. If it was too warm, it kept people from buying cold-weather clothing. It’s laughable, but not uncommon. Now we’re seeing companies warn that the shutdown will have an effect on their earnings.
The government is also warning that economic growth would have been greater without the shutdown (never mind that the money the government spends is sucked out of the private sector in the first place). In reality, the impact from the government shutdown is extremely small, but we expect to be hearing this excuse for several months.
On to corporate earnings, where Factset has reported that 20% of S&P 500 companies have reported third quarter earnings thus far. Almost 70% have beaten earnings estimates and 53% have beaten revenue estimates (revenue is what the company actually earned through sales; its earnings, or profit, is what is left over after costs are considered). Remember, though, that estimates have been steadily lowered going into earnings period. Thompson Reuters reported recent estimates of 4.2% this quarter, when they had estimates of 8.5% growth back in July.
When looking at earnings on a year-over-year basis, earnings have grown only 1.3% and revenue is up 1.9%.
While we worry that earnings won’t be as solid as expected, they really haven’t really mattered much to the overall direction of the market. Instead the focus has been on the Fed and its stimulus, along with the fights in Washington like we’ve seen the last couple weeks. We don’t expect that to change in the coming weeks.
Next Week
Next week will be extremely busy. Now that the government is back in action, several reports not released during the shutdown will begin rolling in. The big employment report will come on Tuesday and durable goods will come on Friday. We will also get info on housing and import prices. Corporate earnings will continue to come in at a strong pace, too.
Investment Strategy
The lack of conflict in Washington and the printing of money by the Fed are likely to help stocks move higher in the short run. Over the longer term we remain cautious as stocks look more expensive and investors appear overly optimistic. We only need to look at the reaction of Google stock this week as evidence, whose share price jumped $122, or 14%, on good earnings.
Other concerns include fights returning to Washington in the coming months and the Fed either pulling back on its stimulus or we start to feel the consequences of massive money printing.
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.
In bonds, yields have fallen recently (so prices have risen). We see yields rising (so prices fall) when it looks as though the Fed will pull back on its stimulus, but that doesn’t seem likely in the near term. A short position (bet on the decline in prices) will do well at that point, but serves only as a nice hedge now. It isn’t intended to be a longer 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.
Gold had a nice week this week, but has had a shaky stretch. 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.
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.
