It was another week of record highs in the stock market. For the week, the Dow was higher by 1.3%, the S&P rose 1.6%, and the Nasdaq topped them both with a gain of 1.7%. Gold eked out a slight gain, rising 0.2%. Oil fell to its lowest level since June midweek, but climbed higher later to close with a loss of 0.8% at $93.84 per barrel. The other major type of oil, Brent, took a different path and rose steadily all week to close at $108.50.
Source: Yahoo Finance
The week was fairly quiet, with news out of the Fed again the main driver of the markets.
Investors were anxious to hear testimony from Fed chairman nominee Janet Yellen at her confirmation hearing on Thursday. Most already know her stances on issues of the Fed, but few have heard her speak at length, so it gave a good opportunity to hear her views directly from her.
Preceding the event, her written remarks were released on Wednesday, allowing the public to get an early glimpse of her testimony. The comments were even more dovish than many expected, meaning she was even more supportive of the stimulus programs and willing continue using them. It caused stocks to pop higher, as can be clearly seen in the chart above.
From the remarks, we see she believes the stimulus programs are vital in helping the economy recover and more was needed to help the economy further. She thinks there are dangers in ending the programs too soon, reassuring the market that stimulus will remain in place for the foreseeable future. Also, any adverse consequences from the stimulus are outweighed by their benefits.
On the stock market, she does not see the any bubbles forming and denied the Fed’s role in boosting stock prices. This is ironic, since stocks hang on every word from the Fed and soared on her support of the stimulus.
Further evidence of the Fed’s role in the market can be seen in the chart below, taken from an article by Lance Roberts of STA Wealth. It shows the movements of the stock market strongly corresponding to the money printed from the Fed.
Investors were anxious to hear testimony from Fed chairman nominee Janet Yellen at her confirmation hearing on Thursday. Most already know her stances on issues of the Fed, but few have heard her speak at length, so it gave a good opportunity to hear her views directly from her.
Preceding the event, her written remarks were released on Wednesday, allowing the public to get an early glimpse of her testimony. The comments were even more dovish than many expected, meaning she was even more supportive of the stimulus programs and willing continue using them. It caused stocks to pop higher, as can be clearly seen in the chart above.
From the remarks, we see she believes the stimulus programs are vital in helping the economy recover and more was needed to help the economy further. She thinks there are dangers in ending the programs too soon, reassuring the market that stimulus will remain in place for the foreseeable future. Also, any adverse consequences from the stimulus are outweighed by their benefits.
On the stock market, she does not see the any bubbles forming and denied the Fed’s role in boosting stock prices. This is ironic, since stocks hang on every word from the Fed and soared on her support of the stimulus.
Further evidence of the Fed’s role in the market can be seen in the chart below, taken from an article by Lance Roberts of STA Wealth. It shows the movements of the stock market strongly corresponding to the money printed from the Fed.
Her take on the market is different from her predecessor, Ben Bernanke. He openly supported the “wealth effect” created by the Fed’s actions, where rising stock prices increased people’s wealth, therefore causing people to spend more and boost the economy.
We viewed her testimony as highly dangerous. It assumes the only way for the economy to recover is through stimulus programs from the Fed. When all you have is a hammer, every problem looks like a nail.
With five years of stimulus already, growth is hard to find. One might logically conclude after this amount of time and the lack of results, a different approach is needed. Unfortunately, the longer this continues, the more difficult and painful it will be to end.
As for other news this week, economic data was largely negative. Small business optimism fell sharply, exports declined while imports increased, and national industrial production and New York area manufacturing were both negative.
Lastly, corporate earnings for the third quarter are nearly complete. 92% of companies have reported so far, with Factset finding 73% beating earnings estimates and 53% topping revenue estimates (revenue is what the company earned through sales while earnings, or profit, is what is left over after costs are subtracted). Remember, though, that these estimates were dramatically lowered as earnings season approached.
Compared to a year ago, profits have grown 3.5% while revenue is 2.9% higher. These numbers aren’t great, but are an improvement from recent quarters.
Next Week
Next week again looks fairly quiet. Corporate earnings will trickle in, but will have little impact on the market. We will get a few important economic reports, including inflation at the consumer and producer level and retail sales.
Investment Strategy
With the gain in the markets this week, stocks are appearing overly expensive for the short run. We could see markets move a little higher from here since as long as the Fed keeps printing, the wind is at its back. But caution is warranted as a pullback – or at least a pause – is increasingly likely.
We’ve written extensively on our concerns for the longer run, which includes worries of unintended consequences from the Fed’s stimulus, mentioned above. Other concerns include high valuation ratios, record high margin (borrowing to buy stocks) levels, massive amounts of new money coming into stock funds, and an exuberance around the IPO market.
We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in. Fundamental analysis tells us how good a company is, while the technical (or the charts) 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.
Bonds have been volatile recently as yields are again rising (so prices are falling). A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge. It isn’t intended to be a longer term investment.
TIPs have showed some recent improvement, and remain an important hedge against future inflation. Municipal bonds are in the same boat and work for the right client. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold took another turn lower, continuing the volatility this investment has seen recently. 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 viewed her testimony as highly dangerous. It assumes the only way for the economy to recover is through stimulus programs from the Fed. When all you have is a hammer, every problem looks like a nail.
With five years of stimulus already, growth is hard to find. One might logically conclude after this amount of time and the lack of results, a different approach is needed. Unfortunately, the longer this continues, the more difficult and painful it will be to end.
As for other news this week, economic data was largely negative. Small business optimism fell sharply, exports declined while imports increased, and national industrial production and New York area manufacturing were both negative.
Lastly, corporate earnings for the third quarter are nearly complete. 92% of companies have reported so far, with Factset finding 73% beating earnings estimates and 53% topping revenue estimates (revenue is what the company earned through sales while earnings, or profit, is what is left over after costs are subtracted). Remember, though, that these estimates were dramatically lowered as earnings season approached.
Compared to a year ago, profits have grown 3.5% while revenue is 2.9% higher. These numbers aren’t great, but are an improvement from recent quarters.
Next Week
Next week again looks fairly quiet. Corporate earnings will trickle in, but will have little impact on the market. We will get a few important economic reports, including inflation at the consumer and producer level and retail sales.
Investment Strategy
With the gain in the markets this week, stocks are appearing overly expensive for the short run. We could see markets move a little higher from here since as long as the Fed keeps printing, the wind is at its back. But caution is warranted as a pullback – or at least a pause – is increasingly likely.
We’ve written extensively on our concerns for the longer run, which includes worries of unintended consequences from the Fed’s stimulus, mentioned above. Other concerns include high valuation ratios, record high margin (borrowing to buy stocks) levels, massive amounts of new money coming into stock funds, and an exuberance around the IPO market.
We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in. Fundamental analysis tells us how good a company is, while the technical (or the charts) 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.
Bonds have been volatile recently as yields are again rising (so prices are falling). A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge. It isn’t intended to be a longer term investment.
TIPs have showed some recent improvement, and remain an important hedge against future inflation. Municipal bonds are in the same boat and work for the right client. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold took another turn lower, continuing the volatility this investment has seen recently. 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.
