Stocks stumbled out of the 2014 gate, notching their worst yearly start since 2005. For the week stocks were mixed, with the Dow lower by 0.2%, while the S&P was higher by 0.6% and the Nasdaq gained 1.0%. Gold turned in a gain of 0.7%. Oil prices fell sharply for the week, falling 1.3% to $92.72 per barrel. The international Brent crude, used in much of our gas here in the East, fell to $106.83 per barrel.
Source: Yahoo Finance
We like to touch on this at the beginning of every year – some investors look at historical patterns from the Stock Trader’s Almanac to make predictions on the full year. For example, if the market (here, the market is represented by the S&P 500) rises on the first day of the year, the average gain for the year is just north of 10% according to investment firm Birinyi and Associates.
If the market rises the first five days, there is an 86% chance of closing the year higher.
Likewise, if the first month closes higher, there is about a 75% chance that the market will be higher for the year.
Since the market got off to its slowest start since 2005, lower the on both the first day and the first five days, the Stock Trader’s Almanac signals a tougher year for 2014.
While stocks followed the Almanac’s predictions the last two years, it didn’t work out so well the year before. So while this is a fun and interesting statistic to note, we wouldn’t go making investment decisions based on these trends.
Getting into the events of the week, the big news came on Friday with the December employment report. Expectations were high for this figure as economists estimated a gain of 200,000 jobs. Unfortunately, the number came in at a weak 74,000 jobs added. This was the smallest gain in two years.
Despite the small gain, the unemployment rate fell from 7.0% to 6.7%. While this number is the best in five years, it is highly misleading. The rate has fallen due to workers leaving the labor force, with the labor force now at a 36 year low (this means the percentage of people available for work compared to the overall population is the lowest in 36 years). This is a serious issue.
To illustrate how big an impact the labor force size has, if we were to measure the unemployment rate using the size of labor force when President Obama took office, we would have unemployment above 11%.
Additionally, with this being the final number for the year, we can see that the U.S. added fewer jobs in 2013 than we did in 2012. Despite the monumental amounts of stimulus being pumped into the economy, the employment picture is not as promising as many believe.
Also making news this week, the Fed was out with the minutes from their latest meeting. Investors were interested in this behind-the-scenes look since it was the first meeting to announce a reduction in stimulus.
It appears that most Fed members supported a reduction in stimulus, and many cited a decreasing effectiveness of the program. They are also concerned over bubbles forming, noting the rise in stocks, companies buying back their own stock, and the high level of risky loans.
In the end, the minutes told us little we didn’t already know and had little impact on the market. It is worth noting, the minutes were the longest ever released. While their commitment to transparency high, they tend to say a lot, though actually communicating very little.
Finally, corporate earnings for the fourth quarter began rolling in this week. So far, the results look pretty poor. Adding to the negative outlook, several retail companies warned of poor earnings due to weaker than expected sales over the Christmas period. According to data provider Factset, analysts expect earnings to grow over 6% for the quarter, although they were calling for 9.6% growth just three months ago. This is a tough target to beat, so earnings may disappoint.
Next Week
Next week looks to be a very active one. Corporate earnings will start coming in at a strong pace, with many financial companies reporting. Additionally, several regional Fed presidents, including outgoing chief Ben Bernanke, will be making speeches. In light of the poor employment report, it will be interesting to hear what they say.
Economic data reports will also pick up. We will get info on retail sales, inflation, housing, manufacturing, and industrial production.
Investment Strategy
Despite the recent drop in stocks, they still look expensive in the short run. We’d like to see them come off much further before adding to our positions in the broader stock market. Longer term, we have serious concerns that we have discussed extensively here in the past.
Instead of buying the broader market, right now we still prefer finding 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 yields have been rising (so prices falling) recently, so bonds have not fared well. The poor employment report on Friday saw this trend reverse, so the trajectory may have changed, or at least paused. A short position (bet on the decline in prices) has done well till now, but serves only as a nice hedge. It isn’t intended to be a longer term investment.
Continuing with bonds, TIPs have shown weakness recently, however, they 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 continues to look weak and volatile. It’s good as a long term hedge, but caution is warranted in the short term.
We like other commodities for the long term, especially due to weaker currencies around the globe. This is a longer-term play, so buying on the dips may work with a longer time horizon.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.
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.
If the market rises the first five days, there is an 86% chance of closing the year higher.
Likewise, if the first month closes higher, there is about a 75% chance that the market will be higher for the year.
Since the market got off to its slowest start since 2005, lower the on both the first day and the first five days, the Stock Trader’s Almanac signals a tougher year for 2014.
While stocks followed the Almanac’s predictions the last two years, it didn’t work out so well the year before. So while this is a fun and interesting statistic to note, we wouldn’t go making investment decisions based on these trends.
Getting into the events of the week, the big news came on Friday with the December employment report. Expectations were high for this figure as economists estimated a gain of 200,000 jobs. Unfortunately, the number came in at a weak 74,000 jobs added. This was the smallest gain in two years.
Despite the small gain, the unemployment rate fell from 7.0% to 6.7%. While this number is the best in five years, it is highly misleading. The rate has fallen due to workers leaving the labor force, with the labor force now at a 36 year low (this means the percentage of people available for work compared to the overall population is the lowest in 36 years). This is a serious issue.
To illustrate how big an impact the labor force size has, if we were to measure the unemployment rate using the size of labor force when President Obama took office, we would have unemployment above 11%.
Additionally, with this being the final number for the year, we can see that the U.S. added fewer jobs in 2013 than we did in 2012. Despite the monumental amounts of stimulus being pumped into the economy, the employment picture is not as promising as many believe.
Also making news this week, the Fed was out with the minutes from their latest meeting. Investors were interested in this behind-the-scenes look since it was the first meeting to announce a reduction in stimulus.
It appears that most Fed members supported a reduction in stimulus, and many cited a decreasing effectiveness of the program. They are also concerned over bubbles forming, noting the rise in stocks, companies buying back their own stock, and the high level of risky loans.
In the end, the minutes told us little we didn’t already know and had little impact on the market. It is worth noting, the minutes were the longest ever released. While their commitment to transparency high, they tend to say a lot, though actually communicating very little.
Finally, corporate earnings for the fourth quarter began rolling in this week. So far, the results look pretty poor. Adding to the negative outlook, several retail companies warned of poor earnings due to weaker than expected sales over the Christmas period. According to data provider Factset, analysts expect earnings to grow over 6% for the quarter, although they were calling for 9.6% growth just three months ago. This is a tough target to beat, so earnings may disappoint.
Next Week
Next week looks to be a very active one. Corporate earnings will start coming in at a strong pace, with many financial companies reporting. Additionally, several regional Fed presidents, including outgoing chief Ben Bernanke, will be making speeches. In light of the poor employment report, it will be interesting to hear what they say.
Economic data reports will also pick up. We will get info on retail sales, inflation, housing, manufacturing, and industrial production.
Investment Strategy
Despite the recent drop in stocks, they still look expensive in the short run. We’d like to see them come off much further before adding to our positions in the broader stock market. Longer term, we have serious concerns that we have discussed extensively here in the past.
Instead of buying the broader market, right now we still prefer finding 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 yields have been rising (so prices falling) recently, so bonds have not fared well. The poor employment report on Friday saw this trend reverse, so the trajectory may have changed, or at least paused. A short position (bet on the decline in prices) has done well till now, but serves only as a nice hedge. It isn’t intended to be a longer term investment.
Continuing with bonds, TIPs have shown weakness recently, however, they 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 continues to look weak and volatile. It’s good as a long term hedge, but caution is warranted in the short term.
We like other commodities for the long term, especially due to weaker currencies around the globe. This is a longer-term play, so buying on the dips may work with a longer time horizon.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.
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.
