A late-week gain put stocks into positive territory for the week. Through the close Friday, the Dow gained 0.6%, the S&P rose 0.8%, and the Nasdaq turned in a 0.5% return. Gold rose steadily all week, closing with a 1.9% increase. Oil was also higher, gaining 2.5% to close just below $100 per barrel. The international Brent crude moved higher to $108.83 per barrel.
Source: Yahoo Finance
This week had a little bit of everything. We began with the worst day of the year for stocks, only to have the best day of the year later in the week. The gains marked an end to the decline we’ve seen in the markets since the beginning of the year.
The week started with worries that the economy was losing momentum. Recent economic reports supported that view – job growth has been weak, the housing market cooling, retail sales poor, and car sales have been dropping. Released on Monday was a report showing much weaker manufacturing activity, which helped send stocks lower.
When there was poor economic data in the past, we knew the Fed was nearby with their money printing presses ready to make things right. While we didn’t like this since it only papers over the problem and causes bigger problems down the road, stocks liked it in the meantime. Now we know the Fed is committed to pulling back on the stimulus, so the markets don’t have that crutch to help them anymore. This has contributed to the decline we’ve seen in stocks.
After the sharp drop, stocks found some footing. There wasn’t really any news behind the turnaround, it just looks like stocks were oversold and due for a rise.
For economic data this week, the big news came on Friday with the employment report. Results were much weaker than expected as the economy added only 113,000 jobs on projections of over 180,000. The weather did not appear to be a factor, either.
Additionally, the previous month’s employment report was extremely week, but many investors brushed it off in the belief it would be revised higher. Unfortunately, it was not. Taken together, the past two months have shown very disappointing job gains, a concern for the economy going forward.
Sounding like a positive, the unemployment rate fell to a five-year low of 6.6%. Since the labor force has weakened so dramatically, this number has lost reliability. As an example, if the size of the labor force was the same as when President Obama took office, the unemployment rate would be closer to 11%.
The week started with worries that the economy was losing momentum. Recent economic reports supported that view – job growth has been weak, the housing market cooling, retail sales poor, and car sales have been dropping. Released on Monday was a report showing much weaker manufacturing activity, which helped send stocks lower.
When there was poor economic data in the past, we knew the Fed was nearby with their money printing presses ready to make things right. While we didn’t like this since it only papers over the problem and causes bigger problems down the road, stocks liked it in the meantime. Now we know the Fed is committed to pulling back on the stimulus, so the markets don’t have that crutch to help them anymore. This has contributed to the decline we’ve seen in stocks.
After the sharp drop, stocks found some footing. There wasn’t really any news behind the turnaround, it just looks like stocks were oversold and due for a rise.
For economic data this week, the big news came on Friday with the employment report. Results were much weaker than expected as the economy added only 113,000 jobs on projections of over 180,000. The weather did not appear to be a factor, either.
Additionally, the previous month’s employment report was extremely week, but many investors brushed it off in the belief it would be revised higher. Unfortunately, it was not. Taken together, the past two months have shown very disappointing job gains, a concern for the economy going forward.
Sounding like a positive, the unemployment rate fell to a five-year low of 6.6%. Since the labor force has weakened so dramatically, this number has lost reliability. As an example, if the size of the labor force was the same as when President Obama took office, the unemployment rate would be closer to 11%.
A better metric to look at is the employment-to-population ratio, which is simply the amount of people employed to the total working-age population. As you can see in the nearby chart, that number has shown no improvement in four years.
As for other economic data, above we mentioned the weakness in the manufacturing sector, but a report on the service sector showed decent strength.
Finally, corporate earnings have fared relatively well, although any impact on the market has taken a back seat to the bigger macro issues. With almost 70% of companies in the S&P 500 reporting earnings so far, Factset reports that earnings have grown 8.1% while revenue (what the company actually earned through sales) only rose 0.8%. It shows these companies have done well earning a profit, but those profits have come from cutting costs, not increasing sales. This has been the trend for some time and we worry if it could cause problems down the road.
Next Week
Next week looks to be a little less busy. There will be only a couple economic reports released, retail sales and industrial production, and corporate earnings are beginning to slow down. All eyes will be on the new Fed chair, Janet Yellen, as she makes her first official appearance in front of Congress. We’ll hear her views on the economy and the stimulus program, though we don’t expect any surprises from her testimony.
Investment Strategy
The broader market looked very oversold in the early part of the week, providing a good opportunity to buy the index. We have concerns for the longer run, but think markets have room to move higher in the shorter term. The lack of a market decline on Friday despite the poor employment report supports that view.
Since the market has risen off its lows, we feel the buying opportunity for the broader market is less attractive and would again put new money into individual stocks.
Like we mention every week, when looking at individual stocks, we look at fundamental analysis (looking at the numbers from accounting statements) to find good companies to buy and technical analysis (looking at the charts) to tell us 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 rose this week (so prices fell). A short position (bet on the decline in prices) fared well, and acts as a nice hedge when yields do rise. It isn’t intended to be a longer term investment, though, just a method for hedging higher rates.
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. Floating rate bonds are becoming a new hot asset class and worth a look. We keep a longer term focus with these investments.
Gold again turned in a decent performance, but has been stuck in this $1,200-1,300 range for many weeks now. It may be good as a long term hedge, but there may still be weakness 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.
