After pushing to new highs last week, stocks turned sharply lower this week. Through the close Friday, the Dow lost 0.7%, the S&P was down 0.9%, and the Nasdaq fared the worst with a 1.6% drop. Gold did well, nearing four-month highs with a 1.3% gain. Oil continued to move lower, declining 3.1% to $100.83 per barrel. The international Brent oil fell to $107.25 per barrel.
Source: Yahoo Finance
There were several big stories playing out this week, all contributing to the decline in stocks. Higher-flying companies were hit hardest, while safer sectors like utility stocks actually saw gains.
First, corporate earnings season got underway this week as companies began reporting their results from the second quarter. Investors are very cautious about this quarter’s earnings, skeptical that the rise we’ve seen in stocks will be validated by improving corporate earnings. It appears many investors took some gains off the table in case that turns out to be true.
Expectations for corporate earnings growth do look fairly high. Economists are predicting in a 4.9% year-over-year gain according to Factset, while they only grew 2.8% last quarter. They predict even higher growth later in the year. Usually the bar is set low so it’s easier to beat, so this higher bar may make it harder to meet expectations.
Of the earnings released this week, some were decent, but others continued a trend we’ve noticed recently. Many companies cite a poor economy as the factor behind their weaker sales. This contradicts the belief that the economy is improving. It may just be an excuse though, much like the “blame it on the bad weather” excuse we see during the winter months. Only time will tell if this is true.
Another big story weighing on the market came from Europe. Reminiscent of the European debt crisis from 2011, a Portuguese bank failure sparked worries of broader bank failures. While it looks like the bank failure was just a one-off, it did remind investors that markets have become overly calm. Fundamental problems have not been fixed, only patched over with more debt.
Something like this is how we believe the next big leg down in the market will start. Markets are extremely complacent, overlooking significant risks in economies around the globe. It takes a small event like this to prick the bubble and ripple through the markets. While the current situation with the Portuguese bank is probably not that trigger, it reminds us how fragile markets currently are.
Finally, the Fed was in the news with the release of the minutes from their latest meeting. As usual, it told us little we didn’t already expect. They will end their bond buying stimulus program in October, which they have been steadily winding down until now.
They will also keep interest rates low for the foreseeable future. This was a concern, because improving economic reports had many investors believing rates would rise sooner to avoid overheating the market. As much as we believe higher rates would be better for the economy in the long run, the lower rates have helped stocks higher in the short run.
The Fed did note an uneasiness with complacency in the markets. They don’t think investors recognize the risks on the economy and interest rates, although we believe this problem was entirely of their making. Their actions have pushed investors into riskier assets and pushed markets higher, a goal of their stimulus program. It shouldn’t be surprising to see investors behaving as they currently are.
Next Week
Corporate earnings releases begin to pick up next week. More than 10% of companies in the S&P 500 will be reporting their results, which will give us a good feel for the rest of the corporate earnings releases.
As for economic data, we’ll get info on retail sales, inflation at the producer level, industrial production, and leading economic indicators. Fed chief Janet Yellen will also be in the news as she makes her semi-annual testimony before Congress on the strength of the economy. Next week looks to be a fairly busy one.
Investment Strategy
As mentioned above, we worry that an external event similar to this Portuguese bank story will be the trigger of an event to send markets lower. It doesn’t seem like this is that trigger, though.
We still see stocks as expensive, so we are not interested in putting new money into the broader market right now. We fear that the longer this continues, the longer debt is allowed to increase and bubbles to grow, the worse the ultimate correction will be. Despite that negative longer-term outlook, we are not doing any selling at this time.
For new money, we prefer to find undervalued individual names to invest in. We evaluate the company’s fundamentals to tell us if it is worth buying, while technical analysis, or the charts, tell us if it is a good time to buy.
As for bonds, prices rose this week (so bond yields fell), but they remain volatile. Despite this move, prices have been in this range for some time, so they haven’t really established a longer trend either way. With prices so high, it increases the chance they will fall in the future. A position to profit in this scenario (a short position, where your profit increases if prices fall) acts as a nice hedge in that case. Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted.
Bonds to protect against inflation, or TIPs, have done well on the recent higher inflation data. We think they remain an important hedge against future inflation and are likely to do well as inflation increases. Some municipal bonds look attractive for the right client, but not as good as they did several months ago. 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 is another good hedge for the portfolio, and it did well this week. However, it has been around this level for many months now, doing very little over this time period.
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.
First, corporate earnings season got underway this week as companies began reporting their results from the second quarter. Investors are very cautious about this quarter’s earnings, skeptical that the rise we’ve seen in stocks will be validated by improving corporate earnings. It appears many investors took some gains off the table in case that turns out to be true.
Expectations for corporate earnings growth do look fairly high. Economists are predicting in a 4.9% year-over-year gain according to Factset, while they only grew 2.8% last quarter. They predict even higher growth later in the year. Usually the bar is set low so it’s easier to beat, so this higher bar may make it harder to meet expectations.
Of the earnings released this week, some were decent, but others continued a trend we’ve noticed recently. Many companies cite a poor economy as the factor behind their weaker sales. This contradicts the belief that the economy is improving. It may just be an excuse though, much like the “blame it on the bad weather” excuse we see during the winter months. Only time will tell if this is true.
Another big story weighing on the market came from Europe. Reminiscent of the European debt crisis from 2011, a Portuguese bank failure sparked worries of broader bank failures. While it looks like the bank failure was just a one-off, it did remind investors that markets have become overly calm. Fundamental problems have not been fixed, only patched over with more debt.
Something like this is how we believe the next big leg down in the market will start. Markets are extremely complacent, overlooking significant risks in economies around the globe. It takes a small event like this to prick the bubble and ripple through the markets. While the current situation with the Portuguese bank is probably not that trigger, it reminds us how fragile markets currently are.
Finally, the Fed was in the news with the release of the minutes from their latest meeting. As usual, it told us little we didn’t already expect. They will end their bond buying stimulus program in October, which they have been steadily winding down until now.
They will also keep interest rates low for the foreseeable future. This was a concern, because improving economic reports had many investors believing rates would rise sooner to avoid overheating the market. As much as we believe higher rates would be better for the economy in the long run, the lower rates have helped stocks higher in the short run.
The Fed did note an uneasiness with complacency in the markets. They don’t think investors recognize the risks on the economy and interest rates, although we believe this problem was entirely of their making. Their actions have pushed investors into riskier assets and pushed markets higher, a goal of their stimulus program. It shouldn’t be surprising to see investors behaving as they currently are.
Next Week
Corporate earnings releases begin to pick up next week. More than 10% of companies in the S&P 500 will be reporting their results, which will give us a good feel for the rest of the corporate earnings releases.
As for economic data, we’ll get info on retail sales, inflation at the producer level, industrial production, and leading economic indicators. Fed chief Janet Yellen will also be in the news as she makes her semi-annual testimony before Congress on the strength of the economy. Next week looks to be a fairly busy one.
Investment Strategy
As mentioned above, we worry that an external event similar to this Portuguese bank story will be the trigger of an event to send markets lower. It doesn’t seem like this is that trigger, though.
We still see stocks as expensive, so we are not interested in putting new money into the broader market right now. We fear that the longer this continues, the longer debt is allowed to increase and bubbles to grow, the worse the ultimate correction will be. Despite that negative longer-term outlook, we are not doing any selling at this time.
For new money, we prefer to find undervalued individual names to invest in. We evaluate the company’s fundamentals to tell us if it is worth buying, while technical analysis, or the charts, tell us if it is a good time to buy.
As for bonds, prices rose this week (so bond yields fell), but they remain volatile. Despite this move, prices have been in this range for some time, so they haven’t really established a longer trend either way. With prices so high, it increases the chance they will fall in the future. A position to profit in this scenario (a short position, where your profit increases if prices fall) acts as a nice hedge in that case. Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted.
Bonds to protect against inflation, or TIPs, have done well on the recent higher inflation data. We think they remain an important hedge against future inflation and are likely to do well as inflation increases. Some municipal bonds look attractive for the right client, but not as good as they did several months ago. 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 is another good hedge for the portfolio, and it did well this week. However, it has been around this level for many months now, doing very little over this time period.
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.
