An eventful week saw stocks close in positive territory. Through the Friday close, the Dow gained 0.9%, the S&P rose 0.5%, and the Nasdaq returned 0.4%. Gold saw volatility from geopolitical events and Fed testimony to close the week with a 2.1% loss. Oil briefly dipped below $100 per barrel before rising again, closing at $103.13 for a 2.3% increase. The international Brent oil, primarily used for our gas here in the east, actually moved slightly lower to $107.14 per barrel.
Source: Yahoo Finance
Geopolitical events were a major story this week as new conflicts returned to the headlines. Though they were quite serious, stocks held up rather firmly and didn’t see as much reaction as we might have thought.
Stocks did move immediately lower when news broke Thursday of the downed plane in Ukraine. They were further pressured by Israel’s announcement of ground forces heading into Gaza. However, stocks reversed course Friday, moving sharply higher to recover all the ground lost from these events.
This same story has played out numerous times recently. Stocks will drop sharply on a geopolitical flare-up, whether it was Russia’s initial conflict with Ukraine, ISIS overtaking parts of Iraq, or the Israel-Palestine feud. The drop in stocks becomes a buying opportunity and share prices resume their climb despite the conflicts continuing. It appears the focus is more on the liquidity and stimulus from the central banks – as long as these are present, stocks will have the wind at their back.
Speaking of central banks, comments from Fed chief Janet Yellen impacted the market this week.
Appearing before Congress for her semi-annual testimony, investors were expecting to hear clues of a reduction in stimulus and higher interest rates coming sooner than anticipated. After all, she mentioned in her December Congressional appearance that they didn’t expect unemployment to hit 6% until 2015. It’s 6.1% today, incredibly close to that number. Improving conditions means less stimulus, and since stimulus has sent stocks higher, less stimulus means a lower stock market.
Indeed, she correctly noted that this unemployment rate is deceiving. It has improved largely due to people leaving the labor force, not necessarily because employment is improving. Since conditions are still not at the level they desire, these stimulative policies will remain in place longer than many believe, even after their target is reached (though the target always seems to move).
Since economic conditions still not at their goal, we would have loved to hear a Congressman ask why, after more than five years of your stimulus programs, would the Fed conclude the right prescription was in place? It seems a fair question to ask.
Another theme of the testimony focused on bubbles. Many Congressmen expressed concerns that the Fed’s policies were forming new bubbles in the economy. She dismissed this idea, but indicated a concern with high valuations in riskier high-yield debt bonds, plus smaller-cap stocks, biotechnology, and social media companies. Stocks sold off on this news and these sectors closed lower on the week.
As for economic data this week, the news was mixed. Economic activity in the northeast showed a sharp increase and the Fed’s Beige Book (which collects anecdotal evidence on the strength of the economy) also showed improvement.
On the other hand, retail sales and industrial production both saw slight increases, but were both below estimates. Housing starts last month were very weak and consumer sentiment was lower. Inflation at the producer level rose sharply, too, and while the Fed would see this as a positive, common sense tells us that higher prices are a negative for the economy.
Finally, about 15% of companies in the S&P 500 have released earnings so far. While it is still far too early to draw any conclusions at this point, the numbers thus far were in line with estimates according to Factset, on both the earnings and revenue side.
Next Week
Next week looks to be another busy one. About 150 of the companies in the S&P 500 will report their earnings, so we will start to get a clear picture on how well companies performed last quarter.
As for economic data, we’ll get info on inflation at the consumer level, housing, manufacturing, and durable goods.
Investment Strategy
The market continues to shrug off bad news, with these record low interest rates continuing to help fuel stocks higher. While it may help stocks in the short run, we have serious concerns for the longer run. The broader market is still looking expensive here, so we aren’t adding any new money to it at this point, but we aren’t selling now, either.
One point of caution, high-yield debt continues to move lower. This is often a leading indicator, signaling that stocks may move lower in the near term. This is something worth watching.
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. It is only a hedge at this point – rising on geopolitical worries and falling once they are out of the headlines and has been stuck in the same range for over a year now. Still, it is a good hedge if things go south.
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.
Stocks did move immediately lower when news broke Thursday of the downed plane in Ukraine. They were further pressured by Israel’s announcement of ground forces heading into Gaza. However, stocks reversed course Friday, moving sharply higher to recover all the ground lost from these events.
This same story has played out numerous times recently. Stocks will drop sharply on a geopolitical flare-up, whether it was Russia’s initial conflict with Ukraine, ISIS overtaking parts of Iraq, or the Israel-Palestine feud. The drop in stocks becomes a buying opportunity and share prices resume their climb despite the conflicts continuing. It appears the focus is more on the liquidity and stimulus from the central banks – as long as these are present, stocks will have the wind at their back.
Speaking of central banks, comments from Fed chief Janet Yellen impacted the market this week.
Appearing before Congress for her semi-annual testimony, investors were expecting to hear clues of a reduction in stimulus and higher interest rates coming sooner than anticipated. After all, she mentioned in her December Congressional appearance that they didn’t expect unemployment to hit 6% until 2015. It’s 6.1% today, incredibly close to that number. Improving conditions means less stimulus, and since stimulus has sent stocks higher, less stimulus means a lower stock market.
Indeed, she correctly noted that this unemployment rate is deceiving. It has improved largely due to people leaving the labor force, not necessarily because employment is improving. Since conditions are still not at the level they desire, these stimulative policies will remain in place longer than many believe, even after their target is reached (though the target always seems to move).
Since economic conditions still not at their goal, we would have loved to hear a Congressman ask why, after more than five years of your stimulus programs, would the Fed conclude the right prescription was in place? It seems a fair question to ask.
Another theme of the testimony focused on bubbles. Many Congressmen expressed concerns that the Fed’s policies were forming new bubbles in the economy. She dismissed this idea, but indicated a concern with high valuations in riskier high-yield debt bonds, plus smaller-cap stocks, biotechnology, and social media companies. Stocks sold off on this news and these sectors closed lower on the week.
As for economic data this week, the news was mixed. Economic activity in the northeast showed a sharp increase and the Fed’s Beige Book (which collects anecdotal evidence on the strength of the economy) also showed improvement.
On the other hand, retail sales and industrial production both saw slight increases, but were both below estimates. Housing starts last month were very weak and consumer sentiment was lower. Inflation at the producer level rose sharply, too, and while the Fed would see this as a positive, common sense tells us that higher prices are a negative for the economy.
Finally, about 15% of companies in the S&P 500 have released earnings so far. While it is still far too early to draw any conclusions at this point, the numbers thus far were in line with estimates according to Factset, on both the earnings and revenue side.
Next Week
Next week looks to be another busy one. About 150 of the companies in the S&P 500 will report their earnings, so we will start to get a clear picture on how well companies performed last quarter.
As for economic data, we’ll get info on inflation at the consumer level, housing, manufacturing, and durable goods.
Investment Strategy
The market continues to shrug off bad news, with these record low interest rates continuing to help fuel stocks higher. While it may help stocks in the short run, we have serious concerns for the longer run. The broader market is still looking expensive here, so we aren’t adding any new money to it at this point, but we aren’t selling now, either.
One point of caution, high-yield debt continues to move lower. This is often a leading indicator, signaling that stocks may move lower in the near term. This is something worth watching.
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. It is only a hedge at this point – rising on geopolitical worries and falling once they are out of the headlines and has been stuck in the same range for over a year now. Still, it is a good hedge if things go south.
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.
