Ouch. The week was a rough one on Wall Street. Through the Friday close, the Dow fell 2.8%, its worst week since January. The S&P 500 had its worst week in two years, falling 2.7%, and the Nasdaq was lower by 2.2%. Gold moved lower, which is surprising since it usually does well when trouble arises, off 0.7%. On a positive note, oil hit its lowest level since March, falling 4.1% to $97.88 per barrel, hopefully leading to lower prices at the pump. The international Brent oil, used for much of our gas here in the east, moved down to $104.69 per barrel.
Source: Yahoo Finance
Several stories came to a head this week, all contributing to the activity we saw in the market. There were geopolitical stories like new sanctions being applied to Russia. Argentina was unable to make payments to bondholders, triggering a default and reminding investors that debt problems are still out there. Plus, economic data released this week added to the decline, although probably not for reasons you would think.
We’ll start with the Fed, who held another of their periodic policy meetings on Wednesday. There was little in the way of surprises, but they did strike a noticeably different tone than the previous month’s meeting.
They noted how eonomic data has improved since their last meeting and inflation has increased, one of their objectives. This worried investors that the Fed would pull back on their stimulative policies sooner than expected. Low interest rates have helped stocks rise and any increase in rates is likely to pressure stocks lower.
Quelling some of those fears, they noted disappointments with the employment picture and will keep their stimulative policies in place until it improves.
The very next day, however, saw a positive employment item that helped send stocks sharply lower. The employment cost index - an obscure metric to most - showed the biggest gain in six years. This means wages are increasing, another one of the Fed’s goals. It also means one step closer to the Fed pulling back on its stimulative policies, so stocks sold off.
Also adding pressure to stocks was the second quarter GDP report. It came in much stronger than expected, indicating an increase in economic growth after a very weak first quarter.
Why would a positive economic report send stocks lower? Again, it’s all about the Fed. Good economic news means less stimulus. This activity of the market shows what an odd time we live in when good news is bad news for the stock market.
Closing out the week, on Friday we received the employment report for the month of July. Economists were looking for roughly 230,000 jobs added, only to be disappointed with the 209,000 reported. In a way this was good, since an overly good report would have added to fears of – again with the Fed – a pullback in stimulus.
We’ll conclude this section with corporate earnings, which received little attention though nearly 30% of the S&P 500 reported earnings this week. According to Factset, corporate earnings have grown 7.6%, while revenue (which is what a company received in sales, earnings are what remain after costs are subtracted) rose 4.2%. Heading into earnings season, analysts were expecting a gain of 4.9% in earnings, so these numbers have been much better than expected.
Next Week
Next week will be much quieter for data. Corporate earnings releases have peaked, so we’ll start to see fewer and fewer companies reporting their earnings. As for economic data, we’ll get info on the strength of the service sector, plus factory orders and the trade balance. Nothing too important.
After the volatility of this week though, it still may be another rough week. There will be a lot of activity in overseas markets, too, as central banks in Europe hold policy meetings.
Investment Strategy
Last week we discussed high yield bonds, pointing out their decline over the past month was a signal the stock market could move lower. Often this works as a good leading indicator, but sometimes it doesn’t. Well, stocks did move lower this week. But what’s more troubling, though, is that high yield bonds moved even lower (stocks are indicated in the orange line below, high yield bonds are the black). This gives us a reason for caution.
We’ll start with the Fed, who held another of their periodic policy meetings on Wednesday. There was little in the way of surprises, but they did strike a noticeably different tone than the previous month’s meeting.
They noted how eonomic data has improved since their last meeting and inflation has increased, one of their objectives. This worried investors that the Fed would pull back on their stimulative policies sooner than expected. Low interest rates have helped stocks rise and any increase in rates is likely to pressure stocks lower.
Quelling some of those fears, they noted disappointments with the employment picture and will keep their stimulative policies in place until it improves.
The very next day, however, saw a positive employment item that helped send stocks sharply lower. The employment cost index - an obscure metric to most - showed the biggest gain in six years. This means wages are increasing, another one of the Fed’s goals. It also means one step closer to the Fed pulling back on its stimulative policies, so stocks sold off.
Also adding pressure to stocks was the second quarter GDP report. It came in much stronger than expected, indicating an increase in economic growth after a very weak first quarter.
Why would a positive economic report send stocks lower? Again, it’s all about the Fed. Good economic news means less stimulus. This activity of the market shows what an odd time we live in when good news is bad news for the stock market.
Closing out the week, on Friday we received the employment report for the month of July. Economists were looking for roughly 230,000 jobs added, only to be disappointed with the 209,000 reported. In a way this was good, since an overly good report would have added to fears of – again with the Fed – a pullback in stimulus.
We’ll conclude this section with corporate earnings, which received little attention though nearly 30% of the S&P 500 reported earnings this week. According to Factset, corporate earnings have grown 7.6%, while revenue (which is what a company received in sales, earnings are what remain after costs are subtracted) rose 4.2%. Heading into earnings season, analysts were expecting a gain of 4.9% in earnings, so these numbers have been much better than expected.
Next Week
Next week will be much quieter for data. Corporate earnings releases have peaked, so we’ll start to see fewer and fewer companies reporting their earnings. As for economic data, we’ll get info on the strength of the service sector, plus factory orders and the trade balance. Nothing too important.
After the volatility of this week though, it still may be another rough week. There will be a lot of activity in overseas markets, too, as central banks in Europe hold policy meetings.
Investment Strategy
Last week we discussed high yield bonds, pointing out their decline over the past month was a signal the stock market could move lower. Often this works as a good leading indicator, but sometimes it doesn’t. Well, stocks did move lower this week. But what’s more troubling, though, is that high yield bonds moved even lower (stocks are indicated in the orange line below, high yield bonds are the black). This gives us a reason for caution.
On that cautious note, we are near a good level to put new money into the broader market. We haven’t done so yet and it’s not a strong buying point, but may be worth a nibble if we see stock prices moderate. We do remain very cautious and fear a broader decline in stocks down the road, but are willing to dip a toe in the water.
After this selloff, many individual stock names present nice buying opportunities, but again with caution. We look at a company’s fundamentals to tell us if it is worth buying, and technical analysis, or the charts, tell us if it is a good time to buy.
On bonds, prices fell again this week (so bond yields rose), but they remain volatile. Despite this move, prices have been in this flat range for nearly a year now, so they haven’t established a trend either way. With prices so high, though, 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.
European bonds look extremely expensive at the moment and also look like fantastic short opportunities.
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.
After this selloff, many individual stock names present nice buying opportunities, but again with caution. We look at a company’s fundamentals to tell us if it is worth buying, and technical analysis, or the charts, tell us if it is a good time to buy.
On bonds, prices fell again this week (so bond yields rose), but they remain volatile. Despite this move, prices have been in this flat range for nearly a year now, so they haven’t established a trend either way. With prices so high, though, 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.
European bonds look extremely expensive at the moment and also look like fantastic short opportunities.
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.
