A large decline Friday crimped what looked like an otherwise decent week for stocks. For the week, the Dow gained 0.6%, the S&P 500 rose 1.2%, and the Nasdaq fared the best with a return of 2.2%. Government bonds again saw their highest price in more than a year (so bond yields traded at the lowest level over that same time) as investors looked for a safe place to park their money. Gold saw a decline of 0.3% on the week. Oil also moved lower by 0.3% to $97.35 per barrel. The international Brent oil, used for much of our gas here in the east, saw the lowest prices in more than a year to close at $103.40 per barrel.
Source: Yahoo Finance
Stocks saw some of the lowest volume of trading this the year on a combination of a lack of news and perhaps as many investors take vacations before the new school year. The light volume left the market open to big moves on geopolitical news, which we saw on Friday when Ukraine reportedly destroyed a Russian military unit that crossed into the country.
This week mostly wrapped up the corporate earnings season as almost 95% of companies in the S&P 500 have now released their earnings. On average, companies have seen their earnings grow 8.4% on a year-over-year basis, which is the second-fastest rate since 2011. Remember, heading in to earnings season analysts were expecting a 4.9% growth, so earnings have been much stronger than expected.
It is worth noting, though, that these earnings numbers haven’t resulted in gains for the market. Since the earnings reports first started, the market is lower over this time period.
The bond market, usually a boring topic, was again a big story this week. Bond yields keep moving lower as investors seek out a safe place to park their money. Part of it is these geopolitical problems that have sprung up around the globe.
Another part is a concern for weaker economic growth. Typically the bond market is a good leading indicator for the broader economy, so this is something to keep an eye on.
Bond yields are even lower in Europe, which is unusual since less credit-worthy countries typically trade at higher bond yields (like with credit cards, where more credit-worthy people pay lower rates than riskier people). Yields moved to new historic lows this week as we learned economic growth in the Eurozone stalled over the last quarter. In the past year, the economy has essentially gone nowhere.
This has increased calls for even more stimulus in the Eurozone. Political leaders fear a scenario like that of Japan’s, where growth has declined for nearly 20 years, and believe more stimulus will bring economic growth.
This ignores the fact that Japan has undergone stimulus measures for well over a decade. It failed to work, so they recently increased the stimulus dramatically, giving the economy a quick jolt. The growth was short lived, however, as this week we learned the economy shrank 6.8% over the past year.
This is the problem with all the stimulus programs around the globe. It may give a quick jolt to the economy, but it is only temporary and leaves the economy worse than before. History has shown that only fundamental fixes to an economy will bring about growth – lower taxes, lower regulations, easier labor standards, stable currency, lower debt – but these are politically unpopular. Until these real reforms are implemented, we foresee a very bumpy ride ahead.
Next Week
Next week looks to be a quiet one for economic data, but there will be plenty of other news to keep an eye on. As for economic data, we’ll get info on inflation at the consumer level, plus data on housing and leading economic indicators.
Geopolitical events were a big player in moving the market this week and will likely do the same next week.
Possibly having a bigger impact on the market next week will be the Fed, who is holding their annual economic symposium in Jackson Hole. News out of this event, plus the minutes from their last meeting, may give us a better idea on the direction of the stimulus program.
Investment Strategy
Despite the drop Friday, stocks continue to move higher from the lows we hit last week. The indicators we look at reinforce the idea that the market will trend higher from here. We think the buying opportunity has passed and don’t plan on adding any new money to the broader stock index. Instead, we’d prefer putting new money into undervalued individual names at this point.
While the market has the potential to move higher in the short term, we still have serious concerns for the longer term. We worry about overvaluations in riskier investments, ranging from stocks to the bond market. Europe, in particular, is a worry as they drift back into recession with record levels of overvalued debt. At some point we see this correcting in a painful way, but it is anyone’s guess as to when this will occur.
As for bonds, prices rose sharply this week to their best level in over a year (so bond yields fell to record lows). These yields are on the low level of the range they been in over the last year, so despite the volatility, they haven’t established a broader 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.
This week mostly wrapped up the corporate earnings season as almost 95% of companies in the S&P 500 have now released their earnings. On average, companies have seen their earnings grow 8.4% on a year-over-year basis, which is the second-fastest rate since 2011. Remember, heading in to earnings season analysts were expecting a 4.9% growth, so earnings have been much stronger than expected.
It is worth noting, though, that these earnings numbers haven’t resulted in gains for the market. Since the earnings reports first started, the market is lower over this time period.
The bond market, usually a boring topic, was again a big story this week. Bond yields keep moving lower as investors seek out a safe place to park their money. Part of it is these geopolitical problems that have sprung up around the globe.
Another part is a concern for weaker economic growth. Typically the bond market is a good leading indicator for the broader economy, so this is something to keep an eye on.
Bond yields are even lower in Europe, which is unusual since less credit-worthy countries typically trade at higher bond yields (like with credit cards, where more credit-worthy people pay lower rates than riskier people). Yields moved to new historic lows this week as we learned economic growth in the Eurozone stalled over the last quarter. In the past year, the economy has essentially gone nowhere.
This has increased calls for even more stimulus in the Eurozone. Political leaders fear a scenario like that of Japan’s, where growth has declined for nearly 20 years, and believe more stimulus will bring economic growth.
This ignores the fact that Japan has undergone stimulus measures for well over a decade. It failed to work, so they recently increased the stimulus dramatically, giving the economy a quick jolt. The growth was short lived, however, as this week we learned the economy shrank 6.8% over the past year.
This is the problem with all the stimulus programs around the globe. It may give a quick jolt to the economy, but it is only temporary and leaves the economy worse than before. History has shown that only fundamental fixes to an economy will bring about growth – lower taxes, lower regulations, easier labor standards, stable currency, lower debt – but these are politically unpopular. Until these real reforms are implemented, we foresee a very bumpy ride ahead.
Next Week
Next week looks to be a quiet one for economic data, but there will be plenty of other news to keep an eye on. As for economic data, we’ll get info on inflation at the consumer level, plus data on housing and leading economic indicators.
Geopolitical events were a big player in moving the market this week and will likely do the same next week.
Possibly having a bigger impact on the market next week will be the Fed, who is holding their annual economic symposium in Jackson Hole. News out of this event, plus the minutes from their last meeting, may give us a better idea on the direction of the stimulus program.
Investment Strategy
Despite the drop Friday, stocks continue to move higher from the lows we hit last week. The indicators we look at reinforce the idea that the market will trend higher from here. We think the buying opportunity has passed and don’t plan on adding any new money to the broader stock index. Instead, we’d prefer putting new money into undervalued individual names at this point.
While the market has the potential to move higher in the short term, we still have serious concerns for the longer term. We worry about overvaluations in riskier investments, ranging from stocks to the bond market. Europe, in particular, is a worry as they drift back into recession with record levels of overvalued debt. At some point we see this correcting in a painful way, but it is anyone’s guess as to when this will occur.
As for bonds, prices rose sharply this week to their best level in over a year (so bond yields fell to record lows). These yields are on the low level of the range they been in over the last year, so despite the volatility, they haven’t established a broader 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.
