Stocks moved lower all week before a gain Friday pushed stocks into positive territory. For the week, the Dow was higher by 0.4%, the S&P 500 gained 0.3%, and the Nasdaq also returned 0.4%. Government bonds saw their highest price in more than a year this week, so bond yields traded at the lowest level over that same time. Gold gained ground on geopolitical worries, rising 1.2%. Oil hit six-month lows this week with a loss of 0.2% to $97.65 per barrel. The international Brent oil, used for much of our gas here in the east, had the opposite result with an increase to $105.31 per barrel.
Source: Yahoo Finance
With little in the way of economic news this week, geopolitical events took the spotlight. The fighting in Ukraine/Russia and Iraq has recently had little impact on the market, but was a major factor in the market direction this week.
The threat of a Russian invasion into Ukraine has increased, so tensions have been rising. Negative comments from officials on both sides saw an immediate move lower in stocks.
Markets saw additional selling on Thursday as President Obama announced airstrikes on the terrorists in Iraq. Any time military action is used tends to be a negative for stocks.
Like we’ve seen in the past with these geopolitical events, the selling was short lived and stocks resumed their rise on Friday. With the market, it only seems to react if there is an increase or decrease in tensions – otherwise it is ignored. This is one reason why the Israel/Gaza fight has had little impact on the market – conditions are bad, but no better or worse than they have been.
Economic data this week was largely positive, but since they weren’t major reports, they had little impact on the market. The strength of our service sector stands at the best level since 2005 and the trade deficit improved. On the trade deficit, it improved as our exports rose slightly and imports fell strongly. To many, the lack of imports indicates less demand in the economy and could mean trouble in the future.
Finally, about 90% of companies in the S&P 500 have reported their earnings at this point. And they’ve done pretty well. According to Factset, earnings have grown a decent 8.4%. As for revenue, (what companies actually receive in sales) it has seen a 4.3% growth, the best in over three years.
Next Week
We’ll see an increase in economic data released next week, though the reports are not that significant. We’ll get info on retail sales over the last month, info on the strength of small businesses, industrial production, and inflation at the producer level (PPI).
Several regional Fed presidents will be making speeches, too, so investors will be paying close attention to what they have to say.
Investment Strategy
After the strong selloff last week, we did a little buying early this week. The market has been somewhat volatile since then, but the gain Friday was encouraging.
Lately we have discussed the action in the high yield bond (or junk bond) market, citing its recent decline as a leading indicator for the broader stock market. This week, however, those high yield bonds rose sharply, as can be seen in the black line on the graph below. The S&P 500 is in orange. If high yield bonds continue higher from here, it could be a sign the broader market will rise, as well.
The threat of a Russian invasion into Ukraine has increased, so tensions have been rising. Negative comments from officials on both sides saw an immediate move lower in stocks.
Markets saw additional selling on Thursday as President Obama announced airstrikes on the terrorists in Iraq. Any time military action is used tends to be a negative for stocks.
Like we’ve seen in the past with these geopolitical events, the selling was short lived and stocks resumed their rise on Friday. With the market, it only seems to react if there is an increase or decrease in tensions – otherwise it is ignored. This is one reason why the Israel/Gaza fight has had little impact on the market – conditions are bad, but no better or worse than they have been.
Economic data this week was largely positive, but since they weren’t major reports, they had little impact on the market. The strength of our service sector stands at the best level since 2005 and the trade deficit improved. On the trade deficit, it improved as our exports rose slightly and imports fell strongly. To many, the lack of imports indicates less demand in the economy and could mean trouble in the future.
Finally, about 90% of companies in the S&P 500 have reported their earnings at this point. And they’ve done pretty well. According to Factset, earnings have grown a decent 8.4%. As for revenue, (what companies actually receive in sales) it has seen a 4.3% growth, the best in over three years.
Next Week
We’ll see an increase in economic data released next week, though the reports are not that significant. We’ll get info on retail sales over the last month, info on the strength of small businesses, industrial production, and inflation at the producer level (PPI).
Several regional Fed presidents will be making speeches, too, so investors will be paying close attention to what they have to say.
Investment Strategy
After the strong selloff last week, we did a little buying early this week. The market has been somewhat volatile since then, but the gain Friday was encouraging.
Lately we have discussed the action in the high yield bond (or junk bond) market, citing its recent decline as a leading indicator for the broader stock market. This week, however, those high yield bonds rose sharply, as can be seen in the black line on the graph below. The S&P 500 is in orange. If high yield bonds continue higher from here, it could be a sign the broader market will rise, as well.
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.
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.
