Please note: There will be no market commentary next week due to the Thanksgiving holiday. Additionally, there may or may not be a market commentary the following week, though it is too early to determine at this point.
Stocks saw another week of record highs. Through the close Friday, the Dow rose 1.0%, the S&P gained 1.1% and the Nasdaq was higher by 0.5%. Gold had another increase, up by 1.1%. Oil prices saw an rise this week with a gain of 0.9% to close at $76.51 per barrel. The international Brent oil, used for much of our gas here in the East, closed the week slightly higher to just north of $80 per barrel.
Stocks saw another week of record highs. Through the close Friday, the Dow rose 1.0%, the S&P gained 1.1% and the Nasdaq was higher by 0.5%. Gold had another increase, up by 1.1%. Oil prices saw an rise this week with a gain of 0.9% to close at $76.51 per barrel. The international Brent oil, used for much of our gas here in the East, closed the week slightly higher to just north of $80 per barrel.
Source: Google Finance
The week was relatively uneventful until Friday, with news from central bankers again having a large impact on the market.
Monday opened with economic data showing Japan had fallen back into a recession. Their latest GDP report was firmly in the red, which was a surprise to economists who expected a solid improvement.
Keep in mind, Japan recently implemented a massive stimulus program – the biggest in the history of the world based on the size of their economy – and they are still seeing negative economic growth.
Despite the lack of results, Japan’s prime minister has promised to do even more stimulus in light of the poor economic growth. In fact, he is looking to hand out cash or gift certificates to get people to spend more. It is almost embarrassing how desperate they are to create growth and we worry the long-term damage they are ultimately doing to the economy will be extremely harmful to a lot of people.
Japan wasn’t the only country announcing more stimulus this week. Both Europe and China have seen several poor economic reports recently, indicating their economies are slowing. In an attempt to create more growth, China surprised the market by announcing new stimulus measures. Europe was not far behind as the head of their central bank made some of the strongest remarks yet that they would print even more money for stimulus. Stocks soared on the news Friday.
We keep saying, maybe the fact that these countries have to keep coming back to do more stimulus shows the policy does not work. Otherwise, their economies would be booming due to the amount of stimulus they have created. We think history will not look kindly on this period as their growth policies are misguided and harmful. Still, it does send stocks higher in the meantime.
Our central bank was in the news, too, as the minutes from their latest policy meeting were released. However, they told us very little, so there was little reaction in the market.
Finally, our economic data this week was mixed. Manufacturing and housing reports showed improvement. Inflation at the consumer level remained flat from last month while ticking higher at the producer level. Lower energy prices bring the inflation level down, but prices for other items like food have increased, making the inflation rate a wash.
Next Week
The Thanksgiving holiday will make next week a quiet one, but we’ll still get a few important economic reports. There will be a revision to third-quarter GDP, plus durable goods and personal income and spending. The rest of the world will have a full work-week, so we may see more activity coming from foreign markets.
Investment Strategy
No change here. We are very cautious on the market at this point. On a short-term basis, stocks were cheap a month ago and now stand at expensive levels. We would not put new money into the broader market at this time. Though we have a cautious outlook, all the money flowing into the market from central bank money printing could keep stocks afloat. Plus, any time markets fall, a central bank will step in and print money to prevent it from falling. It’s hard to bet against this.
Our longer term view remains unchanged. We continue to have worries for the market due to market distortions created by the central banks and money printing. Stimulus continues to propel stocks higher, but we worry the longer it continues, the more painful the correction will be.
We’re again updating one of our leading indicator charts below. High yield bonds (the black line) have done well to foreshadow the movement in the broader stock market (the orange line). At this time, they are signaling a more cautious tone. One factor that may affect this chart is lower oil prices – many energy companies issue this risky, high-yield debt and the lower oil prices are hurting their profitability. This may be part of high-yield’s decline. And remember that no indicator is perfect. As we continue to see, big moves in the market have come on the words of central bankers, which are inherently unpredictable.
Monday opened with economic data showing Japan had fallen back into a recession. Their latest GDP report was firmly in the red, which was a surprise to economists who expected a solid improvement.
Keep in mind, Japan recently implemented a massive stimulus program – the biggest in the history of the world based on the size of their economy – and they are still seeing negative economic growth.
Despite the lack of results, Japan’s prime minister has promised to do even more stimulus in light of the poor economic growth. In fact, he is looking to hand out cash or gift certificates to get people to spend more. It is almost embarrassing how desperate they are to create growth and we worry the long-term damage they are ultimately doing to the economy will be extremely harmful to a lot of people.
Japan wasn’t the only country announcing more stimulus this week. Both Europe and China have seen several poor economic reports recently, indicating their economies are slowing. In an attempt to create more growth, China surprised the market by announcing new stimulus measures. Europe was not far behind as the head of their central bank made some of the strongest remarks yet that they would print even more money for stimulus. Stocks soared on the news Friday.
We keep saying, maybe the fact that these countries have to keep coming back to do more stimulus shows the policy does not work. Otherwise, their economies would be booming due to the amount of stimulus they have created. We think history will not look kindly on this period as their growth policies are misguided and harmful. Still, it does send stocks higher in the meantime.
Our central bank was in the news, too, as the minutes from their latest policy meeting were released. However, they told us very little, so there was little reaction in the market.
Finally, our economic data this week was mixed. Manufacturing and housing reports showed improvement. Inflation at the consumer level remained flat from last month while ticking higher at the producer level. Lower energy prices bring the inflation level down, but prices for other items like food have increased, making the inflation rate a wash.
Next Week
The Thanksgiving holiday will make next week a quiet one, but we’ll still get a few important economic reports. There will be a revision to third-quarter GDP, plus durable goods and personal income and spending. The rest of the world will have a full work-week, so we may see more activity coming from foreign markets.
Investment Strategy
No change here. We are very cautious on the market at this point. On a short-term basis, stocks were cheap a month ago and now stand at expensive levels. We would not put new money into the broader market at this time. Though we have a cautious outlook, all the money flowing into the market from central bank money printing could keep stocks afloat. Plus, any time markets fall, a central bank will step in and print money to prevent it from falling. It’s hard to bet against this.
Our longer term view remains unchanged. We continue to have worries for the market due to market distortions created by the central banks and money printing. Stimulus continues to propel stocks higher, but we worry the longer it continues, the more painful the correction will be.
We’re again updating one of our leading indicator charts below. High yield bonds (the black line) have done well to foreshadow the movement in the broader stock market (the orange line). At this time, they are signaling a more cautious tone. One factor that may affect this chart is lower oil prices – many energy companies issue this risky, high-yield debt and the lower oil prices are hurting their profitability. This may be part of high-yield’s decline. And remember that no indicator is perfect. As we continue to see, big moves in the market have come on the words of central bankers, which are inherently unpredictable.
As for the bond market, bond prices have stalled, similar to stocks. Many investors see bonds as overpriced have looked for them to fall in value. A short position would be the trade for this scenario, where your profit increases when prices fall). A short position may make for a nice hedge, but this should be a longer-term trade as the potential for profit seems low at this time. Floating rate bonds are another trade to consider in this scenario, but they tend to be riskier, so caution is warranted.
European bonds, especially for the profligate countries, look extremely expensive at the moment and also look like fantastic short opportunities. This trade has done well recently as some of the riskier countries saw the bonds fall in value (so yields rose).
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. They have not done well recently, but are intended to be a longer term investment. 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. It hasn’t fared well lately, but remains a good hedge for the long run.
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.
European bonds, especially for the profligate countries, look extremely expensive at the moment and also look like fantastic short opportunities. This trade has done well recently as some of the riskier countries saw the bonds fall in value (so yields rose).
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. They have not done well recently, but are intended to be a longer term investment. 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. It hasn’t fared well lately, but remains a good hedge for the long run.
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.
