Stocks saw a steadily increasing market this week. Through the close Friday, the Dow gained 0.9%, the S&P climbed 1.6% and the Nasdaq rose a decent 2.7%. Gold reached five-month highs with a 1.2% gain on the week. Oil saw another volatile week to close lower by 7.2% to $45.59 per barrel. The international Brent oil, used for much of our gas here in the east, moved down to $48.55 per barrel.
Source: Google Finance (the Monday holiday skewed our chart this week)
All eyes were on the European Central Bank (ECB) this week. They held a widely-anticipated policy meeting on Thursday where they were expected to announce a new stimulus program. Investors were reluctant to make any big moves before that meeting.
For years the ECB has discussed doing a new stimulus program where they would print money to buy bonds of the various governments, making it easier for them to borrow (much like what our Fed did here). It is also supposed to increase inflation, for they believe higher inflation leads to economic growth.
The day before the meeting, it was leaked that the ECB would print €50 billion (about $58 billion) a month to buy government bonds of the Euro countries. Many speculate the “leak” was intentional, like a trial balloon to gauge interest in the market. That number was met with a tepid response, as many traders were expecting a larger figure.
As it turned out, the ECB did announce a larger number than the one that was leaked. They decided to print €60 billion a month and the program would last until September, 2016 at a minimum, but will continue until inflation hits 2%. It took some time for the market to find direction after the announcement, but stocks closed the day solidly in the green.
By now you are probably aware of how we feel about these stimulus programs. We think it will do little to actually help Europe. The deflation needed to bring prices lower to help the average person will not be allowed occur. There has been no evidence of higher inflation ever leading to economic growth, too, so we’re not even sure why there is such an emphasis on increasing costs.
Further, the fundamental reforms necessary to make Europe competitive again will be ignored. Governments can continue to spend money and drive up debts, papering over problems that will someday rear their head in a terrible manner.
Japan has tried this program for decades and remains stuck in an economic stagnation. We embarked on a similar program, resulting in the weakest economic recovery since WWII, despite the biggest stimulus program in the history of the world. The results have not been pretty, so we question why anyone would wish to continue down this path.
However, markets are likely to move higher and some of the volatility we have seen this year will be reduced due to all the money printed. That money will flow into the stock market and push up prices. This is why the stock market loves these stimulus programs. In fact, Japan purchased the most European stocks in history the week before the ECB announcement. Imagine that, buying stocks with money printed out of thin air! If only we had that ability…
While the focus was on the ECB this week, corporate earnings started coming in at a solid pace. Unfortunately, the results have not been pretty. According to Factset, almost 20% of the companies in the S&P 500 have reported their earnings. Those earnings have shown no growth, which is well below the already low 1.1% economists were expecting. It is still early in the earnings season so these figures are bound to change, but it has been a disappointing start so far.
Next Week
Next week looks to be another busy one. The market will still likely move on this week’s news out of the ECB. Our Fed will be in the news, too, as they hold a policy meeting, but no policy changes are expected to be announced.
Corporate earnings will come in at a strong pace, so the market may pay attention to them, too. As for economic data, we’ll get info on durable goods, housing, and GDP for the fourth quarter.
Lastly, the elections in Greece this weekend are likely to grab some headlines. A far-left, anti-Euro candidate looks likely to grab the win. It will be important to see what they can actually do, for any changes in their standing in the Euro or their debt repayments is likely to ripple across the entire continent.
Investment Strategy
With the ECB joining many other central banks in printing money, it is likely to help stocks move higher and reduce volatility in the market. The new ECB stimulus program doesn’t officially begin until March, but stocks are still likely to move higher. Clearly this is a wind behind the markets back.
Despite this, the market is not at a point where we would add new money to the broader index. However, there are many undervalued individual stocks that look attractive and we picked up a few names this week.
We still have concerns for the longer term of the market. We worry about the distortions created by the central banks and money printing (just look at the recent plunge in oil prices). Stimulus continues to send stocks higher, but we worry the longer it continues, the more painful the correction will be.
As for the bond market, bond prices rose (so yields fell) when investors pulled money out of stocks and put them into the safer bonds. This reversed when stocks rose this week. Bond prices may continue to rise (so yields fall) as the stimulus programs push up bond prices around the globe.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. They have not fared well recently as the likelihood of inflation has waned with the lower energy prices, but we are keeping a longer term focus with them. 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, too.
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 has done well lately, but with the volatility we’ve seen in it over the years, it is better to think of it as a hedge for the portfolio.
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.
For years the ECB has discussed doing a new stimulus program where they would print money to buy bonds of the various governments, making it easier for them to borrow (much like what our Fed did here). It is also supposed to increase inflation, for they believe higher inflation leads to economic growth.
The day before the meeting, it was leaked that the ECB would print €50 billion (about $58 billion) a month to buy government bonds of the Euro countries. Many speculate the “leak” was intentional, like a trial balloon to gauge interest in the market. That number was met with a tepid response, as many traders were expecting a larger figure.
As it turned out, the ECB did announce a larger number than the one that was leaked. They decided to print €60 billion a month and the program would last until September, 2016 at a minimum, but will continue until inflation hits 2%. It took some time for the market to find direction after the announcement, but stocks closed the day solidly in the green.
By now you are probably aware of how we feel about these stimulus programs. We think it will do little to actually help Europe. The deflation needed to bring prices lower to help the average person will not be allowed occur. There has been no evidence of higher inflation ever leading to economic growth, too, so we’re not even sure why there is such an emphasis on increasing costs.
Further, the fundamental reforms necessary to make Europe competitive again will be ignored. Governments can continue to spend money and drive up debts, papering over problems that will someday rear their head in a terrible manner.
Japan has tried this program for decades and remains stuck in an economic stagnation. We embarked on a similar program, resulting in the weakest economic recovery since WWII, despite the biggest stimulus program in the history of the world. The results have not been pretty, so we question why anyone would wish to continue down this path.
However, markets are likely to move higher and some of the volatility we have seen this year will be reduced due to all the money printed. That money will flow into the stock market and push up prices. This is why the stock market loves these stimulus programs. In fact, Japan purchased the most European stocks in history the week before the ECB announcement. Imagine that, buying stocks with money printed out of thin air! If only we had that ability…
While the focus was on the ECB this week, corporate earnings started coming in at a solid pace. Unfortunately, the results have not been pretty. According to Factset, almost 20% of the companies in the S&P 500 have reported their earnings. Those earnings have shown no growth, which is well below the already low 1.1% economists were expecting. It is still early in the earnings season so these figures are bound to change, but it has been a disappointing start so far.
Next Week
Next week looks to be another busy one. The market will still likely move on this week’s news out of the ECB. Our Fed will be in the news, too, as they hold a policy meeting, but no policy changes are expected to be announced.
Corporate earnings will come in at a strong pace, so the market may pay attention to them, too. As for economic data, we’ll get info on durable goods, housing, and GDP for the fourth quarter.
Lastly, the elections in Greece this weekend are likely to grab some headlines. A far-left, anti-Euro candidate looks likely to grab the win. It will be important to see what they can actually do, for any changes in their standing in the Euro or their debt repayments is likely to ripple across the entire continent.
Investment Strategy
With the ECB joining many other central banks in printing money, it is likely to help stocks move higher and reduce volatility in the market. The new ECB stimulus program doesn’t officially begin until March, but stocks are still likely to move higher. Clearly this is a wind behind the markets back.
Despite this, the market is not at a point where we would add new money to the broader index. However, there are many undervalued individual stocks that look attractive and we picked up a few names this week.
We still have concerns for the longer term of the market. We worry about the distortions created by the central banks and money printing (just look at the recent plunge in oil prices). Stimulus continues to send stocks higher, but we worry the longer it continues, the more painful the correction will be.
As for the bond market, bond prices rose (so yields fell) when investors pulled money out of stocks and put them into the safer bonds. This reversed when stocks rose this week. Bond prices may continue to rise (so yields fall) as the stimulus programs push up bond prices around the globe.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. They have not fared well recently as the likelihood of inflation has waned with the lower energy prices, but we are keeping a longer term focus with them. 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, too.
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 has done well lately, but with the volatility we’ve seen in it over the years, it is better to think of it as a hedge for the portfolio.
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.
