A volatile, short week saw stocks move lower. For the week, the Dow declined 1.2%, the S&P lost 0.9%, and the Nasdaq was lower by 0.4%. A sharp drop Tuesday put gold down for the week, off 1.2%. Oil was lower for much of the week, too, but a late Friday gain closed it higher by 1.0% on the week to $60.30 per barrel. The international Brent oil, which is used to make much of our gas here in the east, was lower by just a nickel to $65.50 per barrel.
Source: Google Finance
We saw another fairly unremarkable week this week, but the lighter trading volume helped contribute to the large swings we saw in the market. There were a few economic reports traders kept an eye on, as they could impact the Fed’s decision on when to raise interest rates. Plus, Greece was back in the headlines.
We’ll start with economic reports, whose results were largely mixed. The big report came on Friday with the revision to first quarter GDP. Previously showing our economy had a slight growth of 0.2%, the number was revised down to -0.7%. This was no surprise as nearly all economists were expecting a negative growth.
It is disappointing, however, that after all these years of stimulus we continue to see a stagnant economy. To us, though, it’s not a surprise as we firmly believe they are applying the wrong remedy, and it doesn’t look likely to change any time soon.
Other economic data was better, though. Housing data came in strong and while durable goods showed a decline, they were higher when excluding airplane purchases, which can skew this number.
Investors are looking at these reports through the prism of the Fed and their stimulus. Better economic data means less stimulus is needed. Since stimulus helps send stocks higher, good economic reports mean less stimulus and stocks move lower. Yes, we’re back to good news equaling bad news.
The Fed seems adamant about raising interest rates this year, though. Last Friday, Fed chief Janet Yellen expressed her desire to raise rates sooner rather than later. We think this was a reason for the strong sell-off on Tuesday, after investors had the long weekend to digest the remarks.
Drama in Greece had an impact on our markets this week, too. They have another debt repayment approaching next week and don’t appear to have the funds to do so. We’re back to where we were a few months ago – Greece out of money and looking for a lifeline. Another bailout looks unlikely so the consequences could be more severe this time. However, we won’t underestimate the Europeans desire to kick the can further down the road.
Finally, a story from the tech world we thought was worth noting. The CEO of Snapchat – the messaging app that supposedly makes money somehow – warned in an interview that we were experiencing a tech bubble that will someday burst. He cited low interest rates pushing investors into riskier investments that don’t warrant such high valuations. He warned it wasn’t a matter of if the bubble will burst, but when.
We found this noteworthy, because Snapchat itself is looking to go public to raise funds. That someone directly benefitting from these conditions would raise a red flag was something we thought worth paying attention to.
Next Week
Next week looks to be a very busy one. There will be several economic reports to watch in addition to the Greek debt payment on Friday, which they are expected to miss.
As for the economic reports, we’ll see info on the strength of the manufacturing and service sectors, inflation, income and spending, and factory orders. The big report comes on Friday with May’s employment report (hard to believe it’s almost June!). Remember, these reports are all looked at through the lens of more stimulus, so a good report might sends stocks lower, and vice-versa.
As we approach June, we need to keep in mind that it is historically one of the worst months of the year as it is down more often than it is up. The market usually ticks higher later in the year, but we could see yet another volatile June.
Investment Strategy
Again, no change here. Stock markets were somewhat expensive in the short run, so it wasn’t surprising to see them move lower over the last two weeks. Still, they are not at a point where we would do any buying, plus they are not at a level we’d consider selling. They’ve grinded sideways to slightly higher over the last couple months and we haven’t seen a catalyst to really give them momentum in either direction.
Our longer term view remains unchanged, too. We continue to have concerns for the long run as we worry the longer these stimulus programs remain in place, the greater the distortions in the market become. This makes the correction even more painful when it does correct. The “when” is anyone’s guess, however. Plus, a lack of companies reinvesting in themselves makes the future look less-bright.
Bonds yields moved lower this week (and prices higher) as bonds have regained their appeal as a safe haven amidst the Greek drama. They remain in a tight range, though, and we see no reason for this to change any time soon. Stimulus from global central bankers will keep our bonds attractive to investors and therefore keep yields low (and prices high).
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. They have seen an uptick in interest, so TIPs have performed well recently.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low. Therefore, 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 when more stimulus looks likely and falling on the opposite. But it does protect against negative effects from policymakers.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets. However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged.
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.
We’ll start with economic reports, whose results were largely mixed. The big report came on Friday with the revision to first quarter GDP. Previously showing our economy had a slight growth of 0.2%, the number was revised down to -0.7%. This was no surprise as nearly all economists were expecting a negative growth.
It is disappointing, however, that after all these years of stimulus we continue to see a stagnant economy. To us, though, it’s not a surprise as we firmly believe they are applying the wrong remedy, and it doesn’t look likely to change any time soon.
Other economic data was better, though. Housing data came in strong and while durable goods showed a decline, they were higher when excluding airplane purchases, which can skew this number.
Investors are looking at these reports through the prism of the Fed and their stimulus. Better economic data means less stimulus is needed. Since stimulus helps send stocks higher, good economic reports mean less stimulus and stocks move lower. Yes, we’re back to good news equaling bad news.
The Fed seems adamant about raising interest rates this year, though. Last Friday, Fed chief Janet Yellen expressed her desire to raise rates sooner rather than later. We think this was a reason for the strong sell-off on Tuesday, after investors had the long weekend to digest the remarks.
Drama in Greece had an impact on our markets this week, too. They have another debt repayment approaching next week and don’t appear to have the funds to do so. We’re back to where we were a few months ago – Greece out of money and looking for a lifeline. Another bailout looks unlikely so the consequences could be more severe this time. However, we won’t underestimate the Europeans desire to kick the can further down the road.
Finally, a story from the tech world we thought was worth noting. The CEO of Snapchat – the messaging app that supposedly makes money somehow – warned in an interview that we were experiencing a tech bubble that will someday burst. He cited low interest rates pushing investors into riskier investments that don’t warrant such high valuations. He warned it wasn’t a matter of if the bubble will burst, but when.
We found this noteworthy, because Snapchat itself is looking to go public to raise funds. That someone directly benefitting from these conditions would raise a red flag was something we thought worth paying attention to.
Next Week
Next week looks to be a very busy one. There will be several economic reports to watch in addition to the Greek debt payment on Friday, which they are expected to miss.
As for the economic reports, we’ll see info on the strength of the manufacturing and service sectors, inflation, income and spending, and factory orders. The big report comes on Friday with May’s employment report (hard to believe it’s almost June!). Remember, these reports are all looked at through the lens of more stimulus, so a good report might sends stocks lower, and vice-versa.
As we approach June, we need to keep in mind that it is historically one of the worst months of the year as it is down more often than it is up. The market usually ticks higher later in the year, but we could see yet another volatile June.
Investment Strategy
Again, no change here. Stock markets were somewhat expensive in the short run, so it wasn’t surprising to see them move lower over the last two weeks. Still, they are not at a point where we would do any buying, plus they are not at a level we’d consider selling. They’ve grinded sideways to slightly higher over the last couple months and we haven’t seen a catalyst to really give them momentum in either direction.
Our longer term view remains unchanged, too. We continue to have concerns for the long run as we worry the longer these stimulus programs remain in place, the greater the distortions in the market become. This makes the correction even more painful when it does correct. The “when” is anyone’s guess, however. Plus, a lack of companies reinvesting in themselves makes the future look less-bright.
Bonds yields moved lower this week (and prices higher) as bonds have regained their appeal as a safe haven amidst the Greek drama. They remain in a tight range, though, and we see no reason for this to change any time soon. Stimulus from global central bankers will keep our bonds attractive to investors and therefore keep yields low (and prices high).
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. They have seen an uptick in interest, so TIPs have performed well recently.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low. Therefore, 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 when more stimulus looks likely and falling on the opposite. But it does protect against negative effects from policymakers.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets. However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged.
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.
