Commentary for the week ending 8-28-15

The most volatile week we’ve seen in years closed with a gain.  For the week, the Dow rose 1.1%, the S&P gained 0.9%, and the Nasdaq added a solid 2.6%.  Gold lost some of the gains it achieved recently, off 2.2%.  A late-week surge sent oil higher on the week, up nearly 12% to $45.22 per barrel.  The international Brent oil, used to make much of our gas here in the east, added $4 to $49.93 per barrel.  

Source: Google Finance

The markets continued to lose ground as we opened the week, but reversed course sharply as the week went on and bargain hunters stepped in to snap up stocks.  Like the past few weeks, there wasn’t one trigger we could point to as the cause of the swings in the market.  A malaise had been building, leaving investors very uncertain about the direction of the market and creating a volatile trading environment.

We’ll start with Monday’s open, which was like walking right into a buzz saw.  The Dow immediately opened down over 1,000 points, which was a loss of more than 6%.  Panic selling at the open after last week’s losses was the likely culprit for such a big move (remember – never sell on panic, especially at the open!). 

Thankfully, stocks moderated from there on Monday, with the Dow closing down a more modest 588 points.  Any other day, that large of a move would be bemoaned.  After falling more than 1,000 points, though, investors seemed content with a 588-point move lower. 

Many investors have been looking for a pullback in stocks to begin putting new money in (count us among them), so the big move lower brought out the bargain hunters.  This lead to a tug-of-war between the bears and the bulls (bears are investors who think the market will move lower and bulls believe it will move higher) for the remainder of the week.

While the volatility in the market was probably driven more by the battle between the bulls and the bears, there were a few news items that investors had their eyes on.

China continues to be a concern.  Their markets opened the week with the worst one-day drop on record as anxieties about the weakness in their economy accelerate.  The Chinese government responded by announcing several new stimulus measures designed to pump more money into the economy and boost spending.  The stimulus currently in place had yet to produce any growth, but more of the same should do the trick, right?

This round of stimulus created a new worry as the government ordered pension plans to buy more stocks to boost prices.  This will create a serious problem for pensioners if stocks were to fall further.  It is a very irresponsible policy, but we live in very irresponsible times.  

Also in the news was the Fed.  This week they held their annual retreat in Jackson Hole, Wyoming.  The turmoil in the market gave them plenty to discuss. 

Only a few weeks ago, investors believed an increase in interest rates was likely to come in September.  This had been a significant factor in the markets decline.  However, Fed officials this week seemed to suggest a September rate hike was unlikely, which was a contributing factor to the markets increase. 

Postponing the withdrawal of stimulus will help the markets in the near term, but this week shows just how volatile the market can be when rates do move higher. 

Finally, this week offered a good opportunity to engage in some tax-loss harvesting.  The sale of a stock triggers a tax on the profits.  However, losses in your portfolio can offset these gains.  Therefore, this was a good time to sell losing stocks to offset those gains.  If it is a position you intend to keep for a long time, you can immediately buy back a similar – but not identical – position. 

For example, one of the more popular positions in our portfolios is the Vanguard Total Stock Market Index fund.  We can sell some of this fund and buy, say, the Schwab US Broad Market Index fund since it is a similar – but not identical – fund as they track slightly different indexes. 

Tax-loss harvesting is something to remember when markets move lower. 


Next Week

We’ll see some important economic reports next week, especially in light of the recent market volatility.  One of the metrics the Fed is focused on is employment, making this week’s report on employment all that more important.  We’ll also get reports on the strength of the manufacturing and service sectors.

These reports are important for their impact on the Fed’s stimulus.  We may see the market move lower if these reports beat expectations, since it means we are a step closer to having the stimulus programs withdrawn. 


Investment Strategy

We did some buying on the weakness in the market this week.  One concern is that it seemed like everyone was also buying this week.  Buy-to-sell ratios were at all-time highs.  When too many investors get on one side of the trade, the market tends to do the opposite.

Another concern still surrounds the Fed and their stimulus program.  We think the direction of the market hinges on their stimulus policy.  Without a clear path forward, it is difficult to tell where the market will move in the short run. 

Some of our longer-run fears were realized with the recent market action.  The distortions created in the market by the Fed’s stimulus program will cause large downturns when the stimulus comes off.

Looking at longer term fundamentals, we are concerned over the lack of companies reinvesting their earnings into their business.  Money has instead flowed into stock buybacks and dividends, not reinvested back in the company.  This signals lower corporate growth down the road. 

Bonds were a popular alternative this week as stocks fell, so bond prices rose and yields fell.  However, that trend reversed when stocks found support.  Prices are still on the high end of the range we have seen, which makes them an expensive hedge at this point.  Cash may be a better option and we would avoid longer-term bonds. 

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

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 on geopolitical issues and when more stimulus looks likely and falling on the opposite. 

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.

Commentary for the week ending 8-21-15

There’s no way to sugarcoat it, it was an ugly week for the market.  Through the close Friday, the Dow and S&P both fell 5.8%, and the Nasdaq plunged 6.8%.  Gold had another good week, up 4.2% to a seven-week high.  Oil hit new six-and-a-half year lows, off 6.2% to close at $40.45 per barrel.  The international Brent oil, used to make much of our gas here in the east, closed down to $45.34 per barrel. 

Source: Google Finance

Fears about the weakness of the global economy and uncertainties as to when the Fed pulls back on its stimulus broke the market this week.  Stocks had their worst week since 2011 and the major indexes are now negative on the year. 

We must say, the drop wasn’t a total surprise.  We’ve seen many warning signs recently, like the “death cross” we discussed last week and the weakening breadth in the market (where the amount of companies making new highs declined as the new lows increased) discussed a couple weeks ago.  The problem is, we’ve seen these warnings several times in the past, only for no decline to appear.  It’s been a very tricky market. 

It’s also been an unusual market in that this year stocks have traded in one of the tightest ranges (from the high to low in stock prices) on record.  A glimpse at the charts below shows us how that range was broken to the downside this week. 

The bottom of a range is called “support,” where the market tends to find buyers that keep it from falling further.  Breaking thorough that range is usually a bad sign for the market.  Without that support, you can keep falling for a long time. 

Looking back even further, we can clearly see the tight range of the market.  We can see how the rise stalled out this year after steadily moving higher in the prior years.  The next chart shows us clearly breaking out of that range.

So what happened this week to send markets sharply lower?  Like the last few weeks, there wasn’t one story we could point to as the culprit.  Instead, it looks like an accumulation of the malaise from the last few weeks.  Global growth is slowing, led by weakness in China, while the Fed seems unsure of its path forward. 

Plus, technical factors like those discussed above play an important role in the market’s direction.  These tend not to make headlines, but cannot be overlooked.

As for the news of the week, the Fed made headlines with the release of the minutes from their latest meeting.  They see the economy improving and expressed a desire to raise interest rates this year. 

The “when” remains the question, however.  Some Fed members called for a September rate increase, while others cited weaknesses around the globe as reason for pause.  This indecision is weighing on the credibility of the Fed and likely played a part in the market decline. 

The slowing growth in China was also a story this week.  Economic data from the country continued to disappoint, sending their markets down more than 11% on the week. 

This also impacted commodity markets as a slowdown in China means less need for commodities, sending commodity prices lower.  That, in turn, sent companies correlated to commodities much lower, including names like companies Exxon, Alcoa, or even Caterpillar.

The weakness in China raised talks of more stimulus in the country, but we continue to ask, if it hasn’t worked yet, what makes them think it will work now?

Case in point is Japan.  This week we learned their economy shrunk for yet another quarter.  This comes after more than 15 years of stimulus programs, with the last two years seeing a significant increase in the amount of stimulus.  Yet the economy has yet to improve. 

Countless countries around the globe – including ours – are taking this wrong approach to fix their economies.  Central planning and stimulus doesn’t work – fundamental reforms are needed.  This includes measures like liberalizing labor markets, reducing regulations, reforming tax codes, and stabilizing currencies.  All have proven to work in the past.  Until fundamental reforms like these are made, we see no reason to break out of the economic malaise that has enveloped the globe. 


Next Week

Next week looks to be another relatively uneventful one – in terms of scheduled economic data.  As we saw this week, that doesn’t necessarily mean the market will be any quieter.

As for the economic data, we’ll get more info on housing, durable goods, personal income and spending, and the revision to second quarter GDP. 

The Fed will also be in the news as they hold a retreat in Jackson Hole, WY.  This is an annual event and we often hear new Fed policies being discussed or introduced.  Investors will be closely watching for any surprises this year, especially after the week we had.  


Investment Strategy

Well, last week clearly wasn’t an ideal time to buy.  However, we are near a point where we would consider putting new money in the market.  We don’t want to catch a falling knife, so we need to see the market stabilize or move higher before committing any new funds, though. 

Further, we aren’t sure if this is the start of the “end-of-stimulus” decline we’ve feared.  Stimulus programs from the Fed have been propping up the market in the face of a stagnant economy and lackluster corporate earnings.  As the stimulus comes off, these flaws are revealed and rightly send the market lower.  If this is the case, we may be in for a bumpy ride. 

As for bonds, their prices rose this week (and yields fell) as investors sought a safe place to park their money as stocks plunged.  Prices are on the high end of the range we have seen, meaning they are an expensive hedge at this point.  Cash may be a better option and  we would avoid longer-term bonds. 

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

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 on geopolitical issues and when more stimulus looks likely and falling on the opposite.  It did very well this week, though. 

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.

Commentary for the week ending 8-14-15

A volatile week saw stocks end not far from where they started.  Through the Friday close, the Dow added 0.6%, the S&P rose 0.7%, and the Nasdaq gained a slight 0.1%.  Currency worries sent gold higher, up 1.7% this week.  Oil prices hit six-year lows to close the week down 3.1% at $42.50 per barrel.  The international Brent oil, used to make much of our gas here in the east, actually rose slightly to close at $48.74 per barrel. 

Source: Google Finance

This week had a little bit of everything, sending the market on a wild ride. 

We opened the week strongly to the upside, which was a welcomed relief after the decline we’ve experienced recently.  A couple events were credited for the gain.

One was a deal completed by Warren Buffett’s company, Berkshire Hathaway, which was their largest on record.  Big deals are done when there is optimism for the future, so this was seen as a bullish sign by the market.

Another reason for the increase in stocks was poor economic data out of China.  Yes, it’s another case of “good news is bad news,” because investors believed it would lead to more stimulus from the Chinese government to prop up the economy and market. 

And those investors were right, though not in the way they expected.  Instead of more stimulus, on Tuesday the government weakened their currency by the most in over 20 years.  This will help their sagging export sector, since a weaker currency makes their exports look cheaper and more attractive to foreign buyers. 

Unfortunately it also makes their imports more expensive.  American companies who sell their products in China will now face a headwind as the higher prices will cause sales to drop.  This weighed on our markets for the remainder of the week.

Investors are also worried because it seemed like an act of desperation.  The Chinese claim it to be a step towards making the currency more “market-driven,” but this was a radical step that is not taken if their economy is performing well.  It again raises the concerns over a weaker Chinese economy. 

Another concern is the increased likelihood of a currency war, especially in the Asia region.  Japan has already made comments indicating as much.  These countries are all large exporters, so they lose ground to the cheaper Chinese products.  A currency war ends up hurting all countries, since it reduces trade and causes higher prices for everyone. 

The chance for an interest rate increase from the Fed also came into question this week.  Until now, it was widely believed the Fed would raise interest rates in September (this is important, because record low interest rates have fueled the rise in the stock market).  The chance of a currency war, along with the stronger dollar weighing on our exports, adds two new issues that may give the Fed pause.  

Economic data this week continued to be “good, but not great,” though showing a steady improvement.  Retail sales finally ticked higher and the weekly employment report continues to be solid.  Inflation at the producer level ticked higher, and while we don’t consider this a positive, the Fed likes to see rising prices as it believes it shows signs of growth (though history shows this is not true). 

Finally, this week also had something from the charts.  The recent decline in the Dow caused it to achieve the ominous-sounding “death cross.”  This occurs when the Dow’s short-term moving average crosses the long-term average (the 50-day and 200-day moving averages), which can best be understood by the chart below. 

This usually signals a downward trend in the market, though this failed to be the case last time it occurred.

Next Week

Next week looks to be a little quieter.  Corporate earnings season is nearly wrapped up and the only economic data reports will be on inflation at the consumer level (CPI) and housing. 

A few more regional Fed presidents will be speaking, too.  We don’t expect to hear anything new, but investors will be closely watching anything from the Fed as their September meeting nears. 


Investment Strategy

No change here.  The market is near a level we usually find attractive for putting some new money in.  We say usually, because it has worked well until this point.  This time, however, there is the near-term prospect of the Fed announcing a hike in interest rates, which will be a drag on the markets.  The market may be worth a nibble at this point.

In the longer run, our view remains unchanged.  The market still looks expensive from a long-term perspective.  There are large distortions created by these stimulus programs and we worry that as the stimulus comes off, so will stocks. 

From a fundamental standpoint, we are concerned over the lack of companies reinvesting their earnings into their business.  Money has instead flowed into stock buybacks and dividends, not reinvested back in the company.  This signals lower corporate growth down the road. 

As for bonds, their prices rose this week (and yields fell) as investors sought a safe place to park their money as stocks fell.  However, they are still trading around levels we’ve seen the last three months – though currently on the low end – and we expect little change in the near term.  We would avoid longer-term bonds at this point. 

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

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 on geopolitical issues and when more stimulus looks likely and falling on the opposite. 

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.

Commentary for the week ending 8-7-15

Stocks took another turn lower this week, with the Dow hitting its lowest level in six months.  For the week, the Dow fell 1.8%, the S&P lost 1.3%, and the Nasdaq moved lower by 1.7%.  A late-week surge sent gold to a slightly lower close, off 0.1%.  Oil continues to move lower, which is great news for gas prices.  It lost 6.9% this week to close at $43.87 per barrel, the lowest price since March.  The international Brent oil, used to make much of our gas here in the east, lost more than $3 to close at $48.56 per barrel. 

Source: Google Finance

The week was another rough one for the markets and there still wasn’t one single item we could point to as being responsible for the decline.  However, the threat of an interest rate increase has been weighing on investors’ minds and may be putting pressure on the market. 

Economic data was a major focus this week as several important reports were released. The results were mixed, but have been consistent with the theme of “good, but not great” we’ve seen over the last several months.  However, “good, but not great” may just be enough for the Fed to begin raising interest rates as soon as September, which many fear will signal the end of the remarkable run the market has seen the last several years.

The big economic report came on Friday with the employment report for July.  The economy added 215,000 jobs, right in line with estimates.  This figure is lower than the recent average, but an increase of more than 200,000 makes it “good, but not great.”  With employment a major focus of the Fed, this string of “good, but not great” reports have raised the prospect of a rate increase in the coming months. 

We also had reports on the strength of the manufacturing and service sectors in July.  Manufacturing hit its worst level since March, but the service sector stood at the strongest level in a decade.  Since economic data is now viewed through the lens of the Fed and their stimulus, the solid service sector report sent stocks lower. 

The odds of a September rate hike were further increased when Atlanta regional Fed president Dennis Lockhart stated he favored a rate hike at that time.  Though he is but one of many members, his statement is indicative of a broader line of thinking at the Fed.  

Another factor weighing on the market this week was media-sector stocks.  Comments out of Disney (who own the ABC and ESPN networks) confirmed what many have speculated – cord-cutting is eating into their revenue.  People are shunning cable packages in favor of lower cost options, like Netflix.  This slammed the media sector stocks like Disney, Viacom, Fox, and Time Warner and dragged the market lower. 

Corporate earnings season is entering the ninth inning as about 90% of companies in the S&P 500 have reported results so far.  The results have been better than expected, but are still nothing to cheer about.  Analysts originally expected a decline of 4.5% in earnings, so the current print of -2.3% looks better in comparison.  It’s still a decline though. 

Further, revenue (what a company made in sales.  Earnings are what remain after costs are subtracted) is down 4.5%, the second straight quarter of a revenue decline.  This rarely happens outside of recessions, so it is something to keep an eye on. 


Next Week

We’ll see another fairly busy week next week.  Corporate earnings releases are starting to slow, but we’ll see a few economic reports to keep an eye on.  There will be info on retail sales, productivity, employment, and inflation at the producer level.

Investors will also be closely watching the speeches from a few more regional Fed presidents for any clues as to when interest rates will rise.  As mentioned above, the market moved this week on comments from a regional president, so it will be something to keep an eye on. 


Investment Strategy

The market is approaching a level we usually find attractive for putting some new money in.  We say usually, because it has worked well until this point.  This time, however, there is the near-term prospect of the Fed announcing a hike in interest rates, which will be a drag on the markets.  The market may be worth a nibble if it moves lower from here, but we are very cautious at this point. 

In the longer run, our view remains unchanged.  The market still looks expensive from a long-term perspective.  There are large distortions created by these stimulus programs and we worry that as the stimulus comes off, so will stocks. 

From a fundamental standpoint, we are concerned over the lack of companies reinvesting their earnings into their business.  Money has instead flowed into stock buybacks and dividends, not reinvested back in the company.  This signals lower corporate growth down the road. 

As for bonds, their prices rose this week (and yields fell) as investors sought a safe place to park their money as stocks fell.  However, they are still trading around levels we’ve seen the last three months and we expect little change in the near term.  We would avoid longer-term bonds at this point. 

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

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 on geopolitical issues and when more stimulus looks likely and falling on the opposite. 

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.

Commentary for the week ending 7-31-15

Stocks halted their decline this week, closing with a decent gain.  Through the Friday close, the Dow rose 0.7%, the S&P gained 1.2%, and the Nasdaq added 0.8%.  Gold ended the week with a little pop, up 0.9%.  Oil saw another nice decline, off by 2.1% to $47.12 per barrel.  The international Brent oil, used to make much of our gas here in the east, lost $3 to close at $51.81 per barrel. 

Source: Google Finance

The Dow hit a six-month low this week before turning the corner and heading higher.  There wasn’t any news we could point to as being responsible for the rise in stocks, either.  It was a relatively uneventful week with no market-moving news to steer stocks.

Unfortunately, China was back in the headlines as the week opened with a sharp drop in their markets.  Monday saw the worst one-day drop in more than eight years.  The government was quick to announce an increase in their stock buying – taking them even further from the free-market reforms they once touted – but investors are increasingly doubtful they will be able to push stocks higher.  Their market closed the month down 15%, making it the worst month since 2009. 

As for our markets, we saw some news from the Fed as they held another policy meeting.  We weren’t expecting to hear anything new and that’s exactly what we got.  The Fed still looks poised to raise interest rates this year (low interest rates have fueled the stock market rally), with September looking like the most likely target.  However, they are quick to point out their dependence on economic data, giving them an excuse if they decide to delay the much-needed rate increase. 

Economic data this week was rather modest.  Durable goods showed a nice increase while housing reports were more subdued.  A report on wages posted an increase of 0.2% over the past quarter, a bad sign since it was the lowest increase ever during the second quarter. 

The big economic report was the GDP figure for the second quarter.  Coming in at 2.3%, it’s a number that’s not too hot and not too cold, though economists were expecting something closer to 3%. 

Revisions to the GDP calculation were the big story, though.  The Bureau of Labor and Statistics made adjustments to the methodology for calculating GDP and published revised numbers for past periods.  Cynics (like us) point out these revisions are almost always done to make the data look better.  However, that wasn’t the case this time. 

The revisions did make the quarters of colder periods (fourth and first quarters) look better, but the warmer periods (second and third quarter) were revised lower.  This netted out to a decline from the previous numbers, so economic growth was weaker than originally estimated.  The economy just can’t break out of this funk. 

Finally, the breadth of the market we’ve discussed so much lately was again a hot topic this week.  The “breadth” is a metric investors use to judge the momentum of the market by counting the amount of companies advancing or declining.  A large number of companies moving higher is a good sign for the market, where a large number of companies declining means the opposite. 

Currently, more and more companies are hitting new lows for the year, but the markets have moved higher.  This is a concern because more money chasing fewer names usually happens before market downturns.  We saw this in the dot-com bubble and in 2007 before the market collapse. 

We even saw it last fall before stocks dropped over 7%.  In that case, though, they bounced back sharply from the decline and eventually moved even higher. 

With corporate earnings slowing and revenue (what a company made in sales.  Earnings are what remain after costs are subtracted) down for the second-straight quarter, this is something to keep an eye on. 


Next Week

Next week looks to be an average week.  Corporate earnings will continue to come in at a steady pace while we’ll get a few noteworthy economic reports. 

All eyes will be on the monthly employment report out Friday, since it is important for timing the Fed’s pullback from the stimulus program.  We’ll also get reports on the strength of the manufacturing and service sectors and personal income and spending. 


Investment Strategy

We’re neutral on the market at this point.  This week it hit levels we consider oversold (or cheap) in the short run before bouncing higher, so it currently stands at a level where we are not looking to do any buying or selling of the broader index.  There are many individual stocks that still appear on the cheap side, but this volatile earnings season keeps us cautious. 

In the longer run, our view remains unchanged.  The market still looks expensive.  There are large distortions created by these stimulus programs and we worry that as the stimulus comes off, so will stocks. 

From a fundamental standpoint, we are concerned over the lack of companies reinvesting their earnings into their business.  Money has instead flowed into stock buybacks and dividends, not reinvested back in the company.  This signals lower corporate growth down the road. 

As for bonds, their prices rose this week (and yields fell) as investors sought a safe place to park their money as stocks fell.  However, they are still trading around levels we’ve seen the last three months and we expect little change in the near term.  We would avoid longer-term bonds at this point. 

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

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 on geopolitical issues and when more stimulus looks likely and falling on the opposite. 

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.