Please note: there will be no market commentary for the next two weeks. We’ll be back with our commentary for the week ending 12/11/15. Thanks.
Stocks reversed their recent decline and turned in a solid week. Through the Friday close, the Dow rose 3.4%, the S&P gained 3.3%, and the Nasdaq added 3.6%. Gold closed with a slight loss of 0.6%. Oil turned in a loss of 3.3% to close at $39.39 per barrel. The international Brent oil moved down only three cents to $44.42 per barrel.
Stocks reversed their recent decline and turned in a solid week. Through the Friday close, the Dow rose 3.4%, the S&P gained 3.3%, and the Nasdaq added 3.6%. Gold closed with a slight loss of 0.6%. Oil turned in a loss of 3.3% to close at $39.39 per barrel. The international Brent oil moved down only three cents to $44.42 per barrel.
Source: Google Finance
This week was unusual in that events that we’d expect to send markets lower actually saw stocks turn higher.
Monday opened fresh off the Paris attacks, which most people would conclude to be a negative for stocks. However, the market rallied strongly. Part of this came from an increase in oil prices on terrorism concerns. Higher oil prices are good for energy companies, giving this sector the best gains of the day.
Stocks also rose this week when minutes from the latest Fed meeting showed an increased likelihood of an interest rate hike at the next meeting in December. We’d normally see this as a negative for stocks as higher interest rates make it more expensive to borrow money, which then pressures the stock market.
While stocks rose when it appeared the U.S. was moving away from stimulus, stocks also moved higher when Europe looked like they were moving towards more stimulus. The minutes from the last European Central Bank (ECB) meeting indicated a willingness to print more money to stimulate the economy. Comments from the head of the ECB on Friday explicitly noted an increase in stimulus was likely.
There’s all this talk about stimulus – but is it really helping? Japan has undertaken more stimulus than any other country and in recent years have ramped it up to unimaginable levels. Unfortunately this week they reported another contraction in their economy, making this their fifth time in recession in the last seven years.
Stimulus does not fundamentally help an economy. It does make their stock market rise, but it makes their debts rise and currency weaken, too.
The weaker currency does help companies who export their products (since it makes them appear cheaper to buyers overseas). As we see in Japan, though, the weaker currency makes everything within the country cost more. This hurts the people of the country and is not a path to economic growth.
Finally, we’ll bring up something we last discussed in July – market breadth. “Breadth” is the amount of companies in the index advancing or declining. A large number of companies moving higher is a good sign for the market and a large number of companies declining means the opposite.
While the market has been rising, the amount of companies making new highs is trending lower:
Monday opened fresh off the Paris attacks, which most people would conclude to be a negative for stocks. However, the market rallied strongly. Part of this came from an increase in oil prices on terrorism concerns. Higher oil prices are good for energy companies, giving this sector the best gains of the day.
Stocks also rose this week when minutes from the latest Fed meeting showed an increased likelihood of an interest rate hike at the next meeting in December. We’d normally see this as a negative for stocks as higher interest rates make it more expensive to borrow money, which then pressures the stock market.
While stocks rose when it appeared the U.S. was moving away from stimulus, stocks also moved higher when Europe looked like they were moving towards more stimulus. The minutes from the last European Central Bank (ECB) meeting indicated a willingness to print more money to stimulate the economy. Comments from the head of the ECB on Friday explicitly noted an increase in stimulus was likely.
There’s all this talk about stimulus – but is it really helping? Japan has undertaken more stimulus than any other country and in recent years have ramped it up to unimaginable levels. Unfortunately this week they reported another contraction in their economy, making this their fifth time in recession in the last seven years.
Stimulus does not fundamentally help an economy. It does make their stock market rise, but it makes their debts rise and currency weaken, too.
The weaker currency does help companies who export their products (since it makes them appear cheaper to buyers overseas). As we see in Japan, though, the weaker currency makes everything within the country cost more. This hurts the people of the country and is not a path to economic growth.
Finally, we’ll bring up something we last discussed in July – market breadth. “Breadth” is the amount of companies in the index advancing or declining. A large number of companies moving higher is a good sign for the market and a large number of companies declining means the opposite.
While the market has been rising, the amount of companies making new highs is trending lower:
Meanwhile, the amount of companies hit new lows is rising:
Despite the market continuing to rise, we need to be cautious. This isn’t something that would cause us to sell, but it does tell us that if there was a sell-off, it could be larger than normal. This is something to keep an eye on.
Next Week
Next week will be busy in the first three days and quiet thereafter due to Thanksgiving. We’ll get info on housing, the revision to GDP, personal income and spending, and inflation. There will be a handful of companies reporting earnings, too.
Worth noting, the week of Thanksgiving is historically a positive one, so that is worth considering.
Investment Strategy
Stocks are at a level where we wouldn’t consider doing any buying or selling at this point. They quickly rallied off their somewhat-oversold levels last week, so they are more on the expensive side in the very short term.
Looking out a few weeks or months, it is a little more difficult to determine as we think it will largely be driven by the Fed. The Fed may pull back on their stimulus, but other central banks look to add to theirs. Stocks do tend to be higher into year-end, but we may see more volatility as the odds of a December rate hike increases.
Longer term, we continue to have worries. Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored. Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent. Corporate earnings are lackluster and revenue has been in a declining trend. A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends. This indicates lower corporate growth down the road.
Bond prices remain high (so yields are low) as they hover near the top of the range they’ve been in the last couple months. We are likely to continue seeing relatively low yields and high prices in bonds for some time, though, so we aren’t forecasting any major changes for bonds in the near future.
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.
Next Week
Next week will be busy in the first three days and quiet thereafter due to Thanksgiving. We’ll get info on housing, the revision to GDP, personal income and spending, and inflation. There will be a handful of companies reporting earnings, too.
Worth noting, the week of Thanksgiving is historically a positive one, so that is worth considering.
Investment Strategy
Stocks are at a level where we wouldn’t consider doing any buying or selling at this point. They quickly rallied off their somewhat-oversold levels last week, so they are more on the expensive side in the very short term.
Looking out a few weeks or months, it is a little more difficult to determine as we think it will largely be driven by the Fed. The Fed may pull back on their stimulus, but other central banks look to add to theirs. Stocks do tend to be higher into year-end, but we may see more volatility as the odds of a December rate hike increases.
Longer term, we continue to have worries. Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored. Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent. Corporate earnings are lackluster and revenue has been in a declining trend. A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends. This indicates lower corporate growth down the road.
Bond prices remain high (so yields are low) as they hover near the top of the range they’ve been in the last couple months. We are likely to continue seeing relatively low yields and high prices in bonds for some time, though, so we aren’t forecasting any major changes for bonds in the near future.
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.
