Stocks rose to new highs for the year early in the week, though stalling in the latter half. For the week, the Dow rose 1.8%, the S&P gained 1.6%, and the Nasdaq also added 1.8%. Gold took a turn lower, off a slight 0.1%. Oil rose again, up 1.9% to $40.40 per barrel, which was well off its highs for the week. The international Brent oil added $1 to close at $42.84.
Source: Barchart.com
This was the first week in a long time where central banks were not the focus of the markets. Instead the focus was on the corporate earnings from the first quarter that started coming in this week.
Bank earnings were a particular focus as a majority of the large banks reported results. Their numbers were poor – both earnings and revenue fell across the board (revenue is what the company made in sales, earnings are what remain once costs are subtracted). Low interest rates, bad loans to oil companies, and poor trading results were among the many factors weighing on banks.
However, the results weren’t as bad as expected and were thus seen as a positive. Bank stocks rose as a result, which also helped the broader market move higher.
This is something we expect to see more often this earnings season. The bar has been set at the lowest level since the financial crisis and becomes a very easy level to beat. This is likely to provide some support for stocks in the coming weeks.
Economic data this week was relatively poor, too. Retail sales fell over the past month and industrial production was lower for the seventh-straight month, something that has never occurred outside of a recession. On the other hand, the Fed’s Beige Book (which gives anecdotal accounts on the strength of the economy) showed continued moderate economic growth.
Inflation was also in focus as several inflation reports were released this week. It looks like inflation rose slightly over the past month, helped by higher gas prices. However, the inflation results were not as high as expected, making it a disappointment to policymakers who want to see higher inflation levels. As we mentioned with the earnings results above, it’s all about expectations.
Chinese economic data was also in focus as they hit their lowest GDP level since 2009. Worries about Chinese economic weakness have weighed on our markets before, so it is something to keep an eye on.
Finally, oil prices were a big topic this week. Prices have moved steadily higher recently, well off the lows of just a few months ago. Oil has moved higher on talks of freezes or cuts in production, but the threat has always been more talk than action.
This weekend is another meeting with the big oil producing countries. Odds are we’ll see some sort of agreement on a freeze in oil production which will drive oil prices higher. We’ve seen this before, though, only to see the agreement fall apart. We think it’s likely to happen again this time, too.
Next Week
Earnings will continue to be in focus as one-fifth of the companies in the S&P 500 will report results, along with nearly half of the companies in the Dow index.
We will see very little in the way of economic data, with a few reports on housing and leading economic indicators.
Investment Strategy
No change here. Stocks still appear to be overbought (expensive) in the short run and we are not looking to put any new money in at this time. Above we mentioned earnings would likely help support the stock market, so we aren’t actively selling, we just think there is more risk to the downside.
From a medium-term perspective, we may still have more room to rise since the Fed is fixated on sending markets higher and they will do anything in their power to do so.
It’s the longer-term where we have concerns. The stimulus of the last several years masked many problems, causing a misallocation of resources and allowing bubbles to form. It also prevented necessary changes from occurring at both a corporate and political level. If the stimulus is ever forced to end, those flaws become more apparent. We’re now seeing lower corporate earnings, massive debt levels, poor economic growth, and potential for recession. This will weigh on the market at some point, but the question remains as to when.
Bond prices have been very high (and yields very low) and started to move lower this week. We think demand will keep prices high and yields low, though maybe not as high as we have seen.
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. We keep a longer term focus with these investments.
Gold is another good hedge for the portfolio and has showed it in recent weeks. It is only a hedge at this point – rising on geopolitical issues and a flight to safety.
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.
Bank earnings were a particular focus as a majority of the large banks reported results. Their numbers were poor – both earnings and revenue fell across the board (revenue is what the company made in sales, earnings are what remain once costs are subtracted). Low interest rates, bad loans to oil companies, and poor trading results were among the many factors weighing on banks.
However, the results weren’t as bad as expected and were thus seen as a positive. Bank stocks rose as a result, which also helped the broader market move higher.
This is something we expect to see more often this earnings season. The bar has been set at the lowest level since the financial crisis and becomes a very easy level to beat. This is likely to provide some support for stocks in the coming weeks.
Economic data this week was relatively poor, too. Retail sales fell over the past month and industrial production was lower for the seventh-straight month, something that has never occurred outside of a recession. On the other hand, the Fed’s Beige Book (which gives anecdotal accounts on the strength of the economy) showed continued moderate economic growth.
Inflation was also in focus as several inflation reports were released this week. It looks like inflation rose slightly over the past month, helped by higher gas prices. However, the inflation results were not as high as expected, making it a disappointment to policymakers who want to see higher inflation levels. As we mentioned with the earnings results above, it’s all about expectations.
Chinese economic data was also in focus as they hit their lowest GDP level since 2009. Worries about Chinese economic weakness have weighed on our markets before, so it is something to keep an eye on.
Finally, oil prices were a big topic this week. Prices have moved steadily higher recently, well off the lows of just a few months ago. Oil has moved higher on talks of freezes or cuts in production, but the threat has always been more talk than action.
This weekend is another meeting with the big oil producing countries. Odds are we’ll see some sort of agreement on a freeze in oil production which will drive oil prices higher. We’ve seen this before, though, only to see the agreement fall apart. We think it’s likely to happen again this time, too.
Next Week
Earnings will continue to be in focus as one-fifth of the companies in the S&P 500 will report results, along with nearly half of the companies in the Dow index.
We will see very little in the way of economic data, with a few reports on housing and leading economic indicators.
Investment Strategy
No change here. Stocks still appear to be overbought (expensive) in the short run and we are not looking to put any new money in at this time. Above we mentioned earnings would likely help support the stock market, so we aren’t actively selling, we just think there is more risk to the downside.
From a medium-term perspective, we may still have more room to rise since the Fed is fixated on sending markets higher and they will do anything in their power to do so.
It’s the longer-term where we have concerns. The stimulus of the last several years masked many problems, causing a misallocation of resources and allowing bubbles to form. It also prevented necessary changes from occurring at both a corporate and political level. If the stimulus is ever forced to end, those flaws become more apparent. We’re now seeing lower corporate earnings, massive debt levels, poor economic growth, and potential for recession. This will weigh on the market at some point, but the question remains as to when.
Bond prices have been very high (and yields very low) and started to move lower this week. We think demand will keep prices high and yields low, though maybe not as high as we have seen.
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. We keep a longer term focus with these investments.
Gold is another good hedge for the portfolio and has showed it in recent weeks. It is only a hedge at this point – rising on geopolitical issues and a flight to safety.
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.
