A late-week sell-off saw stocks close with little change. For the week, the Dow rose 0.6%, the S&P returned 0.5%, while the Nasdaq was lower by 0.7%. Gold was higher on the week, adding 0.4%. Oil notched its third week of gains with a rise of 2.6% to close at $43.75 per barrel. The international Brent oil climbed to $45.09.
Source: Google Finance
The week was a very uneventful one for news. Corporate earnings were the main story, with one-fifth of the companies in the S&P 500 and nearly half of the companies in the Dow index reporting results.
Earnings remain awful, coming in at the worst level since the financial crisis. However, it’s the expectations that matter here.
Companies that beat their estimate – which is very easy as the bar is so low – generally saw their share price rise. On the other hand, companies that miss estimates, like many tech companies this week (including Microsoft and Google), saw their shares move much lower.
With the bar so low, though, many more companies are beating estimates, which has helped the market move higher.
A couple central banks overseas made news, too. The European Central Bank (ECB) held a policy meeting this week and while no changes to their current stimulus policy were announced, they expressed their willingness to do more stimulus if economic conditions don’t improve.
They’ve also recently stepped up their bond purchases where the ECB is printing more money to buy corporate bonds. It sounds insane – printing money to buy corporate debt. We think these types of interventionist policies do more harm than good by distorting markets and creating long-term problems.
The Japanese central bank, the BOJ, was the other central bank in the news this week in advance of a policy meeting next week. Their economy continues to struggle and their currency is stronger (a weaker currency boosts their exports since it makes their products look cheaper to foreign buyers), so they, too, suggested more stimulus was possible.
Keep in mind, they are already doing more stimulus than the world has ever seen and it has failed to work. These policy makers blindly continue down a destructive path, believing their ideas will eventually work if they only do them at a grander scale. We don’t see it ending well.
Next Week
Corporate earnings will come in at a pretty strong pace next week, with some big names like Apple, Facebook, Amazon, and Exxon reporting results. We’ll also see info on important economic reports like GDP, which is expected to show very little growth. We’ll also see reports on durable goods, personal income and spending, and housing.
Central banks will be in the news, too. Our Fed will hold a policy meeting where the subject of interest rate increases will be the focus. They are not expected to raise rates next meeting, but many investors suspect one will come soon. They will closely watch what the Fed says about possible future rate hikes.
Also, above we mentioned the policy meeting of the Japanese central bank next week. They may very well announce more stimulus, so it is something to keep an eye on.
Investment Strategy
Everything still looks expensive at this point. Now, that doesn’t mean it can’t get even more expensive, we just don’t see any opportunities to put new money into the market right now.
A positive sign for the market, many of the technical indicators we follow are not flashing a red light like we typically see before a big sell-off. Breadth remains strong, with the amount of advancing stocks well above declining ones and new highs vastly outnumbering new lows. High yield bonds, small cap stocks, and transportation-sector stocks are all good leading indicators for the market, and they remain strong, as well.
Still, in the short-term, we think the risks to the downside are greater than the potential upside.
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 the most 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 (so yields are higher). We think demand will keep prices high and yields low, though maybe not at the levels of the past few weeks.
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. 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.
Earnings remain awful, coming in at the worst level since the financial crisis. However, it’s the expectations that matter here.
Companies that beat their estimate – which is very easy as the bar is so low – generally saw their share price rise. On the other hand, companies that miss estimates, like many tech companies this week (including Microsoft and Google), saw their shares move much lower.
With the bar so low, though, many more companies are beating estimates, which has helped the market move higher.
A couple central banks overseas made news, too. The European Central Bank (ECB) held a policy meeting this week and while no changes to their current stimulus policy were announced, they expressed their willingness to do more stimulus if economic conditions don’t improve.
They’ve also recently stepped up their bond purchases where the ECB is printing more money to buy corporate bonds. It sounds insane – printing money to buy corporate debt. We think these types of interventionist policies do more harm than good by distorting markets and creating long-term problems.
The Japanese central bank, the BOJ, was the other central bank in the news this week in advance of a policy meeting next week. Their economy continues to struggle and their currency is stronger (a weaker currency boosts their exports since it makes their products look cheaper to foreign buyers), so they, too, suggested more stimulus was possible.
Keep in mind, they are already doing more stimulus than the world has ever seen and it has failed to work. These policy makers blindly continue down a destructive path, believing their ideas will eventually work if they only do them at a grander scale. We don’t see it ending well.
Next Week
Corporate earnings will come in at a pretty strong pace next week, with some big names like Apple, Facebook, Amazon, and Exxon reporting results. We’ll also see info on important economic reports like GDP, which is expected to show very little growth. We’ll also see reports on durable goods, personal income and spending, and housing.
Central banks will be in the news, too. Our Fed will hold a policy meeting where the subject of interest rate increases will be the focus. They are not expected to raise rates next meeting, but many investors suspect one will come soon. They will closely watch what the Fed says about possible future rate hikes.
Also, above we mentioned the policy meeting of the Japanese central bank next week. They may very well announce more stimulus, so it is something to keep an eye on.
Investment Strategy
Everything still looks expensive at this point. Now, that doesn’t mean it can’t get even more expensive, we just don’t see any opportunities to put new money into the market right now.
A positive sign for the market, many of the technical indicators we follow are not flashing a red light like we typically see before a big sell-off. Breadth remains strong, with the amount of advancing stocks well above declining ones and new highs vastly outnumbering new lows. High yield bonds, small cap stocks, and transportation-sector stocks are all good leading indicators for the market, and they remain strong, as well.
Still, in the short-term, we think the risks to the downside are greater than the potential upside.
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 the most 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 (so yields are higher). We think demand will keep prices high and yields low, though maybe not at the levels of the past few weeks.
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. 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.
