A volatile week saw stocks turn in their worst performance since early February. For the week, the Dow and S&P both lost 1.2% and the Nasdaq was down 1.3%. Bonds were a big story as yields on government bonds fell sharply (so prices rose). Gold moved higher on the week, up 0.4%. Oil also moved higher, up 3.4% to $39.66 per barrel. The international Brent oil added $3 to close at $41.89.
Source: Google Finance
Volatility returned to the markets this week. Stocks have seen an incredible run since the lows hit in mid-February, so it wasn’t surprising to see them take a breather here. The volatility is coming from that tug between investors thinking the market will move lower and others who think it will continue higher.
For the investors thinking the market will go down (the bears), they are seeing certain markets not behave the way the central bankers want to see. Both the European and Japanese central banks are actively trying to push their currencies lower, but their currencies are actually doing the opposite and rising.
This is a signal the central banks are losing their ability to influence the market and their policies are becoming ineffective. The slowing global economic growth despite monumental amounts of stimulus is another sign of the limitations of the central banks.
On the other hand, investors who think the market will go higher (the bulls) see the slow global growth as a sign our Fed will not pull back on their stimulative policies by raising interest rates (low rates have helped fuel the rise in stocks). Since this has been important in sending stocks higher, it will continue to be positive for stocks.
News from the Fed this week supported the view that they will not raise interest rates any time soon. The minutes from last month’s meeting were released this week and affirmed a cautious stance on rate hikes.
As we have discussed recently, they are shifting from their core mandates of full employment and steady prices to instead focus on global economic issues (which is far outside their responsibilities, in our view). You can always find a problem somewhere on the globe at any given time, so this always gives them an excuse to keep the stimulative policies alive. In fact, the word “global” was used 22 times. This was notable as the word rarely appeared in the past.
Switching gears, next week will mark the beginning of corporate earnings releases from the first quarter. The bar has been set very low, with earnings expected to come in at -8.5% according to Factset. This would be the fourth-straight quarter of negative earnings, something that has not happened since the financial crisis.
With the bar set so low, though, it does make it more likely earnings will beat estimates and possibly give stocks a reason to move higher.
Finally, in honor of the Masters tournament this week, here is a link to pictures of the course in 1935. It’s quite a difference from the course we see today! Below is an image of the iconic 12th green:
For the investors thinking the market will go down (the bears), they are seeing certain markets not behave the way the central bankers want to see. Both the European and Japanese central banks are actively trying to push their currencies lower, but their currencies are actually doing the opposite and rising.
This is a signal the central banks are losing their ability to influence the market and their policies are becoming ineffective. The slowing global economic growth despite monumental amounts of stimulus is another sign of the limitations of the central banks.
On the other hand, investors who think the market will go higher (the bulls) see the slow global growth as a sign our Fed will not pull back on their stimulative policies by raising interest rates (low rates have helped fuel the rise in stocks). Since this has been important in sending stocks higher, it will continue to be positive for stocks.
News from the Fed this week supported the view that they will not raise interest rates any time soon. The minutes from last month’s meeting were released this week and affirmed a cautious stance on rate hikes.
As we have discussed recently, they are shifting from their core mandates of full employment and steady prices to instead focus on global economic issues (which is far outside their responsibilities, in our view). You can always find a problem somewhere on the globe at any given time, so this always gives them an excuse to keep the stimulative policies alive. In fact, the word “global” was used 22 times. This was notable as the word rarely appeared in the past.
Switching gears, next week will mark the beginning of corporate earnings releases from the first quarter. The bar has been set very low, with earnings expected to come in at -8.5% according to Factset. This would be the fourth-straight quarter of negative earnings, something that has not happened since the financial crisis.
With the bar set so low, though, it does make it more likely earnings will beat estimates and possibly give stocks a reason to move higher.
Finally, in honor of the Masters tournament this week, here is a link to pictures of the course in 1935. It’s quite a difference from the course we see today! Below is an image of the iconic 12th green:
Next Week
Corporate earnings will be a big focus next week as first quarter results start rolling in. We’ll also see a few economic reports, including retail sales, inflation, and industrial production.
Several regional Fed presidents will again be speaking, and they always have the potential to move the market.
Investment Strategy
We were not surprised to see stocks move lower here as they were looking overbought (expensive) from a short-term perspective. They still look expensive, in our view, and we would hesitate to put any new money in at this time.
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 yields moved lower again this week. We think demand will keep prices high and yields low, though maybe not as high as we are currently seeing.
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.
Corporate earnings will be a big focus next week as first quarter results start rolling in. We’ll also see a few economic reports, including retail sales, inflation, and industrial production.
Several regional Fed presidents will again be speaking, and they always have the potential to move the market.
Investment Strategy
We were not surprised to see stocks move lower here as they were looking overbought (expensive) from a short-term perspective. They still look expensive, in our view, and we would hesitate to put any new money in at this time.
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 yields moved lower again this week. We think demand will keep prices high and yields low, though maybe not as high as we are currently seeing.
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.
