It’s that time of year again. As many of you know, our office is located at the entrance of TPC Sawgrass, home of the Players Championship. Tournament practice rounds begin Monday and we will be attending for much of the week. However, we will be in the office every day, though our hours will vary day-to-day. We will continue to monitor the market even though we may not be in the office. Any phone calls not immediately answered will be returned the same day. We foresee little to no inconvenience to our clients and hope for your understanding. There will be no market commentary next week. Thank you.
Stocks kicked off the week on a strong note but trended lower thereafter. Through Friday’s close, the Dow lost 0.2%, the S&P 500 fell 0.4%, and the Nasdaq had another very poor week falling 0.8%. Gold was slightly lower, down 0.4%. Oil prices finally had a losing week, lower by 3.1% to close at $44.56 per barrel. The international Brent oil, which is used in much of our gas here in the east, fell to $45.28.
Stocks kicked off the week on a strong note but trended lower thereafter. Through Friday’s close, the Dow lost 0.2%, the S&P 500 fell 0.4%, and the Nasdaq had another very poor week falling 0.8%. Gold was slightly lower, down 0.4%. Oil prices finally had a losing week, lower by 3.1% to close at $44.56 per barrel. The international Brent oil, which is used in much of our gas here in the east, fell to $45.28.
Source: Google Finance
The momentum in the market has been to the downside since mid-April and poor economic data released this week helped continue that downtrend.
The big report came on Friday with the employment data for April. The figure was a disappointing 160,000 jobs added, well below expectations of over 200,000. This was the weakest level in seven months.
Stocks were initially lower on the report, but poor employment means less chance for the Fed to pull back on its stimulus and raise interest rates, so this helped stocks move higher. We can’t forget how important that stimulus has been for the market.
Other data this week was disappointing, too. One important metric we don’t talk much about is productivity, which measures the output of a worker.
We are in one of the worst stretches ever for productivity. First quarter data shows workers are putting in more hours and their wages are rising, but the amount of output from each employee is declining.
This is important because it could help explain why hiring has been so strong (until this month, that is). Employers get little out of the workers they have and must hire more workers to keep up with demand. This hurts a company’s profitability as the new workers add to costs, which hurts even more with the recent minimum wage hikes.
The lower productivity is a factor weighing on the bottom line of businesses.
We also had data on the strength of the manufacturing and service sectors this week. Manufacturing was slightly lower over last month and the service sector was slightly stronger. They both remain below levels of last December, however.
Economic data from China was also disappointing. With global factors weighing more on our market these days, this also had an impact on stocks this week. Despite adding roughly $1 trillion in stimulus in the first quarter (as new debt issuance), Chinese manufacturing remains weak. Australia acknowledged their commodity exports to China were slowing, confirming a slowdown in China.
Finally, we are in the latter part of corporate earnings season for the first quarter. Earnings are on pace to decline just over 7%, making this the fourth-straight quarter of declines.
This 7% figure is slightly better than the 7.5% drop analysts were expecting, so this earnings season was seen as a success despite being the worst level since the financial crisis. We will note, this low level in earnings may mark a bottom so earnings going forward may look better.
Next Week
It will be fairly quiet for economic data with the only notable reports coming on Friday with data on retail sales and inflation at the producer level. Earnings releases are slowing, but we’ll still hear from some big names like Disney, Macy’s, and Honda.
Many regional Fed presidents will be making speeches. These usually have the potential to move the market, but the poor economic data has decreased the chances of a rate hike any time soon. Any tough talk from the Fed presidents will likely be ignored.
Investment Strategy
The sell-off over the last two weeks has pushed the market to a slightly oversold level where we think it’s possible to see a bit of a bounce higher. It would probably be more short-lived and not the start of another leg higher, though. Stocks will need to sell-off further before we commit any significant new money to the market.
Looking out a few months, 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 rose this week (so yields fell) and remain near a very high level. We don’t see any significant moves happening any time soon, though, as demand will keep prices high and yields low.
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.
The big report came on Friday with the employment data for April. The figure was a disappointing 160,000 jobs added, well below expectations of over 200,000. This was the weakest level in seven months.
Stocks were initially lower on the report, but poor employment means less chance for the Fed to pull back on its stimulus and raise interest rates, so this helped stocks move higher. We can’t forget how important that stimulus has been for the market.
Other data this week was disappointing, too. One important metric we don’t talk much about is productivity, which measures the output of a worker.
We are in one of the worst stretches ever for productivity. First quarter data shows workers are putting in more hours and their wages are rising, but the amount of output from each employee is declining.
This is important because it could help explain why hiring has been so strong (until this month, that is). Employers get little out of the workers they have and must hire more workers to keep up with demand. This hurts a company’s profitability as the new workers add to costs, which hurts even more with the recent minimum wage hikes.
The lower productivity is a factor weighing on the bottom line of businesses.
We also had data on the strength of the manufacturing and service sectors this week. Manufacturing was slightly lower over last month and the service sector was slightly stronger. They both remain below levels of last December, however.
Economic data from China was also disappointing. With global factors weighing more on our market these days, this also had an impact on stocks this week. Despite adding roughly $1 trillion in stimulus in the first quarter (as new debt issuance), Chinese manufacturing remains weak. Australia acknowledged their commodity exports to China were slowing, confirming a slowdown in China.
Finally, we are in the latter part of corporate earnings season for the first quarter. Earnings are on pace to decline just over 7%, making this the fourth-straight quarter of declines.
This 7% figure is slightly better than the 7.5% drop analysts were expecting, so this earnings season was seen as a success despite being the worst level since the financial crisis. We will note, this low level in earnings may mark a bottom so earnings going forward may look better.
Next Week
It will be fairly quiet for economic data with the only notable reports coming on Friday with data on retail sales and inflation at the producer level. Earnings releases are slowing, but we’ll still hear from some big names like Disney, Macy’s, and Honda.
Many regional Fed presidents will be making speeches. These usually have the potential to move the market, but the poor economic data has decreased the chances of a rate hike any time soon. Any tough talk from the Fed presidents will likely be ignored.
Investment Strategy
The sell-off over the last two weeks has pushed the market to a slightly oversold level where we think it’s possible to see a bit of a bounce higher. It would probably be more short-lived and not the start of another leg higher, though. Stocks will need to sell-off further before we commit any significant new money to the market.
Looking out a few months, 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 rose this week (so yields fell) and remain near a very high level. We don’t see any significant moves happening any time soon, though, as demand will keep prices high and yields low.
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.
