Similar to the previous four weeks, this week closed with little change in the market. For the week, the Dow rose just 0.1%, the S&P was lower by a tiny 0.02%, and the Nasdaq was down 0.1%. Gold moved higher by 0.3%. A weaker dollar helped send commodity prices higher, with oil continuing to rise on a big 8.7% gain to close at $48.57 per barrel. The international Brent oil added more than $3 to close at $50.79.
Source: Google Finance
The week was another relatively uneventful one with very low trading volume.
Corporate earnings are winding down, but we still had several rolling in this week. Many retail companies reported earnings and the results were mixed. Target, for example, did poorly while Wal-Mart did well, so it was tough to get a feel for the overall picture of retailers.
According to Factset, 95% of companies in the S&P 500 have reported earnings (LINK) and they are on pace to fall 3.2%. Revenue (what a company earned in sales) was also lower. These are both better than expected, though – but remember how we have talked about expectations being lowered just so they can “beat” those low expectations.
The Fed was also in the news. Early in the week, several regional Fed presidents made comments citing an improving economy and an increase in interest rates was likely. Higher interest rates are bad for stocks, so they fell on the news.
However, the minutes from the latest Fed meeting were released on Wednesday and painted a different picture. They did discuss how the economy was improving, but signaled they would wait for more data to come in before changing any of their policies.
Since it looked like stimulus will be around for a while longer, stocks rose on the news.
With the Fed giving conflicting views on its future policies, investors will be closely watching a Fed meeting next week – a symposium, really – where Fed chief Yellen will be giving a speech. Investors would like to see if she gives any specifics on interest rate hikes or any other economic policies. Our bet is more obfuscating language designed to keep the markets guessing, mostly because the Fed themselves are unsure of any future actions.
One concern Fed members have been in agreement on is low inflation levels. They set a goal for 2% inflation, but metrics they follow have fallen short of this number. Actually, their preferred metric (the PCE, or Personal Consumption Expenditure) has rarely been above this level throughout history, so being below 2% is pretty common.
However, a more popular inflation metric, the CPI, has been showing higher levels of inflation. The Core CPI (which excludes food and energy, which, again, is a preferred measurement for the Fed) was released this week and has been above 2% for nine-straight months now. Inflation by this metric hasn’t been this high since 2008 and it proves inflation is out there (but anyone who actually has to buy things could tell you that), the Fed just chooses to ignore it.
Next Week
Next week will be all about the Fed. As mentioned above, they will be holding their annual symposium in Jackson Hole. The big news will come on Friday with a speech by Fed chair Janet Yellen. Investors will be closely watching for any changes in economic policy.
We’ll also get a few economic reports, including data on housing, retail sales, and the revision to second quarter GDP.
Investment Strategy
No change. We remain in expensive territory here. That’s not to say the market can’t go higher from here, but there is reason to be cautious in the short-term.
Looking out a little further, we see headwinds for stocks but the response from central banks will have the most influence on the direction of the market. Additional support, whether it is stimulus from printing money or lowering interest rates, will reassure the markets and likely see them head higher – or at least ease the decline.
In the long term we remain very cautious. The money printed through stimulus has masked many problems, causing a misallocation of resources and allowing bubbles to form. It prevented necessary changes from occurring at both a corporate and political level – changes that would actually help the economy. Just how far out this day of reckoning is remains anyone’s guess, however.
Bonds were relatively quiet this week as yields rose slightly (so prices fell slightly). We think prices will remain high and yields low, though, as demand from investors will continue to be strong.
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 as 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 are winding down, but we still had several rolling in this week. Many retail companies reported earnings and the results were mixed. Target, for example, did poorly while Wal-Mart did well, so it was tough to get a feel for the overall picture of retailers.
According to Factset, 95% of companies in the S&P 500 have reported earnings (LINK) and they are on pace to fall 3.2%. Revenue (what a company earned in sales) was also lower. These are both better than expected, though – but remember how we have talked about expectations being lowered just so they can “beat” those low expectations.
The Fed was also in the news. Early in the week, several regional Fed presidents made comments citing an improving economy and an increase in interest rates was likely. Higher interest rates are bad for stocks, so they fell on the news.
However, the minutes from the latest Fed meeting were released on Wednesday and painted a different picture. They did discuss how the economy was improving, but signaled they would wait for more data to come in before changing any of their policies.
Since it looked like stimulus will be around for a while longer, stocks rose on the news.
With the Fed giving conflicting views on its future policies, investors will be closely watching a Fed meeting next week – a symposium, really – where Fed chief Yellen will be giving a speech. Investors would like to see if she gives any specifics on interest rate hikes or any other economic policies. Our bet is more obfuscating language designed to keep the markets guessing, mostly because the Fed themselves are unsure of any future actions.
One concern Fed members have been in agreement on is low inflation levels. They set a goal for 2% inflation, but metrics they follow have fallen short of this number. Actually, their preferred metric (the PCE, or Personal Consumption Expenditure) has rarely been above this level throughout history, so being below 2% is pretty common.
However, a more popular inflation metric, the CPI, has been showing higher levels of inflation. The Core CPI (which excludes food and energy, which, again, is a preferred measurement for the Fed) was released this week and has been above 2% for nine-straight months now. Inflation by this metric hasn’t been this high since 2008 and it proves inflation is out there (but anyone who actually has to buy things could tell you that), the Fed just chooses to ignore it.
Next Week
Next week will be all about the Fed. As mentioned above, they will be holding their annual symposium in Jackson Hole. The big news will come on Friday with a speech by Fed chair Janet Yellen. Investors will be closely watching for any changes in economic policy.
We’ll also get a few economic reports, including data on housing, retail sales, and the revision to second quarter GDP.
Investment Strategy
No change. We remain in expensive territory here. That’s not to say the market can’t go higher from here, but there is reason to be cautious in the short-term.
Looking out a little further, we see headwinds for stocks but the response from central banks will have the most influence on the direction of the market. Additional support, whether it is stimulus from printing money or lowering interest rates, will reassure the markets and likely see them head higher – or at least ease the decline.
In the long term we remain very cautious. The money printed through stimulus has masked many problems, causing a misallocation of resources and allowing bubbles to form. It prevented necessary changes from occurring at both a corporate and political level – changes that would actually help the economy. Just how far out this day of reckoning is remains anyone’s guess, however.
Bonds were relatively quiet this week as yields rose slightly (so prices fell slightly). We think prices will remain high and yields low, though, as demand from investors will continue to be strong.
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 as 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.
