Markets eventually saw some volatility this week as they closed with a loss. By the Friday close, the Dow lost 2.2% while the S&P and Nasdaq were both down 2.4%. Gold was again up slightly, rising 0.2%. Oil turned higher, rising 3.4% to close at $45.71 per barrel. The international Brent oil rose to $47.88.
Source: Google Finance
It was a very quiet week for economic and corporate data, so the market turned its focus to the central banks.
First, the one notable economic report this week was data on the service sector of the economy. The ISM Services report came in well below expectations and at its weakest level since 2010. This comes after a weak reading on manufacturing last week, so it shows the economy is slowing.
Of course, the market rose on the news since a weak economy reduces the chance for the Fed to pull back on its stimulus by raising interest rates.
The good mood was short lived. Despite that weaker economic data, two regional Fed presidents made comments this week indicating an interest rate hike was still likely.
On Wednesday, regional Fed President Jeffrey Lacker said there was a 'strong case' for a rate hike in September. Friday saw similar comments from regional President Eric Rosengren. Stocks fell strongly on Friday as a result, notching the largest drop since June.
The European Central Bank (or ECB) was also in the news after a policy meeting this week. They announced no changes to their current stimulus policy, which has interest rates set at historic lows as they print roughly $90 billion a month to buy bonds.
This disappointed investors as many believed additional stimulus was in the works. The news also added pressure to the markets.
More economists are now calling on the ECB to expand their stimulus program by printing money to buy stocks in addition to bonds. They rightly point out that the ECB is buying so many bonds right now that they may soon run out of bonds to buy.
Japan has already taken this path. They are printing money to buy stocks through ETF products and now own a massive 60% share of the ETF market there.
This is just madness at this point. Printing money to buy stocks and bonds creates major distortions in the market that will ultimately implode. Further, these attempts have yet to produce any positive results, so we question why the need to venture even further into unchartered territory when there is no evidence it even works. This will not end well.
Next Week
Comments from Fed members weighed heavily on the markets this week, so investors will be closely watching the speeches from several other regional Fed members next week. These comments will probably have the most impact on the market next week, but we’ll also be watching a few economic reports, including retail sales and inflation at the consumer and producer levels.
Investment Strategy
Well, last week did not appear to be a good time to buy stocks. Clearly the direction of the market is still heavily dependent on Fed policy, so it is difficult to make any predictions from here. It is a frustrating investing environment when the direction of the market is dependent not on economic fundamentals, but the actions – or even just the words – of central bankers.
That said, we are nearing an oversold (cheap) level for stocks. The market has been lower on the potential for higher interest rates, but we don’t believe the Fed will raise rates any time soon. This would be a positive for stocks and could help send them higher.
Looking out a little longer, we are very worried about the market. 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 prices fell this week as yields rose and have been trending this way for the last two months. However, we think prices will remain relatively high and yields low as demand from investors will keep prices elevated.
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.
First, the one notable economic report this week was data on the service sector of the economy. The ISM Services report came in well below expectations and at its weakest level since 2010. This comes after a weak reading on manufacturing last week, so it shows the economy is slowing.
Of course, the market rose on the news since a weak economy reduces the chance for the Fed to pull back on its stimulus by raising interest rates.
The good mood was short lived. Despite that weaker economic data, two regional Fed presidents made comments this week indicating an interest rate hike was still likely.
On Wednesday, regional Fed President Jeffrey Lacker said there was a 'strong case' for a rate hike in September. Friday saw similar comments from regional President Eric Rosengren. Stocks fell strongly on Friday as a result, notching the largest drop since June.
The European Central Bank (or ECB) was also in the news after a policy meeting this week. They announced no changes to their current stimulus policy, which has interest rates set at historic lows as they print roughly $90 billion a month to buy bonds.
This disappointed investors as many believed additional stimulus was in the works. The news also added pressure to the markets.
More economists are now calling on the ECB to expand their stimulus program by printing money to buy stocks in addition to bonds. They rightly point out that the ECB is buying so many bonds right now that they may soon run out of bonds to buy.
Japan has already taken this path. They are printing money to buy stocks through ETF products and now own a massive 60% share of the ETF market there.
This is just madness at this point. Printing money to buy stocks and bonds creates major distortions in the market that will ultimately implode. Further, these attempts have yet to produce any positive results, so we question why the need to venture even further into unchartered territory when there is no evidence it even works. This will not end well.
Next Week
Comments from Fed members weighed heavily on the markets this week, so investors will be closely watching the speeches from several other regional Fed members next week. These comments will probably have the most impact on the market next week, but we’ll also be watching a few economic reports, including retail sales and inflation at the consumer and producer levels.
Investment Strategy
Well, last week did not appear to be a good time to buy stocks. Clearly the direction of the market is still heavily dependent on Fed policy, so it is difficult to make any predictions from here. It is a frustrating investing environment when the direction of the market is dependent not on economic fundamentals, but the actions – or even just the words – of central bankers.
That said, we are nearing an oversold (cheap) level for stocks. The market has been lower on the potential for higher interest rates, but we don’t believe the Fed will raise rates any time soon. This would be a positive for stocks and could help send them higher.
Looking out a little longer, we are very worried about the market. 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 prices fell this week as yields rose and have been trending this way for the last two months. However, we think prices will remain relatively high and yields low as demand from investors will keep prices elevated.
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.
