The markets declined throughout the week, with the performance of the three major markets ending with a wide disparity. For the week, the Dow was higher by 0.1%, while the S&P fell 0.7% and the Nasdaq lost 1.3%. Gold saw some volatility but closed with a 0.7% gain. Oil moved steadily lower with a loss of 4.6% to close at $48.66 per barrel. The international Brent oil closed down to $49.60.
Source: Google Finance
The markets have been fairly quiet as investors have been unwilling to place any big bets on the direction of the market before the election.
The biggest impact on the market this week was corporate earnings, as this was one of the busiest weeks for third quarter results. According to Factset, we may see the first quarter of higher earnings in a year-and-a-half. About 60% of companies in the S&P 500 have reported and are seeing an earnings increase of 1.6%. Though modest, it shows we are moving the right direction.
Revenue, or sales, are on pace to be higher for the first time in six quarters.
Bonds were a big story this week, too, as their yields hit the highest level since late-May (so prices are the lowest since that time). It’s not just in the U.S. either, as yields are rising around the globe. This is important because it means it will cost more to borrow funds.
We’ve heard the higher bond yields are due to higher inflation expectations, since higher inflation means investors would seek a higher yield to outpace inflation. That is probably true to some extent, but we think yields are higher mostly because of our Fed (and possibly other central banks) and the expectations they will be raising interest rates. This is causing investors to try to get out in front of that action by selling bonds.
The third quarter report on the strength of the economy, the GDP, also came in this week. The economy grew at 2.9%, better than the low-2% number many were expecting. It’s much better than the 1.4% from last quarter, too. We’re still on pace to grow just below 2% for the year, though, which shows a deceleration from the 2.6% of last year. While the recent number was encouraging, we are still stuck in a growth rut.
Finally, you’ve probably seen some of the large merger and acquisition announcements recently. We’re actually closing out the busiest month ever for M&A.
Part of the reason for so many deals is the lack of growth – companies can’t increase their earnings so they buy other companies in order to do so.
The other – and probably main – reason for so many deals is the possibility for higher borrowing costs in the coming months. Companies take on debt to do these deals and the low borrowing costs make financing easy. Higher borrowing rates will make this more difficult, so companies seem to be taking advantage now before rates rise.
Next Week
A lot of economic reports will come in next week after the month ends. We’ll get info on the strength of the manufacturing and service sectors, plus the always important employment report. Corporate earnings will again be a big story, too.
There will also be a Fed policy meeting, but no changes are expected at that time.
Finally, the approaching election is sure to add some volatility to the markets, especially with the news from the FBI late Friday.
Investment Strategy
Still no change here. Stocks remain in a rut since early September and it is difficult to find any momentum in either direction. If anything, stocks may be a bit on the cheap side, but not at a level we would find attractive for new buying.
From a longer term perspective, everything looks expensive. Central bank policies have driven asset classes higher, which leaves few places to hide if the market were to turn. We worry this is an asset bubble that will end badly – but knowing when that day of reckoning is remains anyone’s guess.
As mentioned above, bond prices fell this week as yields ticked higher. We don’t expect a significant change here as we think prices will remain relatively high and yields low as demand from investors will keep prices elevated, even with higher rates from the Fed.
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.
The biggest impact on the market this week was corporate earnings, as this was one of the busiest weeks for third quarter results. According to Factset, we may see the first quarter of higher earnings in a year-and-a-half. About 60% of companies in the S&P 500 have reported and are seeing an earnings increase of 1.6%. Though modest, it shows we are moving the right direction.
Revenue, or sales, are on pace to be higher for the first time in six quarters.
Bonds were a big story this week, too, as their yields hit the highest level since late-May (so prices are the lowest since that time). It’s not just in the U.S. either, as yields are rising around the globe. This is important because it means it will cost more to borrow funds.
We’ve heard the higher bond yields are due to higher inflation expectations, since higher inflation means investors would seek a higher yield to outpace inflation. That is probably true to some extent, but we think yields are higher mostly because of our Fed (and possibly other central banks) and the expectations they will be raising interest rates. This is causing investors to try to get out in front of that action by selling bonds.
The third quarter report on the strength of the economy, the GDP, also came in this week. The economy grew at 2.9%, better than the low-2% number many were expecting. It’s much better than the 1.4% from last quarter, too. We’re still on pace to grow just below 2% for the year, though, which shows a deceleration from the 2.6% of last year. While the recent number was encouraging, we are still stuck in a growth rut.
Finally, you’ve probably seen some of the large merger and acquisition announcements recently. We’re actually closing out the busiest month ever for M&A.
Part of the reason for so many deals is the lack of growth – companies can’t increase their earnings so they buy other companies in order to do so.
The other – and probably main – reason for so many deals is the possibility for higher borrowing costs in the coming months. Companies take on debt to do these deals and the low borrowing costs make financing easy. Higher borrowing rates will make this more difficult, so companies seem to be taking advantage now before rates rise.
Next Week
A lot of economic reports will come in next week after the month ends. We’ll get info on the strength of the manufacturing and service sectors, plus the always important employment report. Corporate earnings will again be a big story, too.
There will also be a Fed policy meeting, but no changes are expected at that time.
Finally, the approaching election is sure to add some volatility to the markets, especially with the news from the FBI late Friday.
Investment Strategy
Still no change here. Stocks remain in a rut since early September and it is difficult to find any momentum in either direction. If anything, stocks may be a bit on the cheap side, but not at a level we would find attractive for new buying.
From a longer term perspective, everything looks expensive. Central bank policies have driven asset classes higher, which leaves few places to hide if the market were to turn. We worry this is an asset bubble that will end badly – but knowing when that day of reckoning is remains anyone’s guess.
As mentioned above, bond prices fell this week as yields ticked higher. We don’t expect a significant change here as we think prices will remain relatively high and yields low as demand from investors will keep prices elevated, even with higher rates from the Fed.
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.
