Another bumpy ride saw stocks end the week down slightly. Through Friday’s close, the Dow was lower by 0.6%, the S&P was down 1.0%, and the Nasdaq fared the worst with a 1.5% drop. Gold fell 0.6% on the week. Oil hit its highest price in a year with a 1.3% gain to close at $50.32 per barrel. The international Brent oil rose to $52.00.
Source: Google Finance
There was a lot going on this week that contributed to the volatility.
We’ll start with corporate earnings for the third quarter which started coming in this week. Analysts have set expectations low and predict yet another quarter of negative earnings, making this the sixth quarter of negative earnings in a row. Back in June they saw higher earnings this quarter, but have since revised down their expectations.
This is important to note since stock prices move on expectations. A lowered bar makes expectations easier to beat. Even poor earnings will see stocks rise if the result is better than an even-worse expectation.
That played out to some degree this week. Several big banks reported their earnings and the results were not great. However – they were better than expectations, which was seen as a positive and stocks rose.
We think this will be a common story in the coming weeks.
The Fed was also a big story this week. The minutes from their last meeting in September were released and showed them inching towards an increase in interest rates (this is important because the low rates have helped send stocks higher). The decision not to raise rates at the September meeting was a “close call,” suggesting to investors that a rate hike at their meeting in December is likely.
We’ll start with corporate earnings for the third quarter which started coming in this week. Analysts have set expectations low and predict yet another quarter of negative earnings, making this the sixth quarter of negative earnings in a row. Back in June they saw higher earnings this quarter, but have since revised down their expectations.
This is important to note since stock prices move on expectations. A lowered bar makes expectations easier to beat. Even poor earnings will see stocks rise if the result is better than an even-worse expectation.
That played out to some degree this week. Several big banks reported their earnings and the results were not great. However – they were better than expectations, which was seen as a positive and stocks rose.
We think this will be a common story in the coming weeks.
The Fed was also a big story this week. The minutes from their last meeting in September were released and showed them inching towards an increase in interest rates (this is important because the low rates have helped send stocks higher). The decision not to raise rates at the September meeting was a “close call,” suggesting to investors that a rate hike at their meeting in December is likely.
The Fed last raised rates in December of last year. This weighed on the market and if you remember, January saw the worst start to a year in history as stocks fell sharply. We think that could be a very real possibility again this year.
Another big factor behind that January drop was worries about the Chinese economy. China has faded from the headlines recently, but new worries resurfaced this week. Exports from the country have fallen 10% over the past year. This is significant since China makes and exports so many products, making them a bellwether for the global economy. The large decline in exports is a signal of lower global economic growth. This is something to keep an eye on.
Next Week
Corporate earnings will again be a big story next week as the pace of companies releasing their data picks up. About 16% of companies in the S&P 500 will be reporting earnings, including some big names like Microsoft, McDonalds, Bank of America, and GE.
We’ll also see a few important economic reports, including data on industrial production, inflation at the consumer level (CPI) and housing stats.
Investment Strategy
Stocks have been stuck 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.
Bonds prices fell this week as yields rose in anticipation of higher rates from the Fed. 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.
Another big factor behind that January drop was worries about the Chinese economy. China has faded from the headlines recently, but new worries resurfaced this week. Exports from the country have fallen 10% over the past year. This is significant since China makes and exports so many products, making them a bellwether for the global economy. The large decline in exports is a signal of lower global economic growth. This is something to keep an eye on.
Next Week
Corporate earnings will again be a big story next week as the pace of companies releasing their data picks up. About 16% of companies in the S&P 500 will be reporting earnings, including some big names like Microsoft, McDonalds, Bank of America, and GE.
We’ll also see a few important economic reports, including data on industrial production, inflation at the consumer level (CPI) and housing stats.
Investment Strategy
Stocks have been stuck 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.
Bonds prices fell this week as yields rose in anticipation of higher rates from the Fed. 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.
