Yet another positive week for the markets. At the Friday close, the Dow was higher by 2.4%, the S&P also rose 2.4%, and the Nasdaq climbed 3.0%. This week notched another record high for gold, while oil continues to rise.
Source: MSN Moneycentral
We expected to see more volatility this week, but it never really materialized. Most of the gains came on Tuesday while the remainder of the week traded in a fairly narrow range, frequently fluctuating between gains and losses but ending with little change. Helping the markets higher, the worries about
Economic reports released this week were mostly unfavorable. Housing remains weak, which is not surprising given the expiration of the government assistance programs. Business activity is showing weakness and leading economic indicators came in lower than expected. Both the consumer and producer price indexes (CPI and PPI) showed a drop. Normally that wouldn’t be a bad thing, since it would mean lower prices for consumers. However, this drop is concentrated in the energy sector, as oil prices have fallen. The rest of the economy is showing rising prices and is not enough to offset the drop in oil, hence the drop in consumer and producer prices.
The biggest surprise came in the weekly initial jobless claims, as the report showed 12,000 more initial jobless than the previous week. That number now stands at 472,000 initial jobless claims for the week. Couple this with the disappointing employment report last week and the employment picture is something we are very worried about.
This pessimism is one of the drivers behind the record high prices in gold. Investors are searching for returns but are having a hard time finding them. Bonds are paying very little due to record low interest rates and stocks have been very volatile. Seeing the problems around the globe and concerns over the currencies of debt-laden countries, gold becomes a natural safe haven and new source for returns. Since the start of the year, gold has risen 15% and continually reached new highs. At these record high levels, naturally we do not recommend buying. No one knows how long this rally will continue, but we feel the risks outweigh the benefits at this point.
Next Week
The Federal Reserve will be meeting next week and announcing their decision on the fed funds rate, which currently stands at zero. We expect the rate to remain at zero, but will be watching for any indication on when they plan to raise rates.
Home sales and durable goods orders reports will be released next week, although we see them having minimal impact on trading.
Where are we investing now?
The recent rise in the markets has been encouraging, although they have risen on little news and light volume. At the moment, corporate bonds and bond funds still look like the least-scary investment. For stocks, some values can be found, although we remain cautious. Our big-picture outlook still remains the same, as we are optimistic through the end of the year with the low interest rates and stimulus funds pushing the markets higher. The higher interest rates, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.
In equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. We continue to avoid banking and insurance sector stocks, and new government regulations have us staying out of oil companies. TIPs are important as we expect inflation to increase in the future, while
