It was a rough week on Wall Street as the major indices sold off sharply and re-entered the red for the year. At the Friday close, the Dow lost 3.3%, the S&P 500 fell 3.8%, and the Nasdaq fared the worst with a -5.0% return. Oil fell considerably (-6.6%) on the negative economic outlook, while gold rose slightly higher.
Source: MSN Moneycentral
A lingering concern about a weak
One of the Fed presidents, Thomas Hoenig, expressed worries that these record low interest rates will be in place too long (he has mentioned this many times over the past several months). Constantly tinkering with the economy does not allow market forces to operate properly.
Interest rates were too low for too long nearly a decade ago, which fueled the housing bubble we are still trying to recover from. As Hoenig said, we are at risk of creating a boom-and-bust cyclical economy. We agree, and believe that the economy will not improve until government gets out of the way.
Corporate earnings releases are down to a trickle now, but still remain decent. As earning season comes to an end, the results were solid in our view. Although cost cutting was the primary contributor, revenue growth was satisfactory. Going forward, the lack of positive earnings news means the weak economy will be in focus and we worry it will impact the markets to the downside.
The consumer price index was released on Friday, showing a slight gain. Over the past year, the CPI has risen 1.2%. Although small, this gain shows signs of inflation, not deflation.
Recently, economists have become very concerned over deflation, as these effects are supposedly more detrimental to the economy than inflation. Goods are cheaper for consumers, but results in losses to businesses. We don’t see deflation entering the picture, however. There are many components to the CPI, but any trip to the grocery store or gas pump, as well as other everyday purchases, will tell you inflation is prevailing and it is supported by these CPI numbers.
Next Week
Next week looks relatively quiet in terms of both economic and corporate earnings releases. We will get housing information, as well as the Producer Price Index and leading economic indicators, but they will have limited impact on the markets.
Several large companies like Wal-Mart, Target, and Home Depot will release earnings, but we believe these, too, will have limited impact.
Where are we investing now?
Little change here. Like before, earnings continued to be decent and revenues are satisfactory. Companies with a large overseas presence (especially
Our big-picture outlook remains the same, as we are optimistic through the end of the year. Low interest rates and the remaining stimulus will push the markets higher. The higher interest rates down the road, 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. TIPs are important as we expect inflation to increase in the future, while
