Another bumpy week in the markets, ultimately resulting in modest gains for the major indices. At the close, both the Dow and S&P rose 1.8% while the Nasdaq gained 1.5% (a jump higher at the open Monday severely distorted our chart this week). Oil continues to hover around the high level of $80 and gold has been trending higher - up 2% this week.
Source: MSN Moneycentral
As earnings season winds down, the corporate earnings releases still look decent. Revenue growth has been satisfactory; however, cost cutting has been the biggest contributor to those earnings gains. Still, solid earnings contributed to the nearly 10% run the markets have seen since the July lows. Going forward, the lack of these positive reports fueling market gains have make us very cautious for the future.
The unemployment report was released on Friday and left us disappointed. The numbers were weaker than expected, although they showed a gain of over 70,000 private sector jobs. Additionally, the previous month’s job numbers were revised significantly downwards. On its release, the markets dropped over 1%, yet rebounded late in the day. As you can see in the chart provided by the Wall Street Journal, gains have been trending lower and are well below what they should be at this point in a recovery (the light red bar is the private sector jobs, the dark red includes government sector).
With this poor economic picture, investors have been pouring money into relatively safer bonds. Yields on Treasury bonds are at historic lows and are projected to trend lower. This tells us that investors are pessimistic on the future and would rather purchase bonds that return practically nothing, rather than take possible losses in the stock market. It is another negative indicator to us and makes us cautious for the future.
Next Week
Corporate earnings begin to taper off next week and will likely have little impact on the market. We will receive more economic reports, but they too will have little impact. The Consumer Price Index will be released on Friday and it will be interesting to see if inflation or deflation is prevailing.
An important event comes on Tuesday with the Fed Reserve decision on interest rates. It is widely expected to keep rates at this historic low, but we will be watching to see if they may implement any new easing policies. There are rumors that this is a possibility and we are not sure what effect it will have on the market. Guesses are that that they will again purchase mortgages in an attempt to support the housing market. We believe these policies only prolong the inevitable cleansing process that is necessary for markets to function properly.
Where are we investing now?
Like last week, earnings continued to be impressive and revenues are decent. 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
