Source: MSN Moneycentral
As you can see in the chart above, the markets had a lot of movement this week. A large drop on Tuesday was attributed to a surprise interest rate increase out of China. This is an attempt to slow down the growth of the currently red-hot country.
Several stock-specific stories also contributed to the Tuesday drop. An announcement of a lawsuit against Bank of America by several institutional investors and (most importantly) The Federal Reserve of New York sent the entire banking sector lower. The lawsuit is in regards to the foreclosure paperwork fiasco that has made recent headlines.
Earnings results from Apple and IBM also impacted the market to the downside. Earnings were decent, but left investors wanting more. These stocks have had terrific runs recently and may have gotten a bit ahead of themselves.
As Wednesday rolled around, it seemed like all was forgotten. Encouraging earnings results from several big name stocks improved outlook and the aforementioned sectors rose higher.
By the end of the week, over 80% of the earnings releases had beat their estimates. The economy remains weak, but businesses continue to do relatively well in this environment. The market has risen substantially in recent weeks, and we believe these solid earnings results have largely been priced into the market and may not have more room to run.
We are seeing concerns over macro factors like the actions of the Fed and underlying economic conditions having more of an influence than corporate earnings at this time. After the recent run in the markets, investors are beginning to get nervous and the markets are becoming jittery. This tends to happen when markets reverse course. Obviously we have no idea where the market will go, but will be carefully watching to see how these “jitters” play out.
It is interesting to note that the days the market rose are the same days that the Fed injected money into the system (through the Permanent Open Market Operations - POMO - which we have discussed in the past). In fact, most days these operations occur see a higher stock market, if not a temporary jolt higher, depending on how many billions were injected. The Fed actually pulled money out of the system on Thursday and you can see where the market pulled back. This makes us worry that the market is being supported solely by these POMO operations.
Next Week
We will start with this weekend, as the G-20 meeting of financial officials gets underway. There will be debates on exchange rate and currency fluctuations and it will be interesting to see if any agreements are reached and what impact that will have on the dollar (and therefore, commodities). New banking regulations will also be discussed, so bank stocks will certainly be affected by the outcomes, if any agreements are reached.
Next week will certainly be busy as we head into the peak of earnings season. It will also be an important week for economic reports as housing data and durable goods orders will be announced. We will cap the week off on Friday with the third quarter GDP report. There looks to be plenty of information to impact the markets next week.
Where are we investing now?
Little change here. With this jittery market, a correction could be in the works. We believe the markets will close the year higher from here, though, so we would look to add to positions in the event of a pullback. The fundamentals of the economy are weak, but we believe the Fed will do everything in its power to send the stock market higher. Also, investment professionals who have missed this rally due to a conservative portfolio positioning will look to participate in the rally, which will also send the market higher.
Despite this optimistic outlook for the market, we still see considerable weakness in the economy, so we are very careful with our positions. Other headwinds like higher future taxes, increasing government involvement in the private sector, and a still-high unemployment rate, continues to worry us. Corporate insiders continue to sell their own stock, as well, at a pace of 2,000 for every one buying. To us, that is another red flag.
If we were to increase our investments, in equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. A weak dollar would be a plus for export-oriented companies. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while U.S. treasuries are a sector we are very bearish (pessimistic) on as yields will increase over time.
Commodities remain a longer term favorite as inflation will also impact prices to the upside along with the weak dollar. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (with certain sectors in China) are areas we favor.
Many of these positions have had terrific runs, so it is possible to see some profit taking at some point in the near future. We continue to hold on to these positions, but would not be opposed to taking some money off the table if weaknesses appear.
