The week was relatively quiet, with the markets bouncing around but ending mostly unchanged. At the Friday close, the Dow fell just 0.1%, the S&P 500 returned nothing, 0.0%, but the Nasdaq had a nice week, up 1.1%. Most commodities were higher, with oil up 1.8% and gold higher by 3.8%. Friday marked the last trading day of October, as well, and the markets had another nice month. The Dow rose 3.0%, the S&P was up 3.7%, and the Nasdaq beat them both at 5.9%.
On Monday, the government sold another round of bonds, this time Treasury Inflation Protected Securities (commonly referred to as TIPS). While there is nothing special about that, it is important to note that for the first time in history, those bonds were sold with a negative yield (which means you earn less than nothing). These investments will only pay off if inflation rises.
That shows us the demand for inflation protection is so strong and the expectation for future inflation is very high. We and other investors believe future quantitative easing programs (stimulus) will stoke future inflation, so protection is certainly necessary.
On Friday, we received rather weak GDP numbers. While the rate grew to 2.0% from 1.7% last quarter, most investors were looking for a rise of at least 2.1%. Additionally, most of the gain came from restocking current inventories, which is not usually a long term item. It also showed that government spending increased by 8.8% (down from 9.1% last quarter), which is also something we don’t like to see. Unfortunately, these numbers tell us that the U.S. economy remains weak and still pretty fragile at this point.
Next Week
As we mentioned above, next week will be very important, possibly one of the most important weeks of the year.
First, we have the election on Tuesday, which should favor the Republican party. It is almost certain that they will gain control of the House, while the Senate remains in question, and the market has priced these results in. It will be nice to get some more business friendly principles in Washington and hopefully change or slow the country’s current direction.
The most important day for the markets will be Wednesday and the Fed meeting. Here the Fed will announce its plans for the next round of quantitative easing (stimulus). The market is pricing in a big number from the Fed (at least $500 billion to over $1 trillion) and we believe the recent market run reflects that. If the announcement comes in lower than that, we will certainly see a sell off.
Our take is that the Fed will hedge its bets. We think they will announce a relatively small number for initial stimulus, but then indicate that it will provide ongoing stimulus as warranted by market conditions. At best this is just a guess, but it seems to fits with the current modus operandi of this group.
We will certainly see a movement in the markets if there are any surprises from these events, but it is important to note what news the market is responding to. A strong move on Wednesday would not necessarily be due to the election results from the previous day.
We will also receive several economic data reports on productivity, employment, and personal income, as well as many more corporate earnings reports. There are many items that can move the markets next week, so we will certainly be busy.
Where are we investing now?
Again, little change here. There will be plenty of data to move the markets next week, so it will be important to pay close attention to what it tells us. Unless we deduct otherwise from the Fed announcement, we believe the markets will close the year higher from here, 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, whether we want them to or not. 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.
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.
Source: MSN Moneycentral
There was little to get excited about on Wall Street this week because investors are looking to a very important week next week. There are the elections on Tuesday, followed by an important Federal Reserve meeting on Wednesday, which we will discuss in detail later. Still, there were a few important events on which we would like to comment on. On Monday, the government sold another round of bonds, this time Treasury Inflation Protected Securities (commonly referred to as TIPS). While there is nothing special about that, it is important to note that for the first time in history, those bonds were sold with a negative yield (which means you earn less than nothing). These investments will only pay off if inflation rises.
That shows us the demand for inflation protection is so strong and the expectation for future inflation is very high. We and other investors believe future quantitative easing programs (stimulus) will stoke future inflation, so protection is certainly necessary.
On Friday, we received rather weak GDP numbers. While the rate grew to 2.0% from 1.7% last quarter, most investors were looking for a rise of at least 2.1%. Additionally, most of the gain came from restocking current inventories, which is not usually a long term item. It also showed that government spending increased by 8.8% (down from 9.1% last quarter), which is also something we don’t like to see. Unfortunately, these numbers tell us that the U.S. economy remains weak and still pretty fragile at this point.
Next Week
As we mentioned above, next week will be very important, possibly one of the most important weeks of the year.
First, we have the election on Tuesday, which should favor the Republican party. It is almost certain that they will gain control of the House, while the Senate remains in question, and the market has priced these results in. It will be nice to get some more business friendly principles in Washington and hopefully change or slow the country’s current direction.
The most important day for the markets will be Wednesday and the Fed meeting. Here the Fed will announce its plans for the next round of quantitative easing (stimulus). The market is pricing in a big number from the Fed (at least $500 billion to over $1 trillion) and we believe the recent market run reflects that. If the announcement comes in lower than that, we will certainly see a sell off.
Our take is that the Fed will hedge its bets. We think they will announce a relatively small number for initial stimulus, but then indicate that it will provide ongoing stimulus as warranted by market conditions. At best this is just a guess, but it seems to fits with the current modus operandi of this group.
We will certainly see a movement in the markets if there are any surprises from these events, but it is important to note what news the market is responding to. A strong move on Wednesday would not necessarily be due to the election results from the previous day.
We will also receive several economic data reports on productivity, employment, and personal income, as well as many more corporate earnings reports. There are many items that can move the markets next week, so we will certainly be busy.
Where are we investing now?
Again, little change here. There will be plenty of data to move the markets next week, so it will be important to pay close attention to what it tells us. Unless we deduct otherwise from the Fed announcement, we believe the markets will close the year higher from here, 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, whether we want them to or not. 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.
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.
