After complaining about a boring market last week, this week was just the opposite. At the close, the Dow dropped 2.1%, the S&P fell 1.7%, and the Nasdaq was off 1.9%. Oil was the story of the week as crude (WTI) climbed to over $103 per barrel but settled around $98. Brent crude (which we discussed last week) reached $120 per barrel but also fell to around $112. Gold rose as well, up 1.5% this week.
Source: MSN Moneycentral
By now we’re sure you’ve heard about the escalating situation in the Middle East and North Africa, particularly in Libya. You’ve probably also seen the surging gas prices that are a result of these conflicts. Crude oil rose by the biggest percentage in over two years to reach the highest price seen in three years.
The high oil price and political unrest helped send the markets lower in the worst weekly performance of the year. It has been a long time since there was any meaningful correction in the market, so this correction was not unexpected. The market could not keep climbing at that trajectory forever.
At any rate, by late Thursday, Saudi Arabia announced it would increase oil production by 8% to make up for any lost supply from Libya. The news reassured the markets, which began to climb, as you can see in the chart above. It also calmed the rising oil markets as they retreated from their highs.
Obviously the situation this week makes us realize how dependent we are on energy supplies from unstable areas. From the U.S. Energy Department, over the last 50 years, our energy demands are 17 times higher, but domestic output has fallen by 40%. It may be of some surprise, but when shale oil is included, the U.S. has almost 3 times the supply of Saudi Arabia! Sunshine and windmills might sound nice, but they may take years and decades to be fully functional, if ever. Until then, more and more of our energy independence remains in the hands of unstable regimes.
It wasn’t just oil and the Middle East making news this week, although it certainly seems like it. Helping the markets higher on Friday was a report showing consumer confidence at the highest level in three years. That is terrific news, but we are curious as to how people can be that optimistic when unemployment is so high and the price of everything is high and climbing.
Sure enough, Rasmussen put out the results of their own economic confidence survey, which came in at the lowest level since December. Only 26% of respondents felt the economy was improving. These results differ dramatically from the other survey; however, we are more inclined to agree with these results.
Finally, largely ignored on Friday was the revision of 4th quarter GDP. The original number stood at 3.2% growth, but was revised lower to just 2.8%. At this point in a typical recovery, GDP should be humming along. It just shows we still have a long way to go for this economy to recover.
Next Week
Next week will wrap up February, so we will begin to get end of the month data. The most important info comes on Friday with the monthly unemployment rate. The January number came in much lower than expected and most economists expect to see a rebound in the February data. We believe a large gain has been priced into the markets, so any miss would likely send the markets lower.
We can’t forget that the market tends to shows gains on the first of the month. Large investors like mutual and pension funds add new money to stocks on this day, driving up prices. There has been a lot of press on this lately and strategies usually stop working when they become too popular. We don’t change our strategy just for the first of the month, so this doesn’t really apply to us, but is just something interesting to watch for.
Where are we investing now?
So was the recent market dip a good buying opportunity? Normally we would believe the market has room to go further south. This market is anything but ordinary, though, and the massive liquidity injections from the Fed will probably keep fueling the market higher. At least for the short to medium term. We see a brewing stagflation scenario ultimately wearing on the markets. Also, any further shocks out of the Middle East could impact the markets like it did this week.
We didn’t really do much buying of stocks this week in response to the dip as we remain rather cautious. If putting new money to work, though, in equities we are focused on large cap higher-quality and multi-national stocks. Large cap has lagged Mid and Small, so there could be more room to run in this area. We continue to avoid banking and healthcare-related 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 we think yields will increase over time.
Commodities remain a long term favorite and any weakness could present buying opportunities. Municipal bonds are still important despite the recent drop in prices. There are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks have had a significant run already and are facing many headwinds for the future, especially inflation. Still, if we had to put new money in, we are favoring developed international markets as opposed to emerging.
Source: MSN MoneycentralBy now we’re sure you’ve heard about the escalating situation in the Middle East and North Africa, particularly in Libya. You’ve probably also seen the surging gas prices that are a result of these conflicts. Crude oil rose by the biggest percentage in over two years to reach the highest price seen in three years.
The high oil price and political unrest helped send the markets lower in the worst weekly performance of the year. It has been a long time since there was any meaningful correction in the market, so this correction was not unexpected. The market could not keep climbing at that trajectory forever.
At any rate, by late Thursday, Saudi Arabia announced it would increase oil production by 8% to make up for any lost supply from Libya. The news reassured the markets, which began to climb, as you can see in the chart above. It also calmed the rising oil markets as they retreated from their highs.
Obviously the situation this week makes us realize how dependent we are on energy supplies from unstable areas. From the U.S. Energy Department, over the last 50 years, our energy demands are 17 times higher, but domestic output has fallen by 40%. It may be of some surprise, but when shale oil is included, the U.S. has almost 3 times the supply of Saudi Arabia! Sunshine and windmills might sound nice, but they may take years and decades to be fully functional, if ever. Until then, more and more of our energy independence remains in the hands of unstable regimes.
It wasn’t just oil and the Middle East making news this week, although it certainly seems like it. Helping the markets higher on Friday was a report showing consumer confidence at the highest level in three years. That is terrific news, but we are curious as to how people can be that optimistic when unemployment is so high and the price of everything is high and climbing.
Sure enough, Rasmussen put out the results of their own economic confidence survey, which came in at the lowest level since December. Only 26% of respondents felt the economy was improving. These results differ dramatically from the other survey; however, we are more inclined to agree with these results.
Finally, largely ignored on Friday was the revision of 4th quarter GDP. The original number stood at 3.2% growth, but was revised lower to just 2.8%. At this point in a typical recovery, GDP should be humming along. It just shows we still have a long way to go for this economy to recover.
Next Week
Next week will wrap up February, so we will begin to get end of the month data. The most important info comes on Friday with the monthly unemployment rate. The January number came in much lower than expected and most economists expect to see a rebound in the February data. We believe a large gain has been priced into the markets, so any miss would likely send the markets lower.
We can’t forget that the market tends to shows gains on the first of the month. Large investors like mutual and pension funds add new money to stocks on this day, driving up prices. There has been a lot of press on this lately and strategies usually stop working when they become too popular. We don’t change our strategy just for the first of the month, so this doesn’t really apply to us, but is just something interesting to watch for.
Where are we investing now?
So was the recent market dip a good buying opportunity? Normally we would believe the market has room to go further south. This market is anything but ordinary, though, and the massive liquidity injections from the Fed will probably keep fueling the market higher. At least for the short to medium term. We see a brewing stagflation scenario ultimately wearing on the markets. Also, any further shocks out of the Middle East could impact the markets like it did this week.
We didn’t really do much buying of stocks this week in response to the dip as we remain rather cautious. If putting new money to work, though, in equities we are focused on large cap higher-quality and multi-national stocks. Large cap has lagged Mid and Small, so there could be more room to run in this area. We continue to avoid banking and healthcare-related 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 we think yields will increase over time.
Commodities remain a long term favorite and any weakness could present buying opportunities. Municipal bonds are still important despite the recent drop in prices. There are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible). Finally, international stocks have had a significant run already and are facing many headwinds for the future, especially inflation. Still, if we had to put new money in, we are favoring developed international markets as opposed to emerging.
