Source: MSN MoneycentralWith six straight negative weeks for the market, we are looking at the longest market downtrend since 2002. The poor economic data that was responsible for much of that selloff continued to be a problem this week. Unfortunately, all this sour data is increasing the fears of a double dip recession and adding a downward pressure to the markets.
The strong selling we saw last week carried over into Monday, making four straight days of losses for the markets. Looking to find some bargains in all this selling, investors began buying stocks on Tuesday, pushing the markets higher.
However, late in the day, Fed chief Ben Bernanke gave a speech commenting on the strength of the economy, saying it was worse than he expected. The sour mood of his speech caused late day selling that sent the markets into the red for the day and on into Wednesday.
By Thursday, the markets reversed course again and popped sharply higher. The Dow closed the day with a gain of 75 points (0.6%), yet was off from the highs from earlier in the day. Tired of all the recent selling, it seemed like investors were looking to do some buying on the first sign of good news. Announced Thursday morning, the US trade deficit narrowed by almost 7%. It was good news, but nothing remarkable. Since it wasn’t bad, though, it gave people a reason to start buying again.
With the market trading higher, further bad economic news of the day (high initial jobless claims, weak inventory growth, and a slowdown in sales of wholesalers) had little impact on the markets, but showed us a slowdown in demand for products.
Although that news was overlooked on Thursday, investors noticed on Friday as the markets plunged back lower. The bad news kept coming in and the markets reacted accordingly. Import prices rose, indicating that inflation from overseas was coming to the U.S. Also, the U.S. budget deficit widened by much more than expected.
At the end of the day, the Dow fell over 170 points (1.4%) and is now up only 3% for the year. The Nasdaq turned negative for the year. On the bright side, though, oil prices dropped on anticipation of an economic slowdown and increased supplies from overseas.
Beginning many months ago, when there was bad news, it was brushed aside since investors figured the Fed would step in with some sort of stimulus to prop things up. They did, through the quantitative easing programs, and it contributed to the remarkable rise in the stock market. Now, though, the stimulus (QE2) is set to expire at the end of the month and there is no indication that there will be further stimulus.
Seeing that the stimulus did little to help the economy (yet created a massive new amount of debt, a weakness in the dollar, and a rise in commodity prices), many people are voicing their displeasure with the Fed and the government. This makes a new stimulus unlikely.
If anything, we think that if markets fall far enough, they do something to prop the market up. There is little chance it will be formerly announced and will definitely not be called “QE”. After all, there is an election coming up and we fear they will do anything for a short term jolt.
Next Week
Same as last week, it will be interesting to see what happens with the markets in the coming week. We had commented on how rare six straight down weeks in the market was, now we can say the same for seven weeks. If there is further selling, it could have us rethinking our outlook on the markets (which it has to a small degree already).
Next week will be packed full of corporate earnings and economic data. There will be some smaller, yet still important reports, like retail sales, industrial production, housing starts, and leading economic indicators.
We are really interested to see the producer and consumer price index reports (CPI and PPI). Although distorted by government manipulation, these are the main reports on inflation in our economy. Economists are predicting a slight increase in these figures, but like all the other recent reports, they could be worse than expected.
Quadruple witching occurs this Friday, as well, which is when options and futures expire at the same time. It tends to add more volatility to the market, so this and the slew of other data could make it a choppy trading week.
Investment Strategy
Like we said last week and above, it is rare to have this many down weeks in a row. Maybe investors will step in and buy this dip, but of course we don’t know. We are still very cautious to buy at this level, as it is tough to say what the market will do from here. Our economy is weak and yet corporate profits have been solid. Record highs, even. It is a tough dynamic to make decisions in.
At this point, we wouldn’t make any bets on the market as a whole but look for attractive individual stock picks. As value investors by nature, we like to buy things that look to be cheap or trading at a discount (using industry jargon, we like to have a margin of safety). Commodities prices have bounced back a bit, but still look reasonable here.
We have enjoyed investing in smaller stocks that are uncorrelated to the movements of the market and economy. These aren’t big positions in our portfolio and can be risky, but it is nice seeing stocks move on fundamentals rather than being pushed around by big investors and high frequency traders.
Outside of these small stocks, if we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. Commodities remain a long term favorite and weakness could present buying opportunities if the price is right.
TIPs are important as we expect inflation to increase, while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds for the future, most notably, inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these weekly and monthly changes.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
