The markets dropped sharply to open the week, but rose steadily from there to close with a nice gain. For the week, the Dow returned a solid 1.5%, the S&P climbed 1.8% and the Nasdaq popped 2.3%. A large gain on Friday helped gold move higher by 1.3% for the week. Oil slowly trended higher all week to nearly $105 per barrel, for a 1.0% gain. Brent crude, used in most of the gas here in the East, moved up to $120 per barrel.
Source: MSN Moneycentral
New worries out of Europe put a pressure on the market early in the week, but decent corporate earnings and the prospect of further stimulus helped push the markets higher for the rest of the week.
Over the weekend France held their first round of elections. The Socialist candidate received a majority of the votes, a result of the unhappiness with the economy and the steps taken to fix it. Though a Socialist President is worrisome thought, the election result wasn’t much of a surprise.
What was a surprise, though, was a collapsing of the Dutch government over the weekend. The idea of a tighter budget has not sat well with the population, resulting in a no-confidence vote in the current government.
By the end of the week, Romania’s government met a similar fate.
The worry now becomes Europe not following through with their austerity plans. The new hot word, austerity here is defined as cuts in government spending with corresponding tax increases to lower their level of debt.
There is no doubt that spending cuts are badly needed as the status quo is unacceptable. However, we feel that tax hikes are the wrong way to go. Higher taxes cut into economic growth, and growth is the solution to their problems.
The trouble is, these tax increases are being lumped in with spending cuts. As these events in France, the Netherlands, and Romania are showing us, the whole austerity package will get tossed out by the angry citizenry. A reduction in spending, combined with a reduction in taxes, would be the recipe for success.
Here in the U.S., corporate earnings have continued to look solid. Of the companies that have released earnings to this point, 75% have beat expectations. According to Thomson Reuters, earnings are on pace to grow slightly more than 7% over the last year (and the number falls to 4.7% when stripping out Apple).
Like we mentioned last week, that 7% growth pace is decent, but still represents a slowdown from the 8.4% growth last quarter and 18% growth in the quarter prior to that.
Plus, revenues are still roughly flat, indicating a lack of growth in sales. Much of the growth in earnings has come from a reduction in expenses. While we like a lean, productive company, we would like to see a pickup in revenues before we get overly optimistic on the corporate picture.
The Fed was also in the news this week as they held their latest policy meeting. There was little change in their outlook and they believed interest rates will remain at these historic lows until 2014, like planned. They also let the door open for another round of stimulus if economic conditions warranted, giving traders the relief they needed that the Fed would step in if the market were to fall.
Economic data this week rather lackluster. The first look at GDP came in well below estimates, showing just a 2.2% growth. Though still growing, this indicates that growth is slowing. It also confirms that this is the worst economic recovery since the last world war.
Durable goods (which are items with a long life, like a washing machine of TV) were also very poor, showing a drop of 4.2% over the past month. Weekly unemployment figures notched another gain as they creep back towards the 400,000 a week level.
We’ll close with some positive news, as consumer confidence ticked slightly higher and housing showed some signs of life.
Next Week
Next week will again be a busy one. Corporate earnings will continue to come in at a steady pace.
With the end of the month next week, we will begin getting April monthly info. The unemployment report will be released on Friday. With the recent weekly figures painting a darker picture, we may get a negative surprise here.
We will also get data on personal income and spending, manufacturing, and service sector strength.
Investment Strategy
Still no change here. The market looks to have some positive momentum at this point. Looking further out, we worry about a stagnating economic picture and troubles returning to Europe. Additionally, the latest round of stimulus wears off in June and the market could drop like it did at the end of the last two stimulus programs. We would be hesitant to add to stock positions at this point.
If we were to get a buying opportunity, we like large cap higher-quality and dividend paying stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising. Also, there is always the opportunity to find an undervalued individual stock at any time.
We like commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), who have been major drivers of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. We are not looking to add to our gold positions at current prices, though.
A short Treasury Bond position (bet on a decline in value) provides a nice hedge here, but we think the potential for profit is low at this time.
On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, in international stocks, 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 daily and weekly fluctuations.
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.
