Another eventful week saw the markets end with mixed results. For the week, the Dow was lower by 1.0%, the S&P 500 was off 0.6%, but the Nasdaq rose 0.7%. Gold fell as prospects faded for more stimulus by the Fed, losing 3.8%. Oil continues to decline and saw new lows of the year, dropping 5.4% to just below $80 per barrel. Brent oil, used in much of the gas here in the East, hit prices not seen in 18 months and closed the week at $91 per barrel.
Source: MSN Moneycentral
The hopes for further stimulus from the Fed pushed the market higher this week, but that hope disappeared and negative economic data caused in a drop in the market.
Still the major factor driving the market, the Fed held a meeting this week where an announcement on further stimulus was to be made. Since economic data has been so weak, there were hopes that the Fed would announce another round of liquidity injections (or money printing), or QE3.
In a disappointment to the market, the Fed announced it would extend its current stimulus program called Operation Twist that was due to end this month. Though still a stimulus, Operation Twist is different from the explicit “liquidity injections” (ahem, money printing) many had hoped for. It is designed to keep interest rates low while not increasing the money supply.
We weren’t one of those hoping for further stimulus, since it clearly does not work and will cause greater problems in the long run. Yet the Fed keeps trying, ignoring its previous failures. However, the market does rise during stimulus and we wouldn’t want to be on the sideline for the ride. At least, until the stimulus ends and the market crashes back down.
At any rate, the markets weren’t exactly excited by news out of the Fed and they struggled to gain any traction. Several disappointing economic reports, plus a downgrade of more than a dozen banks by Moody’s, added to the pessimistic mood.
In a sign that growth around the world is slowing, both China and Europe reported a contraction in their manufacturing sectors. It was particularly worrisome that Germany was a part of that weakness, since the fate of the Euro is relies on their strength. The U.S. was a part of the fun, too, as manufacturing showed a sharp decline in the Philadelphia region.
Political problems in Europe were also a concern for the markets this week. Elections in Greece resulted in a victory for the moderate party, which likely means a continuation of current policies regarding the Euro and their bailouts. Though initially a relief, Greece still needs to straighten out its debt problems and has had little success doing so.
French elections were worrisome, too, as the new socialist President Hollande got an increase in the ranks of socialists in Parliament. This gave his party a majority needed to support his socialist programs.
Debt problems in Spain continue to grow and the calls for more bailouts have increased. At present, the question is where the bailouts funds will come from. The Eurozone has several different methods to get funds to the Spanish banks (and Spain in general), but most rely on Germany footing the bill.
The Germans have become increasingly reluctant to commit more funds unless fundamental changes occur. Those countries with the debt problems, as well as entities like the IMF, are growing even more hostile to Germany. Germany correctly points out that straight bailouts cure nothing, only pushes the problems off to a further date. Plus, it is the German taxpayer’s money that is going to support these profligate countries, and they are clearly not excited about that.
The bailout and entitlement mentality on this continent is not all that surprising. The highest European court ruled this week that if a person were to get sick on their vacation, they are allowed by law to take another one (LINK). You can’t make this stuff up.
Next Week
Next week will be fairly busy. We will get a significant amount of economic reports, including data on housing, consumer confidence, durable goods, income and spending, and a revision to 1st quarter GDP.
There will be some other interesting events, as well. It is expected that the Supreme Court will announce its decision on the healthcare law. An overturn may help the markets since it would be seen as business friendly. However, it introduces another uncertainty and will be something to watch closely.
The EU will hold yet another summit next week to address their debt problems. The likely outcome will be the countries buried in debt gang up on Germany to throw some more bailout money their way.
Lastly, we didn’t spend any time discussing the situation in Egypt, but this is another area to pay attention to. By most accounts, the Muslim Brotherhood won their recent elections, but the ruling military has refused to give up their power. The military has even changed the constitution in their favor, reducing the power of the next President. We aren’t sure which choice is worse since they are both bad, but the potential for uprisings and violence makes this region worth watching.
Investment Strategy
Stimulus is no longer in the forefront with the Fed announcement this week. However, it is in the background as the Fed stated it will take more action if conditions warrant. That acts like a backstop, where investors know that if the economy were to worsen, the Fed will step in with more stimulus and send the markets higher.
If it weren’t for that Fed backstop, we would be very pessimistic with slowing growth and persistent problems in Europe, and the wrong remedies being applied to fix them.
We’re still at a point where basic investing fundamentals like profits, earnings, and the economy have little impact on the direction of the market. The focus is on the actions of central banks around the globe. In these unpredictable circumstances, any short to medium term planning becomes more difficult. Agility is very important at this time.
If we were to get a buying opportunity, we still like large cap higher-quality and dividend paying stocks. Smaller and little-known stocks with low correlation to the market (and Europe) are also promising. There is always the opportunity to find an undervalued individual stock at any time, as well.
We like gold for the long term, as it will do well with debt and economic problems leading to further bailouts and stimulus programs. The lack of immediate money printing by the Fed sent prices lower this week, but we would look to add to our positions if prices move much lower from here.
We like other commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), will result in lower prices in the short term.
Although Treasury bond yields are near historic lows (so prices are near historic highs) and keep trending lower, a short position (bet on a decline in price) only provides a nice hedge here. 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.
