Source: MSN Moneycentral
*Our uploading service is being temperamental, so the chart has a new position this week.
The potential for further stimulus sent the market sharply higher this week. Through the Friday close, the Dow was higher by 3.6%, the S&P 500 rose 3.7%, and the Nasdaq returned 4.0%. Coming off a big week last week, gold fell 1.9%. Oil hovered around its recent lows, gaining 1.1% to $84 per barrel. Brent oil, used for most of the gas here in the East, closed just shy of $100 per barrel.
Stimulus is back in the spotlight. The big moves in the market this week resulted from discussions of additional stimulus. Even talking about more stimulus helped send the market to its best week of the year.
An article in the Wall Street Journal (Link) kicked things off Wednesday morning. It reported that the recent disappointing economic data and problems in Europe put a potential stimulus back on the table.
Other Fed officials chimed in, as well, stating their openness to further action and supported the notion that more stimulus was needed.
However, Fed chief Bernanke made an appearance in front of Congress and addressed the issue. Any detail of another stimulus was notably absent, disappointing the market. Bernanke mentioned the Fed was willing to do more if necessary, but avoided making any specific announcements.
With the talk of more stimulus, we are entering the quirky period where bad news could mean good news for the market. The market loves stimulus since it has shown substantial gains in those periods. More bad news would increase the chance of stimulus from the Fed, which is how bad becomes good.
Since Bernanke gave no specifics this week, their meeting later this month becomes even more important. Investors will be closely watching for clues on a new stimulus from them, or perhaps even an extension of the current program that ends June 30th.
It’s unfortunate we are back in this position, having the whim of the Fed driving the market. It creates an unpredictability (even more so than the market already is) that makes volatility rise and investing difficult. As we saw this week, even the mention of stimulus sent the market sharply higher. The reverse is true when the prospect of stimulus is reduced.
That also ignores the fact that stimulus has been proven ineffective. The economy has not improved while debt and inflation has soared. We also have to worry about the future consequences of trillions of dollars currently being printed.
We would like to see the economy left to heal on its own, without the constant interventions. Nevertheless, we realize that the market rises on stimulus, so we have to be positioned to take advantage of these moves.
On to Europe, where problems continued to fester this week, though they had little impact on our markets.
Spain essentially admitted it was out of money and will need a bailout to shore up their troubled banks. That put the focus on Germany, a fiscally responsible country who must bail out the irresponsible ones. The Germans indicated that they were willing to work with Spain and the Eurozone in general, but they must meet certain conditions, similar to the Greek bailouts.
Of course these irresponsible countries just want to be bailed out, no strings attached. The people of these countries despise the responsible Germans and the division gets wider. It doesn’t seem like this will end well.
Moving from Europe to Asia, last week we mentioned slowing growth in China. In an effort to spur growth, China lowered its interest rate for this first time in four years. China has a report coming out this weekend (and will likely have passed by the time you have read this) on their growth, and that rate cut is looking like a preemptive response to a disappointing report.
Next Week
There will be a slew of events coming next week, keeping the market busy. Starting this weekend, we will hear more details on the potential Spain bailout and the economic strength of China, as mentioned above.
There will be several economic data releases, including reports on manufacturing, retail sales, consumer confidence, and inflation with the PPI and CPI. Inflation will likely tick lower due to falling gas prices, which would be another positive for potential stimulus.
Several more Fed officials will be speaking this week and their remarks will be closely scrutinized.
Finally, there are reports that several big banks in the US will be downgraded next week, which will pressure their stocks and likely the broader market.
Investment Strategy
This week could have been a turning point for the market now that the potential for stimulus has entered the picture. Since it is in the picture, though, it could mean more volatility as investors overanalyze every economic data point and word out of the Fed. We are still cautious here, but realize that the market will likely rise in the face of more stimulus.
Seeing that everyone knows the market will rise on more stimulus, it makes us wonder if it actually will. Similar to the Facebook IPO, when everyone knows a stock will behave a certain way, it tends not to.
Investors are beginning to realize that stimulus has not helped the economy. Adding to that, interest rates are already at all-time lows without much room to move lower. Plus the pop from each additional stimulus is diminishing. So perhaps we may not see the same reaction as the past three stimulus programs? Or perhaps this is just a convenient way of us hedging our bets, so we can say we were right either way? Either way, right now we’d bet on a market rise in the face of more stimulus.
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.
Gold will do well as debt and economic problems are leading to further bailouts and stimulus programs. If the price were to move lower we may add more but would not at these current prices.
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 moving lower, a short position (bet on a decline in value) 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.
Stimulus is back in the spotlight. The big moves in the market this week resulted from discussions of additional stimulus. Even talking about more stimulus helped send the market to its best week of the year.
An article in the Wall Street Journal (Link) kicked things off Wednesday morning. It reported that the recent disappointing economic data and problems in Europe put a potential stimulus back on the table.
Other Fed officials chimed in, as well, stating their openness to further action and supported the notion that more stimulus was needed.
However, Fed chief Bernanke made an appearance in front of Congress and addressed the issue. Any detail of another stimulus was notably absent, disappointing the market. Bernanke mentioned the Fed was willing to do more if necessary, but avoided making any specific announcements.
With the talk of more stimulus, we are entering the quirky period where bad news could mean good news for the market. The market loves stimulus since it has shown substantial gains in those periods. More bad news would increase the chance of stimulus from the Fed, which is how bad becomes good.
Since Bernanke gave no specifics this week, their meeting later this month becomes even more important. Investors will be closely watching for clues on a new stimulus from them, or perhaps even an extension of the current program that ends June 30th.
It’s unfortunate we are back in this position, having the whim of the Fed driving the market. It creates an unpredictability (even more so than the market already is) that makes volatility rise and investing difficult. As we saw this week, even the mention of stimulus sent the market sharply higher. The reverse is true when the prospect of stimulus is reduced.
That also ignores the fact that stimulus has been proven ineffective. The economy has not improved while debt and inflation has soared. We also have to worry about the future consequences of trillions of dollars currently being printed.
We would like to see the economy left to heal on its own, without the constant interventions. Nevertheless, we realize that the market rises on stimulus, so we have to be positioned to take advantage of these moves.
On to Europe, where problems continued to fester this week, though they had little impact on our markets.
Spain essentially admitted it was out of money and will need a bailout to shore up their troubled banks. That put the focus on Germany, a fiscally responsible country who must bail out the irresponsible ones. The Germans indicated that they were willing to work with Spain and the Eurozone in general, but they must meet certain conditions, similar to the Greek bailouts.
Of course these irresponsible countries just want to be bailed out, no strings attached. The people of these countries despise the responsible Germans and the division gets wider. It doesn’t seem like this will end well.
Moving from Europe to Asia, last week we mentioned slowing growth in China. In an effort to spur growth, China lowered its interest rate for this first time in four years. China has a report coming out this weekend (and will likely have passed by the time you have read this) on their growth, and that rate cut is looking like a preemptive response to a disappointing report.
Next Week
There will be a slew of events coming next week, keeping the market busy. Starting this weekend, we will hear more details on the potential Spain bailout and the economic strength of China, as mentioned above.
There will be several economic data releases, including reports on manufacturing, retail sales, consumer confidence, and inflation with the PPI and CPI. Inflation will likely tick lower due to falling gas prices, which would be another positive for potential stimulus.
Several more Fed officials will be speaking this week and their remarks will be closely scrutinized.
Finally, there are reports that several big banks in the US will be downgraded next week, which will pressure their stocks and likely the broader market.
Investment Strategy
This week could have been a turning point for the market now that the potential for stimulus has entered the picture. Since it is in the picture, though, it could mean more volatility as investors overanalyze every economic data point and word out of the Fed. We are still cautious here, but realize that the market will likely rise in the face of more stimulus.
Seeing that everyone knows the market will rise on more stimulus, it makes us wonder if it actually will. Similar to the Facebook IPO, when everyone knows a stock will behave a certain way, it tends not to.
Investors are beginning to realize that stimulus has not helped the economy. Adding to that, interest rates are already at all-time lows without much room to move lower. Plus the pop from each additional stimulus is diminishing. So perhaps we may not see the same reaction as the past three stimulus programs? Or perhaps this is just a convenient way of us hedging our bets, so we can say we were right either way? Either way, right now we’d bet on a market rise in the face of more stimulus.
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.
Gold will do well as debt and economic problems are leading to further bailouts and stimulus programs. If the price were to move lower we may add more but would not at these current prices.
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 moving lower, a short position (bet on a decline in value) 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.
