Please note: there will be no market commentary next week, the week ending October 19th.
The week was a rough one for stocks as the market turned in its worst performance in over four months. Through the close Friday, the Dow fell 2.1%, the S&P lost 2.2%, and the Nasdaq dropped 2.9%. Gold was down, too, losing 1.2%. Oil was higher by 2.2% to close just below $92 per barrel while the other major type of oil, Brent, closed above $114 per barrel.
The week was a rough one for stocks as the market turned in its worst performance in over four months. Through the close Friday, the Dow fell 2.1%, the S&P lost 2.2%, and the Nasdaq dropped 2.9%. Gold was down, too, losing 1.2%. Oil was higher by 2.2% to close just below $92 per barrel while the other major type of oil, Brent, closed above $114 per barrel.
Source: Yahoo Finance
Earnings season for the third quarter kicked off this week and the market was not impressed. Underwhelming earnings helped send the markets lower while signs of slower growth around the globe added to the downward pressure.
The outlook for company earnings had been steadily lowered as we headed into earnings season, so the bar has been set low. Forecasts actually point to a decline in profits (earnings) over the past quarter, the first time in three years. Data provider S&P Capital IQ projects an average decline of 1.3% for S&P 500 companies, down from a gain of just 0.8% in the previous quarter.
The aluminum company, Alcoa, got the ball rolling with disappointing earnings. They actually beat estimates, but that estimate was for a loss. Their revenue (the money from what they actually sold) declined from the previous quarter. Adding to the negative news, they warned that future demand looks to be lower due to slower global growth.
The story with Alcoa is an example why we aren’t keen on the popular “earnings estimates” metric. Most companies beat “estimates,” and that tells us very little about how they actually performed. We prefer to first look at their revenues, then earnings (revenues minus expenses), and compare the numbers to previous periods. This gives us a better idea how the company is actually performing.
Continuing with earnings, news from several other companies added to the downbeat mood. Two companies with strong connections to the global economy, Chevron and Cummins (the diesel engine maker) both warned that their earnings would disappoint.
Several financial companies also released their earnings, with mixed results. JP Morgan looked to have had a solid quarter while Wells Fargo did not.
The initial forecast of lower earnings was supported by the data released this week, while the outlook for the remaining corporate earnings is just as dim.
On to the global growth story, where we received more negative news. The IMF lowered its estimates for global growth for this year. While they see higher growth next year, they also revised this lower. A slowing China, plus troubles in Europe were cited as a cause, while the problems in the US should also not be ignored.
As for Europe, Spain was again in focus as Euro leaders met to discuss their bailout. The debate is on the conditions Spain must meet in order to be eligible for additional bailout funds.
The stock market would like to see a bailout since it takes a Euro breakup off the table for the time being. As we’ve mentioned here before, a bailout does little to solve their problems, only buying time. We have seen this with past bailouts, as these countries keep coming back to the table.
Meanwhile, S&P Ratings Services downgraded the country’s debt.
Economic data here in the US was mixed this week. Coming off the odd drop in the unemployment rate the previous week, this week had a few more unusual positive surprises.
Initial jobless claims are released on a weekly basis and tell us how many people applied for unemployment during the week. The numbers sharply improved to levels not seen since January of 2008, sending the market higher. It wasn’t until further reading indicated that one state did not properly report their claims for the week, skewing the numbers.
Also a surprise, the University of Michigan consumer confidence number soared to levels not seen in five years. This seemed funny, especially since we learned this week that inflation on the producer level (the PPI) rose by 1.1% over the previous month, driven largely by an increase in energy costs. Higher costs don’t usually result in an increase in consumer confidence.
Other economic data was somewhat mixed. The Beige book released by the Fed (which gives info on current economic conditions) showed somewhat of an improvement in conditions, but still remain sluggish, while small business optimism fell over the last month.
Next Week
Next week looks to be a busy one. For economic data, as the week progresses, we will get info on retail sales, inflation with the CPI, industrial production, housing info, and leading economic indicators.
Company earnings really start rolling in as we will get results from a slew of big names. It will be particularly active for companies in the financial sector.
Investment Strategy
The outlook for company earnings had been steadily lowered as we headed into earnings season, so the bar has been set low. Forecasts actually point to a decline in profits (earnings) over the past quarter, the first time in three years. Data provider S&P Capital IQ projects an average decline of 1.3% for S&P 500 companies, down from a gain of just 0.8% in the previous quarter.
The aluminum company, Alcoa, got the ball rolling with disappointing earnings. They actually beat estimates, but that estimate was for a loss. Their revenue (the money from what they actually sold) declined from the previous quarter. Adding to the negative news, they warned that future demand looks to be lower due to slower global growth.
The story with Alcoa is an example why we aren’t keen on the popular “earnings estimates” metric. Most companies beat “estimates,” and that tells us very little about how they actually performed. We prefer to first look at their revenues, then earnings (revenues minus expenses), and compare the numbers to previous periods. This gives us a better idea how the company is actually performing.
Continuing with earnings, news from several other companies added to the downbeat mood. Two companies with strong connections to the global economy, Chevron and Cummins (the diesel engine maker) both warned that their earnings would disappoint.
Several financial companies also released their earnings, with mixed results. JP Morgan looked to have had a solid quarter while Wells Fargo did not.
The initial forecast of lower earnings was supported by the data released this week, while the outlook for the remaining corporate earnings is just as dim.
On to the global growth story, where we received more negative news. The IMF lowered its estimates for global growth for this year. While they see higher growth next year, they also revised this lower. A slowing China, plus troubles in Europe were cited as a cause, while the problems in the US should also not be ignored.
As for Europe, Spain was again in focus as Euro leaders met to discuss their bailout. The debate is on the conditions Spain must meet in order to be eligible for additional bailout funds.
The stock market would like to see a bailout since it takes a Euro breakup off the table for the time being. As we’ve mentioned here before, a bailout does little to solve their problems, only buying time. We have seen this with past bailouts, as these countries keep coming back to the table.
Meanwhile, S&P Ratings Services downgraded the country’s debt.
Economic data here in the US was mixed this week. Coming off the odd drop in the unemployment rate the previous week, this week had a few more unusual positive surprises.
Initial jobless claims are released on a weekly basis and tell us how many people applied for unemployment during the week. The numbers sharply improved to levels not seen since January of 2008, sending the market higher. It wasn’t until further reading indicated that one state did not properly report their claims for the week, skewing the numbers.
Also a surprise, the University of Michigan consumer confidence number soared to levels not seen in five years. This seemed funny, especially since we learned this week that inflation on the producer level (the PPI) rose by 1.1% over the previous month, driven largely by an increase in energy costs. Higher costs don’t usually result in an increase in consumer confidence.
Other economic data was somewhat mixed. The Beige book released by the Fed (which gives info on current economic conditions) showed somewhat of an improvement in conditions, but still remain sluggish, while small business optimism fell over the last month.
Next Week
Next week looks to be a busy one. For economic data, as the week progresses, we will get info on retail sales, inflation with the CPI, industrial production, housing info, and leading economic indicators.
Company earnings really start rolling in as we will get results from a slew of big names. It will be particularly active for companies in the financial sector.
Investment Strategy
Last week we mentioned the upward-sloping range the market has been stuck in since June (indicated by the blue lines). With the drop in the market this week, prices look to be right at the bottom of this range. It will be interesting to see if the market moves back in that range next week, or if the trend has ended.
At the moment, the market doesn’t have much going for it. Earnings aren’t great, global growth is slow, the game plan from the Fed is mapped out for at least the next several months, and Europe continues to languish.
These lowered expectations give a positive surprise more potential impact on the market. Bailout news on Spain could give the market a boost. An improvement in the corporate earnings picture would help, too. How likely is this at the moment? Doubtful, but still possible. As we know, though, the market usually does the opposite of what you expect it to. Like before, agility remains important.
Again, there is no change in our investment options. If we do see a buying opportunity, in stocks, 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 is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs. We wouldn’t add to positions at this point, but would not look to sell, either.
We like other commodities for the long term and had feared a slowdown in China and the other BRIC countries (Brazil, Russia, and India), pushing commodity prices lower in the short run. However, the recent stimulus may send this sector higher and prices may rise from here.
Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds. We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely. A short position (bet on a decline in price) provides a nice hedge here but we believe 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), though our concern has increased as the pace of distressed municipalities is increasing. Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future.
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.
At the moment, the market doesn’t have much going for it. Earnings aren’t great, global growth is slow, the game plan from the Fed is mapped out for at least the next several months, and Europe continues to languish.
These lowered expectations give a positive surprise more potential impact on the market. Bailout news on Spain could give the market a boost. An improvement in the corporate earnings picture would help, too. How likely is this at the moment? Doubtful, but still possible. As we know, though, the market usually does the opposite of what you expect it to. Like before, agility remains important.
Again, there is no change in our investment options. If we do see a buying opportunity, in stocks, 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 is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs. We wouldn’t add to positions at this point, but would not look to sell, either.
We like other commodities for the long term and had feared a slowdown in China and the other BRIC countries (Brazil, Russia, and India), pushing commodity prices lower in the short run. However, the recent stimulus may send this sector higher and prices may rise from here.
Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds. We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely. A short position (bet on a decline in price) provides a nice hedge here but we believe 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), though our concern has increased as the pace of distressed municipalities is increasing. Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future.
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.
