An unusual week with only three trading days closed with mixed results. Through the close Friday, the Dow fell slightly, off 0.1%, the S&P rose 0.2%, and the Nasdaq returned -0.2%. A stronger dollar sent most commodities lower, with gold falling 2.2%. Providing some relief at the gas pump, oil was also lower, down 1.7% to just under $85 per barrel. The foreign Brent crude, used in much of our gas here in the East, closed at $105 per barrel.
Source: Yahoo Finance
Extraordinary circumstances related to the storm in the Northeast closed the stock market both Monday and Tuesday. More importantly to us, it showed how ill-prepared the New York Stock Exchange is to handle disasters of this magnitude.
We wondered why backup plans were not in place, especially after the September 11th attack. Even having an alternative location makes sense to us so another closure like this (or worse) does not happen.
Trading resumed on Wednesday and by all accounts, the day seemed pretty normal. The storm did give a boost to several sectors, like construction and home improvement stores, like Home Depot. On the other hand, many sectors were obviously hurt by the storm, like retailers.
Keynesian economists think events like the storm are beneficial in a sense, because it boosts economic activity due to the rebuilding that is needed. Indeed, there are some that believe we could see a boost in GDP from it. And that’s entirely possible.
But looking at an event like the storm in that way is severely flawed. It doesn’t consider the wealth destroyed. Nor does it consider that the spending on rebuilding is taken away from other sectors that it otherwise would have been spent on.
The storm will also distort economic numbers over the next few months, not giving us an accurate view of the overall economy. We can already see the excuses on earnings reports coming from companies. Any negative earnings will be blamed on the storm, regardless of that even being the case.
As for the market this week, stocks jumped on Thursday due to better than expected economic data. Manufacturing in the US showed a slight tick higher, though still shows extremely slow growth. Retail sales improved and consumer confidence stood at its highest level since 2008.
While that was cited as the reason for the large market gain on Thursday, we think it has more to do with the calendar. Though we have not seen it recently, the first of the month often sees new inflows into the market, pushing it higher. This was also the beginning of a new fiscal year in many cases. Higher than normal trading volume and the subsequent market drop on Friday supports this idea.
This week we also received data on the employment picture, which was highly anticipated after the blowout figures last month.
The economy added 171,000 jobs over the past month, better than expected, though still woefully short of a figure we should see in a normal recovery. The unemployment rate ticked higher to 7.9% from 7.8%, while a broader measure of unemployment, the U-6, stood at 14.6%. Employment seems to be improving, but still has a long way to go.
As for corporate earnings, three-quarters of the S&P 500 companies have released their numbers so far. Growth in earnings is basically flat, while a majority have still come in below revenue estimates. We would like to see the earnings picture improve before we get too optimistic on the future.
Next Week
Next week is all about the election. We will get some corporate earnings and economic data on the strength of the service sector, import and export prices, and consumer sentiment, but they will have a negligible impact on the market, at best.
Will the market move next week based on the election outcome? Most likely. But we aren’t sure which way the market would go regardless of the outcome, at least in the short term.
The Election
Contrary to many others in our industry, we don’t see the election outcome having a significant difference on the markets over the coming years. While there are considerable differences in the candidates and the direction they will take the country, the stock market often doesn’t correlate with these underlying fundamentals.
A Romney presidency is largely seen as being friendlier to business. And it likely will be. But that doesn’t necessarily mean it will be good for the stock market.
We believe the stimulus policies from the Fed, with their extremely low interest rates and the printing of nearly two trillion dollars, has fueled the rise in the markets. A Romney presidency would rightly tighten these policies, but may hurt the market in the meantime. However, it would be a positive in the long run.
An Obama presidency will impose more headwinds to businesses and the economy. Faced with those headwinds, though, it is extremely likely that the Fed will pump more stimulus into the economy, continuing this giant Keynesian experiment. One only has to look at Japan, with their never-ending stimuli and stagnant growth over the last 20 years, to see how this will play out.
As the benefit from each stimulus has less and less impact, it is a worrisome path to take. Yet the market may rise with more stimulus – until it will inevitably come crashing down. Who knows when that will happen, though.
Though it may likely be a wash for the stock market in general, under the different administrations, certain sectors will perform better than others:
Romney victory: Consumer staples, Health care, Financials, and the Dollar.
Obama victory: Technology, Telecom, Commodities, Gold, and Bonds.
Investment Strategy
The market may have room to move lower from here, but it is looking more and more oversold as it does. However, next week will likely be quiet until after the election. It’s anyone’s guess as to how the market will react once we learn the outcome.
It may not be worth taking much of a gamble here in the short run. We’d like to see a larger sell-off before committing more money, but it might not hurt to cautiously nibble.
There is no change in the investments we favor at this time, though as we discussed above, different sectors will benefit based on the election. 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, especially due to money printing around the globe. A slowdown in global growth may weigh on commodity prices in the short run.
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 are less enthusiastic on developed markets, but not totally sold on emerging, either.
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.
We wondered why backup plans were not in place, especially after the September 11th attack. Even having an alternative location makes sense to us so another closure like this (or worse) does not happen.
Trading resumed on Wednesday and by all accounts, the day seemed pretty normal. The storm did give a boost to several sectors, like construction and home improvement stores, like Home Depot. On the other hand, many sectors were obviously hurt by the storm, like retailers.
Keynesian economists think events like the storm are beneficial in a sense, because it boosts economic activity due to the rebuilding that is needed. Indeed, there are some that believe we could see a boost in GDP from it. And that’s entirely possible.
But looking at an event like the storm in that way is severely flawed. It doesn’t consider the wealth destroyed. Nor does it consider that the spending on rebuilding is taken away from other sectors that it otherwise would have been spent on.
The storm will also distort economic numbers over the next few months, not giving us an accurate view of the overall economy. We can already see the excuses on earnings reports coming from companies. Any negative earnings will be blamed on the storm, regardless of that even being the case.
As for the market this week, stocks jumped on Thursday due to better than expected economic data. Manufacturing in the US showed a slight tick higher, though still shows extremely slow growth. Retail sales improved and consumer confidence stood at its highest level since 2008.
While that was cited as the reason for the large market gain on Thursday, we think it has more to do with the calendar. Though we have not seen it recently, the first of the month often sees new inflows into the market, pushing it higher. This was also the beginning of a new fiscal year in many cases. Higher than normal trading volume and the subsequent market drop on Friday supports this idea.
This week we also received data on the employment picture, which was highly anticipated after the blowout figures last month.
The economy added 171,000 jobs over the past month, better than expected, though still woefully short of a figure we should see in a normal recovery. The unemployment rate ticked higher to 7.9% from 7.8%, while a broader measure of unemployment, the U-6, stood at 14.6%. Employment seems to be improving, but still has a long way to go.
As for corporate earnings, three-quarters of the S&P 500 companies have released their numbers so far. Growth in earnings is basically flat, while a majority have still come in below revenue estimates. We would like to see the earnings picture improve before we get too optimistic on the future.
Next Week
Next week is all about the election. We will get some corporate earnings and economic data on the strength of the service sector, import and export prices, and consumer sentiment, but they will have a negligible impact on the market, at best.
Will the market move next week based on the election outcome? Most likely. But we aren’t sure which way the market would go regardless of the outcome, at least in the short term.
The Election
Contrary to many others in our industry, we don’t see the election outcome having a significant difference on the markets over the coming years. While there are considerable differences in the candidates and the direction they will take the country, the stock market often doesn’t correlate with these underlying fundamentals.
A Romney presidency is largely seen as being friendlier to business. And it likely will be. But that doesn’t necessarily mean it will be good for the stock market.
We believe the stimulus policies from the Fed, with their extremely low interest rates and the printing of nearly two trillion dollars, has fueled the rise in the markets. A Romney presidency would rightly tighten these policies, but may hurt the market in the meantime. However, it would be a positive in the long run.
An Obama presidency will impose more headwinds to businesses and the economy. Faced with those headwinds, though, it is extremely likely that the Fed will pump more stimulus into the economy, continuing this giant Keynesian experiment. One only has to look at Japan, with their never-ending stimuli and stagnant growth over the last 20 years, to see how this will play out.
As the benefit from each stimulus has less and less impact, it is a worrisome path to take. Yet the market may rise with more stimulus – until it will inevitably come crashing down. Who knows when that will happen, though.
Though it may likely be a wash for the stock market in general, under the different administrations, certain sectors will perform better than others:
Romney victory: Consumer staples, Health care, Financials, and the Dollar.
Obama victory: Technology, Telecom, Commodities, Gold, and Bonds.
Investment Strategy
The market may have room to move lower from here, but it is looking more and more oversold as it does. However, next week will likely be quiet until after the election. It’s anyone’s guess as to how the market will react once we learn the outcome.
It may not be worth taking much of a gamble here in the short run. We’d like to see a larger sell-off before committing more money, but it might not hurt to cautiously nibble.
There is no change in the investments we favor at this time, though as we discussed above, different sectors will benefit based on the election. 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, especially due to money printing around the globe. A slowdown in global growth may weigh on commodity prices in the short run.
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 are less enthusiastic on developed markets, but not totally sold on emerging, either.
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.
