It was another week with a relatively quiet market. Through the close Friday, the Dow gained 1.2%, the S&P rose 1.0%, and the Nasdaq was weighed down by a poorly performing Apple stock, rising just 0.3%. Gold sustained its move higher with a 1.6% return this week. Oil continues its rise that began in mid-December as it added another 2.1% this week. The international Brent crude has actually trended lower since the start of the year, closing the week with little change at just below $112 per barrel.
Source: Yahoo Finance (the Nasdaq had troubles populating this week)
Though the week had little in the way of major news, stocks continued to push to new highs. The Dow and S&P 500 made new five-year highs while smaller stock indexes hit new all-time highs.
News out of Washington helped send the markets higher as a resolution to the debt ceiling increase was discussed by Republicans in the House. This had been a worry for the market, especially since the last debt ceiling negotiation saw the market drop by 16%.
This hike would be short-term, only a couple of months, which would push it into the same timeframe as the March 1st sequester deadline and late March government funding renewal. It looks like this would be contingent on the Senate producing a budget, something not done in many years.
Corporate earnings were also in the headlines as more companies released their figures this week. A large percentage of banks released their numbers, only to disappoint. Actually, the bigger banks were disappointing while smaller banks fared better.
At this point, only about 13% of S&P 500 stocks have released their earnings and so far there has been no clear trend in the strength of them. Thompson Reuters reports that 62% have beaten earnings estimates and 67% have beaten revenue estimates, both generally in line with average.
Remember, though, that these estimates were very low and don’t give us a good indication of their actual strength. Next week we’ll see some bigger names from a wider variety of sectors, so that will start to give us a better picture.
The Fed was also in the news with the release of their Beige Book (which looks at economic conditions throughout the country) this week. Similar to past reports, they noted a modest growth in the economy. It also placed the blame for any bad news on the drama surrounding the fiscal cliff.
Fed chief Bernanke noted that he was not satisfied with the current pace of the economy and vowed to do all he could to promote the recovery. The risk is that he does too much, further stoking inflation. He addressed this concern by stating that he sees little inflation in the economy and does not forecast any. However, transcripts released this week of conversations around the market collapse in 2007 shows that the Fed isn’t exactly the best at forecasting the future.
Any average person can clearly tell prices are rising, but unfortunately the figures the Fed looks at do not reflect this. The producer and consumer price indexes (PPI and CPI) were released this week, showing no gain in inflation over the previous month. For the year, these figures show inflation running below the Fed’s target of 2-2.5%. A laughable conclusion to most regular people, but it sadly means more inflation is on the way.
Other economic data this week was mixed. Retail sales over the period that includes Christmas saw a gain of 0.5%, higher than economists predicted though lower than the Christmas season in 2011. Housing figures showed improvement. Industrial production also rose while weekly unemployment figures came in at the best level in five years.
On the other hand, manufacturing in the New York and Philly regions showed contraction while an early look at consumer confidence fell to the lowest level since 2011.
Finally, last week saw a noteworthy inflow of cash to equity funds, the largest since 2008. This signaled a positive outlook for stocks. In the most recent week, however, Lipper reports that $4.2 billion was pulled from U.S. stock funds while $4.5 billion went into foreign stock funds. Though a net positive of roughly $300 million, it is far short of the $18 billion that flowed into stocks the week before. Perhaps that was not such a great indicator?
Next Week
As mentioned above, next week we’ll see some bigger names from a wider variety of sectors releasing their earnings, so that will start to give us a better picture of the overall earnings season.
There will be several other economic releases, as well. We will get a couple reports on housing, plus leading economic indicators. Also, keep in mind that the markets will be closed for the Monday holiday.
Investment Strategy
The market is beginning to look expensive here. There might be some room to run higher, but the risk is starting to outweigh the reward. Adding new money to the broader market is looking less appealing, while bets on individual stocks would make more sense.
A positive note, the more near-term risk of the debt ceiling debate impacting the market looks to be off the table at the moment.
On the other hand, fights in Washington still loom on the horizon. This makes a top in the markets in the near term still likely.
Corporate earnings haven’t been stellar, but estimate beats have been around the historical average. The market doesn’t seem to be paying much attention to these releases, anyway.
Also, we often mention the complacency in the market as measured by the volatility (or VIX) index, which hit new levels not seen in almost six years. When investors get this complacent, the market often swings the other direction.
Amid all this, we still have the Fed committed to more stimulus. Actually, central banks around the globe are committed to more stimulus. This has probably been the single biggest factor in the new highs in the market. The market knows that if conditions worsen, the Fed will continue to prop it up.
The rest of our outlook is unchanged. Though we aren’t looking to do any buying in stock indexes at this point, if a buying opportunity were to present itself, we still like higher-quality and dividend paying stocks. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
We still like gold for the long term. Central banks continue to print money to stimulate their economies are weaken the currencies, a condition that favors gold. We would look to add to our positions if it goes much lower from here.
We like other commodities for the long term, especially due to weaker currencies around the globe. A slowdown in global growth may weigh on commodity prices in the short run, though.
As for bonds, Treasury bond yields are higher than their recent average and a short hedged position (bet on a decline in price) has done well here. However, we think this is unlikely to continue, making the short position a nice hedge. The potential for longer term profit is low at this time.
We also think TIPs are important as we still expect inflation to increase. Municipal bonds provide a nice way to reduce taxes, though new itemization laws may reduce their benefits in some cases.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
Please note, 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.
News out of Washington helped send the markets higher as a resolution to the debt ceiling increase was discussed by Republicans in the House. This had been a worry for the market, especially since the last debt ceiling negotiation saw the market drop by 16%.
This hike would be short-term, only a couple of months, which would push it into the same timeframe as the March 1st sequester deadline and late March government funding renewal. It looks like this would be contingent on the Senate producing a budget, something not done in many years.
Corporate earnings were also in the headlines as more companies released their figures this week. A large percentage of banks released their numbers, only to disappoint. Actually, the bigger banks were disappointing while smaller banks fared better.
At this point, only about 13% of S&P 500 stocks have released their earnings and so far there has been no clear trend in the strength of them. Thompson Reuters reports that 62% have beaten earnings estimates and 67% have beaten revenue estimates, both generally in line with average.
Remember, though, that these estimates were very low and don’t give us a good indication of their actual strength. Next week we’ll see some bigger names from a wider variety of sectors, so that will start to give us a better picture.
The Fed was also in the news with the release of their Beige Book (which looks at economic conditions throughout the country) this week. Similar to past reports, they noted a modest growth in the economy. It also placed the blame for any bad news on the drama surrounding the fiscal cliff.
Fed chief Bernanke noted that he was not satisfied with the current pace of the economy and vowed to do all he could to promote the recovery. The risk is that he does too much, further stoking inflation. He addressed this concern by stating that he sees little inflation in the economy and does not forecast any. However, transcripts released this week of conversations around the market collapse in 2007 shows that the Fed isn’t exactly the best at forecasting the future.
Any average person can clearly tell prices are rising, but unfortunately the figures the Fed looks at do not reflect this. The producer and consumer price indexes (PPI and CPI) were released this week, showing no gain in inflation over the previous month. For the year, these figures show inflation running below the Fed’s target of 2-2.5%. A laughable conclusion to most regular people, but it sadly means more inflation is on the way.
Other economic data this week was mixed. Retail sales over the period that includes Christmas saw a gain of 0.5%, higher than economists predicted though lower than the Christmas season in 2011. Housing figures showed improvement. Industrial production also rose while weekly unemployment figures came in at the best level in five years.
On the other hand, manufacturing in the New York and Philly regions showed contraction while an early look at consumer confidence fell to the lowest level since 2011.
Finally, last week saw a noteworthy inflow of cash to equity funds, the largest since 2008. This signaled a positive outlook for stocks. In the most recent week, however, Lipper reports that $4.2 billion was pulled from U.S. stock funds while $4.5 billion went into foreign stock funds. Though a net positive of roughly $300 million, it is far short of the $18 billion that flowed into stocks the week before. Perhaps that was not such a great indicator?
Next Week
As mentioned above, next week we’ll see some bigger names from a wider variety of sectors releasing their earnings, so that will start to give us a better picture of the overall earnings season.
There will be several other economic releases, as well. We will get a couple reports on housing, plus leading economic indicators. Also, keep in mind that the markets will be closed for the Monday holiday.
Investment Strategy
The market is beginning to look expensive here. There might be some room to run higher, but the risk is starting to outweigh the reward. Adding new money to the broader market is looking less appealing, while bets on individual stocks would make more sense.
A positive note, the more near-term risk of the debt ceiling debate impacting the market looks to be off the table at the moment.
On the other hand, fights in Washington still loom on the horizon. This makes a top in the markets in the near term still likely.
Corporate earnings haven’t been stellar, but estimate beats have been around the historical average. The market doesn’t seem to be paying much attention to these releases, anyway.
Also, we often mention the complacency in the market as measured by the volatility (or VIX) index, which hit new levels not seen in almost six years. When investors get this complacent, the market often swings the other direction.
Amid all this, we still have the Fed committed to more stimulus. Actually, central banks around the globe are committed to more stimulus. This has probably been the single biggest factor in the new highs in the market. The market knows that if conditions worsen, the Fed will continue to prop it up.
The rest of our outlook is unchanged. Though we aren’t looking to do any buying in stock indexes at this point, if a buying opportunity were to present itself, we still like higher-quality and dividend paying stocks. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
We still like gold for the long term. Central banks continue to print money to stimulate their economies are weaken the currencies, a condition that favors gold. We would look to add to our positions if it goes much lower from here.
We like other commodities for the long term, especially due to weaker currencies around the globe. A slowdown in global growth may weigh on commodity prices in the short run, though.
As for bonds, Treasury bond yields are higher than their recent average and a short hedged position (bet on a decline in price) has done well here. However, we think this is unlikely to continue, making the short position a nice hedge. The potential for longer term profit is low at this time.
We also think TIPs are important as we still expect inflation to increase. Municipal bonds provide a nice way to reduce taxes, though new itemization laws may reduce their benefits in some cases.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
Please note, 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.
