The markets kicked off the new year with a bang, turning in some record numbers for the week. In the shortened four-day week, the Dow popped 3.8% higher for its biggest weekly gain in over a year. The S&P rose a nice 4.6% to close at a five year high. Meanwhile, the Nasdaq soared 4.8%. Small cap stocks measured by the Russell 2000 also hit a new record high.
The bond market didn’t fare as well, with bond prices falling (so yields rose) and yields on government bonds reaching levels not seen in nine months. Commodities were mixed for the week as gold continued its losing streak after falling 0.4%. Prices are rising at the gas pump as oil gained 2.5% to $93 per barrel. The international Brent crude closed higher at over $111 per barrel.
The bond market didn’t fare as well, with bond prices falling (so yields rose) and yields on government bonds reaching levels not seen in nine months. Commodities were mixed for the week as gold continued its losing streak after falling 0.4%. Prices are rising at the gas pump as oil gained 2.5% to $93 per barrel. The international Brent crude closed higher at over $111 per barrel.
Source: Yahoo Finance (unfortunately we weren’t able to adjust the chart to four days)
Broad gains in the market came as a result of the fiscal cliff agreement reached this week, avoiding the automatic tax increases and spending cuts. Finally, the drama from this subject has ended, giving a relief to the markets.
We’re sure you’ve heard the details on the agreement by now, so we won’t get into the specifics. While the deal wasn’t very good, a positive is that the tax outcome could have been worse.
The negative was that it completely ignored the spending side of the equation, which is where the problems lie. Spending cuts were pushed out two months, coinciding with the debt ceiling negotiations. Unfortunately, the debates in Washington will resume and we will go through the same drama as the next deadline approaches.
While the news out of Washington had the biggest impact on the markets, another reason for the gain this week could have been from the “January effect.” This occurs as investors get back into the market after selling out of losers last year for tax purposes.
The beginning of the year is also when investors like to break out the old Stock Trader’s Almanac and make predictions based on historical patterns. For example, if the market (here, the market is represented by the S&P 500) rises on the first day of the year, the average gain for the year is just north of 10% according to investment firm Birinyi and Associates.
If the market rises the first five days, there is an 86% chance of closing the year higher.
Likewise, if the first month closes higher, there is about a 75% chance that the market will be higher for the year.
The market started last year similar to this one and the predictions held true. On the other hand, they didn’t work out so well the year before. So while this is an interesting statistic to note, we wouldn’t go making investment decisions based on these trends.
As for the other events of the week, the Fed was back in the headlines as the minutes from their December meeting were released. It was newsworthy in that several members indicated a willingness to end the quantitative easing stimulus measures well before the end of 2013 for fear of market distortions. Remember, the Fed’s timeline predicted continuing the stimulus until 2015. Though the Fed is unlikely to remove the stimulus any time soon, it was a wake-up call for a market addicted to stimulus,
Lastly, the monthly employment report was released on Friday. December saw 155,000 jobs added, slightly below the 160,000 predicted, as the unemployment rate remained unchanged at 7.8%. While any job growth is a positive, it still shows a sluggish growth.
Going forward, we think the slow growth in the labor market will persist as the economy trudges along. Additionally, the one-year extension of unemployment benefits as part of the fiscal cliff deal did little to help. Though subject to much debate, credible studies have shown these benefits, where people are paid not to work, actually hurts the labor market.
Next Week
Next week looks fairly quiet for economic data. We will get info on small business optimism, jobs in the Jolts report (which lags by a month and measures job openings and turnover), and the trade balance.
While the economic data will be quiet, fourth quarter company earnings will begin coming in. Notable releases include the aluminum producer Alcoa and Wells Fargo. Additionally, several regional Fed presidents will be making speeches, something investors will follow closely in light of the recent Fed minutes release.
Investment Strategy
While the year got off to a nice start, we know problems will arise in about two months when Washington must hammer out another deal. Odds are the market will react similarly to the most recent debates and we would look to lighten up on stocks before this occurs. Probably not in the immediate future, as there are still many weeks to go, but it will be a consideration going forward.
Adding to our concern, corporate earnings begin rolling in next week and expectations are very low. While the low hurdle makes it easier to impress, the results are likely to be poor.
Also, the higher tax environment creates a headwind for the economy.
Amid all this worry, though, the Fed is lurking in the background, ready and willing to do more stimulus if needed. Though we don’t agree with their policies, their actions do have an effect on the market (which seems to be less effective in each new round).
Though we aren’t looking to do any buying in stocks at this point, if a buying opportunity were to present itself, we still like higher-quality and dividend paying stocks. This is more of a long-term play. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
Despite this long sell-off in gold, we still like it for the longer term. The Fed minutes worried investors that stimulus may not be as likely in the future, but we feel they are committed to printing more money. Other banks around the world are in the same boat. 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 moving higher at the moment and a short hedged position (bet on a decline in price) has done well here. However, we think the move was temporary and unlikely to continue, making the short position a nice hedge but 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.
We’re sure you’ve heard the details on the agreement by now, so we won’t get into the specifics. While the deal wasn’t very good, a positive is that the tax outcome could have been worse.
The negative was that it completely ignored the spending side of the equation, which is where the problems lie. Spending cuts were pushed out two months, coinciding with the debt ceiling negotiations. Unfortunately, the debates in Washington will resume and we will go through the same drama as the next deadline approaches.
While the news out of Washington had the biggest impact on the markets, another reason for the gain this week could have been from the “January effect.” This occurs as investors get back into the market after selling out of losers last year for tax purposes.
The beginning of the year is also when investors like to break out the old Stock Trader’s Almanac and make predictions based on historical patterns. For example, if the market (here, the market is represented by the S&P 500) rises on the first day of the year, the average gain for the year is just north of 10% according to investment firm Birinyi and Associates.
If the market rises the first five days, there is an 86% chance of closing the year higher.
Likewise, if the first month closes higher, there is about a 75% chance that the market will be higher for the year.
The market started last year similar to this one and the predictions held true. On the other hand, they didn’t work out so well the year before. So while this is an interesting statistic to note, we wouldn’t go making investment decisions based on these trends.
As for the other events of the week, the Fed was back in the headlines as the minutes from their December meeting were released. It was newsworthy in that several members indicated a willingness to end the quantitative easing stimulus measures well before the end of 2013 for fear of market distortions. Remember, the Fed’s timeline predicted continuing the stimulus until 2015. Though the Fed is unlikely to remove the stimulus any time soon, it was a wake-up call for a market addicted to stimulus,
Lastly, the monthly employment report was released on Friday. December saw 155,000 jobs added, slightly below the 160,000 predicted, as the unemployment rate remained unchanged at 7.8%. While any job growth is a positive, it still shows a sluggish growth.
Going forward, we think the slow growth in the labor market will persist as the economy trudges along. Additionally, the one-year extension of unemployment benefits as part of the fiscal cliff deal did little to help. Though subject to much debate, credible studies have shown these benefits, where people are paid not to work, actually hurts the labor market.
Next Week
Next week looks fairly quiet for economic data. We will get info on small business optimism, jobs in the Jolts report (which lags by a month and measures job openings and turnover), and the trade balance.
While the economic data will be quiet, fourth quarter company earnings will begin coming in. Notable releases include the aluminum producer Alcoa and Wells Fargo. Additionally, several regional Fed presidents will be making speeches, something investors will follow closely in light of the recent Fed minutes release.
Investment Strategy
While the year got off to a nice start, we know problems will arise in about two months when Washington must hammer out another deal. Odds are the market will react similarly to the most recent debates and we would look to lighten up on stocks before this occurs. Probably not in the immediate future, as there are still many weeks to go, but it will be a consideration going forward.
Adding to our concern, corporate earnings begin rolling in next week and expectations are very low. While the low hurdle makes it easier to impress, the results are likely to be poor.
Also, the higher tax environment creates a headwind for the economy.
Amid all this worry, though, the Fed is lurking in the background, ready and willing to do more stimulus if needed. Though we don’t agree with their policies, their actions do have an effect on the market (which seems to be less effective in each new round).
Though we aren’t looking to do any buying in stocks at this point, if a buying opportunity were to present itself, we still like higher-quality and dividend paying stocks. This is more of a long-term play. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
Despite this long sell-off in gold, we still like it for the longer term. The Fed minutes worried investors that stimulus may not be as likely in the future, but we feel they are committed to printing more money. Other banks around the world are in the same boat. 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 moving higher at the moment and a short hedged position (bet on a decline in price) has done well here. However, we think the move was temporary and unlikely to continue, making the short position a nice hedge but 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.
