A very volatile week saw stocks turn in their worst performance of the year. For the week, both the Dow and S&P dropped 2.1% while the Nasdaq plunged 2.7%. Gold continued to get pummeled, falling 7.0% on the week to reach levels not seen in two years. Providing some relief for us at the gas pump, oil was lower by 3.6% this week. The international Brent crude fell below $100 per barrel for the first time since July to close at $99.53 per barrel.
Source: Yahoo Finance
Even though this week was the worst of the year, it wouldn’t have taken much to claim that title. Prior to this week, the worst weekly decline for the Dow was -0.12%. Clearly we were overdue for a pullback.
We opened the week with the biggest daily drop of the year for stocks. The negative mood seemed to have begun with a report showing slower economic growth in China. Commodities were hit first, since a weaker economy means less commodity demand from the country. The sell-off cascaded into the stock market, which was also hit by weaker economic data here in the U.S. The developing situation in Boston only added to the jitters.
Gold was hit particularly hard, turning in its worst performance in 30 years. The overall commodity sector weakness was probably part of the decline, but there were some other factors in play. One was the talk of less stimulus coming out of the Fed, and the other was Cyprus.
In order to raise more money for their bailout, Cyprus announced they were selling off a large portion of their gold reserves. Remember, they confiscated money from certain bank accounts in order to fund the bailout. Apparently they didn’t collect as much as estimated (since many Russians found a way to transfer cash out of their accounts before the confiscation), thus the need to raise more funds.
The negative tone and volatility set Monday lasted for the remainder of the week.
On to corporate earnings, where around one-fifth of S&P 500 companies have reported earnings at this point. While many have beaten estimates, the bar has been set extremely low. Factset reported earnings so far are showing a decline of 0.4% year-over-year. Revenues (which is the money the company actually earned through sales. Earnings, or profits, are what are left after subtracting costs) appear to be declining, as well, on pace for the weakest quarter since the crisis began.
As for economic data this week, the results leaned toward the negative side. Economic indicators for the New York and Philadelphia regions came in much lower than expected, showing only slight growth. The Fed’s Beige Book (which gives an overview of economic conditions) also supported the slow growth theme.
On the positive side, housing construction came in at the strongest level since the bubble burst, though this was driven more by the construction of apartment buildings than individual homes.
Also, inflation at the consumer level with the CPI was lower than expected (though as we’ve often mentioned, we believe the methodology is flawed and intentionally underestimated). Inflation fell slightly over the past month, driven largely by a drop in gasoline.
Several regional Fed presidents are on record stating that declines in inflation would lead them to support even more stimulus and money printing. They want to see higher inflation. We wonder if there will ever be a point where these folks will admit that their efforts are ineffective, as it is the wrong remedy being applied.
Japan dealt with this since the 1990’s and their stimulus policies failed miserably. Refusing to admit defeat and pursue a different course of action, they recently doubled down on the failed policy. Bubbles created through faulty Fed policies must deflate before a true recovery can occur, they just haven’t been allowed to
Next Week
Next week will be a bit quieter for economic data, but we will get earnings for almost two-fifths of S&P 500 companies. As for economic data, we will get more info on housing, manufacturing in the Richmond and Kansas City regions, plus durable goods and the first quarter GDP number.
Investment Strategy
Each of the past three years started with a solid gain, just like this year has. Each spring, however, the economy weakened and the markets dropped. Could the weak economic reports we’ve recently seen lead to the same pattern this year? It is a scenario worth considering.
Providing a tailwind for the market this time around is the Fed. Though they have been undergoing stimulus programs for several years, they are printing more money than ever, joined by their global cohorts in printing money. We believe this is the primary reason for the market gains and is likely to be the driver behind future gains.
Despite the Fed’s backstop, we are still cautious. Especially in the face of disappointing economic data and corporate earnings. We don’t like putting new money into the broader indexes at this point and prefer finding undervalued individual stocks (which can be tricky around earnings time). We like to have a shorter-term horizon, so we can keep one foot out the door in case the market turns abruptly.
As for what we are looking for, we like higher-quality and dividend paying stocks, though those have seen the biggest gains so far. Companies with operations overseas have seen better earnings than those who do not. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
It’s tough to make a call on gold at this time. We like it for the long run due to the massive amounts of money being printed, but the recent breakdown has made it tough to gauge. It may have found a bottom here, but caution is still warranted.
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, so buying on the dips may work with a longer time horizon.
As for bonds, the money-printing has kept the yields artificially low, which doesn’t show signs of changing any time soon. Eventually we think yields on Treasury bonds will rise (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge, but it may be further down the road before this occurs.
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 opened the week with the biggest daily drop of the year for stocks. The negative mood seemed to have begun with a report showing slower economic growth in China. Commodities were hit first, since a weaker economy means less commodity demand from the country. The sell-off cascaded into the stock market, which was also hit by weaker economic data here in the U.S. The developing situation in Boston only added to the jitters.
Gold was hit particularly hard, turning in its worst performance in 30 years. The overall commodity sector weakness was probably part of the decline, but there were some other factors in play. One was the talk of less stimulus coming out of the Fed, and the other was Cyprus.
In order to raise more money for their bailout, Cyprus announced they were selling off a large portion of their gold reserves. Remember, they confiscated money from certain bank accounts in order to fund the bailout. Apparently they didn’t collect as much as estimated (since many Russians found a way to transfer cash out of their accounts before the confiscation), thus the need to raise more funds.
The negative tone and volatility set Monday lasted for the remainder of the week.
On to corporate earnings, where around one-fifth of S&P 500 companies have reported earnings at this point. While many have beaten estimates, the bar has been set extremely low. Factset reported earnings so far are showing a decline of 0.4% year-over-year. Revenues (which is the money the company actually earned through sales. Earnings, or profits, are what are left after subtracting costs) appear to be declining, as well, on pace for the weakest quarter since the crisis began.
As for economic data this week, the results leaned toward the negative side. Economic indicators for the New York and Philadelphia regions came in much lower than expected, showing only slight growth. The Fed’s Beige Book (which gives an overview of economic conditions) also supported the slow growth theme.
On the positive side, housing construction came in at the strongest level since the bubble burst, though this was driven more by the construction of apartment buildings than individual homes.
Also, inflation at the consumer level with the CPI was lower than expected (though as we’ve often mentioned, we believe the methodology is flawed and intentionally underestimated). Inflation fell slightly over the past month, driven largely by a drop in gasoline.
Several regional Fed presidents are on record stating that declines in inflation would lead them to support even more stimulus and money printing. They want to see higher inflation. We wonder if there will ever be a point where these folks will admit that their efforts are ineffective, as it is the wrong remedy being applied.
Japan dealt with this since the 1990’s and their stimulus policies failed miserably. Refusing to admit defeat and pursue a different course of action, they recently doubled down on the failed policy. Bubbles created through faulty Fed policies must deflate before a true recovery can occur, they just haven’t been allowed to
Next Week
Next week will be a bit quieter for economic data, but we will get earnings for almost two-fifths of S&P 500 companies. As for economic data, we will get more info on housing, manufacturing in the Richmond and Kansas City regions, plus durable goods and the first quarter GDP number.
Investment Strategy
Each of the past three years started with a solid gain, just like this year has. Each spring, however, the economy weakened and the markets dropped. Could the weak economic reports we’ve recently seen lead to the same pattern this year? It is a scenario worth considering.
Providing a tailwind for the market this time around is the Fed. Though they have been undergoing stimulus programs for several years, they are printing more money than ever, joined by their global cohorts in printing money. We believe this is the primary reason for the market gains and is likely to be the driver behind future gains.
Despite the Fed’s backstop, we are still cautious. Especially in the face of disappointing economic data and corporate earnings. We don’t like putting new money into the broader indexes at this point and prefer finding undervalued individual stocks (which can be tricky around earnings time). We like to have a shorter-term horizon, so we can keep one foot out the door in case the market turns abruptly.
As for what we are looking for, we like higher-quality and dividend paying stocks, though those have seen the biggest gains so far. Companies with operations overseas have seen better earnings than those who do not. We also like smaller and mid sized stocks that don’t have a strong correlation to the broader market and Europe.
It’s tough to make a call on gold at this time. We like it for the long run due to the massive amounts of money being printed, but the recent breakdown has made it tough to gauge. It may have found a bottom here, but caution is still warranted.
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, so buying on the dips may work with a longer time horizon.
As for bonds, the money-printing has kept the yields artificially low, which doesn’t show signs of changing any time soon. Eventually we think yields on Treasury bonds will rise (so prices will fall) and a short position (bet on the decline in prices) provides a nice hedge, but it may be further down the road before this occurs.
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.
