Stocks closed lower for the second straight week, a feat we haven’t seen since early February. Through the Friday close, the Dow dropped 1.2%, the S&P was lower by 1.1%, and the Nasdaq fell just 0.1%. Gold saw a solid move to the upside midweek, but a drop Friday resulted in just a 0.4% gain on the week. Oil moved lower to $92 per barrel, a nice drop of 2.3% on the week. The other major type of oil, Brent, fell to just above $100.
Source: Yahoo Finance (a higher Monday open skewed our chart this week)
There wasn’t much in the way of news this week, especially with the holiday Monday, but there was plenty of volatility in the markets. An ominous looking drop in the market occurred late Friday, but that appears to be due to a rebalancing in the MSCI indexes. A rebound Monday would confirm this.
An interesting stat worth noting, the Dow has now been up each of the last 20 straight Tuesdays. In fact, these Tuesday gains alone are responsible for roughly two-thirds of the gains in the market so far this year. Of course, now that we mention this trend, odds are it will no longer occur.
We’re beginning to see a change in attitude in the market. Stocks and bonds had been steadily rising over the past six months (for bonds, that means yields have been falling), but cracks are forming. Bond yields have risen abruptly, raising red flags for investors. Government Treasury bonds have reached the highest levels in more than a year and mortgage rates are also sharply higher.
Worries are creeping back into the market that either the Fed will taper its stimulus, or it may lose control of it entirely. This has sectors related to interest rates getting hit hardest. Rising bond yields means less demand for dividend paying stocks, causing them to underperform the market. REITs (real estate investment trusts) are in the same boat.
This situation has played out in Japan, as well. Their markets have been closely watched since the announcement of their radical new stimulus. Stocks had risen sharply since the stimulus first began, but have reversed course just as sharply in the last two weeks.
More importantly (at least to wonky market watchers), their bond yields have risen dramatically (so prices have fallen) since the start of the stimulus. Similar to our stimulus program, it should have pushed yields lower. That is one of the goals. But they have lost control of interest rates, which has many worried the same can happen here. This is important to watch.
There were several economic reports this week that were better than expected, leading investors to believe an improving economic picture would mean a reduction in stimulus was nearing.
A positive housing report kicked off those Fed taper worries. Over the first quarter, housing prices rose at the strongest pace almost seven years. Many have begun to worry that a new bubble is forming. A big difference this time is the increase in housing is due largely to investors, with about 40% of sales being for cash (perhaps the bubble is forming in investable assets?). Mortgage applications have actually been falling, as a report late this week indicated.
Other economic data this week was mixed. We’re not sure why, but consumer confidence stands at a six-year high and manufacturing in the Chicago region showed a surprising increase.
On the other hand, economic activity in the mid-Atlantic region contracted, first quarter GDP was revised lower to 2.4% from 2.5%, the weekly unemployment report ticked higher, and personal income and spending were flat and negative, respectively. This was the first cut in spending in a year.
Next Week
Next week looks to be fairly busy. We will get info on the manufacturing and service sectors over the past month, the trade deficit, construction data, factory orders, and the employment data on Friday. We look to be entering that period where good news is bad news for the market since it would mean a reduction in market-fueling stimulus. Therefore, a good employment report may be met with a sell-off, and vice-versa.
Investment Strategy
Above we discussed how a worry of a reduction in the Fed’s stimulus is causing investors to worry, but we don’t see a tapering any time soon.
The criteria laid out by the Fed for a pullback in stimulus has not been met. While we disagree with the criteria and program in general, the employment picture is still poor and inflation is running below their target. Frankly, we believe the inflation picture will continue to deteriorate.
The early stimulus saw commodity prices to rise dramatically, which resulted in higher costs for us. Any regular shopper can attest to this. It is natural for this bubble to begin to deflate (and spare us some pain in the wallet), something the Fed doesn’t wish to see. But prices have to come down, and want to. This alone will keep the Fed printing money. We only need to look to Japan and the decades of stimulus to see how long this can drag out.
Will the lack of any imminent tapering send markets higher? Possibly. But we still don’t like investing in the broader market at these high levels. Finding undervalued individual stocks seems to be a better play at this time, though they are increasingly hard to find. We like to have a shorter-term horizon, too, so we can keep one foot out the door in case the market turns abruptly.
Several sectors have been hit hard over the last couple weeks. This includes heavy dividend payers like utilities and REITs, plus others like energy, mining, and property and casualty insurers. Many stocks in the utility and insurance sectors look like they have turned the corner to head higher (at least in the short term). As for the other sectors, we still have our reservations.
Outside of those sectors, we still like higher-quality and dividend paying stocks, though they have become increasingly volatile. 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.
Gold looked stable again this week, but its short-term prospects look poor. While demand for physical gold is still very strong, gold as an investment has shown signs of weakness. We like it for the long run as a good hedge, 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 seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon.
As for bonds, this area garnered much attention this week. Yields are rising sharply (so prices are falling). A short position (bet on the decline in prices) has done well here but only time will tell if a new trend is beginning.
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.
An interesting stat worth noting, the Dow has now been up each of the last 20 straight Tuesdays. In fact, these Tuesday gains alone are responsible for roughly two-thirds of the gains in the market so far this year. Of course, now that we mention this trend, odds are it will no longer occur.
We’re beginning to see a change in attitude in the market. Stocks and bonds had been steadily rising over the past six months (for bonds, that means yields have been falling), but cracks are forming. Bond yields have risen abruptly, raising red flags for investors. Government Treasury bonds have reached the highest levels in more than a year and mortgage rates are also sharply higher.
Worries are creeping back into the market that either the Fed will taper its stimulus, or it may lose control of it entirely. This has sectors related to interest rates getting hit hardest. Rising bond yields means less demand for dividend paying stocks, causing them to underperform the market. REITs (real estate investment trusts) are in the same boat.
This situation has played out in Japan, as well. Their markets have been closely watched since the announcement of their radical new stimulus. Stocks had risen sharply since the stimulus first began, but have reversed course just as sharply in the last two weeks.
More importantly (at least to wonky market watchers), their bond yields have risen dramatically (so prices have fallen) since the start of the stimulus. Similar to our stimulus program, it should have pushed yields lower. That is one of the goals. But they have lost control of interest rates, which has many worried the same can happen here. This is important to watch.
There were several economic reports this week that were better than expected, leading investors to believe an improving economic picture would mean a reduction in stimulus was nearing.
A positive housing report kicked off those Fed taper worries. Over the first quarter, housing prices rose at the strongest pace almost seven years. Many have begun to worry that a new bubble is forming. A big difference this time is the increase in housing is due largely to investors, with about 40% of sales being for cash (perhaps the bubble is forming in investable assets?). Mortgage applications have actually been falling, as a report late this week indicated.
Other economic data this week was mixed. We’re not sure why, but consumer confidence stands at a six-year high and manufacturing in the Chicago region showed a surprising increase.
On the other hand, economic activity in the mid-Atlantic region contracted, first quarter GDP was revised lower to 2.4% from 2.5%, the weekly unemployment report ticked higher, and personal income and spending were flat and negative, respectively. This was the first cut in spending in a year.
Next Week
Next week looks to be fairly busy. We will get info on the manufacturing and service sectors over the past month, the trade deficit, construction data, factory orders, and the employment data on Friday. We look to be entering that period where good news is bad news for the market since it would mean a reduction in market-fueling stimulus. Therefore, a good employment report may be met with a sell-off, and vice-versa.
Investment Strategy
Above we discussed how a worry of a reduction in the Fed’s stimulus is causing investors to worry, but we don’t see a tapering any time soon.
The criteria laid out by the Fed for a pullback in stimulus has not been met. While we disagree with the criteria and program in general, the employment picture is still poor and inflation is running below their target. Frankly, we believe the inflation picture will continue to deteriorate.
The early stimulus saw commodity prices to rise dramatically, which resulted in higher costs for us. Any regular shopper can attest to this. It is natural for this bubble to begin to deflate (and spare us some pain in the wallet), something the Fed doesn’t wish to see. But prices have to come down, and want to. This alone will keep the Fed printing money. We only need to look to Japan and the decades of stimulus to see how long this can drag out.
Will the lack of any imminent tapering send markets higher? Possibly. But we still don’t like investing in the broader market at these high levels. Finding undervalued individual stocks seems to be a better play at this time, though they are increasingly hard to find. We like to have a shorter-term horizon, too, so we can keep one foot out the door in case the market turns abruptly.
Several sectors have been hit hard over the last couple weeks. This includes heavy dividend payers like utilities and REITs, plus others like energy, mining, and property and casualty insurers. Many stocks in the utility and insurance sectors look like they have turned the corner to head higher (at least in the short term). As for the other sectors, we still have our reservations.
Outside of those sectors, we still like higher-quality and dividend paying stocks, though they have become increasingly volatile. 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.
Gold looked stable again this week, but its short-term prospects look poor. While demand for physical gold is still very strong, gold as an investment has shown signs of weakness. We like it for the long run as a good hedge, 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 seems to be weighing on commodity prices here, so buying on the dips may work with a longer time horizon.
As for bonds, this area garnered much attention this week. Yields are rising sharply (so prices are falling). A short position (bet on the decline in prices) has done well here but only time will tell if a new trend is beginning.
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.
