Stocks saw another volatile week. Through the close Friday, the Dow fell 1.2%, the S&P dropped 1.0%, and the Nasdaq was lower by 1.3%. Bonds were a big story this week as yields on government bonds hit the highest level in a year (so bond prices were at the lowest level in a year). Gold is holding steady around its current levels, returning only 0.3% this week. Oil reached its highest price in nine months as it climbed 1.9% to $98 per barrel. The other major type of oil, Brent, rose to $106.
Source: Yahoo Finance
It wasn’t a very pretty week for stocks. The week opened with three straight down days, the first three-day losing streak all year. That streak then ended with the second biggest gain in stocks all year (measured by the S&P), only to reverse course and move lower again on Friday.
Obviously the markets remain volatile. Of the ten trading days so far this month, nine have seen moves of 100 points or more in the Dow (that would be intraday moves, not necessarily the open and closing difference).
There wasn’t much news behind the activity this week. The concern of a “taper” in the stimulus program by the Fed still appears to have the most influence on the market.
We know the Fed pays close attention to the stock market, having cited its rise as one of their goals of the stimulus. In their view, a rise in the market contributes to the wealth effect (where people feel richer so they spend more. It’s a very suspect manipulation of the economy, but we digress), so they want the market higher.
After the three lower days for stocks, the Wall Street Journal put out an article on the Fed, trying to calm any fears of a pullback in stimulus (LINK). These articles have become the fodder for many jokes, since they tend to appear when markets are down. The Fed knows the market will react positively to the news and many see it as a direct form of market manipulation. It also shows us the Fed will try its hardest to never let the market move lower.
Japan also played a role in our markets this week, which has been the case the last several weeks. There has been a strong correlation between our stock market and the exchange rate between the dollar to the Japanese yen. When the dollar weakens against the yen, our stocks move lower, and vice versa. We saw this trend play out again this week.
Their stock market has been extremely volatile, too, and continued to lose ground this week. They are off more than 20% from the recent highs. The move has surprised many, since their markets are not behaving the way many expected in light of the radical stimulus program.
As for economic data this week, there were several surprisingly good economic reports. Retail sales solidly beat expectations while weekly jobless claims reached their best level since early May.
On the other hand, industrial production remained flat, coming in below expectations. Inflation at the producer level was much higher than expected due to higher energy costs. Consumer confidence ticked lower. And lastly, the U.S. budget deficit widened last month, with May seeing the fourth highest monthly spending in history and largest May spending ever.
This shows that despite the sequester, the government continues to spend massive amounts of money (with the exception of the military sector). It reminds us of the recent situation in Europe, where governments bemoaned the austerity (lower government spending) imposed on their countries. But when looking at actual data, spending at the local level may have gone down here and there, but overall federal government spending kept rising.
Next Week
Investors will be closely watching the Fed next week as they hold a policy meeting. The markets are already jittery and we are likely to see even more activity as the Fed gives more clues on the future of stimulus. Sadly this is the current state of the market, where the direction is no longer dependent on fundamentals, but the whims of policymakers.
There will also be several economic reports to watch. We will get info on inflation at the consumer level, manufacturing in the northeast, housing data, and leading economic indicators.
Investment Strategy
Obviously the markets remain volatile. Of the ten trading days so far this month, nine have seen moves of 100 points or more in the Dow (that would be intraday moves, not necessarily the open and closing difference).
There wasn’t much news behind the activity this week. The concern of a “taper” in the stimulus program by the Fed still appears to have the most influence on the market.
We know the Fed pays close attention to the stock market, having cited its rise as one of their goals of the stimulus. In their view, a rise in the market contributes to the wealth effect (where people feel richer so they spend more. It’s a very suspect manipulation of the economy, but we digress), so they want the market higher.
After the three lower days for stocks, the Wall Street Journal put out an article on the Fed, trying to calm any fears of a pullback in stimulus (LINK). These articles have become the fodder for many jokes, since they tend to appear when markets are down. The Fed knows the market will react positively to the news and many see it as a direct form of market manipulation. It also shows us the Fed will try its hardest to never let the market move lower.
Japan also played a role in our markets this week, which has been the case the last several weeks. There has been a strong correlation between our stock market and the exchange rate between the dollar to the Japanese yen. When the dollar weakens against the yen, our stocks move lower, and vice versa. We saw this trend play out again this week.
Their stock market has been extremely volatile, too, and continued to lose ground this week. They are off more than 20% from the recent highs. The move has surprised many, since their markets are not behaving the way many expected in light of the radical stimulus program.
As for economic data this week, there were several surprisingly good economic reports. Retail sales solidly beat expectations while weekly jobless claims reached their best level since early May.
On the other hand, industrial production remained flat, coming in below expectations. Inflation at the producer level was much higher than expected due to higher energy costs. Consumer confidence ticked lower. And lastly, the U.S. budget deficit widened last month, with May seeing the fourth highest monthly spending in history and largest May spending ever.
This shows that despite the sequester, the government continues to spend massive amounts of money (with the exception of the military sector). It reminds us of the recent situation in Europe, where governments bemoaned the austerity (lower government spending) imposed on their countries. But when looking at actual data, spending at the local level may have gone down here and there, but overall federal government spending kept rising.
Next Week
Investors will be closely watching the Fed next week as they hold a policy meeting. The markets are already jittery and we are likely to see even more activity as the Fed gives more clues on the future of stimulus. Sadly this is the current state of the market, where the direction is no longer dependent on fundamentals, but the whims of policymakers.
There will also be several economic reports to watch. We will get info on inflation at the consumer level, manufacturing in the northeast, housing data, and leading economic indicators.
Investment Strategy
We’ve shown the nearby chart several times recently to illustrate the trend in the markets for the last seven months. As you can see, we are currently hugging the very bottom end of that range (the lower blue line). It will be important to see where markets go from here – stocks could bounce higher and continue the trend. Or they could break lower outside the trend, which would possibly indicate a new downward trend forming.
Either way, the attention will remain on the Fed and its stimulus plans. As we saw this week with the WSJ article, the Fed will try its hardest to keep stock prices up. But as we saw with Japan and their stimulus, it is very possible to lose control of that stimulus and see markets reverse course.
One other item we are keeping an eye on, bond yields continue to move higher and prices are falling. This isn’t just government bonds, but corporates, as well. High yield bonds (or junk bonds, which are bonds of riskier companies that pay a higher interest rate) are seen by many as a leading indicator, and their decline signals caution for the broader stock market.
As for where we are investing now, 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. A variety of sectors are trading at oversold (cheap) levels, but we are wary of stocks with a stronger connection to interest rates. We like to have a shorter-term horizon, too, so we can keep one foot out the door in case the market turns abruptly.
Gold keeps hanging around its current level, never really gaining any traction one way or the other. 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 again this week as yields keep rising (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. Both of these sectors have been hit hard recently, but we keep a longer term focus with these investments.
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.
Either way, the attention will remain on the Fed and its stimulus plans. As we saw this week with the WSJ article, the Fed will try its hardest to keep stock prices up. But as we saw with Japan and their stimulus, it is very possible to lose control of that stimulus and see markets reverse course.
One other item we are keeping an eye on, bond yields continue to move higher and prices are falling. This isn’t just government bonds, but corporates, as well. High yield bonds (or junk bonds, which are bonds of riskier companies that pay a higher interest rate) are seen by many as a leading indicator, and their decline signals caution for the broader stock market.
As for where we are investing now, 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. A variety of sectors are trading at oversold (cheap) levels, but we are wary of stocks with a stronger connection to interest rates. We like to have a shorter-term horizon, too, so we can keep one foot out the door in case the market turns abruptly.
Gold keeps hanging around its current level, never really gaining any traction one way or the other. 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 again this week as yields keep rising (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. Both of these sectors have been hit hard recently, but we keep a longer term focus with these investments.
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.
