It was a rough week on Wall Street. For the week, the Dow plunged 1.8%, the S&P was off 2.1%, and the Nasdaq lost 1.9%. The bond sector was again a big story as government bonds had their worst week in a decade, with yields hitting their highest level in two years (so bond prices fell to the lowest level two years). Gold also dropped to its lowest price in two years with a loss of 6.9% this week. Like most other commodities, oil fell 4.5% to $93.69 per barrel. The international oil benchmark, Brent, fell to $101.
Source: Yahoo Finance
The week started on a positive note as stocks rose to within 0.6% of all-time highs. Remarks from the Fed president, however, sparked a dramatic sell-off that wiped out two months of gains in stocks. By the end of the week, practically every asset class lost ground.
The volatility of the market has also been a story. Every trading day but one this month saw swings of more than 100 points, a remarkable statistic.
What happened to make the market sell-off so strongly? Our central bank, the Fed, held a much anticipated policy meeting. Fed chief Ben Bernanke saw encouraging improvements in the economy while noting “downside risks have diminished.” The improving economy means in a pullback in their $85 billion monthly bond buying (money printing) possibly occurring later this year and end next year. This did not sit well with the markets.
The idea of a “taper” is not anything new, as it has been speculated for several weeks. However, this was the first time the chairman really spelled it out with a clear timetable.
Bernanke likely knew his remarks would cause a negative reaction in the market and stressed that this doesn’t mean the end of stimulus. He made it a point to mention that taking your foot off the gas doesn’t mean putting your foot on the brake. They will (attempt to) hold interest rates at these historic lows for many years to come, another form of stimulus.
We have seen what happens to the market when the bond buying (money printing) stimulus is removed. There have been several of these programs over the years and when the printing was in effect or expected, stocks rose. When it ended, markets dropped. It is highly likely this will play out again.
We aren’t sure this tapering will occur as soon as many think. In order for the stimulus to be withdrawn, economic conditions have to move towards the Fed’s goalposts. The employment situation needs to improve and inflation needs to increase. Current conditions are not close to these goals and show little progress in reaching them.
Unfortunately this is what the market has been reduced to – moving on the whims of central planners. It is clear the market is addicted to this stimulus, too. It has created a very unhealthy market.
Adding to the weakness this week was news out of China. Growth is slowing and new political leaders don’t seem as eager to embark on the stimulus programs of their predecessors. Lending standards had been incredibly lose until this point, but it looks like lending will be tighter going forward. China has been a leading growth engine in the world and any weakness would weigh on global markets.
As for economic data this week, the news leaned to the positive side. Economic activity in the northeast region came in above expectations, as well as housing data. Inflation at the consumer level showed only a slight tick higher over the previous month.
Going forward, any negative economic data will be good news for the stock market, and vice versa. An addict market, dependent on stimulus to move higher, does not want that stimulus taken away. Therefore, the weaker the economy, the more likely is stimulus to remain. This has been the scenario to a small degree for the last several weeks but after this week, it will become even more so.
Next Week
Next week will likely be volatile again, not just due to the Fed’s recent comments, but also due to the end of the quarter. There will be a few economic reports, but nothing likely to have much impact on the market. We’ll get info on durable goods, consumer confidence, housing, and personal income and spending.
Investment Strategy
This sell-off hit everything. Stocks, bonds, commodities – all were lower. With this pullback, we still wouldn’t buy into any of these broader sectors at this point. Finding undervalued individual names seems to be a better play, though everything still seems rather expensive. We are also wary of stocks with a strong 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 got crushed this week. 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 very 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 particularly hard, 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.
The volatility of the market has also been a story. Every trading day but one this month saw swings of more than 100 points, a remarkable statistic.
What happened to make the market sell-off so strongly? Our central bank, the Fed, held a much anticipated policy meeting. Fed chief Ben Bernanke saw encouraging improvements in the economy while noting “downside risks have diminished.” The improving economy means in a pullback in their $85 billion monthly bond buying (money printing) possibly occurring later this year and end next year. This did not sit well with the markets.
The idea of a “taper” is not anything new, as it has been speculated for several weeks. However, this was the first time the chairman really spelled it out with a clear timetable.
Bernanke likely knew his remarks would cause a negative reaction in the market and stressed that this doesn’t mean the end of stimulus. He made it a point to mention that taking your foot off the gas doesn’t mean putting your foot on the brake. They will (attempt to) hold interest rates at these historic lows for many years to come, another form of stimulus.
We have seen what happens to the market when the bond buying (money printing) stimulus is removed. There have been several of these programs over the years and when the printing was in effect or expected, stocks rose. When it ended, markets dropped. It is highly likely this will play out again.
We aren’t sure this tapering will occur as soon as many think. In order for the stimulus to be withdrawn, economic conditions have to move towards the Fed’s goalposts. The employment situation needs to improve and inflation needs to increase. Current conditions are not close to these goals and show little progress in reaching them.
Unfortunately this is what the market has been reduced to – moving on the whims of central planners. It is clear the market is addicted to this stimulus, too. It has created a very unhealthy market.
Adding to the weakness this week was news out of China. Growth is slowing and new political leaders don’t seem as eager to embark on the stimulus programs of their predecessors. Lending standards had been incredibly lose until this point, but it looks like lending will be tighter going forward. China has been a leading growth engine in the world and any weakness would weigh on global markets.
As for economic data this week, the news leaned to the positive side. Economic activity in the northeast region came in above expectations, as well as housing data. Inflation at the consumer level showed only a slight tick higher over the previous month.
Going forward, any negative economic data will be good news for the stock market, and vice versa. An addict market, dependent on stimulus to move higher, does not want that stimulus taken away. Therefore, the weaker the economy, the more likely is stimulus to remain. This has been the scenario to a small degree for the last several weeks but after this week, it will become even more so.
Next Week
Next week will likely be volatile again, not just due to the Fed’s recent comments, but also due to the end of the quarter. There will be a few economic reports, but nothing likely to have much impact on the market. We’ll get info on durable goods, consumer confidence, housing, and personal income and spending.
Investment Strategy
This sell-off hit everything. Stocks, bonds, commodities – all were lower. With this pullback, we still wouldn’t buy into any of these broader sectors at this point. Finding undervalued individual names seems to be a better play, though everything still seems rather expensive. We are also wary of stocks with a strong 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 got crushed this week. 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 very 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 particularly hard, 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.
