Please note: there will be no market commentary next week.
Stocks halted their decline this week as markets moved higher. Through the Friday close, the Dow gained 0.7%, the S&P rose 0.9%, and the Nasdaq was higher by 1.4%. Friday also marked and end to the quarter and half, with the Dow turning in its best first-half performance since 1999 on a rise of 14%.
Bonds hit the highest yields in over two years (so prices were at the lowest level in over two years), but moved lower as the week progressed. Gold continues to plunge, hitting almost three year lows with a 5.3% drop this week. Oil mirrored the stock market, rising 3.1% to $96.49 per barrel. The international oil benchmark, Brent, rose to $102.
Stocks halted their decline this week as markets moved higher. Through the Friday close, the Dow gained 0.7%, the S&P rose 0.9%, and the Nasdaq was higher by 1.4%. Friday also marked and end to the quarter and half, with the Dow turning in its best first-half performance since 1999 on a rise of 14%.
Bonds hit the highest yields in over two years (so prices were at the lowest level in over two years), but moved lower as the week progressed. Gold continues to plunge, hitting almost three year lows with a 5.3% drop this week. Oil mirrored the stock market, rising 3.1% to $96.49 per barrel. The international oil benchmark, Brent, rose to $102.
Source: Yahoo Finance (a lower Monday open skewed the chart this week)
The past several weeks saw a large amount of volatility on fears of a reduction in stimulus from the Fed. This was particularly clear last week after comments from Fed chief Ben Bernanke indicated a reduction was likely if economic conditions improve. Those remarks prompted even more selling in the markets.
This week was different. In an effort to show that stimulus will not end any time soon, almost half of the FOMC members made public statements to this effect. It seemed like a coordinated effort by the central bankers to push markets back higher. The nearby chart is only current through Thursday, but gives a good summary of the activity this week (Source link and similar WSJ article. Also, Hilsenrath is not an FOMC member, but seen by many as a spokesman for the Fed in his writings for the Wall Street Journal).
With the Fed chief’s remarks causing the market to drop, then subsequent “clarifications” of those comments by the other Fed members, it makes us realize the stimulus will not end any time soon. Frankly, it could be many, many years – if ever.
The market thus far has been fueled higher by the stimulus (historically low interest rates and massive amounts of money printing). It is only natural that the market will pull back when that stimulus is removed. But as we saw this week, the Fed will never let the market go lower. They will always be chasing their tail, printing more and more money to keep markets afloat.
Obviously the stimulus was designed to “stimulate” the economy. Data this week showed that it just isn’t working. The final revision to first quarter GDP was released this week. Earlier estimates saw growth running at 2.5 and 2.4% year-over-year. However, the final number was revised down to 1.8%, a terribly low number. It is even worse considering the massive amounts of money printed to stimulate the economy.
Another frustration with this number was the way it was received. Commentators brushed the number off, saying it doesn’t matter since the first quarter was so long ago. This is true, but we lived under the false impression growth was much higher for months. The poor number deserves to be recognized.
As for other economic data this week, it was full of contradictions. Business activity in the Texas region increased, though was lower in the Chicago region. Durable goods sales rose 3.8% over the last month, though were only higher by 0.7% when excluding aircraft orders.
Also, housing data showed a solid rise in prices over the past year while home sales ticked to a five year high. However, mortgage applications have fallen seven of the last eight weeks, having dropped 30% over that period. It shows that higher rates are having an impact on mortgages, but also reaffirms that the bulk of housing sales are to investors and not necessarily to individual homeowners.
Next Week
There will be a lot of economic data coming next week, but with the holiday on Thursday, we aren’t sure how active markets will be. We will see reports on the strength of the manufacturing and service sectors, construction, factory orders, and the important unemployment report will come on Friday.
It’s likely we’ll hear more from the central bankers, too, as they continue to convince markets an end to stimulus is not near.
Investment Strategy
These times are frustrating for money managers who have traditionally interpreted economic conditions and market forces for direction on the market. These skills are practically useless as the market direction hinges on remarks from economic central planners.
As we saw this week, any pullback in the market will be met with more stimulus (or at least rhetoric) from the Fed to push it back higher. Still, the risk is too high to put new money into broader indexes at this point. We prefer finding undervalued individual names, though most stocks are still on the expensive side. We are wary of stocks with a strong connection to interest rates. Our horizon is shorter, too, so we can keep one foot out the door in case the market turns abruptly.
Gold continues to perform poorly. While demand for physical gold is still very strong, gold as an investment has shown signs of weakness. It may be getting to the point where the sell-off is a bit overdone, so buying opportunities may be near, 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 continues to receive much attention 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.
TIPs have performed poorly recently, but are an important hedge as we still expect inflation to increase down the road. Municipal bonds are in the same boat, but will work for the right client. We keep a longer term focus with these investments.
Finally, in international stocks, we are still not interested in developed markets and 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.
With the Fed chief’s remarks causing the market to drop, then subsequent “clarifications” of those comments by the other Fed members, it makes us realize the stimulus will not end any time soon. Frankly, it could be many, many years – if ever.
The market thus far has been fueled higher by the stimulus (historically low interest rates and massive amounts of money printing). It is only natural that the market will pull back when that stimulus is removed. But as we saw this week, the Fed will never let the market go lower. They will always be chasing their tail, printing more and more money to keep markets afloat.
Obviously the stimulus was designed to “stimulate” the economy. Data this week showed that it just isn’t working. The final revision to first quarter GDP was released this week. Earlier estimates saw growth running at 2.5 and 2.4% year-over-year. However, the final number was revised down to 1.8%, a terribly low number. It is even worse considering the massive amounts of money printed to stimulate the economy.
Another frustration with this number was the way it was received. Commentators brushed the number off, saying it doesn’t matter since the first quarter was so long ago. This is true, but we lived under the false impression growth was much higher for months. The poor number deserves to be recognized.
As for other economic data this week, it was full of contradictions. Business activity in the Texas region increased, though was lower in the Chicago region. Durable goods sales rose 3.8% over the last month, though were only higher by 0.7% when excluding aircraft orders.
Also, housing data showed a solid rise in prices over the past year while home sales ticked to a five year high. However, mortgage applications have fallen seven of the last eight weeks, having dropped 30% over that period. It shows that higher rates are having an impact on mortgages, but also reaffirms that the bulk of housing sales are to investors and not necessarily to individual homeowners.
Next Week
There will be a lot of economic data coming next week, but with the holiday on Thursday, we aren’t sure how active markets will be. We will see reports on the strength of the manufacturing and service sectors, construction, factory orders, and the important unemployment report will come on Friday.
It’s likely we’ll hear more from the central bankers, too, as they continue to convince markets an end to stimulus is not near.
Investment Strategy
These times are frustrating for money managers who have traditionally interpreted economic conditions and market forces for direction on the market. These skills are practically useless as the market direction hinges on remarks from economic central planners.
As we saw this week, any pullback in the market will be met with more stimulus (or at least rhetoric) from the Fed to push it back higher. Still, the risk is too high to put new money into broader indexes at this point. We prefer finding undervalued individual names, though most stocks are still on the expensive side. We are wary of stocks with a strong connection to interest rates. Our horizon is shorter, too, so we can keep one foot out the door in case the market turns abruptly.
Gold continues to perform poorly. While demand for physical gold is still very strong, gold as an investment has shown signs of weakness. It may be getting to the point where the sell-off is a bit overdone, so buying opportunities may be near, 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 continues to receive much attention 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.
TIPs have performed poorly recently, but are an important hedge as we still expect inflation to increase down the road. Municipal bonds are in the same boat, but will work for the right client. We keep a longer term focus with these investments.
Finally, in international stocks, we are still not interested in developed markets and 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.
