A rise in the markets Friday pushed stocks into the green for the week. Through the close, the Dow gained 0.9%, the S&P climbed 0.8%, and the Nasdaq returned 0.4%. Opposite of stocks, gold dropped on Friday, resulting in a 0.7% loss for the week. Oil moved steadily higher all week, closing with a gain of 4.4% to $96 per barrel. The international and other major type of oil, Brent, moved higher to $104.80.
Source: Yahoo Finance
Well, we knew it would happen. Like a baseball announcer declaring a no-hitter in progress and subsequently jinxing it, last week we mentioned the 20-straight higher Tuesdays in the market pattern. Predictably that trend ended this week as markets became increasingly jittery.
Similar to the past few weeks, the focus remains on the actions of the Fed and its stimulus. Increasingly, investors are worried that they will start pulling back in the coming months. We don’t see the Fed tapering any time soon since the criteria laid out by the Fed for a pullback has not been met. The employment picture is lackluster and inflation is running below their target. Regardless, the fears have weighed on the market and turned bad news on the economy into good news for the market.
Japan has also become a concern for the markets. Well, the country itself isn’t exactly a concern, but the behavior of their market in light of a massive new stimulus is concerning. This was something we touched on last week and the troubles have continued into this week.
The Japanese stock market continues to fall after seeing a tremendous rise in the prior months. In fact, their stock market pulled back 20% this week from the highs of two weeks ago. Additionally, their interest rates continue to rise.
This scenario is not what economists expected. Japan appears to be losing control of their stimulus, which investors worry can happen here.
Switching back to our markets, we kicked off the week with a bad manufacturing report, as it fell to the weakest level in four years. Remember, bad news has become good news, so markets rose on the negative report.
The rest of the week saw mixed economic data, though the market steadily declined until late Thursday. Reports on the strength of the service sector were positive, while the trade deficit widened on growing imports. Also, the Fed reported a modest growth in the economy with the release of their Beige Book (which gives an anecdotal account of economic conditions).
This most important data came on Friday with the release of the employment report. Over the past month, 175,000 jobs were added (though a solid majority was low-paying jobs) and the official unemployment rate stands at 7.6%. The gain in jobs was right in line with the average over the past year, so to investors it showed that the employment picture wasn’t changing much. This reassured the market that a pullback in stimulus was not imminent and stocks rose.
Worth noting, Canada also reported their employment figures on Friday (LINK). The increase in jobs was six times the estimate with a gain of 95,000, the highest since 2002. That may not sound like much, but considering the size of the country, that would be like adding over 1,000,000 jobs here.
This is important since they have not embarked on the radical stimulus measures we have. We, too, should be creating many more jobs than we are at this stage in an economic recovery. Instead, we’ve printed money to cover up structural problems while Canada is proof these actions are not needed.
Next Week
It looks like things will quiet down a bit next week in terms of data being released. We will get info on retail sales, the budget deficit, industrial production, and inflation at the producer level. They likely won’t have much impact on the market, but remember, if reports are too positive, it may add a downward pressure to the market and vice versa.
Investment Strategy
The activity in the markets this week showed us the central banks are still in charge of the markets, and will be for some time to come. Stocks rise when it looks like stimulus will be around and sell off when talks of a taper grow.
Bonds also saw big moves this week as prices dropped (so yields rose) sharply. In the most recent week, investors pulled money from bond funds at the fastest rate in five years. This could foreshadow a downward move in stocks and is a trend worth watching.
Similar to the past few weeks, the focus remains on the actions of the Fed and its stimulus. Increasingly, investors are worried that they will start pulling back in the coming months. We don’t see the Fed tapering any time soon since the criteria laid out by the Fed for a pullback has not been met. The employment picture is lackluster and inflation is running below their target. Regardless, the fears have weighed on the market and turned bad news on the economy into good news for the market.
Japan has also become a concern for the markets. Well, the country itself isn’t exactly a concern, but the behavior of their market in light of a massive new stimulus is concerning. This was something we touched on last week and the troubles have continued into this week.
The Japanese stock market continues to fall after seeing a tremendous rise in the prior months. In fact, their stock market pulled back 20% this week from the highs of two weeks ago. Additionally, their interest rates continue to rise.
This scenario is not what economists expected. Japan appears to be losing control of their stimulus, which investors worry can happen here.
Switching back to our markets, we kicked off the week with a bad manufacturing report, as it fell to the weakest level in four years. Remember, bad news has become good news, so markets rose on the negative report.
The rest of the week saw mixed economic data, though the market steadily declined until late Thursday. Reports on the strength of the service sector were positive, while the trade deficit widened on growing imports. Also, the Fed reported a modest growth in the economy with the release of their Beige Book (which gives an anecdotal account of economic conditions).
This most important data came on Friday with the release of the employment report. Over the past month, 175,000 jobs were added (though a solid majority was low-paying jobs) and the official unemployment rate stands at 7.6%. The gain in jobs was right in line with the average over the past year, so to investors it showed that the employment picture wasn’t changing much. This reassured the market that a pullback in stimulus was not imminent and stocks rose.
Worth noting, Canada also reported their employment figures on Friday (LINK). The increase in jobs was six times the estimate with a gain of 95,000, the highest since 2002. That may not sound like much, but considering the size of the country, that would be like adding over 1,000,000 jobs here.
This is important since they have not embarked on the radical stimulus measures we have. We, too, should be creating many more jobs than we are at this stage in an economic recovery. Instead, we’ve printed money to cover up structural problems while Canada is proof these actions are not needed.
Next Week
It looks like things will quiet down a bit next week in terms of data being released. We will get info on retail sales, the budget deficit, industrial production, and inflation at the producer level. They likely won’t have much impact on the market, but remember, if reports are too positive, it may add a downward pressure to the market and vice versa.
Investment Strategy
The activity in the markets this week showed us the central banks are still in charge of the markets, and will be for some time to come. Stocks rise when it looks like stimulus will be around and sell off when talks of a taper grow.
Bonds also saw big moves this week as prices dropped (so yields rose) sharply. In the most recent week, investors pulled money from bond funds at the fastest rate in five years. This could foreshadow a downward move in stocks and is a trend worth watching.
The technical side (a focus on the charts) is also playing a strong role in the direction of the market. Markets continue to trade in the same tight range it has over the past seven months. We touched the bottom end of that range this week but promptly bounced back higher, showing us the trend is likely to continue. If we were to have moved lower outside the range, it could signal a new downward trend in the market.
Even with that upward trend in place, 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 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.
Even with that upward trend in place, 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 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.
