Positive remarks out of the Fed sent markets higher this week. Through the close Friday, the Dow rose by 2.2%, the S&P climbed 3.0%, and the Nasdaq popped higher by 3.5%. Bonds moderated a bit this week as prices rose (and yields fell). Gold saw its best week in two years with a rise of 5.4%. Oil continues to move higher, reaching the highest price in over a year with a 2.6% gain this week and closing at $106 per barrel. The international oil benchmark, Brent, rose to $108. We’ll discuss the story in oil more below.
Source: Yahoo Finance
The gains in the market this week led to a slew of new records. Both the Dow and S&P hit new all-time highs while the Nasdaq hit its highest level in 13 years. The small-cap index, the Russell 2000, also reached a new high. Additionally, the last two weeks saw stocks rise at their fastest pace since 2011 (and over the last seven days, the S&P rose at its fastest pace since 2004).
What was behind the rise in the market this week? The same thing that’s been behind most moves recently - the Fed.
Fed chief Ben Bernanke made comments on the future of stimulus that were interpreted positively by the market. He sees the Fed being “highly accommodative into the foreseeable future,” which means no pullback of stimulus any time soon.
What was behind the rise in the market this week? The same thing that’s been behind most moves recently - the Fed.
Fed chief Ben Bernanke made comments on the future of stimulus that were interpreted positively by the market. He sees the Fed being “highly accommodative into the foreseeable future,” which means no pullback of stimulus any time soon.
He also noted that interest rates will remain at these historic lows far beyond the unemployment rate hitting 6.5% (a target they laid out months ago) and the bond buying (money printing) will continue until inflation is above their 2% target (inflation currently stands at 1.4%, but stands at 8% if measured using 1980 methodology).
These remarks were nothing new really, they just seemed to be interpreted as more positive by the market. Since the fear of a pullback caused the recent volatility, perhaps Bernanke spelling it out even more clearly was enough to reassure the markets.
While the low interest rates and money printing have helped the stock market, it has done little to help the broader economy. Growth is pathetically low at 1.8% (Link) and employment is equally poor when looking at employment to population ratio (Link). Keep in mind, we’ve spent trillions in order to achieve this economic growth.
We wonder if they will ever realize this approach does not work. Likely not, they’ll just assume they haven’t gone big enough (even though this was the largest stimulus program in the history of the world). We have serious concerns that we are moving further down the wrong path.
Legendary investment manager Seth Klarman (whose 1991 book now sells for $2,000) put it nicely this week: If the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse. For if you must rescue everything, then ultimately you will be able to rescue nothing.
Finally, we’ll take a look at the story in oil. Prices have risen sharply over the last several weeks and are starting to affect prices at the pump. Frankly, we aren’t sure exactly what is behind the rise in prices.
Some have said new pipelines here in the U.S. have alleviated the glut in the middle of the country, bringing WTI (or West Texas Intermediary, which is the domestic oil) up to match the price in the international Brent. Others have noted the problems in Egypt contributing to the rise.
However, neither of these really seem to be great explanations – especially the Egypt riots, since the oil gains were largely in the WTI domestic oil. If this explanation were true, it would have affected the international Brent more than WTI.
It could just be that oil is the new hot asset class. Investment money flows to where it thinks it will find the best return, and with bonds recently tanking and stocks becoming more fickle, we think that’s as likely an explanation as any other.
The price difference between the WTI and Brent oils has been a story in itself. The international Brent has been trading at a much higher price than WTI in recent years, often greater than $20 per barrel. This week, that price spread fell to under $2 as WTI spiked higher. The chart below serves as a good illustration of the price differences over time (source Zerohedge.com). This high price doesn’t seem sustainable when considering the fundamentals, but that doesn’t mean oil won’t continue moving higher from here.
The chart begins in 2009 and is current through Wednesday.
Next Week
We’ll see a little more activity next week as several economic reports will be released, including retail sales, inflation at the consumer level, industrial production, housing, and leading economic indicators. There will also be more talk coming from the Fed, which will likely have the most impact on the markets.
Next week we’ll also see more activity in the corporate earnings space. Second quarter earnings officially kicked off this week and the results were a bit better than expected. Remember, though, the bar has been set extremely low here, so even the slightest growth will be met with enthusiasm.
Investment Strategy
It is hard not to be in the market here as stocks continue to move higher. Especially as the Fed has pledged to do everything it can to keep pushing them higher. We don’t like to put new money into the broader market at this time, instead preferring to find undervalued individual names. We would avoid stocks in sectors with a strong correlation to interest rates. Our timeframe is shorter, too, so we can keep one foot out the door in case the market turns abruptly.
Gold may be forming a bottom around this price. While demand for physical gold is still very strong, gold as an investment has generally performed poorly. Caution is still warranted here, but may be worth a nibble.
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.
We’ll see a little more activity next week as several economic reports will be released, including retail sales, inflation at the consumer level, industrial production, housing, and leading economic indicators. There will also be more talk coming from the Fed, which will likely have the most impact on the markets.
Next week we’ll also see more activity in the corporate earnings space. Second quarter earnings officially kicked off this week and the results were a bit better than expected. Remember, though, the bar has been set extremely low here, so even the slightest growth will be met with enthusiasm.
Investment Strategy
It is hard not to be in the market here as stocks continue to move higher. Especially as the Fed has pledged to do everything it can to keep pushing them higher. We don’t like to put new money into the broader market at this time, instead preferring to find undervalued individual names. We would avoid stocks in sectors with a strong correlation to interest rates. Our timeframe is shorter, too, so we can keep one foot out the door in case the market turns abruptly.
Gold may be forming a bottom around this price. While demand for physical gold is still very strong, gold as an investment has generally performed poorly. Caution is still warranted here, but may be worth a nibble.
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.
