Stocks again hit new highs this week but closed with mixed results. For the week, the Dow gained 0.5%, the S&P was higher by 0.7%, but the Nasdaq was lower by 0.4% on weak tech company earnings. Gold rose slightly, climbing 1.2%. Oil prices continue to rise, gaining 2.0% this week to close at $108.05 per barrel. The international oil benchmark, Brent, moved up to $108.28. Unfortunately, it looks like prices at the pump will continue to rise.
Source: Yahoo Finance
Since the actions of the Fed have been the main focus of the stock market, all eyes were on Fed chief Ben Bernanke’s mid-week appearance before Congress to discuss the economy and monetary policy. This caused the week to start out with little volatility as investors awaited his Wednesday and Thursday testimony. In fact, Monday saw the lowest volume of trades all year.
In the end, his words told us nothing new and had little impact on the market. The Fed will continue its stimulus programs until economic conditions meet their targets. Even then, they are likely to continue the stimulus beyond that point.
The Fed also sees a moderately improving economy per their Beige Book (which gives a summary of economic conditions around the country) released this week, though they don’t see conditions improving enough to taper the stimulus in the immediate future. Other economic reports released this week pointed to a softer picture. Inflation at the consumer level increased more than expected, retail sales stood at the lowest level in a year, and housing starts were also at their lowest in a year.
On to earnings, where slightly more than 20% of S&P 500 companies have released their earnings at this point. According to Factset, 72% of them have seen earnings better than expected and 50% saw revenue better than expected (revenue is what the company actually received in sales, earnings are what is left over after costs are taken out).
While the expectations beats may sound impressive, this is right around the average, plus those companies are beating a very low threshold. The growth in earnings only stands at 1.1% year-over-year, whereas economists projected a 4.1% growth only a couple months ago. Revenue growth stands at just 0.9%, which we suppose is an improvement from the decline in revenue last quarter.
If we were to exclude the suddenly hot financial sector, earnings growth actually declined 2.7% while revenue was higher by 0.1%.
These numbers do not paint a very good picture and show that companies are improving their bottom line by cutting costs and reducing workers. This can’t continue forever and we worry that disappointing earnings are in store down the road.
Finally, we’ll touch on the higher oil prices. Last week we discussed how the international oil (Brent) had been trading at a higher price than our domestic oil (WTI, or West Texas Intermediary) for the last several years, but the gap was closing. That officially ended this week as our domestic oil briefly became more expensive than the international oil.
Frankly, we aren’t exactly sure why this is happening. Fundamentals behind oil are relatively decent. However, this week we saw that oil is trading in backwardation. This financial jargon term basically means oil contracts trading in the current month are more expensive than the future months, which is unusual. We bring this up because to us it signals that speculation is playing a part in the rise in prices. With Bernanke and company trying to reflate asset bubbles (like in the stock or housing markets), it isn’t surprising to see new money flowing into the new hot asset class, oil.
Next Week
Next week looks to be fairly quiet for economic data, but will be very heavy on corporate earnings. With economic data, we’ll get new info on the housing sector and durable goods. As for corporate earnings, we’re in the peak of earnings season where almost one-third of S&P 500 companies will release their data
Investment Strategy
No change here. 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.
In the end, his words told us nothing new and had little impact on the market. The Fed will continue its stimulus programs until economic conditions meet their targets. Even then, they are likely to continue the stimulus beyond that point.
The Fed also sees a moderately improving economy per their Beige Book (which gives a summary of economic conditions around the country) released this week, though they don’t see conditions improving enough to taper the stimulus in the immediate future. Other economic reports released this week pointed to a softer picture. Inflation at the consumer level increased more than expected, retail sales stood at the lowest level in a year, and housing starts were also at their lowest in a year.
On to earnings, where slightly more than 20% of S&P 500 companies have released their earnings at this point. According to Factset, 72% of them have seen earnings better than expected and 50% saw revenue better than expected (revenue is what the company actually received in sales, earnings are what is left over after costs are taken out).
While the expectations beats may sound impressive, this is right around the average, plus those companies are beating a very low threshold. The growth in earnings only stands at 1.1% year-over-year, whereas economists projected a 4.1% growth only a couple months ago. Revenue growth stands at just 0.9%, which we suppose is an improvement from the decline in revenue last quarter.
If we were to exclude the suddenly hot financial sector, earnings growth actually declined 2.7% while revenue was higher by 0.1%.
These numbers do not paint a very good picture and show that companies are improving their bottom line by cutting costs and reducing workers. This can’t continue forever and we worry that disappointing earnings are in store down the road.
Finally, we’ll touch on the higher oil prices. Last week we discussed how the international oil (Brent) had been trading at a higher price than our domestic oil (WTI, or West Texas Intermediary) for the last several years, but the gap was closing. That officially ended this week as our domestic oil briefly became more expensive than the international oil.
Frankly, we aren’t exactly sure why this is happening. Fundamentals behind oil are relatively decent. However, this week we saw that oil is trading in backwardation. This financial jargon term basically means oil contracts trading in the current month are more expensive than the future months, which is unusual. We bring this up because to us it signals that speculation is playing a part in the rise in prices. With Bernanke and company trying to reflate asset bubbles (like in the stock or housing markets), it isn’t surprising to see new money flowing into the new hot asset class, oil.
Next Week
Next week looks to be fairly quiet for economic data, but will be very heavy on corporate earnings. With economic data, we’ll get new info on the housing sector and durable goods. As for corporate earnings, we’re in the peak of earnings season where almost one-third of S&P 500 companies will release their data
Investment Strategy
No change here. 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.
