Late-day gains on Friday pushed stocks to a virtually unchanged level on the week. Through that Friday close, the Dow gained 0.1%, the S&P fell a miniscule 0.03%, while the Nasdaq was higher by 0.7% on large gains in tech stocks like Facebook. Gold continues to regain its footing as it rose 2.2%. Oil finally saw a negative week as it fell 2.9% to $104.70 per barrel. The international oil benchmark, Brent, moved down to $107.19.
Source: Yahoo Finance
The market stayed relatively quiet in the early part of the week, largely on a lack of news. A report on the upcoming Fed meeting pushed the market higher on Thursday, while weakness out of Asia weighed on markets Friday before they turned around.
Corporate earnings were the major news story of the week, though they didn’t have much impact on the market. Roughly one-third of S&P 500 companies reported this week, so we are now halfway thorough earnings season. About 70% of the companies have outperformed earnings estimates while half have beaten on revenue (revenue is what the company actually received in sales, earnings are what remain after costs are subtracted).
These performance figures mean little, though, since they don’t really show the overall earnings picture. Estimates have been continually lowered as earnings season approaches, so the threshold to beat becomes much easier.
Instead we look at the growth in earnings. According to data provider Factset, that figure stands at just 1.8% year-over-year, whereas back in March, economists were predicting 4.3% growth. Revenue growth stands at just 0.8% and though bad, is an improvement from last quarter’s negative growth.
Excluding financial companies, earnings growth is negative while revenue is flat.
Much of the focus this week was actually on events occurring next week. We will get our first look at GDP over the last quarter and many are predicting a weak number.
Frankly, we aren’t exactly sure what the story is for GDP. Significant changes are being made to the way the GDP number is computed, but we aren’t sure when they take effect. Some articles we’ve seen indicate the change will be in the number released in July (which would be this one), while others say the changes will be implemented in July, so we’ll see it in next quarter’s number. Either way, big changes are in store for the GDP figure.
The change causes many items that were previously considered expenses to now be considered investments (Link). This includes intangibles like research and development. Other items that were uncounted will now be included, like artistic activities including movies, television, and art, and other minor items like realtor commissions or legal bills.
Those changes are expected to add 3% to the GDP figure.
In our opinion, none of these changes should be made to the GDP calculation, since many of these items become double-counted. Frankly, the only change we’d like to see made is the removal of government spending, since the spent funds are taken out of the private sector.
Adding to the complications, no other country in the world takes these new items into account. Therefore, it artificially makes our growth look stronger than other countries. The GDP will become an apples-to-oranges metric when comparing growth to other countries.
One other effect of this change is it makes our country’s debt-to-GDP number look immediately better and that we improved our debt issues. Obviously this is untrue, although you can see how it would appeal to politicians.
The other discussion about next week was the details surrounding the Fed’s policy meeting next Wednesday. No changes are expected in the current policy, but they may change the descriptions of the economic targets their policies are based on.
For example, while the Fed is looking for an unemployment rate of 6.5% to begin raising interest rates, that target may be lowered 6% due to the effect of the declining labor force in bringing the unemployment rate down.
They have also discussed their goal of 2.5% in inflation before they pull back on the bond buying (money printing) program. The speculation now is that they may also include a lower limit trigger, which would describe the policy if inflation falls below 1.5%.
Regardless, next week looks like it will be more active than this week.
Next Week
As we noted above, next week will be a fairly busy one. Not only will we have the policy discussion from the Fed and the first look at GDP, we’ll also get info on manufacturing and the always important employment report.
Corporate earnings releases will continue to come in at a strong pace, too. As we saw with the quiet market this week, earnings don’t seem to move the market much anymore. Instead, all eyes will be on the Fed.
Investment Strategy
Still no change here. We continue to stay in the market as the Fed drives stock prices higher while pledging to do everything it can to keep pushing them higher. It still looks expensive, though, and would not put new money into the broader market at this time. Instead, we prefer to find undervalued individual names. We would avoid stocks in sectors with a strong correlation to interest rates. Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly.
Gold continues to show stability around this level. It has performed poorly this year, but the bottom may be in. It may be worth a nibble, 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 how long this will last.
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.
Corporate earnings were the major news story of the week, though they didn’t have much impact on the market. Roughly one-third of S&P 500 companies reported this week, so we are now halfway thorough earnings season. About 70% of the companies have outperformed earnings estimates while half have beaten on revenue (revenue is what the company actually received in sales, earnings are what remain after costs are subtracted).
These performance figures mean little, though, since they don’t really show the overall earnings picture. Estimates have been continually lowered as earnings season approaches, so the threshold to beat becomes much easier.
Instead we look at the growth in earnings. According to data provider Factset, that figure stands at just 1.8% year-over-year, whereas back in March, economists were predicting 4.3% growth. Revenue growth stands at just 0.8% and though bad, is an improvement from last quarter’s negative growth.
Excluding financial companies, earnings growth is negative while revenue is flat.
Much of the focus this week was actually on events occurring next week. We will get our first look at GDP over the last quarter and many are predicting a weak number.
Frankly, we aren’t exactly sure what the story is for GDP. Significant changes are being made to the way the GDP number is computed, but we aren’t sure when they take effect. Some articles we’ve seen indicate the change will be in the number released in July (which would be this one), while others say the changes will be implemented in July, so we’ll see it in next quarter’s number. Either way, big changes are in store for the GDP figure.
The change causes many items that were previously considered expenses to now be considered investments (Link). This includes intangibles like research and development. Other items that were uncounted will now be included, like artistic activities including movies, television, and art, and other minor items like realtor commissions or legal bills.
Those changes are expected to add 3% to the GDP figure.
In our opinion, none of these changes should be made to the GDP calculation, since many of these items become double-counted. Frankly, the only change we’d like to see made is the removal of government spending, since the spent funds are taken out of the private sector.
Adding to the complications, no other country in the world takes these new items into account. Therefore, it artificially makes our growth look stronger than other countries. The GDP will become an apples-to-oranges metric when comparing growth to other countries.
One other effect of this change is it makes our country’s debt-to-GDP number look immediately better and that we improved our debt issues. Obviously this is untrue, although you can see how it would appeal to politicians.
The other discussion about next week was the details surrounding the Fed’s policy meeting next Wednesday. No changes are expected in the current policy, but they may change the descriptions of the economic targets their policies are based on.
For example, while the Fed is looking for an unemployment rate of 6.5% to begin raising interest rates, that target may be lowered 6% due to the effect of the declining labor force in bringing the unemployment rate down.
They have also discussed their goal of 2.5% in inflation before they pull back on the bond buying (money printing) program. The speculation now is that they may also include a lower limit trigger, which would describe the policy if inflation falls below 1.5%.
Regardless, next week looks like it will be more active than this week.
Next Week
As we noted above, next week will be a fairly busy one. Not only will we have the policy discussion from the Fed and the first look at GDP, we’ll also get info on manufacturing and the always important employment report.
Corporate earnings releases will continue to come in at a strong pace, too. As we saw with the quiet market this week, earnings don’t seem to move the market much anymore. Instead, all eyes will be on the Fed.
Investment Strategy
Still no change here. We continue to stay in the market as the Fed drives stock prices higher while pledging to do everything it can to keep pushing them higher. It still looks expensive, though, and would not put new money into the broader market at this time. Instead, we prefer to find undervalued individual names. We would avoid stocks in sectors with a strong correlation to interest rates. Our timeframe is shorter (looking out a couple weeks or months), so we can keep one foot out the door in case the market turns abruptly.
Gold continues to show stability around this level. It has performed poorly this year, but the bottom may be in. It may be worth a nibble, 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 how long this will last.
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.
