Stocks turned in another negative week on fears of a reduction in stimulus. For the week, the Dow was lower by 2.2%, the S&P fell 2.1%, and the Nasdaq returned -1.6%. Yields on government bonds rose to the highest level in two years (so prices fell to the lowest level over that period). Gold turned in a nice week with a rise of 4.5%. Oil prices climbed steadily, rising 1.4% to $107.46 per barrel. The international Brent oil, which is used for much of our gas here in the east, moved up to $110.42.
Source: Yahoo Finance
Economic data released this week showed slight improvements, leading many to conclude a reduction in stimulus is likely and thus causing the market to sharply sell-off. The decline was the worst we’ve seen in a year and stocks have now notched two straight negative weeks, a rare event these days.
Leading the positive economic reports, the weekly jobless claims came in at their best level in six years. Also closely watched was the inflation metrics, showing the PPI unchanged from the previous month and CPI higher by 0.2%. Both are now higher than 2% year-over-year.
These two metrics are important since they are the two specifically targeted by the Fed and their stimulus. They want to see an improvement in employment and an increase in inflation, so as the data moves in that direction, it indicates less need for stimulus.
While the data is slowly moving that direction, the regional Fed presidents speaking this week (Bullard and Lockhart) didn’t give any indication a pullback in stimulus was likely in the near term. They noted it was possible, but they don’t have enough data to make a decision at this time. Bullard even mentioned the broader employment picture remains poor and the economy in general was probably not strong enough to support a tapering. Of course, the five years of stimulus and little in the way of results shows the stimulus has been completely ineffective anyway, but we digress.
The remarks by these Fed officials adds to our belief that a reduction in stimulus will not occur in the coming months. It may be possible by December, but certainly not September. The scenario for the market may play out again like June, where the market drops on expectations of a taper, only to rise again when the market sees no tapering imminent.
Next week will be a big one for the Fed. Their annual Jackson Hole retreat begins next week and is attended by central bankers around the globe. It was here in 2010 that Fed chief Bernanke announced the second stimulus program that sent stocks soaring. This year may be less newsworthy since Bernanke will not be attending, nor will the heads of the European and England central banks. Nevertheless, investors will be watching closely for any clues on the future of stimulus.
The growth level of several other countries also made the news this week. Europe officially exited recession by posting its first GDP gain in six quarters on an increase of 0.3%. Germany and France were major contributors to the growth. The situation is still very fragile, though. These countries have not made the needed reforms, only using stimulus to paper over the problems. We have no doubt problems will arise again in the future.
Opposite of Europe, the economic growth level in Japan came in much less than expected. Economists were predicting a 3.6% growth rate after growing 3.8% in the previous quarter. However, growth came in at 2.6%, one full point below the estimate. On the plus side, it was a positive number. However, it may signal that their radical stimulus program is not working out how they expected.
Finally, we’ll touch on the corporate earnings picture. Earnings season is practically complete now, with 93% of companies reporting earnings at this point. According to Factset, earnings have grown 2.1% while revenue is up roughly the same. Worth noting, if we exclude the financial sector from the equation, earnings growth is negative, actually down 2.9%. While these numbers show weakness, analysts have very high hopes for earnings through the end of the year. However, we don’t see any reason for those expectations will be realized.
Next Week
As we mentioned above, the Fed will likely be the major story next week. A few regional presidents will be making speeches, the minutes from their last meeting will be released, plus their annual Jackson Hole summit will begin. Aside from the Fed, both corporate earnings and economic data will be relatively quiet. We will see info on the strength of the housing sector, plus leading economic indicators – neither of which will have much impact on the market.
Investment Strategy
With the pullback this week, the broader stock market is looking more attractive, at least in the short term. If we see the market move lower from here, it may provide a good buying opportunity – again, at least for the short term. We don’t think the Fed is likely to reduce its stimulus any time soon, which may send stocks higher similar to the market reaction in June.
We still have concerns for the longer term. As we discussed last week, the market is expensive, margin levels are at all-time highs, fights in Washington are approaching, and corporate earnings and economic fundamentals are poor. But these items have mattered little in the run-up the market has had. It’s been the stimulus from the Fed fueling stocks and we don’t see that ending soon.
We mentioned above that the overall market is looking cheaper, but with its direction so dependent on the actions of the Fed, we would tread lightly. We like finding undervalued individual names to invest in rather than the overall market. Technical analysis helps us find those undervalued stocks while the fundamentals tell us how strong the company is and if it’s worth an investment. 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.
As for gold, it continues to bounce around this current level. If the Fed does announce a pullback in its money-printing stimulus program, gold may move lower. It may be worth a nibble here, 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 serves only as a nice hedge, not intended to be a loner term investment.
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.
Leading the positive economic reports, the weekly jobless claims came in at their best level in six years. Also closely watched was the inflation metrics, showing the PPI unchanged from the previous month and CPI higher by 0.2%. Both are now higher than 2% year-over-year.
These two metrics are important since they are the two specifically targeted by the Fed and their stimulus. They want to see an improvement in employment and an increase in inflation, so as the data moves in that direction, it indicates less need for stimulus.
While the data is slowly moving that direction, the regional Fed presidents speaking this week (Bullard and Lockhart) didn’t give any indication a pullback in stimulus was likely in the near term. They noted it was possible, but they don’t have enough data to make a decision at this time. Bullard even mentioned the broader employment picture remains poor and the economy in general was probably not strong enough to support a tapering. Of course, the five years of stimulus and little in the way of results shows the stimulus has been completely ineffective anyway, but we digress.
The remarks by these Fed officials adds to our belief that a reduction in stimulus will not occur in the coming months. It may be possible by December, but certainly not September. The scenario for the market may play out again like June, where the market drops on expectations of a taper, only to rise again when the market sees no tapering imminent.
Next week will be a big one for the Fed. Their annual Jackson Hole retreat begins next week and is attended by central bankers around the globe. It was here in 2010 that Fed chief Bernanke announced the second stimulus program that sent stocks soaring. This year may be less newsworthy since Bernanke will not be attending, nor will the heads of the European and England central banks. Nevertheless, investors will be watching closely for any clues on the future of stimulus.
The growth level of several other countries also made the news this week. Europe officially exited recession by posting its first GDP gain in six quarters on an increase of 0.3%. Germany and France were major contributors to the growth. The situation is still very fragile, though. These countries have not made the needed reforms, only using stimulus to paper over the problems. We have no doubt problems will arise again in the future.
Opposite of Europe, the economic growth level in Japan came in much less than expected. Economists were predicting a 3.6% growth rate after growing 3.8% in the previous quarter. However, growth came in at 2.6%, one full point below the estimate. On the plus side, it was a positive number. However, it may signal that their radical stimulus program is not working out how they expected.
Finally, we’ll touch on the corporate earnings picture. Earnings season is practically complete now, with 93% of companies reporting earnings at this point. According to Factset, earnings have grown 2.1% while revenue is up roughly the same. Worth noting, if we exclude the financial sector from the equation, earnings growth is negative, actually down 2.9%. While these numbers show weakness, analysts have very high hopes for earnings through the end of the year. However, we don’t see any reason for those expectations will be realized.
Next Week
As we mentioned above, the Fed will likely be the major story next week. A few regional presidents will be making speeches, the minutes from their last meeting will be released, plus their annual Jackson Hole summit will begin. Aside from the Fed, both corporate earnings and economic data will be relatively quiet. We will see info on the strength of the housing sector, plus leading economic indicators – neither of which will have much impact on the market.
Investment Strategy
With the pullback this week, the broader stock market is looking more attractive, at least in the short term. If we see the market move lower from here, it may provide a good buying opportunity – again, at least for the short term. We don’t think the Fed is likely to reduce its stimulus any time soon, which may send stocks higher similar to the market reaction in June.
We still have concerns for the longer term. As we discussed last week, the market is expensive, margin levels are at all-time highs, fights in Washington are approaching, and corporate earnings and economic fundamentals are poor. But these items have mattered little in the run-up the market has had. It’s been the stimulus from the Fed fueling stocks and we don’t see that ending soon.
We mentioned above that the overall market is looking cheaper, but with its direction so dependent on the actions of the Fed, we would tread lightly. We like finding undervalued individual names to invest in rather than the overall market. Technical analysis helps us find those undervalued stocks while the fundamentals tell us how strong the company is and if it’s worth an investment. 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.
As for gold, it continues to bounce around this current level. If the Fed does announce a pullback in its money-printing stimulus program, gold may move lower. It may be worth a nibble here, 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 serves only as a nice hedge, not intended to be a loner term investment.
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.
