A more active week this week ended with stocks in the green. Through the Friday close, the Dow rose 0.6%, the S&P was higher by 1.1%, and the Nasdaq topped them both with a nice 2.1% gain. Gold took a breather this week as it came off 0.8%. Oil prices rose firmly, though a decline Friday put the domestic crude up 2.1% for the week to $107 per barrel. The international oil benchmark, Brent, closed near $109.
Source: Yahoo Finance
This week we saw a large amount of companies releasing their earnings, but they haven’t really mattered to the market. Instead, all eyes were on the Fed, who held a policy meeting this week. It also made the GDP and employment reports released this week even more important, since those results would give clues on the direction of the Fed’s stimulus programs.
The excitement began on Wednesday with the GDP report. Growth after the second quarter stood at 1.7%, higher than the 1% expected and an increase from last quarter. The expectations for this number were a bit of a guessing game though, since it was the first quarter where significant changes were made to the computation of GDP, as we discussed last week.
As a part of those changes, GDP growth last quarter was revised significantly lower from 1.8% to just 1.1%, which was how growth this quarter looked higher than last quarter.
In general, the changes made economic growth look stronger than before, which is not surprising. More recently, it made 2012 growth look slightly better, but turned 2011 growth negative from a slight positive.
All-in-all, this GDP number is extremely weak and is likely to be revised lower. It also reaffirms that we are experiencing the worst economic recovery since WWII. Economists think growth will noticeably increase in the second half, but they were also the ones predicting 3-4% growth in the first half, a figure we didn’t come close to achieving.
The other big economic news was the employment report on Friday. The amount of jobs added last month was much lower than expected at only 162,000. Previous months gains were also revised lower. The unemployment rate ticked down to 7.4%, which is the lowest since 2008. That may sound positive, but that improvement was not really an improvement, since the rate was lowered due to people leaving the labor force.
While these two economic reports were very weak, they did show slight increases. This has many thinking the Fed will still pull back on their stimulus programs in the coming months. We don’t.
This week the Fed noted the fragile economy and low inflation (by their metrics) in their policy meeting. They would like to see those figures improve before pulling back on the stimulus programs, so when combined with the economic reports this week, it doesn’t seem like a pullback is likely.
These lackluster economic reports beg the question, how are the Fed’s programs actually helping the economy? The results have been poor and the downside risks of printing trillions of dollars out of thin air are extremely high. However, it is clear the stimulus has boosted stock prices and any tapering would reverse that. This is why the market wants to see the stimulus continue.
As for other economic data this week, the results were mixed. Manufacturing last month grew at a surprisingly strong pace. Also, in the first half of the year, home prices grew at the fastest pace since the housing bust. However, home ownership stands at the lowest level since 1995 while rental costs are at the highest level on record.
Lastly, we’ll take a look at the earnings picture. So far, almost 80% of S&P 500 companies have reported their earnings. According to Factset, 73% have beat earnings estimates and 55% have beaten revenues (revenue is what a company actually receives in sales, earnings are what remain when costs are subtracted from revenue).
As we have mentioned numerous times, these “beats” have come from downwardly revised estimates, so the number to beat is extremely low. When looking at actual growth, earnings have risen 1.7% and revenues have climbed 1.9%, both weak numbers.
Next Week
Next week looks to be much less busy than this week. We are past the peak for corporate earnings releases, but we’ll get about 10% of the S&P 500 companies releasing their figures next week. Economic data looks to be fairly quiet too, as we get reports on the strength of the service sector and the trade balance.
Investment Strategy
It’s hard not to be in the market as the Fed drives stock prices higher while pledging to do everything it can to keep pushing them higher. The overall market looks expensive, though, so we are very cautious and would not put new money into it at this time.
Instead, we prefer to find undervalued individual names. Technical analysis helps us find those undervalued names 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.
Gold continues to show stability around this level. It has performed poorly this year, but might be starting to bottom. 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.
The excitement began on Wednesday with the GDP report. Growth after the second quarter stood at 1.7%, higher than the 1% expected and an increase from last quarter. The expectations for this number were a bit of a guessing game though, since it was the first quarter where significant changes were made to the computation of GDP, as we discussed last week.
As a part of those changes, GDP growth last quarter was revised significantly lower from 1.8% to just 1.1%, which was how growth this quarter looked higher than last quarter.
In general, the changes made economic growth look stronger than before, which is not surprising. More recently, it made 2012 growth look slightly better, but turned 2011 growth negative from a slight positive.
All-in-all, this GDP number is extremely weak and is likely to be revised lower. It also reaffirms that we are experiencing the worst economic recovery since WWII. Economists think growth will noticeably increase in the second half, but they were also the ones predicting 3-4% growth in the first half, a figure we didn’t come close to achieving.
The other big economic news was the employment report on Friday. The amount of jobs added last month was much lower than expected at only 162,000. Previous months gains were also revised lower. The unemployment rate ticked down to 7.4%, which is the lowest since 2008. That may sound positive, but that improvement was not really an improvement, since the rate was lowered due to people leaving the labor force.
While these two economic reports were very weak, they did show slight increases. This has many thinking the Fed will still pull back on their stimulus programs in the coming months. We don’t.
This week the Fed noted the fragile economy and low inflation (by their metrics) in their policy meeting. They would like to see those figures improve before pulling back on the stimulus programs, so when combined with the economic reports this week, it doesn’t seem like a pullback is likely.
These lackluster economic reports beg the question, how are the Fed’s programs actually helping the economy? The results have been poor and the downside risks of printing trillions of dollars out of thin air are extremely high. However, it is clear the stimulus has boosted stock prices and any tapering would reverse that. This is why the market wants to see the stimulus continue.
As for other economic data this week, the results were mixed. Manufacturing last month grew at a surprisingly strong pace. Also, in the first half of the year, home prices grew at the fastest pace since the housing bust. However, home ownership stands at the lowest level since 1995 while rental costs are at the highest level on record.
Lastly, we’ll take a look at the earnings picture. So far, almost 80% of S&P 500 companies have reported their earnings. According to Factset, 73% have beat earnings estimates and 55% have beaten revenues (revenue is what a company actually receives in sales, earnings are what remain when costs are subtracted from revenue).
As we have mentioned numerous times, these “beats” have come from downwardly revised estimates, so the number to beat is extremely low. When looking at actual growth, earnings have risen 1.7% and revenues have climbed 1.9%, both weak numbers.
Next Week
Next week looks to be much less busy than this week. We are past the peak for corporate earnings releases, but we’ll get about 10% of the S&P 500 companies releasing their figures next week. Economic data looks to be fairly quiet too, as we get reports on the strength of the service sector and the trade balance.
Investment Strategy
It’s hard not to be in the market as the Fed drives stock prices higher while pledging to do everything it can to keep pushing them higher. The overall market looks expensive, though, so we are very cautious and would not put new money into it at this time.
Instead, we prefer to find undervalued individual names. Technical analysis helps us find those undervalued names 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.
Gold continues to show stability around this level. It has performed poorly this year, but might be starting to bottom. 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.
