Stocks reversed their decline this week. Through the Friday close, the Dow turned in a -0.5% return while the S&P was higher by 0.5% and the Nasdaq rose 1.5%. Yields on government bonds continued to rise, again hitting the highest level in two years (so prices fell to the lowest level over that period), but reversed course late in the week. Gold showed a nice gain of 1.8%. The two major types of oil moved in different directions this week with our domestic oil falling 0.8% to $106.42 per barrel. The international Brent oil, which is used for much of our gas here in the east, moved higher to $111.
Source: Yahoo Finance
This week we saw an end to a six-day losing streak for stocks, the longest and worst losing streak in over a year. The only news moving the market was again the Fed, whose comments have been closely watched for any clues on the future of stimulus.
The minutes from the latest Fed meeting in July were released this week. Basically they told us nothing. We saw that a “few” regional presidents supported pulling back on the bond buying portion of the stimulus, while a “few” others preferred to wait for more economic data. It provided no clarity on when the Fed will pull back from its stimulus programs.
Stocks were unsure what to make of these comments, dropping sharply when the minutes were released, only to rise sharply, and again fall sharply.
Just like the market, to us it seems like the Fed is confused on how to pull back on their stimulus. At some point it has to end. However, we’ve seen that when stimulus is reduced – or threatened to be reduced – the market will fall. Since so much energy and effort has been put into boosting prices, they are hesitant to pull back and lose any gains that have been made. It seems like they are still trying to figure out how to exit without disrupting the market. We’re not sure that is possible.
One view that seemed to have broad agreement amongst the Fed members was that economic growth is much weaker than expected. But rest assured, they forecast stronger a stronger economy later this year. Their forecasts have been consistently overly optimistic and incorrect to this point, so we’re pretty sure they will again be incorrect. We see no reason for economic growth to pick up any time soon.
The Fed continues with this assumption that more stimulus will help the economy grow, but in the five years since the bond buying began, success is difficult to find. Economic growth is poor and easily lower than predicted. The only thing it has been successful in is creating bubbles in asset prices, whether it is in commodities, stocks, or bonds. And it creates more problems in the longer run.
Switching gears, there wasn’t much economic data released this week. We saw an uptick in the weekly unemployment numbers after last week’s strong number. We also saw conflicting reports on the housing sector, with existing home sales increasing over the last month while new home sales dropped sharply. The increase in existing home sales was likely due to buyers trying to close before mortgage rates rose higher, so the housing picture doesn’t appear to be as strong as expected.
Lastly, trading on the Nasdaq exchange was a major story this week. A glitch halted trading for three hours Thursday afternoon and its effects can be seen in the chart above. While this posed a serious problem for frequent traders, it really had no impact on trading with our firm, especially since we only place a handful of trades a month – at most. Problems like this or the flash crash in 2010 may grab headlines, but impacts few of us in the broader investment industry.
Next Week
The lack of any clear direction for stimulus makes future economic releases even more important. The market is likely to fall if a positive report is released since it would signal a reduction in stimulus is coming sooner rather than later.
Closely watched this week will be the revision to second quarter GDP. The first print showed a 1.7 figure and many are expecting it to be revised above 2%. We will also get info on durable goods, consumer confidence, and personal income and spending.
Investment Strategy
Stocks began looking oversold this week, so Thursday may have been a good buying opportunity for the broader stock market, at least for the short term.
The Fed is still in the driver’s seat when it comes to the direction of the stock market, so any new clues on the future of stimulus will impact its direction. As a reduction in stimulus becomes more apparent, stocks and bonds will fall. Many investors believe a taper will begin in September, but we don’t think it is likely in the coming months, so stocks may still have some upside to run.
We still have concerns for the longer term. The market is still expensive, margin levels are at all-time highs, fights in Washington are approaching, and corporate earnings and economic fundamentals have been unimpressive. Still, these factors have mattered little in the stock market’s direction so far as the market has focused on stimulus.
While we liked the broader stock market this week, we still like finding undervalued individual names to invest in. 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. It spiked this week on the bad housing data, which signaled more stimulus is likely. If the Fed does announce a pullback in this money-printing 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.
The minutes from the latest Fed meeting in July were released this week. Basically they told us nothing. We saw that a “few” regional presidents supported pulling back on the bond buying portion of the stimulus, while a “few” others preferred to wait for more economic data. It provided no clarity on when the Fed will pull back from its stimulus programs.
Stocks were unsure what to make of these comments, dropping sharply when the minutes were released, only to rise sharply, and again fall sharply.
Just like the market, to us it seems like the Fed is confused on how to pull back on their stimulus. At some point it has to end. However, we’ve seen that when stimulus is reduced – or threatened to be reduced – the market will fall. Since so much energy and effort has been put into boosting prices, they are hesitant to pull back and lose any gains that have been made. It seems like they are still trying to figure out how to exit without disrupting the market. We’re not sure that is possible.
One view that seemed to have broad agreement amongst the Fed members was that economic growth is much weaker than expected. But rest assured, they forecast stronger a stronger economy later this year. Their forecasts have been consistently overly optimistic and incorrect to this point, so we’re pretty sure they will again be incorrect. We see no reason for economic growth to pick up any time soon.
The Fed continues with this assumption that more stimulus will help the economy grow, but in the five years since the bond buying began, success is difficult to find. Economic growth is poor and easily lower than predicted. The only thing it has been successful in is creating bubbles in asset prices, whether it is in commodities, stocks, or bonds. And it creates more problems in the longer run.
Switching gears, there wasn’t much economic data released this week. We saw an uptick in the weekly unemployment numbers after last week’s strong number. We also saw conflicting reports on the housing sector, with existing home sales increasing over the last month while new home sales dropped sharply. The increase in existing home sales was likely due to buyers trying to close before mortgage rates rose higher, so the housing picture doesn’t appear to be as strong as expected.
Lastly, trading on the Nasdaq exchange was a major story this week. A glitch halted trading for three hours Thursday afternoon and its effects can be seen in the chart above. While this posed a serious problem for frequent traders, it really had no impact on trading with our firm, especially since we only place a handful of trades a month – at most. Problems like this or the flash crash in 2010 may grab headlines, but impacts few of us in the broader investment industry.
Next Week
The lack of any clear direction for stimulus makes future economic releases even more important. The market is likely to fall if a positive report is released since it would signal a reduction in stimulus is coming sooner rather than later.
Closely watched this week will be the revision to second quarter GDP. The first print showed a 1.7 figure and many are expecting it to be revised above 2%. We will also get info on durable goods, consumer confidence, and personal income and spending.
Investment Strategy
Stocks began looking oversold this week, so Thursday may have been a good buying opportunity for the broader stock market, at least for the short term.
The Fed is still in the driver’s seat when it comes to the direction of the stock market, so any new clues on the future of stimulus will impact its direction. As a reduction in stimulus becomes more apparent, stocks and bonds will fall. Many investors believe a taper will begin in September, but we don’t think it is likely in the coming months, so stocks may still have some upside to run.
We still have concerns for the longer term. The market is still expensive, margin levels are at all-time highs, fights in Washington are approaching, and corporate earnings and economic fundamentals have been unimpressive. Still, these factors have mattered little in the stock market’s direction so far as the market has focused on stimulus.
While we liked the broader stock market this week, we still like finding undervalued individual names to invest in. 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. It spiked this week on the bad housing data, which signaled more stimulus is likely. If the Fed does announce a pullback in this money-printing 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.
