Geopolitical events weighed on the markets this week. Through the close Friday, the Dow was lower by 1.3%, the S&P fell 1.8% and the Nasdaq dropped 1.9%. Friday also marked the end to August, which turned out to be the worst month for stocks in over a year and also the least active in trading volume for the last 16 years. Gold continued to rise with a slight gain of 0.1%. Oil rose sharply this week hitting its highest price in two years, closing the week with a gain of 1.2% to $107.65 per barrel. The international Brent oil, which is used for much of our gas here in the east, rose to $114.45.
Source: Yahoo Finance
Military action in Syria was the main story behind the market decline this week. It started when Secretary of State John Kerry made a speech Monday describing possible military action against Syria. The prospect of military action always creates uncertainty for the market, so stocks dropped sharply on the remarks, which can be seen in the chart above.
As the week progressed, stocks started to moderate as the initial reaction from possible military activity subsided. The situation is still in flux as there are no concrete details, so the market is still likely to move on any new information. We are sure when the military response is finalized, it will be announced to the public in great detail since it makes perfect sense to telegraph military activity – especially to any potential target (this comment is entirely sarcastic).
Since expectations for the future of stimulus from the Fed has had the biggest impact on the market, this event was also scrutinized for its effect on a Fed taper. More economists have indicated that this event will cause the Fed to postpone its taper in September, but many still believe a September reduction is likely. Especially since there are fewer bonds available for the Fed to print money to buy.
Military action in Syria also had a significant impact on the commodity markets this week. Obviously the region is very important for the oil industry, so it made sense to see oil prices rise. Prices could continue to rise if the situation gets messy. Gold also saw gains, hitting the highest levels in three months.
Economic reports this week had an impact on the market, too. We started the week with a negative durable goods report (durable goods are items with a longer life, like a refrigerator or telephone) that sent stocks higher, since poor economic reports make a stimulus reduction less likely.
On the positive side, GDP was revised higher from 1.7% to 2.5%, although the bulk of the revisions were due to an increase in exports. The important personal consumption segment was revised lower. Also, inventories have been building, which has many economists predicting a slower growth in the third quarter (if inventories are high, businesses won’t need to produce more items to fill the shelves).
As for other economic data this week, economic activity in the Richmond and Chicago regions picked up, consumer confidence ticked higher, weekly jobless claims improved, while personal income and spending were only slightly higher. A report on housing prices showed a 12% rise from a year ago ending in June, but the creator of the report, Bob Shiller, concedes that speculation is currently running at a very high level
Next Week
With markets closed Monday, a lot of economic data releases will be crammed into the remaining four days. We will get info on the strength of the manufacturing and service sectors over the past month, along with construction spending, the trade balance, and factory orders. The most important report comes on Friday with the release of the employment data since it is one of the benchmarks the Fed looks at regarding stimulus. A solid report may send the markets lower, since it would signal a reduction in stimulus is more likely.
There will also be several regional Fed presidents making speeches and all will be closely watched for clues on stimulus. They have a widely anticipated September meeting on the 17th, so the Fed will be a hot topic for several weeks.
Finally, next week we are entering the month of September, historically the worst month for stocks. There are many reasons to be cautious at this point, so we may be entering a more volatile investing period.
Investment Strategy
The broader stock market still looks on the cheap side, at least for the short term. Remember, you want to buy when stocks have sold off and sell when they have risen, a simple concept that is difficult to stick to.
There are some unknowns out there that will have a large impact on the market, so we are looking for a more volatile investing market in the weeks and months ahead.
In the near term, the situation in Syria is obviously a concern, as well as the stimulus story from the Fed. When a reduction in stimulus becomes more apparent, stocks and bonds will fall. Many investors still believe a taper will begin in September, but we aren’t so sure for reasons discussed in the past, so stocks may still have some upside to run.
As for the longer term, the market is still expensive from a longer-term perspective. Plus margin levels are at all-time highs, fights in Washington are approaching, and corporate earnings and economic fundamentals have been unimpressive. Now we have the geopolitical risks in the Middle East to contend with.
While the broader market looks more attractive in the short term, 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.
Gold has done well recently. If the Fed does announce a pullback in this money-printing program, gold may move lower. With the recent rise in prices, we would be hesitant to add any more at these levels.
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.
As the week progressed, stocks started to moderate as the initial reaction from possible military activity subsided. The situation is still in flux as there are no concrete details, so the market is still likely to move on any new information. We are sure when the military response is finalized, it will be announced to the public in great detail since it makes perfect sense to telegraph military activity – especially to any potential target (this comment is entirely sarcastic).
Since expectations for the future of stimulus from the Fed has had the biggest impact on the market, this event was also scrutinized for its effect on a Fed taper. More economists have indicated that this event will cause the Fed to postpone its taper in September, but many still believe a September reduction is likely. Especially since there are fewer bonds available for the Fed to print money to buy.
Military action in Syria also had a significant impact on the commodity markets this week. Obviously the region is very important for the oil industry, so it made sense to see oil prices rise. Prices could continue to rise if the situation gets messy. Gold also saw gains, hitting the highest levels in three months.
Economic reports this week had an impact on the market, too. We started the week with a negative durable goods report (durable goods are items with a longer life, like a refrigerator or telephone) that sent stocks higher, since poor economic reports make a stimulus reduction less likely.
On the positive side, GDP was revised higher from 1.7% to 2.5%, although the bulk of the revisions were due to an increase in exports. The important personal consumption segment was revised lower. Also, inventories have been building, which has many economists predicting a slower growth in the third quarter (if inventories are high, businesses won’t need to produce more items to fill the shelves).
As for other economic data this week, economic activity in the Richmond and Chicago regions picked up, consumer confidence ticked higher, weekly jobless claims improved, while personal income and spending were only slightly higher. A report on housing prices showed a 12% rise from a year ago ending in June, but the creator of the report, Bob Shiller, concedes that speculation is currently running at a very high level
Next Week
With markets closed Monday, a lot of economic data releases will be crammed into the remaining four days. We will get info on the strength of the manufacturing and service sectors over the past month, along with construction spending, the trade balance, and factory orders. The most important report comes on Friday with the release of the employment data since it is one of the benchmarks the Fed looks at regarding stimulus. A solid report may send the markets lower, since it would signal a reduction in stimulus is more likely.
There will also be several regional Fed presidents making speeches and all will be closely watched for clues on stimulus. They have a widely anticipated September meeting on the 17th, so the Fed will be a hot topic for several weeks.
Finally, next week we are entering the month of September, historically the worst month for stocks. There are many reasons to be cautious at this point, so we may be entering a more volatile investing period.
Investment Strategy
The broader stock market still looks on the cheap side, at least for the short term. Remember, you want to buy when stocks have sold off and sell when they have risen, a simple concept that is difficult to stick to.
There are some unknowns out there that will have a large impact on the market, so we are looking for a more volatile investing market in the weeks and months ahead.
In the near term, the situation in Syria is obviously a concern, as well as the stimulus story from the Fed. When a reduction in stimulus becomes more apparent, stocks and bonds will fall. Many investors still believe a taper will begin in September, but we aren’t so sure for reasons discussed in the past, so stocks may still have some upside to run.
As for the longer term, the market is still expensive from a longer-term perspective. Plus margin levels are at all-time highs, fights in Washington are approaching, and corporate earnings and economic fundamentals have been unimpressive. Now we have the geopolitical risks in the Middle East to contend with.
While the broader market looks more attractive in the short term, 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.
Gold has done well recently. If the Fed does announce a pullback in this money-printing program, gold may move lower. With the recent rise in prices, we would be hesitant to add any more at these levels.
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.
