Please note: there will be no market commentary next week. Thank you.
News from the Fed pushed stocks to new highs this week. Through the Friday close, the Dow was higher by 0.5%, the S&P gained 1.3%, and the Nasdaq rose 1.4%. Prices on bonds rose this week, so the yields moved lower. Similar to stocks, gold rose a solid 1.8%. Oil continued to trend lower, falling 3.3% to $104.67 per barrel. The international oil, Brent, moved down to $109.
News from the Fed pushed stocks to new highs this week. Through the Friday close, the Dow was higher by 0.5%, the S&P gained 1.3%, and the Nasdaq rose 1.4%. Prices on bonds rose this week, so the yields moved lower. Similar to stocks, gold rose a solid 1.8%. Oil continued to trend lower, falling 3.3% to $104.67 per barrel. The international oil, Brent, moved down to $109.
Source: Yahoo Finance (a higher Monday open skewed our chart this week)
By now you’ve probably heard that the Fed decided to maintain its current stimulus program. Almost all asset classes immediately shot higher (while others like the dollar, declined) on news that the punch bowl would not be taken away. We didn’t realize how widespread the expectation for a reduction in stimulus was, so the news came as a surprise to many investors. We weren’t surprised, but it caused us to be more worried for the long term.
The explanation for continuing the stimulus should be concerning. The Fed currently sees lower growth than expected and downwardly revised its projections for future growth. This is cited as the reason for continuing the stimulus.
It is even more worrisome when you realize the Fed has consistently been over-optimistic on its economic growth projections. For example, in 2011, the Fed forecasted roughly 4% growth for 2013, yet we are on track for less than 2% (LINK). At no point has the Fed been close in their estimations, so it’s a safe bet that growth will be even lower than their dismal projections.
It should also be noted that the Fed has been engaging in stimulus programs for five years. After five years of poor results, a logical conclusion would be to change tactics, not dig the hole deeper. These actions are not without consequences. Printing trillions of dollars is extremely negative for the long run. Keeping interest rates too low for too long produces bubbles that can pop very quickly (and we are likely inflating bubbles at this time). These are very serious concerns for the long run.
Putting off a reduction in stimulus also added to future volatility. The next Fed meeting in late October will be a replay of the guessing game of the last two weeks. The questions will remain the same and the market reactions are likely to be, too. Even if a slight pullback in stimulus was announced, every meeting going forward would have investors wondering if they will pull back even more. The Fed has backed itself into a corner here.
There was other Fed news impacting the market this week, too (unfortunately markets no longer move on fundamentals, just central planning activities). Fed chief Bernanke is set to leave his post in January and the leading replacement was rumored to be Larry Summers.
Over the weekend, Dr. Summers removed himself from the running, leaving Janet Yellen as the likely replacement. Dr. Yellen is currently the number two at the Fed, behind Ben Bernanke. She is widely viewed as even more interventionist than Ben Bernanke, and far more than Larry Summers, so markets popped higher on news that stimulus will likely be around longer than it otherwise would have.
As you can tell, markets like stimulus. Unfortunately it has done little for the economy.
Next Week
Next week won’t be as busy as this one, but we’ll still get a fairly good amount of data. The will be info on consumer confidence, durable goods, housing, GDP, and personal income and spending. News from the Fed will continue, as well, with several regional presidents will be making speeches.
Investment Strategy
In the shorter term, stocks started to look expensive (overbought) this week, so we saw more risk to the downside than upward potential. The sell-off Friday lessened that concern somewhat, but the reasons for the large decline were more likely due to the nuances of the market than a reversal in sentiment. Friday saw three stocks come out of the Dow index and three new ones move in, plus it was “quadruple witching” Friday, where options and futures all expire at the same time. This added to the volatility of the day. Monday will give us a better idea if the sell-off was real or not.
At this point, we are hesitant to add any new money into stock market indexes. Not only do stocks look expensive, but we have other concerns like the debt ceiling fight approaching, which weighed on the markets last time around.
Instead we would look for undervalued individual names to invest in. Fundamental analysis tells us how good a company is while the technical (chart) side gives us a good idea of when to buy. 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 saw a strong move higher when the continuation of stimulus was announced. It may do well with more stimulus, but eventually that stimulus will have to be removed. If the market begins to anticipate a pullback, gold could move lower again like it did the last several weeks. It’s good for a hedge here, but caution is 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 well recently but serves only as a nice hedge. It isn’t 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 explanation for continuing the stimulus should be concerning. The Fed currently sees lower growth than expected and downwardly revised its projections for future growth. This is cited as the reason for continuing the stimulus.
It is even more worrisome when you realize the Fed has consistently been over-optimistic on its economic growth projections. For example, in 2011, the Fed forecasted roughly 4% growth for 2013, yet we are on track for less than 2% (LINK). At no point has the Fed been close in their estimations, so it’s a safe bet that growth will be even lower than their dismal projections.
It should also be noted that the Fed has been engaging in stimulus programs for five years. After five years of poor results, a logical conclusion would be to change tactics, not dig the hole deeper. These actions are not without consequences. Printing trillions of dollars is extremely negative for the long run. Keeping interest rates too low for too long produces bubbles that can pop very quickly (and we are likely inflating bubbles at this time). These are very serious concerns for the long run.
Putting off a reduction in stimulus also added to future volatility. The next Fed meeting in late October will be a replay of the guessing game of the last two weeks. The questions will remain the same and the market reactions are likely to be, too. Even if a slight pullback in stimulus was announced, every meeting going forward would have investors wondering if they will pull back even more. The Fed has backed itself into a corner here.
There was other Fed news impacting the market this week, too (unfortunately markets no longer move on fundamentals, just central planning activities). Fed chief Bernanke is set to leave his post in January and the leading replacement was rumored to be Larry Summers.
Over the weekend, Dr. Summers removed himself from the running, leaving Janet Yellen as the likely replacement. Dr. Yellen is currently the number two at the Fed, behind Ben Bernanke. She is widely viewed as even more interventionist than Ben Bernanke, and far more than Larry Summers, so markets popped higher on news that stimulus will likely be around longer than it otherwise would have.
As you can tell, markets like stimulus. Unfortunately it has done little for the economy.
Next Week
Next week won’t be as busy as this one, but we’ll still get a fairly good amount of data. The will be info on consumer confidence, durable goods, housing, GDP, and personal income and spending. News from the Fed will continue, as well, with several regional presidents will be making speeches.
Investment Strategy
In the shorter term, stocks started to look expensive (overbought) this week, so we saw more risk to the downside than upward potential. The sell-off Friday lessened that concern somewhat, but the reasons for the large decline were more likely due to the nuances of the market than a reversal in sentiment. Friday saw three stocks come out of the Dow index and three new ones move in, plus it was “quadruple witching” Friday, where options and futures all expire at the same time. This added to the volatility of the day. Monday will give us a better idea if the sell-off was real or not.
At this point, we are hesitant to add any new money into stock market indexes. Not only do stocks look expensive, but we have other concerns like the debt ceiling fight approaching, which weighed on the markets last time around.
Instead we would look for undervalued individual names to invest in. Fundamental analysis tells us how good a company is while the technical (chart) side gives us a good idea of when to buy. 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 saw a strong move higher when the continuation of stimulus was announced. It may do well with more stimulus, but eventually that stimulus will have to be removed. If the market begins to anticipate a pullback, gold could move lower again like it did the last several weeks. It’s good for a hedge here, but caution is 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 well recently but serves only as a nice hedge. It isn’t 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.
