A relatively uneventful week saw stocks end with little change. For the week, the Dow was higher by 0.3%, the S&P gained a slight 0.1%, while the Nasdaq fell 0.5%. Gold had a rough week, closing down 2.9%. Oil continues its move lower, falling 3.3% to $94.61 per barrel. The other major type of oil, Brent, closed the week just below $106 per barrel.
Source: Yahoo Finance
Stocks reached new all-time highs early in the week, only to reverse course after comments from the Fed.
One of their periodic policy meetings was held this week to determine the level of interest rates and the amount of monthly stimulus. No change was expected, and no change was the result.
They also noted the economy is expanding at a moderate pace, in line with their previous statements. This line made stocks drop, though. Apparently many investors expected a downgrade in the Fed’s economic outlook and for them to mention slowing growth. If the economy is improving, a reduction in stimulus is possible in the near future. And since stimulus has sent stocks higher, a reduction in stimulus would be bad for the market.
We didn’t interpret the report that way and don’t think they will pull back on stimulus any time soon (even though we think the economy would be better off if they did). They still see the economy as weak overall, citing a slowdown in the housing sector, employment, and inflation figures lower than they would like.
Data released this week supported that view. Pending home sales fell for the first time in two years as mortgage rates moved higher. An employment report released by payroll company ADP was very weak. Also, inflation at the producer level is the lowest since 2009 and the consumer level is running at 1.2% (1.7% core), below their 2-2.5% target. Unless these figures move more in line with the Fed’s objectives, we won’t see any form of tapering any time soon.
Other economic data this week was better. Manufacturing figures showed substantial improvement and industrial production rose more than expected. Additionally, retail sales were lower by 0.1%, but were up 0.4% when excluding auto sales.
Finally, we’re beyond the peak for earnings reports this quarter with three-quarters of the companies in the S&P 500 reporting earnings. According to data service firm Factset, 74% of companies have beat earnings estimates and 53% beat revenue estimates (revenue is what the company earned through sales while earnings, or profit, is what is left over after costs are subtracted).
Remember, though, that these estimates were dramatically lowered as earnings season approached. When comparing figures from a year ago, earnings have grown 3.0% over that time and revenue is 2.9% higher. These figures aren’t great, but not as bad as they have been.
Next Week
The amount of corporate earnings releases will continue to slow next week, but we’ll get a few important economic reports. We’ll get a look at GDP growth over the past quarter, plus the employment numbers for October. Other reports include the strength of the service sector, factory orders, leading economic indicators, and personal income and spending.
Investment Strategy
Still no change here. Stocks were due for a breather after rising steadily since early October, but as long as the Fed has the pedal down on its money printing, we’ll likely head higher in the short run.
We have concerns for the longer run, though. The money printing from the Fed is an obvious long term concern, but we’re also seeing other red flags like record high margin levels (borrowing money to buy stocks), extremely high optimism, and above average valuation ratios like price-to-earnings or market cap-to-GDP. Frankly, everything is looking a bit expensive.
We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in. Fundamental analysis tells us how good a company is, while the technical (or chart) side gives us a good idea of when to buy. We would avoid stocks in sectors with a strong correlation to the broader stock market and 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.
In bonds, yields have fallen (so prices have risen). We see yields rising (and therefore prices falling) when it looks like the Fed will pull back on its stimulus, but that doesn’t seem likely in the near term. A short position (bet on the decline in prices) will do well at that point, but serves only as a nice hedge now. It isn’t intended to be a longer term investment.
TIPs have showed some recent improvement, and remain an important hedge against future inflation. Municipal bonds are in the same boat and work for the right client. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold took another turn lower, continuing the volatility this investment has seen recently. 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.
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.
One of their periodic policy meetings was held this week to determine the level of interest rates and the amount of monthly stimulus. No change was expected, and no change was the result.
They also noted the economy is expanding at a moderate pace, in line with their previous statements. This line made stocks drop, though. Apparently many investors expected a downgrade in the Fed’s economic outlook and for them to mention slowing growth. If the economy is improving, a reduction in stimulus is possible in the near future. And since stimulus has sent stocks higher, a reduction in stimulus would be bad for the market.
We didn’t interpret the report that way and don’t think they will pull back on stimulus any time soon (even though we think the economy would be better off if they did). They still see the economy as weak overall, citing a slowdown in the housing sector, employment, and inflation figures lower than they would like.
Data released this week supported that view. Pending home sales fell for the first time in two years as mortgage rates moved higher. An employment report released by payroll company ADP was very weak. Also, inflation at the producer level is the lowest since 2009 and the consumer level is running at 1.2% (1.7% core), below their 2-2.5% target. Unless these figures move more in line with the Fed’s objectives, we won’t see any form of tapering any time soon.
Other economic data this week was better. Manufacturing figures showed substantial improvement and industrial production rose more than expected. Additionally, retail sales were lower by 0.1%, but were up 0.4% when excluding auto sales.
Finally, we’re beyond the peak for earnings reports this quarter with three-quarters of the companies in the S&P 500 reporting earnings. According to data service firm Factset, 74% of companies have beat earnings estimates and 53% beat revenue estimates (revenue is what the company earned through sales while earnings, or profit, is what is left over after costs are subtracted).
Remember, though, that these estimates were dramatically lowered as earnings season approached. When comparing figures from a year ago, earnings have grown 3.0% over that time and revenue is 2.9% higher. These figures aren’t great, but not as bad as they have been.
Next Week
The amount of corporate earnings releases will continue to slow next week, but we’ll get a few important economic reports. We’ll get a look at GDP growth over the past quarter, plus the employment numbers for October. Other reports include the strength of the service sector, factory orders, leading economic indicators, and personal income and spending.
Investment Strategy
Still no change here. Stocks were due for a breather after rising steadily since early October, but as long as the Fed has the pedal down on its money printing, we’ll likely head higher in the short run.
We have concerns for the longer run, though. The money printing from the Fed is an obvious long term concern, but we’re also seeing other red flags like record high margin levels (borrowing money to buy stocks), extremely high optimism, and above average valuation ratios like price-to-earnings or market cap-to-GDP. Frankly, everything is looking a bit expensive.
We wouldn’t add any new money to stock market indexes at this point, instead looking for undervalued individual names to invest in. Fundamental analysis tells us how good a company is, while the technical (or chart) side gives us a good idea of when to buy. We would avoid stocks in sectors with a strong correlation to the broader stock market and 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.
In bonds, yields have fallen (so prices have risen). We see yields rising (and therefore prices falling) when it looks like the Fed will pull back on its stimulus, but that doesn’t seem likely in the near term. A short position (bet on the decline in prices) will do well at that point, but serves only as a nice hedge now. It isn’t intended to be a longer term investment.
TIPs have showed some recent improvement, and remain an important hedge against future inflation. Municipal bonds are in the same boat and work for the right client. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold took another turn lower, continuing the volatility this investment has seen recently. 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.
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.
