Please note: due to the Thanksgiving holiday, there will be no market commentary next week.
Stocks continue to climb, turning in their seventh-straight weekly gain. For the week, the Dow rose 0.7%, the S&P was higher by 0.4%, and the Nasdaq was relatively unchanged with a gain of 0.1%. Gold hit its lowest level in four months, falling 3.4% this week. Oil rose slightly, climbing 0.4% to $94.84 per barrel. The other major type of oil, Brent, rose at a faster pace to close at $110.49.
Source: Yahoo Finance
Stocks have been on a tear recently, notching new all-time highs along the way. Since early October, they have risen over 8% alone. Markets have been helped by slightly better than expected – though slowing – profits. But the main driver of this rally has been the Fed and their stimulus programs. Once again, they were the factor behind the market moves this week.
On Wednesday, minutes from the recent October Fed meeting were released. They showed an ongoing debate on whether the stimulus programs should be pared back, but in the end, nothing new was learned. They continue to support pulling back on the stimulus if the data supports it. Since it does mean a tapering is on the table, while unlikely in our opinion, stocks sold off on the news.
The minutes showed lot of contradictory back-and-forth discussions that seemed to purposely muddle their message. Recent years have seen a remarkable increase in transparency from the Fed. While it has shed a light on their thinking, it has kept the market hanging on every word. To us, it seems like they figured by saying everything and nothing at the same time, the market wouldn’t be able to overreact to every word. It worked, because no one really understood what was discussed.
While these minutes were released on Wednesday, Fed chief Bernanke made speech Tuesday evening at the annual dinner for the National Economists Club (a wild bunch of folks, let me tell you). His remarks were wildly dovish, meaning he showed an enthusiasm for more stimulus, keeping rates at record lows for years and flooding the market with $85 billion a month in printed money. While the market worries a reduction in stimulus is on the table based on the Fed’s minutes, Bernanke’s comments show it’s not happening any time soon.
Economic data this week supported that view. One of the goals of the stimulus program is higher inflation, upwards of 2% annually. So when inflation rises to this level, they will pull back on the stimulus. Inflation metrics released this week showed a decline, with inflation at the consumer level standing at just 1%, the lowest level since early 2009.
It is clear the economic data is not going the way the Fed expects. Instead of changing course after five years of ineffective policy, they will continue their current path in the hopes that results appear. It may mean higher stocks in the meantime, but we fear the longer this goes, the worse it will be in the long run. It is a very dangerous policy.
Next Week
With the Thanksgiving holiday next week, a lot of economic data will be crammed into the early part of the week. Markets are actually open on Friday, but it tends to be one of the quietest days of the year. In the shortened week, we’ll get info on consumer confidence, housing, durable goods, income and spending, and leading economic indicators.
Investment Strategy
No change here. Stocks still look expensive for the short run. We could see markets move a little higher from here since as long as the Fed keeps printing, the wind is at its back. But caution is warranted as a pullback – or at least a pause – is increasingly likely.
We’ve written extensively on our concerns for the longer run. This includes worries of unintended consequences from the Fed’s stimulus, slowing earnings growth, high valuation ratios, record high margin (borrowing to buy stocks) levels, massive amounts of new money coming into stock funds, and exuberance around the IPO market.
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 the charts) 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.
Bonds have been volatile recently as yields are again rising (so prices are falling). A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge. It isn’t intended to be a longer term investment.
TIPs have shown weakness recently, having the worst year since their inception in 1997. However, they 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 as a long term hedge, 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.
On Wednesday, minutes from the recent October Fed meeting were released. They showed an ongoing debate on whether the stimulus programs should be pared back, but in the end, nothing new was learned. They continue to support pulling back on the stimulus if the data supports it. Since it does mean a tapering is on the table, while unlikely in our opinion, stocks sold off on the news.
The minutes showed lot of contradictory back-and-forth discussions that seemed to purposely muddle their message. Recent years have seen a remarkable increase in transparency from the Fed. While it has shed a light on their thinking, it has kept the market hanging on every word. To us, it seems like they figured by saying everything and nothing at the same time, the market wouldn’t be able to overreact to every word. It worked, because no one really understood what was discussed.
While these minutes were released on Wednesday, Fed chief Bernanke made speech Tuesday evening at the annual dinner for the National Economists Club (a wild bunch of folks, let me tell you). His remarks were wildly dovish, meaning he showed an enthusiasm for more stimulus, keeping rates at record lows for years and flooding the market with $85 billion a month in printed money. While the market worries a reduction in stimulus is on the table based on the Fed’s minutes, Bernanke’s comments show it’s not happening any time soon.
Economic data this week supported that view. One of the goals of the stimulus program is higher inflation, upwards of 2% annually. So when inflation rises to this level, they will pull back on the stimulus. Inflation metrics released this week showed a decline, with inflation at the consumer level standing at just 1%, the lowest level since early 2009.
It is clear the economic data is not going the way the Fed expects. Instead of changing course after five years of ineffective policy, they will continue their current path in the hopes that results appear. It may mean higher stocks in the meantime, but we fear the longer this goes, the worse it will be in the long run. It is a very dangerous policy.
Next Week
With the Thanksgiving holiday next week, a lot of economic data will be crammed into the early part of the week. Markets are actually open on Friday, but it tends to be one of the quietest days of the year. In the shortened week, we’ll get info on consumer confidence, housing, durable goods, income and spending, and leading economic indicators.
Investment Strategy
No change here. Stocks still look expensive for the short run. We could see markets move a little higher from here since as long as the Fed keeps printing, the wind is at its back. But caution is warranted as a pullback – or at least a pause – is increasingly likely.
We’ve written extensively on our concerns for the longer run. This includes worries of unintended consequences from the Fed’s stimulus, slowing earnings growth, high valuation ratios, record high margin (borrowing to buy stocks) levels, massive amounts of new money coming into stock funds, and exuberance around the IPO market.
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 the charts) 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.
Bonds have been volatile recently as yields are again rising (so prices are falling). A short position (bet on the decline in prices) has done well here, but serves only as a nice hedge. It isn’t intended to be a longer term investment.
TIPs have shown weakness recently, having the worst year since their inception in 1997. However, they 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 as a long term hedge, 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.
