This week saw a bit more activity than the last as stocks again reached a new record high. Through the Friday close, the Dow rose 0.9%, the S&P gained 0.5%, and the Nasdaq was lower by 0.1%. Gold fell sharply on Friday to close the week with a 2.2% loss. Oil continued to fall most the week, but a gain on Friday left it unchanged for the week. The other major type of oil, Brent, closed the week down to $105 per barrel.
Source: Yahoo Finance
This week was a bit of an odd one. News from Europe and economic reports here sent stocks one direction initially, yet reversed course shortly thereafter and moved strongly the opposite direction. Then we had a new stock start trading that had never made a profit, yet was valued higher than half the companies in the S&P 500.
We’ll start with news out of Europe. Concerned about deflation, the European Central Bank (the European equivalent of our Fed) surprised markets on Thursday by lowering interest rates to promote more inflation. Since more intervention by global central banks has fueled stock gains, stocks rose on the news. The gains were short lived and stocks moved sharply lower.
European stocks have done very well lately, now at their highest level in five years. We would be very cautious on this region, though. The rise in their stock market is very similar to ours – central bank stimulus has pushed stocks higher. Underlying fundamentals are still poor with growth anemic, employment abysmal, and government debt levels even higher than when the debt crisis hit. Like our stock market, they may continue to rise as long as the central banks provide the stimulus, but this can only mask the poor fundamentals for so long.
Back here in the states, two major economic reports were much better than expected. Since everything is now viewed through the prism of the Fed and the effect of economic data on stimulus, positive economic reports would cause stimulus to end earlier. SO the positive reports resulted in stocks falling initially, but later reversed course to close the week higher.
First, GDP for the third quarter came in much better than expected at a 2.8% growth. It was a solid number, but masked some underlying issues. The consumer spending component was lower than expected and business investment was solidly negative. Plus, 0.8% of the 2.8% came from inventory rebuilding, which is not necessarily an indicator of growth.
Then we had employment figures for October coming in almost twice as high as expected. We added a decent 204,000 jobs over the month and the two previous months were revised higher. However, the size of the labor force fell by the third-largest amount in history to reach the lowest level since 1978.
The government shutdown may have skewed this number though, as the one-week delay altered their data collecting. Overall, the positive number showed that the shutdown had little impact on the economy.
The other big story of the week was the initial stock offering of Twitter. Despite never turning a profit and losing $134 million so far this year, the stock soared at the opening. Somehow the company is now valued higher than half the companies in the S&P 500.
The exuberance around these IPO’s has many worried that stocks are getting too overvalued, worried that the liquidity from the Fed has pushed investors into risky investments.
Supporting that idea, October saw the most IPO’s come to market since 2007, before the latest market crash. Additionally, University of Florida professor and researcher Jay Ritter noted that 61% of companies who came to market this year have lost money over the last 12 months. This is the highest percentage since 2000, again before a market crash. This is another red flag for investors to consider on the longer-term direction of the market.
Next Week
Next week looks very quiet from a data standpoint. For economic reports, we’ll get info on small business optimism, the trade balance, and industrial production. Corporate earnings are already coming in at a slower pace and will slow further next week.
Investment Strategy
Stocks haven’t done much lately, and while they still have a little room to move higher, the downside risk is significant. In the short run we could continue to rise from here as long as the Fed keeps stimulating. If the trend of positive economic reports continues, though, it could cause the market to worry a reduction in stimulus was near and force a sell-off.
We’ve often discussed our worries for the longer-term which include: stocks as a whole looking expensive as valuation ratios are high. Margin levels remain at record highs. The most amount of money since 2007 has poured into stock funds. The excitement around the IPO situation discussed above is cause for concern. Finally, the adverse effect of money printing from the Fed is a serious issue to consider.
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.
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 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.
We’ll start with news out of Europe. Concerned about deflation, the European Central Bank (the European equivalent of our Fed) surprised markets on Thursday by lowering interest rates to promote more inflation. Since more intervention by global central banks has fueled stock gains, stocks rose on the news. The gains were short lived and stocks moved sharply lower.
European stocks have done very well lately, now at their highest level in five years. We would be very cautious on this region, though. The rise in their stock market is very similar to ours – central bank stimulus has pushed stocks higher. Underlying fundamentals are still poor with growth anemic, employment abysmal, and government debt levels even higher than when the debt crisis hit. Like our stock market, they may continue to rise as long as the central banks provide the stimulus, but this can only mask the poor fundamentals for so long.
Back here in the states, two major economic reports were much better than expected. Since everything is now viewed through the prism of the Fed and the effect of economic data on stimulus, positive economic reports would cause stimulus to end earlier. SO the positive reports resulted in stocks falling initially, but later reversed course to close the week higher.
First, GDP for the third quarter came in much better than expected at a 2.8% growth. It was a solid number, but masked some underlying issues. The consumer spending component was lower than expected and business investment was solidly negative. Plus, 0.8% of the 2.8% came from inventory rebuilding, which is not necessarily an indicator of growth.
Then we had employment figures for October coming in almost twice as high as expected. We added a decent 204,000 jobs over the month and the two previous months were revised higher. However, the size of the labor force fell by the third-largest amount in history to reach the lowest level since 1978.
The government shutdown may have skewed this number though, as the one-week delay altered their data collecting. Overall, the positive number showed that the shutdown had little impact on the economy.
The other big story of the week was the initial stock offering of Twitter. Despite never turning a profit and losing $134 million so far this year, the stock soared at the opening. Somehow the company is now valued higher than half the companies in the S&P 500.
The exuberance around these IPO’s has many worried that stocks are getting too overvalued, worried that the liquidity from the Fed has pushed investors into risky investments.
Supporting that idea, October saw the most IPO’s come to market since 2007, before the latest market crash. Additionally, University of Florida professor and researcher Jay Ritter noted that 61% of companies who came to market this year have lost money over the last 12 months. This is the highest percentage since 2000, again before a market crash. This is another red flag for investors to consider on the longer-term direction of the market.
Next Week
Next week looks very quiet from a data standpoint. For economic reports, we’ll get info on small business optimism, the trade balance, and industrial production. Corporate earnings are already coming in at a slower pace and will slow further next week.
Investment Strategy
Stocks haven’t done much lately, and while they still have a little room to move higher, the downside risk is significant. In the short run we could continue to rise from here as long as the Fed keeps stimulating. If the trend of positive economic reports continues, though, it could cause the market to worry a reduction in stimulus was near and force a sell-off.
We’ve often discussed our worries for the longer-term which include: stocks as a whole looking expensive as valuation ratios are high. Margin levels remain at record highs. The most amount of money since 2007 has poured into stock funds. The excitement around the IPO situation discussed above is cause for concern. Finally, the adverse effect of money printing from the Fed is a serious issue to consider.
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.
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 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.
