Stocks notched their second straight weekly decline. For the week, the Dow and S&P both fell 1.7% and the Nasdaq was lower by 1.5%. Gold was very active again, closing with a gain of 0.4%. A late-week drop sent oil lower on the week, losing 1.1% to $96.60 per barrel. The other major type of oil, Brent, which is used for much of our gas here in the East, declined steadily all week to close at $108.30 per barrel.
Source: Yahoo Finance
In terms of news and data, this week was very quiet. All eyes were on the Fed meeting next week, with investors using this period to adjust their portfolios in preparation for the outcome of that meeting.
The sell-off this week showed more investors are expecting a reduction in stimulus from the Fed. In fact, stock mutual funds saw their biggest outflow all year according to Lipper. This makes sense after the year we’ve had in the markets. Satisfied with returns so far this year, investors can lock in their gains now and not have to worry about the results from the Fed meeting.
A couple items this week supported the idea that a taper could come soon. Several Fed officials made speeches that favored an immediate reduction in stimulus. This did not seem newsworthy to us, though, since they are the same officials who supported an immediate reduction at the September meeting.
The budget agreement reached between Republican and Democrats also increased the odds of a reduction in stimulus. One of the reasons the Fed did not pull back on stimulus in September was concerns over the debt ceiling fight. The left and the right coming together showed some stability in Washington (although this was fairly easy, since the House bill does very little), removing that concern for the Fed.
Regardless of this new info, we still don’t see a reduction in stimulus occurring. There are two major data points the Fed looks at to make this decision. One is employment, which saw a solid report last week. However, this was only slightly better than the three-year average, so it was hardly remarkable. Then this week, weekly jobless claims worsened sharply. This shows the employment situation is volatile, so the Fed may wait to see more improvement first.
Inflation is the other factor the Fed is looking at. They would like to see inflation running north of two percent a year, but figures watched by the Fed show it running roughly half that level.
Sadly, the market has become a giant guessing game on the actions of the Fed. We would love to see them exit these programs completely, especially since they seem to do more harm than good. However, we just don’t see it happening any time soon and markets may continue to move higher in the meantime.
Next Week
Next week will be very important. As mentioned above, all eyes will be on the Fed meeting and announcement on the stimulus program. We believe there will be no reduction in the stimulus program and the market is likely to rise in that event. If a reduction is announced, we expect the market to sell-off, and the strength of the sell-off will depend on the size of reduction in stimulus.
Aside from the Fed, there will also be several economic reports worth watching. There will be a report on inflation at the consumer level, industrial production, housing info, and a revision to GDP.
Investment Strategy
Stocks have been due for a pullback, so this decline has not been too surprising. They’d have to fall quite a bit more before we would add new funds. Much of the direction of the market will depend on the Fed, though, and next week will be very important for this reason.
We expect the Fed to hold off any reduction in stimulus, so the market is likely to rise in that case. This is only a short-term view, looking out a couple weeks or months. We have serious concerns about the longer run, especially when the Fed begins to pull back on its stimulus programs.
Like before, we wouldn’t add any new money to the broader 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, 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 continues to look weak, 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. This is a longer-term play, 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.
The sell-off this week showed more investors are expecting a reduction in stimulus from the Fed. In fact, stock mutual funds saw their biggest outflow all year according to Lipper. This makes sense after the year we’ve had in the markets. Satisfied with returns so far this year, investors can lock in their gains now and not have to worry about the results from the Fed meeting.
A couple items this week supported the idea that a taper could come soon. Several Fed officials made speeches that favored an immediate reduction in stimulus. This did not seem newsworthy to us, though, since they are the same officials who supported an immediate reduction at the September meeting.
The budget agreement reached between Republican and Democrats also increased the odds of a reduction in stimulus. One of the reasons the Fed did not pull back on stimulus in September was concerns over the debt ceiling fight. The left and the right coming together showed some stability in Washington (although this was fairly easy, since the House bill does very little), removing that concern for the Fed.
Regardless of this new info, we still don’t see a reduction in stimulus occurring. There are two major data points the Fed looks at to make this decision. One is employment, which saw a solid report last week. However, this was only slightly better than the three-year average, so it was hardly remarkable. Then this week, weekly jobless claims worsened sharply. This shows the employment situation is volatile, so the Fed may wait to see more improvement first.
Inflation is the other factor the Fed is looking at. They would like to see inflation running north of two percent a year, but figures watched by the Fed show it running roughly half that level.
Sadly, the market has become a giant guessing game on the actions of the Fed. We would love to see them exit these programs completely, especially since they seem to do more harm than good. However, we just don’t see it happening any time soon and markets may continue to move higher in the meantime.
Next Week
Next week will be very important. As mentioned above, all eyes will be on the Fed meeting and announcement on the stimulus program. We believe there will be no reduction in the stimulus program and the market is likely to rise in that event. If a reduction is announced, we expect the market to sell-off, and the strength of the sell-off will depend on the size of reduction in stimulus.
Aside from the Fed, there will also be several economic reports worth watching. There will be a report on inflation at the consumer level, industrial production, housing info, and a revision to GDP.
Investment Strategy
Stocks have been due for a pullback, so this decline has not been too surprising. They’d have to fall quite a bit more before we would add new funds. Much of the direction of the market will depend on the Fed, though, and next week will be very important for this reason.
We expect the Fed to hold off any reduction in stimulus, so the market is likely to rise in that case. This is only a short-term view, looking out a couple weeks or months. We have serious concerns about the longer run, especially when the Fed begins to pull back on its stimulus programs.
Like before, we wouldn’t add any new money to the broader 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, 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 continues to look weak, 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. This is a longer-term play, 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.
