Please note: Due to the Christmas and New Year’s holidays over the next two weeks, this will be our last commentary for the year. We wish you all a Merry Christmas and Happy New Year.
The market again reached new all-time highs, even on an inflation-adjusted basis, on news from the Fed. For the week, the Dow gained a solid 3.0%, the S&P rose 2.4%, and the Nasdaq returned 2.6%. Gold fell sharply, down 2.5% to reach its lowest level in over three years. Oil rose strongly, climbing 2.5% to $99.32 per barrel. The other major type of oil, Brent, rose steadily as well, closing at $111.84 per barrel.
The market again reached new all-time highs, even on an inflation-adjusted basis, on news from the Fed. For the week, the Dow gained a solid 3.0%, the S&P rose 2.4%, and the Nasdaq returned 2.6%. Gold fell sharply, down 2.5% to reach its lowest level in over three years. Oil rose strongly, climbing 2.5% to $99.32 per barrel. The other major type of oil, Brent, rose steadily as well, closing at $111.84 per barrel.
Source: Yahoo Finance
All eyes were on the Fed this week as they made an announcement on the direction of their stimulus program. Roughly half of economists surveyed, including us, expected no change in the direction of the stimulus program. However, we were all surprised when the Fed did announce a slight reduction in stimulus.
The reduction comes from the bond buying portion of the stimulus. Prior to the announcement, the Fed was printing $85 billion a month to buy mortgage and government bonds, which kept borrowing rates low for these items. They reduced that amount of monthly bond buying by $10 billion, and may continue cutting the amount further in the coming months.
While this is a reduction in stimulus, there is another type of stimulus the Fed engages in that was extended. They announced interest rates will be kept at these historic lows for even longer than expected.
An analogy has been floating around the investment community that is an easy way to summarize the announcement. Think of the stimulus as a car. The Fed has used two gas pedals to keep the stimulus going. One pedal, the bond buying portion, saw the Fed let off the gas slightly. The other pedal, the low interest rates, was pushed down even harder. This shows that the announcement by the Fed can be seen a net increase in stimulus for the markets.
This is why we think stocks rose as sharply as they did. These low rates allow companies to continue to issue bonds and buy back stock, which boosts stock prices. It also allows the multiple expansion to continue, which without getting too technical, low rates make future earnings worth more and drives up stock prices. Unfortunately, it also contributes to speculative bubbles that tend to end badly.
This continuation of stimulus only adds to the optimistic view of the markets. A recent sentiment survey by Investors Intelligence, which surveys 100 investment advisors, shows optimism at the highest level since 1987. This is a very dangerous development and shows investors are overly optimistic.
With this being our last newsletter of the year, we’ll conclude with a link to a video (we aren’t tech-savvy enough to post the actual video here). It is from the old Louis Rukeyser program, filmed at the end of 1999, but sounds every bit like it could have been filmed today. The market in the ‘90s saw a solid boom, with 1999 seeing markets up over 20%. Just like what we hear today, every panelist on the program expected the trend to continue and saw no dangers on the horizon.
Two weeks after this was filmed, markets topped and moved lower until 2002. It wasn’t until 2006 that markets again reached that same level seen in 1999. When nearly everyone is convinced on the direction of the market, it should be time to worry.
Next Week
With Christmas shortening next week, it looks to be fairly quiet. We’ll get a few economic reports early in the week, including personal income and spending, durable goods, and new home sales. Aside from that, there should be little to report.
Investment Strategy
No change here. The wind is currently at the back of the market, so stocks may continue moving higher in the short run. We wouldn’t add to any broader market positions and may trim back if stocks move much higher from here. As we’ve discussed extensively before, we have concerns for the longer term.
Right now we prefer finding 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 reduction comes from the bond buying portion of the stimulus. Prior to the announcement, the Fed was printing $85 billion a month to buy mortgage and government bonds, which kept borrowing rates low for these items. They reduced that amount of monthly bond buying by $10 billion, and may continue cutting the amount further in the coming months.
While this is a reduction in stimulus, there is another type of stimulus the Fed engages in that was extended. They announced interest rates will be kept at these historic lows for even longer than expected.
An analogy has been floating around the investment community that is an easy way to summarize the announcement. Think of the stimulus as a car. The Fed has used two gas pedals to keep the stimulus going. One pedal, the bond buying portion, saw the Fed let off the gas slightly. The other pedal, the low interest rates, was pushed down even harder. This shows that the announcement by the Fed can be seen a net increase in stimulus for the markets.
This is why we think stocks rose as sharply as they did. These low rates allow companies to continue to issue bonds and buy back stock, which boosts stock prices. It also allows the multiple expansion to continue, which without getting too technical, low rates make future earnings worth more and drives up stock prices. Unfortunately, it also contributes to speculative bubbles that tend to end badly.
This continuation of stimulus only adds to the optimistic view of the markets. A recent sentiment survey by Investors Intelligence, which surveys 100 investment advisors, shows optimism at the highest level since 1987. This is a very dangerous development and shows investors are overly optimistic.
With this being our last newsletter of the year, we’ll conclude with a link to a video (we aren’t tech-savvy enough to post the actual video here). It is from the old Louis Rukeyser program, filmed at the end of 1999, but sounds every bit like it could have been filmed today. The market in the ‘90s saw a solid boom, with 1999 seeing markets up over 20%. Just like what we hear today, every panelist on the program expected the trend to continue and saw no dangers on the horizon.
Two weeks after this was filmed, markets topped and moved lower until 2002. It wasn’t until 2006 that markets again reached that same level seen in 1999. When nearly everyone is convinced on the direction of the market, it should be time to worry.
Next Week
With Christmas shortening next week, it looks to be fairly quiet. We’ll get a few economic reports early in the week, including personal income and spending, durable goods, and new home sales. Aside from that, there should be little to report.
Investment Strategy
No change here. The wind is currently at the back of the market, so stocks may continue moving higher in the short run. We wouldn’t add to any broader market positions and may trim back if stocks move much higher from here. As we’ve discussed extensively before, we have concerns for the longer term.
Right now we prefer finding 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.
