Stocks turned in their worst week since January with five-straight down days. Through the Friday close, the Dow plunged 2.4%, the S&P dropped 2.0%, and the Nasdaq returned -2.1%. Gold had a fantastic week, hitting six-month highs with a 3.1% gain. Oil prices fell on global growth concerns and a strategic petroleum reserve release, falling 3.6% to just below $99 per barrel. The international Brent oil actually moved slightly higher to $108.50.
Source: Yahoo Finance
It was a very rough week for stocks and we can’t point to one single causefor the decline. Instead, there were several external factors impacting an already expensive market.
We’ll start with China, where a slew of bad news weighed on the market.
Last week we mentioned the default of a Chinese solar company, notable since it was the first Chinese company to default. Concerns are increasing that slowing growth in the country could trigger a wave of additional bankruptcies. Their economy is loaded with debt, so this could become a serious problem.
Worrisome economic data released this week showed the Chinese economy growing even slower than many feared. Spending by Chinese consumers hit the lowest level in three years. Industrial output hit the lowest level in five years. They notched their biggest trade deficit in two years as exports plunged. Now, year-over-year growth stands near a 15-year low.
Since China is the world’s largest consumer raw materials like copper, these commodities plunged on reports of slower growth. This is important, since companies and investors buy up copper and use it as collateral to make other investments. The dropping prices make their collateral worth less and would force them to sell other holdings, like stocks or these commodities, to raise cash. This likely played a part in the decline in stocks. See how it’s all connected?
The other external factor weighing on the market was the situation occurring in Ukraine. Tensions have been escalating since the initial Russian invasion, but the markets had paid little attention since that first encounter.
This week, though, worries increased as Russian troops have been building on the edge of Ukraine. It is feared that they are readying for a possible invasion. John Kerry warned of a serious response to further actions in the region, either by Russia or Crimean leaders. It’s clear Russia does not take us seriously, so sanctions are likely.
Lastly, a U.S. topic. Recent economic reports have been poor with weather taking the blame. After all, the message has been that cold weather keeps people inside and prevents them from spending money, thus weighing on economic reports
A recent survey by the bank, RBC, showed that people actually spent more during this cold period. This contradicts these economists’ theories and shows the economy may not be as strong as many believe.
We’ll start with China, where a slew of bad news weighed on the market.
Last week we mentioned the default of a Chinese solar company, notable since it was the first Chinese company to default. Concerns are increasing that slowing growth in the country could trigger a wave of additional bankruptcies. Their economy is loaded with debt, so this could become a serious problem.
Worrisome economic data released this week showed the Chinese economy growing even slower than many feared. Spending by Chinese consumers hit the lowest level in three years. Industrial output hit the lowest level in five years. They notched their biggest trade deficit in two years as exports plunged. Now, year-over-year growth stands near a 15-year low.
Since China is the world’s largest consumer raw materials like copper, these commodities plunged on reports of slower growth. This is important, since companies and investors buy up copper and use it as collateral to make other investments. The dropping prices make their collateral worth less and would force them to sell other holdings, like stocks or these commodities, to raise cash. This likely played a part in the decline in stocks. See how it’s all connected?
The other external factor weighing on the market was the situation occurring in Ukraine. Tensions have been escalating since the initial Russian invasion, but the markets had paid little attention since that first encounter.
This week, though, worries increased as Russian troops have been building on the edge of Ukraine. It is feared that they are readying for a possible invasion. John Kerry warned of a serious response to further actions in the region, either by Russia or Crimean leaders. It’s clear Russia does not take us seriously, so sanctions are likely.
Lastly, a U.S. topic. Recent economic reports have been poor with weather taking the blame. After all, the message has been that cold weather keeps people inside and prevents them from spending money, thus weighing on economic reports
A recent survey by the bank, RBC, showed that people actually spent more during this cold period. This contradicts these economists’ theories and shows the economy may not be as strong as many believe.
Next Week
There will be a lot to look out for next week. Since geopolitical events played a part in the decline this week, it will be important to watch the events unfolding in Crimea as they hold a vote on joining Russia. Sanctions could be imposed in that case, which will have an impact on the economies in the area.
As for here at home, we’ll have several economic reports to watch. There will be data on industrial production, inflation at the consumer level, and housing info. The Fed will also be in the news with their announcement on interest rates, although no changes are expected.
Investment Strategy
Despite the recent weakness, we aren’t making changes to our investment outlook. The broader market is still on the expensive side and we aren’t looking to buy, but aren’t selling, either. The sell-off has knocked some individual names down to a more attractive buying level, though, so there are a few potential buys out there.
Yields plunged this week and bond prices rose. However, they have been in this range for some time now and trying to figure out where they’ll go from here is a guessing game, at best. Bonds will always have their place in a portfolio, but there is a worry about rates rising (so prices would fall). A short position (bet on the decline in prices) acts as a nice hedge if yields do rise. Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier investments, so caution is warranted.
Continuing with bonds, TIPs remain an important hedge against future inflation and 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 keeps climbing, but remains volatile. We’d still be cautious, but it acts as a good hedge in the longer run.
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 see weakness around the globe and favor neither the developed or emerging markets.
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.
There will be a lot to look out for next week. Since geopolitical events played a part in the decline this week, it will be important to watch the events unfolding in Crimea as they hold a vote on joining Russia. Sanctions could be imposed in that case, which will have an impact on the economies in the area.
As for here at home, we’ll have several economic reports to watch. There will be data on industrial production, inflation at the consumer level, and housing info. The Fed will also be in the news with their announcement on interest rates, although no changes are expected.
Investment Strategy
Despite the recent weakness, we aren’t making changes to our investment outlook. The broader market is still on the expensive side and we aren’t looking to buy, but aren’t selling, either. The sell-off has knocked some individual names down to a more attractive buying level, though, so there are a few potential buys out there.
Yields plunged this week and bond prices rose. However, they have been in this range for some time now and trying to figure out where they’ll go from here is a guessing game, at best. Bonds will always have their place in a portfolio, but there is a worry about rates rising (so prices would fall). A short position (bet on the decline in prices) acts as a nice hedge if yields do rise. Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier investments, so caution is warranted.
Continuing with bonds, TIPs remain an important hedge against future inflation and 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 keeps climbing, but remains volatile. We’d still be cautious, but it acts as a good hedge in the longer run.
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 see weakness around the globe and favor neither the developed or emerging markets.
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.
