An uneventful week saw stocks close with little change. While markets were up over 1% at one point, by Friday the Dow closed lower by 0.3%, the S&P dropped a slight 0.1%, and the Nasdaq lost 0.5%. Gold gained some ground on geopolitical troubles in Ukraine, rising 0.6%. Oil prices took a turn lower, losing 2.7% to just over $100 per barrel. The international Brent oil, used for much of our gas here in the east, closed at $109.39.
Source: Yahoo Finance
We saw a fairly quiet week on Wall Street this week, where the focus was more on fundamentals like corporate earnings than external factors we typically see, like the Fed.
We’ll start with earnings, since this was this busiest week for corporations to release their results for the first quarter. As we can see from the reaction in the market, the results were rather lackluster.
Nearly half of the companies in the S&P 500 have released their earnings so far and the good news is earnings have beaten estimates. The market was looking for a 1.4% drop in earnings coming into earnings season, but the results currently stand at a 0.2% gain according to Factset.
These estimates beats happen every quarter – the bar is set low and then the actual results are celebrated when companies beat the low estimate. This masks the fact that earnings have grown very little over the past quarter. Growth in revenue (what a company actually earned in sales. Earnings are what is left after subtracting costs) is actually negative, so it shows earnings are not improving due to better sales, but the cutting of costs.
Economic data released this week was fairly light, but leaned to the negative side. Several housing reports came in much lower than expected as sales slow and mortgage applications declined to their lowest level in 14 years. Poor weather cannot be cited as the culprit, since sales rose in the Northeast but declined in all other regions. We also saw a sharp rise in weekly unemployment claims.
On the positive side, durable goods (which are longer-lasting items like a car or refrigerator) showed a nice increase, though much was due to an increase in airplane orders. Manufacturing in the mid-Atlantic region showed an increase and consumer sentiment ticked higher.
Switching gears, this week saw a troubling increase in military activity in the Ukraine-Russia fight. The market has largely ignored the tensions in the region till now, and it is uncertain if it will have any impact on the market going forward. However, military activity usually has a negative impact on markets, especially when involving countries with significant energy resources. This is a very serious situation and is something to watch closely.
And finally, one last item that makes us a little cautious. This week saw the largest junk bond issuance in history – by far. Junk bonds are issued by companies or countries with less-than-stellar financial health and have a higher risk of default.
A French cable company called Numericable Group issued the bonds, which were met with strong demand. This tells us investors are moving further and further into riskier investments and we worry they may be taking on too much risk. This adds to our caution.
Next Week
Next week looks to be another busy one. About a quarter of the S&P 500 companies will release their earnings, but there will also be several important economic reports. We’ll get our first look at GDP from the first quarter, plus employment figures for April (hard to believe we are almost to May!). There will also be data on personal income and spending and consumer confidence.
The Fed will also be in the headlines as they hold another of their periodic meetings. They are expected to announce another cut in their bond buying (money printing) stimulus program, but any changes will have an impact on the market.
Investment Strategy
We are not looking to make any changes in our investment strategy at this time. Markets have bounced around these levels for some time now, but aren’t at buying or selling levels. While we wouldn’t add or subtract money to the broader indexes, there are some individual names that may warrant buying or selling, especially for those with a shorter-term view.
Bonds continue to do well as prices are climbing and yields falling. This still remains a volatile play in the short run, though. In the longer run, there are concerns of an increase in interest rates so a short position (bet on yields rising and prices falling) acts as a good hedge in that case. Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted.
Continuing with bonds, we think TIPs remain an important hedge against future inflation while municipal bonds 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 is another hedge for the portfolio, but it remains volatile.
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.
We’ll start with earnings, since this was this busiest week for corporations to release their results for the first quarter. As we can see from the reaction in the market, the results were rather lackluster.
Nearly half of the companies in the S&P 500 have released their earnings so far and the good news is earnings have beaten estimates. The market was looking for a 1.4% drop in earnings coming into earnings season, but the results currently stand at a 0.2% gain according to Factset.
These estimates beats happen every quarter – the bar is set low and then the actual results are celebrated when companies beat the low estimate. This masks the fact that earnings have grown very little over the past quarter. Growth in revenue (what a company actually earned in sales. Earnings are what is left after subtracting costs) is actually negative, so it shows earnings are not improving due to better sales, but the cutting of costs.
Economic data released this week was fairly light, but leaned to the negative side. Several housing reports came in much lower than expected as sales slow and mortgage applications declined to their lowest level in 14 years. Poor weather cannot be cited as the culprit, since sales rose in the Northeast but declined in all other regions. We also saw a sharp rise in weekly unemployment claims.
On the positive side, durable goods (which are longer-lasting items like a car or refrigerator) showed a nice increase, though much was due to an increase in airplane orders. Manufacturing in the mid-Atlantic region showed an increase and consumer sentiment ticked higher.
Switching gears, this week saw a troubling increase in military activity in the Ukraine-Russia fight. The market has largely ignored the tensions in the region till now, and it is uncertain if it will have any impact on the market going forward. However, military activity usually has a negative impact on markets, especially when involving countries with significant energy resources. This is a very serious situation and is something to watch closely.
And finally, one last item that makes us a little cautious. This week saw the largest junk bond issuance in history – by far. Junk bonds are issued by companies or countries with less-than-stellar financial health and have a higher risk of default.
A French cable company called Numericable Group issued the bonds, which were met with strong demand. This tells us investors are moving further and further into riskier investments and we worry they may be taking on too much risk. This adds to our caution.
Next Week
Next week looks to be another busy one. About a quarter of the S&P 500 companies will release their earnings, but there will also be several important economic reports. We’ll get our first look at GDP from the first quarter, plus employment figures for April (hard to believe we are almost to May!). There will also be data on personal income and spending and consumer confidence.
The Fed will also be in the headlines as they hold another of their periodic meetings. They are expected to announce another cut in their bond buying (money printing) stimulus program, but any changes will have an impact on the market.
Investment Strategy
We are not looking to make any changes in our investment strategy at this time. Markets have bounced around these levels for some time now, but aren’t at buying or selling levels. While we wouldn’t add or subtract money to the broader indexes, there are some individual names that may warrant buying or selling, especially for those with a shorter-term view.
Bonds continue to do well as prices are climbing and yields falling. This still remains a volatile play in the short run, though. In the longer run, there are concerns of an increase in interest rates so a short position (bet on yields rising and prices falling) acts as a good hedge in that case. Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted.
Continuing with bonds, we think TIPs remain an important hedge against future inflation while municipal bonds 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 is another hedge for the portfolio, but it remains volatile.
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.
