A late-Friday sell-off put a damper on an otherwise nice week for stocks. For the week, the Dow rose 0.6%, the S&P was higher by 0.4%, and the Nasdaq sold off late in the week for a 0.7% loss. Gold rose on the potential for more money printing in Europe, but sold off later to close relatively flat. Oil prices bounced around, but closed up slightly to $101.14 per barrel. The international Brent oil moved lower to $106.57.
Source: Yahoo Finance
The week was a relatively uneventful one. We did receive several economic reports, but comments from the Fed to start the week sent stocks higher and they kept drifting higher from there until late Friday.
On Monday morning, the new Fed chief Janet Yellen kicked off the week with a speech aimed at reassuring the market that stimulus will be around for a “long time.” She focused primarily on unemployment, discussing how they can do more to increase jobs.
Her speech was different from any other Fed president in that she highlighted the plight of three people struggling to find employment and discussed how the Fed’s actions will help them get back to work.
We have serious concerns with this approach. She postures the Fed’s policy as the sole driver in putting people to work, ignoring structural issues like poor government policies that hurt employment. One woman highlighted had worked in the medical insurance field before losing her job. Could the new healthcare law have affected her position? The Fed seems to ignore such factors.
Also not mentioned, two of the three individuals highlighted had prior felony convictions, one a heroin conviction just a year ago. Perhaps this hindered their job search? This seems to be quite an omission.
Janet Yellen sounded more like a politician than a central banker. The proper role of the central bank is not to set public policy; it is to maintain steady prices and a functioning banking system. It is up to elected officials to set the fiscal policy to improve the employment situation.
It seemed a little funny to us, too, since the Fed has engaged in these stimulus policies for over five years. Yellen is admitting a poor employment scenario, so how will even more of the same lead to success? It is clear a different policy is needed.
Getting back to the events of the week, several economic reports released this week showed improvement. Manufacturing and the service sectors showed gains, plus factory orders increased. However, exports fell strongly last month, leading to the largest trade deficit since September.
The big economic report came on Friday with the release of the March jobs number. The last several months saw very poor numbers which many attributed to the cold winter weather, therefore expecting a rebound in this month’s number as temperatures warmed up. Economists were estimating 200,000 jobs added in March, but whisper numbers reached as high as 300,000. The actual number came in at 192,000, on the low end of expectations, but an improvement from the last several months.
Lastly, some cracks are emerging in the market as the high-flying momentum stocks have been quietly, but strongly, moving lower. These are the stocks that have plowed higher, good news or bad. They were behind the strong sell-off late Friday.
There has been no real reason why they’ve sold off like they have; sometimes this is the way the market behaves. We can’t say it’s because they looked too expensive, because they’ve looked expensive for many months but continued to move higher. It will be something to watch closely to see if it starts dragging the broader market lower.
The chart below shows how some of these high-flying names have behaved recently. The top blue line represents the S&P 500, while the remainder are popular momentum stock names. The company names should be easy to determine from their ticker symbols. Link.
On Monday morning, the new Fed chief Janet Yellen kicked off the week with a speech aimed at reassuring the market that stimulus will be around for a “long time.” She focused primarily on unemployment, discussing how they can do more to increase jobs.
Her speech was different from any other Fed president in that she highlighted the plight of three people struggling to find employment and discussed how the Fed’s actions will help them get back to work.
We have serious concerns with this approach. She postures the Fed’s policy as the sole driver in putting people to work, ignoring structural issues like poor government policies that hurt employment. One woman highlighted had worked in the medical insurance field before losing her job. Could the new healthcare law have affected her position? The Fed seems to ignore such factors.
Also not mentioned, two of the three individuals highlighted had prior felony convictions, one a heroin conviction just a year ago. Perhaps this hindered their job search? This seems to be quite an omission.
Janet Yellen sounded more like a politician than a central banker. The proper role of the central bank is not to set public policy; it is to maintain steady prices and a functioning banking system. It is up to elected officials to set the fiscal policy to improve the employment situation.
It seemed a little funny to us, too, since the Fed has engaged in these stimulus policies for over five years. Yellen is admitting a poor employment scenario, so how will even more of the same lead to success? It is clear a different policy is needed.
Getting back to the events of the week, several economic reports released this week showed improvement. Manufacturing and the service sectors showed gains, plus factory orders increased. However, exports fell strongly last month, leading to the largest trade deficit since September.
The big economic report came on Friday with the release of the March jobs number. The last several months saw very poor numbers which many attributed to the cold winter weather, therefore expecting a rebound in this month’s number as temperatures warmed up. Economists were estimating 200,000 jobs added in March, but whisper numbers reached as high as 300,000. The actual number came in at 192,000, on the low end of expectations, but an improvement from the last several months.
Lastly, some cracks are emerging in the market as the high-flying momentum stocks have been quietly, but strongly, moving lower. These are the stocks that have plowed higher, good news or bad. They were behind the strong sell-off late Friday.
There has been no real reason why they’ve sold off like they have; sometimes this is the way the market behaves. We can’t say it’s because they looked too expensive, because they’ve looked expensive for many months but continued to move higher. It will be something to watch closely to see if it starts dragging the broader market lower.
The chart below shows how some of these high-flying names have behaved recently. The top blue line represents the S&P 500, while the remainder are popular momentum stock names. The company names should be easy to determine from their ticker symbols. Link.
Next Week
It starts to get busy next week as we get data from the first quarter. We’ll get a handful of earnings and estimates are very, very low, so this will be something to watch. Additionally, we’ll get more info on employment with the JOLTs figures (although these lag by a month), trade, import prices, and inflation at the producer level.
We’ll also get minutes from the latest Fed meeting and several regional Fed presidents will be making speeches. All-in-all, there will be plenty of info to move the market next week.
Investment Strategy
We continue to worry about the longer-term for the market, and while we think stocks are getting expensive for the short-term, they may have some room to run higher, especially as the Fed continues to prop up the market with stimulus. For new money into the market, undervalued individual stocks look more appealing than the broader index.
There are a variety of factors for our cautious outlook, whether it is record high margin levels (where investors borrow money to buy stock, and high levels indicate a correction is likely), record corporate insider selling, or a record amount of unprofitable IPO’s coming to market, plus global concerns like a slowdown in China. The recent sell-off in the high-flyers also adds to our caution. These low interest rates continue to make stocks look good, but any hint of a rise can send them sharply the other direction.
On bonds, bond yields hit their highest level in a month this week (so prices hit their lowest level), making a short position (bet on prices falling) look good. Still, 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. The short provides a nice hedge, but isn’t intended to be a long-term investment. 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 continues to be 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.
It starts to get busy next week as we get data from the first quarter. We’ll get a handful of earnings and estimates are very, very low, so this will be something to watch. Additionally, we’ll get more info on employment with the JOLTs figures (although these lag by a month), trade, import prices, and inflation at the producer level.
We’ll also get minutes from the latest Fed meeting and several regional Fed presidents will be making speeches. All-in-all, there will be plenty of info to move the market next week.
Investment Strategy
We continue to worry about the longer-term for the market, and while we think stocks are getting expensive for the short-term, they may have some room to run higher, especially as the Fed continues to prop up the market with stimulus. For new money into the market, undervalued individual stocks look more appealing than the broader index.
There are a variety of factors for our cautious outlook, whether it is record high margin levels (where investors borrow money to buy stock, and high levels indicate a correction is likely), record corporate insider selling, or a record amount of unprofitable IPO’s coming to market, plus global concerns like a slowdown in China. The recent sell-off in the high-flyers also adds to our caution. These low interest rates continue to make stocks look good, but any hint of a rise can send them sharply the other direction.
On bonds, bond yields hit their highest level in a month this week (so prices hit their lowest level), making a short position (bet on prices falling) look good. Still, 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. The short provides a nice hedge, but isn’t intended to be a long-term investment. 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 continues to be 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.
