Stocks moved higher this week on some of the lightest trading volume of the year. For the week, the Dow gained 0.7%, the S&P rose 1.2%, and the Nasdaq returned a nice 2.3%. Gold ended with little change, off just 0.1%. Oil prices steadily moved higher, climbing 2.7% to $104.35 per barrel. The international Brent oil, used for much of our gas here in the east, rose to $110.44 per barrel.
Source: Yahoo Finance
While the week was light in the amount of trading, the news flow was also quiet. There were few corporate earnings releases and even fewer economic reports. However, the two days that saw large moves were the two days with news out of the Fed.
Two regional Fed presidents made headlines Tuesday when they discussed raising interest rates. Though the Fed does not plan to do so in the near future, stocks sold off on the news because stocks do well with low interest rates.
Interest rates have been held at records lows for over 5 years now in an attempt to encourage borrowing. Low interest rates tend to create bubbles when held too low for too long (we could be creating them now), so it is necessary to raise interest rates, preferably sooner rather than later. The Fed will have to raise interest rates eventually, so these comments from the Fed are an attempt to warm the market to their eventual arrival.
On Wednesday the Fed released the minutes from their latest meeting, showing us no surprises. The discussion centered more on longer-term items like those interest rate increases, but emphasized they won’t rise until next year at the earliest. This reassured markets that rates will not rise anytime soon, helping send stocks back higher.
The big story last week was the activity in the bond market, with bond yields falling sharply (so prices rose sharply). Bonds traded around those same levels this week, staying within a tight range and ending with little change.
There is still debate on the cause of the big move in the bond market last week, with more and more investors thinking it was a sign of a coming recession. They point to the lackluster earnings reports and slow economic growth as evidence. Numerous money managers seem to have taken notice and are worried, with the average cash amount in these portfolios hitting the highest level in two years (more cash shows a risk-aversion).
We think that while a recession may be a possibility, the decline in rates probably had more to do with potential stimulus in Europe pushing down rates for European bonds. This made the US bond market more attractive by default and saw investors pile into US debt.
Lastly, one market indicator made news this week. Investors are watching what is commonly referred to as the “fear gauge,” or VIX index (the price for this index rises when there is more fear, or volatility, in the markets and falls with less fear). This week the VIX hit its lowest level in 14 months, showing a large amount of complacency in the market. While this may sound like a positive, low levels tend to be a contrary indicator and are often followed by a drop in the market. This is a reason to be cautious.
Next Week
On the holiday-shortened week, we’ll get a few reports worth watching. There will be info on durable goods sales (which are items with a longer life, like a refrigerator or car), consumer confidence, personal consumption, income, and spending. We’ll also get the revision to the first quarter GDP, which stood at a paltry 0.1% growth in our first look. Most economists think that will be revised lower, showing our economy contracted in the first quarter.
An important event to watch will be the election in Ukraine. While the market has paid little attention to this region recently, it will be interesting to see Putin’s reaction if the election doesn’t go his way, which it is expected to do.
Investment Strategy
While we discussed reasons for caution in the first section, we aren’t doing any selling at this point. Stocks are on the expensive side, but not at a high enough level that we are overly concerned in the short run. We wouldn’t put new money into the broader indexes, but instead look for undervalued individual names. Fundamental analysis tells us what companies to buy, while technical analysis gives us a good idea of when to buy them.
Bonds saw little change this week, but this area remains volatile in the short run. 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.
TIPs have done well on the recent higher inflation data. We think they remain an important hedge against future inflation. Some municipal bonds look attractive for the right client, but not as good as they did several months ago. 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 has been stuck in this range for months and done very little.
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.
Two regional Fed presidents made headlines Tuesday when they discussed raising interest rates. Though the Fed does not plan to do so in the near future, stocks sold off on the news because stocks do well with low interest rates.
Interest rates have been held at records lows for over 5 years now in an attempt to encourage borrowing. Low interest rates tend to create bubbles when held too low for too long (we could be creating them now), so it is necessary to raise interest rates, preferably sooner rather than later. The Fed will have to raise interest rates eventually, so these comments from the Fed are an attempt to warm the market to their eventual arrival.
On Wednesday the Fed released the minutes from their latest meeting, showing us no surprises. The discussion centered more on longer-term items like those interest rate increases, but emphasized they won’t rise until next year at the earliest. This reassured markets that rates will not rise anytime soon, helping send stocks back higher.
The big story last week was the activity in the bond market, with bond yields falling sharply (so prices rose sharply). Bonds traded around those same levels this week, staying within a tight range and ending with little change.
There is still debate on the cause of the big move in the bond market last week, with more and more investors thinking it was a sign of a coming recession. They point to the lackluster earnings reports and slow economic growth as evidence. Numerous money managers seem to have taken notice and are worried, with the average cash amount in these portfolios hitting the highest level in two years (more cash shows a risk-aversion).
We think that while a recession may be a possibility, the decline in rates probably had more to do with potential stimulus in Europe pushing down rates for European bonds. This made the US bond market more attractive by default and saw investors pile into US debt.
Lastly, one market indicator made news this week. Investors are watching what is commonly referred to as the “fear gauge,” or VIX index (the price for this index rises when there is more fear, or volatility, in the markets and falls with less fear). This week the VIX hit its lowest level in 14 months, showing a large amount of complacency in the market. While this may sound like a positive, low levels tend to be a contrary indicator and are often followed by a drop in the market. This is a reason to be cautious.
Next Week
On the holiday-shortened week, we’ll get a few reports worth watching. There will be info on durable goods sales (which are items with a longer life, like a refrigerator or car), consumer confidence, personal consumption, income, and spending. We’ll also get the revision to the first quarter GDP, which stood at a paltry 0.1% growth in our first look. Most economists think that will be revised lower, showing our economy contracted in the first quarter.
An important event to watch will be the election in Ukraine. While the market has paid little attention to this region recently, it will be interesting to see Putin’s reaction if the election doesn’t go his way, which it is expected to do.
Investment Strategy
While we discussed reasons for caution in the first section, we aren’t doing any selling at this point. Stocks are on the expensive side, but not at a high enough level that we are overly concerned in the short run. We wouldn’t put new money into the broader indexes, but instead look for undervalued individual names. Fundamental analysis tells us what companies to buy, while technical analysis gives us a good idea of when to buy them.
Bonds saw little change this week, but this area remains volatile in the short run. 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.
TIPs have done well on the recent higher inflation data. We think they remain an important hedge against future inflation. Some municipal bonds look attractive for the right client, but not as good as they did several months ago. 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 has been stuck in this range for months and done very little.
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.
