The week was a rocky one for stocks. Through the Friday close, the Dow lost 0.6%, the S&P fell a slight 0.03%, and the Nasdaq actually rose by 0.5%. Gold moved higher mid-week, but fell to close with a smaller gain of 0.5%. Oil prices again moved higher, rising 2.0% to $102 per barrel. The international Brent oil, used for much of our gas here in the east, moved up to $109.68 per barrel.
Source: Yahoo Finance
There were two main stories playing out this week. One was the rise and then sharp drop in the stock market. The other was the bond market, which saw prices move sharply higher (so yields moved lower) this week.
We’ll start with the stock market, which saw a couple sharply lower days this week. While many factors play a part in market moves like this, one economic report likely played a major part: inflation.
Inflation reports released this week showed inflation running higher than expected. As measured by the PPI, prices at the producer level increased sharply last month and have risen 2.1% over the past year. They were 2.0% higher at the consumer level (which is the prices we pay). As any regular shopper can confirm, higher food prices were the culprit, with meat prices up the most in one month since 2003 (and the second-most in 34 years).
These numbers over 2% are significant, since this is the Fed’s target before pulling back on stimulus (although the Fed uses a different metric to gauge inflation, they tend to be similar). This told investors that the Fed may raise interest rates sooner than expected, and since lower rates have sent stock prices higher, they sold-off on the news. Markets fell sharply the two days these reports were released, which supports our view.
Hopefully this will end the parade of policymakers expressing fears of disinflation or deflation. They believe inflation shows a healthy economy and have done their best to push it higher. Unfortunately for them, inflation metrics have shown little to no increase, which has them worried.
Unfortunately their view is completely inaccurate. First, we believe their inflation metrics significantly undervalue inflation experienced by everyday Americans. Second, forcing people to pay more to live is a misguided economic policy. History has shown that healthy, growing economies experienced lower prices. Rising prices were found in poor economic times, recalling the inflationary period of the 1970’s. We aren’t sure how the sharpest rise in meat prices in over a decade is helpful, but we’ll let you decide for yourself.
On to bonds, which though they may not be exciting to our readers, were a major story this week. Bond prices rose sharply as their yield hit the lowest level since October.
A concern over the lack of economic growth around the globe was the culprit. European countries continue to struggle, which has increased calls for the European central bank to do more to stimulate the economy. This includes pushing down interest rates in European countries to jump-start lending. While they seem reluctant to do so, the market got a jump by pushing rates down anyway, taking US bond rates down (and prices higher) with them.
These central bankers, both here and abroad, continue to wonder why economic growth is so poor. After all, they have forced years of stimulus on these economies and have little to show for it. The answer is obvious. Citing history again, it has shown that the best economies are the ones with the least government involvement and central planning. This is the exact opposite of our current policies. Instead, seeing years of failed growth, they continue to double down and dig the hole deeper.
We’ll wrap up this section by touching on earnings, which are nearly complete for the first quarter. Earnings growth has been much better than expected, with Factset reporting earnings growth of 2.1% over the past year. Remember, economists were expecting negative earnings growth this quarter. Revenue, what the company actually received in sales, rose 2.8%. While these numbers are still rather low, they are decent on a relative basis.
Next Week
Next week will be a very quiet one for data. The amount of corporate earnings releases will slow to a trickle and the only economic reports will be on housing. The Fed will be in the news with the release of the minutes from their last meeting, but we don’t see them have much impact on the market.
That doesn’t mean it will be a quiet week for the markets, though, as the bond market will still be in focus after the sharp rise in prices (and drop in yields) this week. Activity in the bond market may spill over to stocks, so next week may be a little more active.
Investment Strategy
Even with the sell-off this week, we aren’t looking to make any changes to our strategy. Stocks remain on the expensive side, but we aren’t looking to do any selling in the broader indexes at this point. Clearly we wouldn’t add to those positions, either, but there are some individual stocks that look attractive for new money.
Bonds were the story of the week and have continued to perform well. This area remains volatile 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 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.
We’ll start with the stock market, which saw a couple sharply lower days this week. While many factors play a part in market moves like this, one economic report likely played a major part: inflation.
Inflation reports released this week showed inflation running higher than expected. As measured by the PPI, prices at the producer level increased sharply last month and have risen 2.1% over the past year. They were 2.0% higher at the consumer level (which is the prices we pay). As any regular shopper can confirm, higher food prices were the culprit, with meat prices up the most in one month since 2003 (and the second-most in 34 years).
These numbers over 2% are significant, since this is the Fed’s target before pulling back on stimulus (although the Fed uses a different metric to gauge inflation, they tend to be similar). This told investors that the Fed may raise interest rates sooner than expected, and since lower rates have sent stock prices higher, they sold-off on the news. Markets fell sharply the two days these reports were released, which supports our view.
Hopefully this will end the parade of policymakers expressing fears of disinflation or deflation. They believe inflation shows a healthy economy and have done their best to push it higher. Unfortunately for them, inflation metrics have shown little to no increase, which has them worried.
Unfortunately their view is completely inaccurate. First, we believe their inflation metrics significantly undervalue inflation experienced by everyday Americans. Second, forcing people to pay more to live is a misguided economic policy. History has shown that healthy, growing economies experienced lower prices. Rising prices were found in poor economic times, recalling the inflationary period of the 1970’s. We aren’t sure how the sharpest rise in meat prices in over a decade is helpful, but we’ll let you decide for yourself.
On to bonds, which though they may not be exciting to our readers, were a major story this week. Bond prices rose sharply as their yield hit the lowest level since October.
A concern over the lack of economic growth around the globe was the culprit. European countries continue to struggle, which has increased calls for the European central bank to do more to stimulate the economy. This includes pushing down interest rates in European countries to jump-start lending. While they seem reluctant to do so, the market got a jump by pushing rates down anyway, taking US bond rates down (and prices higher) with them.
These central bankers, both here and abroad, continue to wonder why economic growth is so poor. After all, they have forced years of stimulus on these economies and have little to show for it. The answer is obvious. Citing history again, it has shown that the best economies are the ones with the least government involvement and central planning. This is the exact opposite of our current policies. Instead, seeing years of failed growth, they continue to double down and dig the hole deeper.
We’ll wrap up this section by touching on earnings, which are nearly complete for the first quarter. Earnings growth has been much better than expected, with Factset reporting earnings growth of 2.1% over the past year. Remember, economists were expecting negative earnings growth this quarter. Revenue, what the company actually received in sales, rose 2.8%. While these numbers are still rather low, they are decent on a relative basis.
Next Week
Next week will be a very quiet one for data. The amount of corporate earnings releases will slow to a trickle and the only economic reports will be on housing. The Fed will be in the news with the release of the minutes from their last meeting, but we don’t see them have much impact on the market.
That doesn’t mean it will be a quiet week for the markets, though, as the bond market will still be in focus after the sharp rise in prices (and drop in yields) this week. Activity in the bond market may spill over to stocks, so next week may be a little more active.
Investment Strategy
Even with the sell-off this week, we aren’t looking to make any changes to our strategy. Stocks remain on the expensive side, but we aren’t looking to do any selling in the broader indexes at this point. Clearly we wouldn’t add to those positions, either, but there are some individual stocks that look attractive for new money.
Bonds were the story of the week and have continued to perform well. This area remains volatile 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 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.
