The stock market rose again this week on more light trading volume. Through the Friday close, the Dow was higher by 0.7%, the S&P gained 1.2%, and the Nasdaq returned a decent 1.4%. Yields on government bonds hit 11-month lows as prices continue to rise. Gold had its worst week in eight months, falling 3.6%. Oil finally had a negative week, losing 1.6% to $102.71 per barrel. The international Brent oil fell to $109.49 per barrel.
Source: Yahoo Finance (the chart was skewed this week by Monday’s holiday)
The week was another quiet one, with the short week and start of summer likely taking its toll on trading volume. Economic data releases were largely negative, but stocks continued to rise anyway, again hitting new highs.
The big story was the GDP report, which showed the strength of our economy. A few weeks ago we got our first look at GDP, which came in at a flat 0.1% growth. With more data now available, this week that GDP number was revised sharply lower to -1%. This shows our economy contracted in the first quarter, the first contraction in three years.
Keep in mind, this contraction comes despite the hundreds of billions of dollars spent on stimulus and trillions more created out of thin air. Yet we remain stuck in the worst economic recovery since WWII. One might look at the lack of results and conclude that a different approach is needed. However, we’re continuing down this path of government intervention in the markets, which as we’ve seen, isn’t likely to work any better than it already has.
With the poor economic report, why were stocks up? It means the Fed is less likely to remove its stimulus programs in the near future so interest rates will remain low for longer. This condition that has been very beneficial to the stock market so far, therefore, stocks rose on the bad news.
Stocks weren’t the only asset class to rise as bonds rose too. Bonds have been a big story in recent weeks as their yields continue to hit new lows (so prices have hit highs). The slow economic growth has been one factor behind the moves as worried investors park their money in relatively safe investments.
The other factor is stimulus policies from the European Central Bank. The ECB will hold a policy meeting next week where investors expect an announcement of some sort of stimulus program. It is expected to drive down interest rates, so investors have been getting a jump on the announcement by pushing yields lower on their own. European bond yields are around the lowest level in the history of the Euro, which spilled over to our market and pushed our yields down, too.
To wrap up this section, we’ll return to the topic of GDP. Almost a year ago, changes were made to the GDP calculation by adding in new items not previously counted (LINK). This had the effect of making the number look bigger than it otherwise would have (of course, they wouldn’t make a change unless the number looked bigger).
Several other countries adopted this idea, too, since every country wants their GDP to look bigger. It also makes their debt situation look better, since it is often measured by a debt-to-GDP ratio. If GDP is higher, their debt situation doesn’t look as bad.
Several weeks ago, Italy jumped the shark by adding rather dubious items to their GDP calculation: hookers and drugs. We’re not kidding. Since people pay money for these items, Italy reasoned they should be included in GDP calculations. Of course, this boosted their GDP and “improved” their economic picture. How’s this for a headline: Cocaine Sales to Boost Italian GDP in Boon for Budget. Link.
We figured that was a one-off. No other country would be so bold as to add items like these. Yet this week, Britain announced they would do the same, officially including prostitution and drug sales in their GDP (LINK). They even went so far as to describe the process of calculating these figures since they are all based on assumptions because, shockingly, prostitutes and drug dealers don’t report their income to the government.
Going forward, we need to be careful about relying on GDP figures too strongly. They are becoming more and more inaccurate as countries adopt questionable items to give an appearance of economic growth. We tend to question the reliability of government numbers to begin with but it is now crossing an absurd level, which is a little frightening.
Next Week
While the last few weeks have been very quiet with the amount of trading volume, that could change next week as there are several important events that are likely to bring traders back in.
First, we’ve been talking a lot about the moves in the bond market recently, much of which were in anticipation of stimulus from Europe. We’ll find out if that is the case this week as the European Central Bank meets to discuss their economic policy. Stimulus or not, we are likely to see a big reaction in the market, either way.
Back here in the U.S., we’ll get an important economic report on Friday with the employment report for May. Expectations are high for this number, so it is possible to see some disappointment here. The week will also have economic reports on the strength of the manufacturing and service sectors, plus factory orders and the trade balance.
Investment Strategy
No change here. While we have our worries for the longer term, we think there is still room for the markets to move higher in the short run. Stocks are expensive here, so we aren’t doing any buying, but aren’t doing any selling, either. For new money, we’d prefer to find undervalued individual names instead of the broader market indexes. A look at a company’s fundamentals tells us if it’s a good one to buy, while technical analysis (the charts) will tell us if it is a good time to buy.
The bond market remains volatile and will likely see more volatility this week. We’ll take a longer view with this sector and while they’ve performed well recently, there is a concern the run may come to an end soon. A bet that rates will rise (a short position, which bets that prices will fall) 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.
The big story was the GDP report, which showed the strength of our economy. A few weeks ago we got our first look at GDP, which came in at a flat 0.1% growth. With more data now available, this week that GDP number was revised sharply lower to -1%. This shows our economy contracted in the first quarter, the first contraction in three years.
Keep in mind, this contraction comes despite the hundreds of billions of dollars spent on stimulus and trillions more created out of thin air. Yet we remain stuck in the worst economic recovery since WWII. One might look at the lack of results and conclude that a different approach is needed. However, we’re continuing down this path of government intervention in the markets, which as we’ve seen, isn’t likely to work any better than it already has.
With the poor economic report, why were stocks up? It means the Fed is less likely to remove its stimulus programs in the near future so interest rates will remain low for longer. This condition that has been very beneficial to the stock market so far, therefore, stocks rose on the bad news.
Stocks weren’t the only asset class to rise as bonds rose too. Bonds have been a big story in recent weeks as their yields continue to hit new lows (so prices have hit highs). The slow economic growth has been one factor behind the moves as worried investors park their money in relatively safe investments.
The other factor is stimulus policies from the European Central Bank. The ECB will hold a policy meeting next week where investors expect an announcement of some sort of stimulus program. It is expected to drive down interest rates, so investors have been getting a jump on the announcement by pushing yields lower on their own. European bond yields are around the lowest level in the history of the Euro, which spilled over to our market and pushed our yields down, too.
To wrap up this section, we’ll return to the topic of GDP. Almost a year ago, changes were made to the GDP calculation by adding in new items not previously counted (LINK). This had the effect of making the number look bigger than it otherwise would have (of course, they wouldn’t make a change unless the number looked bigger).
Several other countries adopted this idea, too, since every country wants their GDP to look bigger. It also makes their debt situation look better, since it is often measured by a debt-to-GDP ratio. If GDP is higher, their debt situation doesn’t look as bad.
Several weeks ago, Italy jumped the shark by adding rather dubious items to their GDP calculation: hookers and drugs. We’re not kidding. Since people pay money for these items, Italy reasoned they should be included in GDP calculations. Of course, this boosted their GDP and “improved” their economic picture. How’s this for a headline: Cocaine Sales to Boost Italian GDP in Boon for Budget. Link.
We figured that was a one-off. No other country would be so bold as to add items like these. Yet this week, Britain announced they would do the same, officially including prostitution and drug sales in their GDP (LINK). They even went so far as to describe the process of calculating these figures since they are all based on assumptions because, shockingly, prostitutes and drug dealers don’t report their income to the government.
Going forward, we need to be careful about relying on GDP figures too strongly. They are becoming more and more inaccurate as countries adopt questionable items to give an appearance of economic growth. We tend to question the reliability of government numbers to begin with but it is now crossing an absurd level, which is a little frightening.
Next Week
While the last few weeks have been very quiet with the amount of trading volume, that could change next week as there are several important events that are likely to bring traders back in.
First, we’ve been talking a lot about the moves in the bond market recently, much of which were in anticipation of stimulus from Europe. We’ll find out if that is the case this week as the European Central Bank meets to discuss their economic policy. Stimulus or not, we are likely to see a big reaction in the market, either way.
Back here in the U.S., we’ll get an important economic report on Friday with the employment report for May. Expectations are high for this number, so it is possible to see some disappointment here. The week will also have economic reports on the strength of the manufacturing and service sectors, plus factory orders and the trade balance.
Investment Strategy
No change here. While we have our worries for the longer term, we think there is still room for the markets to move higher in the short run. Stocks are expensive here, so we aren’t doing any buying, but aren’t doing any selling, either. For new money, we’d prefer to find undervalued individual names instead of the broader market indexes. A look at a company’s fundamentals tells us if it’s a good one to buy, while technical analysis (the charts) will tell us if it is a good time to buy.
The bond market remains volatile and will likely see more volatility this week. We’ll take a longer view with this sector and while they’ve performed well recently, there is a concern the run may come to an end soon. A bet that rates will rise (a short position, which bets that prices will fall) 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.
