Stocks turned in their first negative week in a month. Through the Friday close, the Dow fell 0.9%, the S&P was lower by 0.7%, and the Nasdaq lost 0.3%. Gold saw a nice gain of 1.7%. Oil was the big story of the week, hitting nine month highs of nearly $107 per barrel on a 4.1% increase. The international Brent oil rose to $112.44 per barrel.
Source: Yahoo Finance
The week was very light on economic data and news from the central banks. It helped the week start on a quiet note, but unrest in Iraq stirred up the market, sending stocks lower and oil prices sharply higher.
By now you’ve heard about the Islamic terrorists who quickly took control of large, important cities in Iraq, so we won’t waste time with the details. At the time of this writing, they were advancing on Baghdad with momentum on their side. The collapse of this important city would complicate matters even further. It doesn’t appear the U.S. will intervene in any meaningful way, so the outlook is pessimistic.
On a quick personal note, my brother spent more than two years in the country with the U.S. Army. It is heartbreaking to see the gains they fought so dearly for lost so easily when it was easily avoidable. It is an extremely demoralizing situation for our troops.
Geopolitical instability is always a cause for concern with the markets. Iraq is particularly important due to their oil production, so it had even more of an impact than the recent issues with Russia and Ukraine. While the amount of oil they produce is significant – they are the world’s seventh largest oil producer – their current production isn’t extremely large. The U.S. doesn’t use much of their oil at this time.
The importance comes from their proven supplies, which is fifth highest in the world. They have been slowly ramping up production since the war and were on a promising trajectory. That future output is now in jeopardy after the events of this week, which sent oil prices sharply higher as a result.
As oil and gas prices rose, it increased fears of an economic slowdown. We heard this concern expressed repeatedly this week. While it’s true, it strikes us as funny. Higher oil prices not only increase the cost of gas, but nearly everything. Higher prices means inflation, which is exactly what the Fed and central banks are hoping for.
When faced with a real-world example like this, it clearly illustrates the problem of higher inflation. Higher prices hurt economies, they don’t help it. However, we are certain this will not prompt any changes in Fed policy.
As for economic data released this week, the news was largely negative. Retail sales rose 0.3% over the last month, much less than expected. When excluding transportation and gas from that calculation, growth was flat. Also, we learned inflation at the producer level ticked lower last month. We see any hint of lower prices as a positive, but it was looked at as a negative by central banks who are aiming to boost inflation.
Finally, an interesting situation arose this week with Spain. Their bonds traded at a lower yield than the U.S., which means investors saw them as more creditworthy than us. In fact, they traded at their lowest level since 1789. Yes, they haven’t been better in 225 years, which is amazing when you think about it. This has us very worried that a bond bubble is growing.
The apparent creditworthiness of Spain comes despite their poor economic situation. They have little economic growth, massive amounts of debt, and nearly 25% unemployment. We can be reassured that their GDP will be increasing soon, though. We recently discussed changes many countries made to boost their GDP, or economic growth, by including dubious items like drugs and prostitution in their calculations. Spain will be adopting those items in their GDP calculation, too, which will give the appearance of economic growth. It is troubling to see statistics manipulated so much and become so misleading.
Next Week
The focus will remain on events unfolding in Iraq over the next several days. If conditions worsen, we’re likely to see the market weaken. Like we saw with Ukraine, though, stabilization will likely reassure the markets and oil prices will decline.
The Fed will also be in the news as they hold another of their periodic meetings. We’re not expecting any changes in their policies, but they are expected to lower their economic projections.
We’ll also get economic data with the release of inflation at the consumer level, industrial production, housing, and leading economic indicators.
Investment Strategy
No change here, even with the events of this week. Stocks were on the expensive side to begin with, so the jitters from Iraq had little trouble sending stocks lower. While it depends on the conditions on the ground, any improvement will likely see stocks head higher.
While we aren’t adding new money to the broader market here, we are not selling yet, 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. Prices fell this week, though they had risen considerably in the weeks leading up to now. We take a longer view with this sector and there are worries prices could fall further in the future. A bet on this scenario (a short position, which bets that prices will fall and yields rise) 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.
By now you’ve heard about the Islamic terrorists who quickly took control of large, important cities in Iraq, so we won’t waste time with the details. At the time of this writing, they were advancing on Baghdad with momentum on their side. The collapse of this important city would complicate matters even further. It doesn’t appear the U.S. will intervene in any meaningful way, so the outlook is pessimistic.
On a quick personal note, my brother spent more than two years in the country with the U.S. Army. It is heartbreaking to see the gains they fought so dearly for lost so easily when it was easily avoidable. It is an extremely demoralizing situation for our troops.
Geopolitical instability is always a cause for concern with the markets. Iraq is particularly important due to their oil production, so it had even more of an impact than the recent issues with Russia and Ukraine. While the amount of oil they produce is significant – they are the world’s seventh largest oil producer – their current production isn’t extremely large. The U.S. doesn’t use much of their oil at this time.
The importance comes from their proven supplies, which is fifth highest in the world. They have been slowly ramping up production since the war and were on a promising trajectory. That future output is now in jeopardy after the events of this week, which sent oil prices sharply higher as a result.
As oil and gas prices rose, it increased fears of an economic slowdown. We heard this concern expressed repeatedly this week. While it’s true, it strikes us as funny. Higher oil prices not only increase the cost of gas, but nearly everything. Higher prices means inflation, which is exactly what the Fed and central banks are hoping for.
When faced with a real-world example like this, it clearly illustrates the problem of higher inflation. Higher prices hurt economies, they don’t help it. However, we are certain this will not prompt any changes in Fed policy.
As for economic data released this week, the news was largely negative. Retail sales rose 0.3% over the last month, much less than expected. When excluding transportation and gas from that calculation, growth was flat. Also, we learned inflation at the producer level ticked lower last month. We see any hint of lower prices as a positive, but it was looked at as a negative by central banks who are aiming to boost inflation.
Finally, an interesting situation arose this week with Spain. Their bonds traded at a lower yield than the U.S., which means investors saw them as more creditworthy than us. In fact, they traded at their lowest level since 1789. Yes, they haven’t been better in 225 years, which is amazing when you think about it. This has us very worried that a bond bubble is growing.
The apparent creditworthiness of Spain comes despite their poor economic situation. They have little economic growth, massive amounts of debt, and nearly 25% unemployment. We can be reassured that their GDP will be increasing soon, though. We recently discussed changes many countries made to boost their GDP, or economic growth, by including dubious items like drugs and prostitution in their calculations. Spain will be adopting those items in their GDP calculation, too, which will give the appearance of economic growth. It is troubling to see statistics manipulated so much and become so misleading.
Next Week
The focus will remain on events unfolding in Iraq over the next several days. If conditions worsen, we’re likely to see the market weaken. Like we saw with Ukraine, though, stabilization will likely reassure the markets and oil prices will decline.
The Fed will also be in the news as they hold another of their periodic meetings. We’re not expecting any changes in their policies, but they are expected to lower their economic projections.
We’ll also get economic data with the release of inflation at the consumer level, industrial production, housing, and leading economic indicators.
Investment Strategy
No change here, even with the events of this week. Stocks were on the expensive side to begin with, so the jitters from Iraq had little trouble sending stocks lower. While it depends on the conditions on the ground, any improvement will likely see stocks head higher.
While we aren’t adding new money to the broader market here, we are not selling yet, 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. Prices fell this week, though they had risen considerably in the weeks leading up to now. We take a longer view with this sector and there are worries prices could fall further in the future. A bet on this scenario (a short position, which bets that prices will fall and yields rise) 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.
