Please note: there will be no market commentary next week due to the 4th of July holiday. Thanks, and have a nice long weekend.
The stock market turned in a negative week, though it remains near record highs. Through the Friday close, the Dow fell 0.6%, the S&P was lower by 0.1%, but the Nasdaq gained 0.7%. Gold turned in another positive week, rising 0.2%. Oil took a turn lower, losing 1.0% to $105.74 per barrel. The international Brent, used for much of our gas here in the east, fell to $113.18 per barrel.
The stock market turned in a negative week, though it remains near record highs. Through the Friday close, the Dow fell 0.6%, the S&P was lower by 0.1%, but the Nasdaq gained 0.7%. Gold turned in another positive week, rising 0.2%. Oil took a turn lower, losing 1.0% to $105.74 per barrel. The international Brent, used for much of our gas here in the east, fell to $113.18 per barrel.
Source: Yahoo Finance
The activity was a little different on Wall Street this week as stocks saw pressure to the downside nearly every day. However, the moves in stocks were mostly modest.
Geopolitical events like the fighting in Iraq and Ukraine were largely ignored again this week. A report of Syrian warplanes entering the fight and killing at least 50 insurgents seemed to have pressured markets lower on Tuesday. Beyond this event, the fighting remained on the back burner, with oil prices even declining on the week.
The other item having a big impact on the markets this week was comments from a regional Fed president. Jim Bullard, of the St. Louis bank, commented on a Thursday morning TV program that the Fed was closer to achieving its goals than investors may realize. Stocks sold off strongly after the comments, for it meant a reduction in stimulus earlier than anticipated.
While the comments were a wake-up call, there is still a debate within the Fed itself on the length of the stimulus program, so it’s not clear how long stimulus will be with us. While a regional Fed president may say one thing, the head of the Fed has emphasized their commitment to keeping stimulus around for a long time. This makes it more likely stimulus will be around for longer than Bullard’s comments indicate.
The big economic data of the week was the revision to first quarter GDP. Originally standing at 0.1% on an annualized basis, the number was first revised to -1.0%, and this week revised even lower to -2.9%. It is the weakest economic growth in five years and is the worst non-recession period growth in 57 years. Oddly enough, the bad news had no impact on the market, likely due to it being a report on the first quarter and we’re nearly complete with the second.
Poor weather took much of the blame for the poor economy, but poor weather alone cannot have such a large effect on this data point. It shows the economy is far weaker than many expected. Growth seems to be picking up this quarter, but it must pick up sharply to meet economists’ expectations for the year.
One of the items that helped in the previous revisions was health care spending, which showed a gain of 9.1%. However, this health spending was revised to a loss of 1.4%. Such a large revision is odd, but perhaps sets up the next quarter to show an unusually large gain.
Inflation was a big topic this week, too, as another report showed inflation rising sharply. The report released this week was the PCE deflator, which hit two-year highs. This report measures inflation slightly differently than the reports released the last two weeks, but it tells a similar story. Inflation is rising and hurts consumption, but it is one of the goals of the Fed.
As for other economic data this week, the results were mixed. Housing showed improvement, largely due to the lower recent interest rates. Consumer confidence also showed strength. On the other hand, personal income and spending both increased, but slightly lower than expectations. The increase in spending was actually due to higher inflation, where if adjusted for inflation, spending would have decreased.
Next Week
With next week marking the end of the month and quarter, we’ll begin to get economic data for that period rolling in. In the holiday-shortened week, we’ll see info on housing, the strength of the manufacturing and service sectors, and most importantly, employment. It could be a busy week.
Investment Strategy
Our investment strategy remains unchanged. Stocks are on the expensive side, so it is not surprising to see some pressure to the downside. We don’t believe the downside risks are enough to sell at this point, though we do have serious concerns for the longer run.
While we aren’t selling the broader index at this time, we are not interested in buying it, either. Instead, we look for undervalued individual names to put new money in. We check the company’s fundamentals to tell us if it is worth buying, while technical analysis, or the charts, will tell us if it is a good time to buy.
As for bonds, prices rose this week (so bond yields fell), but they remain volatile. Prices have been in this range for some time now, so they haven’t really established a trend either way. With prices so high, there is the possibility of prices falling in the future. A position to profit in this scenario (a short position, where your profit increases if prices fall) acts as a nice 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, showing another nice gain this week. However, it has been around this level for many months now, doing 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.
Geopolitical events like the fighting in Iraq and Ukraine were largely ignored again this week. A report of Syrian warplanes entering the fight and killing at least 50 insurgents seemed to have pressured markets lower on Tuesday. Beyond this event, the fighting remained on the back burner, with oil prices even declining on the week.
The other item having a big impact on the markets this week was comments from a regional Fed president. Jim Bullard, of the St. Louis bank, commented on a Thursday morning TV program that the Fed was closer to achieving its goals than investors may realize. Stocks sold off strongly after the comments, for it meant a reduction in stimulus earlier than anticipated.
While the comments were a wake-up call, there is still a debate within the Fed itself on the length of the stimulus program, so it’s not clear how long stimulus will be with us. While a regional Fed president may say one thing, the head of the Fed has emphasized their commitment to keeping stimulus around for a long time. This makes it more likely stimulus will be around for longer than Bullard’s comments indicate.
The big economic data of the week was the revision to first quarter GDP. Originally standing at 0.1% on an annualized basis, the number was first revised to -1.0%, and this week revised even lower to -2.9%. It is the weakest economic growth in five years and is the worst non-recession period growth in 57 years. Oddly enough, the bad news had no impact on the market, likely due to it being a report on the first quarter and we’re nearly complete with the second.
Poor weather took much of the blame for the poor economy, but poor weather alone cannot have such a large effect on this data point. It shows the economy is far weaker than many expected. Growth seems to be picking up this quarter, but it must pick up sharply to meet economists’ expectations for the year.
One of the items that helped in the previous revisions was health care spending, which showed a gain of 9.1%. However, this health spending was revised to a loss of 1.4%. Such a large revision is odd, but perhaps sets up the next quarter to show an unusually large gain.
Inflation was a big topic this week, too, as another report showed inflation rising sharply. The report released this week was the PCE deflator, which hit two-year highs. This report measures inflation slightly differently than the reports released the last two weeks, but it tells a similar story. Inflation is rising and hurts consumption, but it is one of the goals of the Fed.
As for other economic data this week, the results were mixed. Housing showed improvement, largely due to the lower recent interest rates. Consumer confidence also showed strength. On the other hand, personal income and spending both increased, but slightly lower than expectations. The increase in spending was actually due to higher inflation, where if adjusted for inflation, spending would have decreased.
Next Week
With next week marking the end of the month and quarter, we’ll begin to get economic data for that period rolling in. In the holiday-shortened week, we’ll see info on housing, the strength of the manufacturing and service sectors, and most importantly, employment. It could be a busy week.
Investment Strategy
Our investment strategy remains unchanged. Stocks are on the expensive side, so it is not surprising to see some pressure to the downside. We don’t believe the downside risks are enough to sell at this point, though we do have serious concerns for the longer run.
While we aren’t selling the broader index at this time, we are not interested in buying it, either. Instead, we look for undervalued individual names to put new money in. We check the company’s fundamentals to tell us if it is worth buying, while technical analysis, or the charts, will tell us if it is a good time to buy.
As for bonds, prices rose this week (so bond yields fell), but they remain volatile. Prices have been in this range for some time now, so they haven’t really established a trend either way. With prices so high, there is the possibility of prices falling in the future. A position to profit in this scenario (a short position, where your profit increases if prices fall) acts as a nice 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, showing another nice gain this week. However, it has been around this level for many months now, doing 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.
