It was another record week as stocks continued their push into record territory. For the week, the Dow gained 1.2%, the S&P rose 1.3%, and the Nasdaq climbed 1.9%. Bond yields reversed course this week as prices fell and yields rose. Gold turned in a gain after showing weakness earlier in the week, rising 0.5%. Oil moved slightly lower, falling just five cents to $102.66 per barrel. The international Brent oil moved down to $108.85 per barrel.
Source: Yahoo Finance
The market continues to slowly churn higher on light trading volume, though it notches a new record with each close higher. Economic data was heavy and mostly positive this week, however investors were more interested in news on stimulus from the European Central Bank.
Central bankers around the globe have worried over the low levels of reported inflation in their countries. European bankers in particular cite “very low inflation” as the cause of the poor economic recovery. They see low food and energy prices as a problem and vowed to take action to boost inflation levels and spur economic growth.
This week, investors got to see what the ECB would do for stimulus to boost inflation. Their announcement included lower interest rates and possible bond buying as stimulus. Since interest rates were so low to begin with, some will be negative. Yes, negative interest rates.
The way these rates work, sometimes banks need to park extra cash at the central bank, who then pays interest to the bank parking the cash. The interest paid is referred to as the deposit rate. To encourage banks to lend out that money and not park it at the central bank, a negative deposit rate would penalize banks by charging them a fee for holding on to money. This is the rationale for putting rates negative.
While this was a big step, it was largely expected and lead to a lukewarm response from the market.
These central banks continue to worry about low inflation and blame it for the lack of economic growth. They fail to consider other factors like poor government policies. We see this as the main factor in the lackluster economic growth, not because lending rates are too high (they’ve been at record lows for years). Until these policies are fixed, real economic growth will not occur. This is why the monumental amounts of stimulus over the last five years produced little in the way of results.
In fact, we think these stimulus policies are doing more harm than good. We only need to look at Japan, who has been doing stimulus in one form or another for almost two decades to try to overcome deflation and a stagnant economy. After failing to produce results, it recently kicked the stimulus into high gear. This has indeed led to higher spending by the Japanese people, which is widely celebrated.
However, it has created the highest misery index in over 30 years (this compares the level of inflation and employment). Food and energy inflation is through the roof with food prices rising the fastest in 23 years. Employment and wage increases have not occurred. The stimulus has merely increased the cost of surviving. Higher food and energy prices are not beneficial, as we mentioned earlier. They are damaging. Central bankers see this as progress, but we certainly do not.
Getting back to the news of the week, the other big story came on Friday with the monthly employment report. The U.S. added 217,000 jobs last month, right around expectations. This was a decent number, but not exactly the “snap-back” many had expected after the cold winter was used as an excuse for weak hiring earlier in the year. Still, it was in line with expectations so it had little effect on the market.
Other economic data on the week was mostly positive. Both the service and manufacturing sectors saw growth, factory orders rose slightly, and the Fed’s Beige Book saw growth in all 12 of their regions, as opposed to only eight the previous month. On the other hand, the trade deficit widened as imports rose and exports fell.
Finally, a bit of news from our Fed. This week they expressed some worries over the complacency in the market. Some regional presidents see investors taking too much risk and fear it could lead to a bubble. Unfortunately, this is from the Fed’s doing as they have forced investors to take more and more risk to achieve returns. It is a genuine concern, though, as it could spell problems down the road.
Next Week
Next week looks fairly quiet for market moving data. We’ll get a report on retail sales, plus inflation at the producer level. That’s about it. There will be several regional Fed presidents making speeches, so it may be interesting to hear what they have to say about the stimulus program after the decent jobs report this week.
Investment Strategy
Still no change here. We continue to have worries for the longer run, but the shorter run still looks to have some upside, though only little. The market is approaching overbought (expensive) levels as investors are growing excessively optimistic. Markets tend to reverse when everyone is on the same side of the trade, so this is reason for caution.
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.
Central bankers around the globe have worried over the low levels of reported inflation in their countries. European bankers in particular cite “very low inflation” as the cause of the poor economic recovery. They see low food and energy prices as a problem and vowed to take action to boost inflation levels and spur economic growth.
This week, investors got to see what the ECB would do for stimulus to boost inflation. Their announcement included lower interest rates and possible bond buying as stimulus. Since interest rates were so low to begin with, some will be negative. Yes, negative interest rates.
The way these rates work, sometimes banks need to park extra cash at the central bank, who then pays interest to the bank parking the cash. The interest paid is referred to as the deposit rate. To encourage banks to lend out that money and not park it at the central bank, a negative deposit rate would penalize banks by charging them a fee for holding on to money. This is the rationale for putting rates negative.
While this was a big step, it was largely expected and lead to a lukewarm response from the market.
These central banks continue to worry about low inflation and blame it for the lack of economic growth. They fail to consider other factors like poor government policies. We see this as the main factor in the lackluster economic growth, not because lending rates are too high (they’ve been at record lows for years). Until these policies are fixed, real economic growth will not occur. This is why the monumental amounts of stimulus over the last five years produced little in the way of results.
In fact, we think these stimulus policies are doing more harm than good. We only need to look at Japan, who has been doing stimulus in one form or another for almost two decades to try to overcome deflation and a stagnant economy. After failing to produce results, it recently kicked the stimulus into high gear. This has indeed led to higher spending by the Japanese people, which is widely celebrated.
However, it has created the highest misery index in over 30 years (this compares the level of inflation and employment). Food and energy inflation is through the roof with food prices rising the fastest in 23 years. Employment and wage increases have not occurred. The stimulus has merely increased the cost of surviving. Higher food and energy prices are not beneficial, as we mentioned earlier. They are damaging. Central bankers see this as progress, but we certainly do not.
Getting back to the news of the week, the other big story came on Friday with the monthly employment report. The U.S. added 217,000 jobs last month, right around expectations. This was a decent number, but not exactly the “snap-back” many had expected after the cold winter was used as an excuse for weak hiring earlier in the year. Still, it was in line with expectations so it had little effect on the market.
Other economic data on the week was mostly positive. Both the service and manufacturing sectors saw growth, factory orders rose slightly, and the Fed’s Beige Book saw growth in all 12 of their regions, as opposed to only eight the previous month. On the other hand, the trade deficit widened as imports rose and exports fell.
Finally, a bit of news from our Fed. This week they expressed some worries over the complacency in the market. Some regional presidents see investors taking too much risk and fear it could lead to a bubble. Unfortunately, this is from the Fed’s doing as they have forced investors to take more and more risk to achieve returns. It is a genuine concern, though, as it could spell problems down the road.
Next Week
Next week looks fairly quiet for market moving data. We’ll get a report on retail sales, plus inflation at the producer level. That’s about it. There will be several regional Fed presidents making speeches, so it may be interesting to hear what they have to say about the stimulus program after the decent jobs report this week.
Investment Strategy
Still no change here. We continue to have worries for the longer run, but the shorter run still looks to have some upside, though only little. The market is approaching overbought (expensive) levels as investors are growing excessively optimistic. Markets tend to reverse when everyone is on the same side of the trade, so this is reason for caution.
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.
