Stocks turned in another week with strong, steady gains. Through the Friday close, the Dow rose a nice 2.0%, the S&P climbed 1.7%, and the Nasdaq also returned 1.7%. Gold had another negative week, off 2.0%. Oil saw its lowest price since January to close the week down 1.8% at $93.65 per barrel. The international Brent oil, used for much of our gas here in the east, closed down to $102.10 per barrel.
Source: Yahoo Finance
As you can see in the chart above, the week saw relatively little volatility as stocks moved steadily higher, though on some of the lightest trading volume of the year. They have now regained all the ground lost in the late July/early August pullback. In fact, the S&P 500 went on to notch another all-time high this week.
The week was very light on news, with the only real stories coming to us from the Fed. We received the minutes from their latest meeting, plus they held their annual retreat for central bankers in Jackson Hole, where Fed Chief Yellen made a widely anticipated speech on their policies.
Again referring to the chart above, we can see from the lack of volatility that these Fed events told us little new. The Fed will continue to keep their foot on the pedal, waiting for more economic information before making any decisions. We did notice that more Fed members are on board with removing these stimulus policies sooner rather than later, but they remain a minority. This is notable though, as more and more members are adopting that view.
The actions of the Fed are very important because the money printing and rock-bottom interest rates have fueled the stock market rise. Therefore, investors are closely watching for any changes since it could spell an end to the run the market has seen. This is why investors are following the Fed so closely.
One last point on the Fed, coming into this week, central bankers openly and vocally wondered why the economy isn’t growing as fast as they predicted. After all, they’ve done countless stimulus programs over the years and their projections showed the economy should be humming along by now. However, we’ve had one of the weakest recoveries on record.
To us, it shows that the economic problems around the world cannot be solved by central banks and stimulus. Economies need fundamental fixes – lower taxes, lower regulations, easier labor standards, stable currency, lower debt – but these are much more difficult and painful to accomplish than just printing money. We discussed this last week, but thought it was worth mentioning again as we frustratingly watch central bankers ignore their failed efforts and discuss doing even more.
As for economic data this week, the releases were largely positive. Housing reports showed continued improvement and manufacturing looked solid.
We also received the CPI report, which shows inflation at the consumer level. Inflation ticked higher by 0.1% over the last month. The report shows food prices soaring, but lower gas and energy prices offset those gains.
Inflation now stands at 2.0% over the past year, which is the fourth straight month of inflation at 2% or higher. However, it was a decline from the 2.1% level a month earlier, so many saw the slight reduction in inflation as an invitation for more stimulus, which helped push stocks higher.
Next Week
We’ll see a few more economic reports next week, but they probably won’t be important enough to have much impact on the market. There will be more info on the housing sector, plus durable goods, personal income and spending, and the updated numbers on second quarter GDP.
This week the market saw a little activity on the Ukraine/Russia fighting, so with light trading volume, it may again cause some fluctuations in stocks.
Investment Strategy
No change here. Stocks have rebounded sharply from the lows of early August and may be due for a bit of a breather. We aren’t putting any new money into the broader market at this point, nor are we selling. For new money, we prefer undervalued individual names at this point.
While the market has the potential to move higher in the short term, we still have serious concerns for the longer term. We worry about overvaluations in riskier investments, ranging from stocks to the bond market. Europe, in particular, is a worry as they drift back into recession with record levels of overvalued debt. At some point we see this correcting in a painful way, but it is anyone’s guess as to when this will occur.
Bond prices moved a bit lower this week (so bond yields moved higher). These yields are on the low level of the range they been in over the last year, so despite the volatility, they haven’t established a broader trend either way. With prices so high, though, it increases the chance they will fall 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.
European bonds look extremely expensive at the moment and also look like fantastic short opportunities.
Bonds to protect against inflation, or TIPs, have done well on the recent higher inflation data. We think they remain an important hedge against future inflation and are likely to do well as inflation increases. 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 good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical worries and falling once they are out of the headlines and has been stuck in the same range for over a year now. Still, it is a good hedge if things go south.
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 week was very light on news, with the only real stories coming to us from the Fed. We received the minutes from their latest meeting, plus they held their annual retreat for central bankers in Jackson Hole, where Fed Chief Yellen made a widely anticipated speech on their policies.
Again referring to the chart above, we can see from the lack of volatility that these Fed events told us little new. The Fed will continue to keep their foot on the pedal, waiting for more economic information before making any decisions. We did notice that more Fed members are on board with removing these stimulus policies sooner rather than later, but they remain a minority. This is notable though, as more and more members are adopting that view.
The actions of the Fed are very important because the money printing and rock-bottom interest rates have fueled the stock market rise. Therefore, investors are closely watching for any changes since it could spell an end to the run the market has seen. This is why investors are following the Fed so closely.
One last point on the Fed, coming into this week, central bankers openly and vocally wondered why the economy isn’t growing as fast as they predicted. After all, they’ve done countless stimulus programs over the years and their projections showed the economy should be humming along by now. However, we’ve had one of the weakest recoveries on record.
To us, it shows that the economic problems around the world cannot be solved by central banks and stimulus. Economies need fundamental fixes – lower taxes, lower regulations, easier labor standards, stable currency, lower debt – but these are much more difficult and painful to accomplish than just printing money. We discussed this last week, but thought it was worth mentioning again as we frustratingly watch central bankers ignore their failed efforts and discuss doing even more.
As for economic data this week, the releases were largely positive. Housing reports showed continued improvement and manufacturing looked solid.
We also received the CPI report, which shows inflation at the consumer level. Inflation ticked higher by 0.1% over the last month. The report shows food prices soaring, but lower gas and energy prices offset those gains.
Inflation now stands at 2.0% over the past year, which is the fourth straight month of inflation at 2% or higher. However, it was a decline from the 2.1% level a month earlier, so many saw the slight reduction in inflation as an invitation for more stimulus, which helped push stocks higher.
Next Week
We’ll see a few more economic reports next week, but they probably won’t be important enough to have much impact on the market. There will be more info on the housing sector, plus durable goods, personal income and spending, and the updated numbers on second quarter GDP.
This week the market saw a little activity on the Ukraine/Russia fighting, so with light trading volume, it may again cause some fluctuations in stocks.
Investment Strategy
No change here. Stocks have rebounded sharply from the lows of early August and may be due for a bit of a breather. We aren’t putting any new money into the broader market at this point, nor are we selling. For new money, we prefer undervalued individual names at this point.
While the market has the potential to move higher in the short term, we still have serious concerns for the longer term. We worry about overvaluations in riskier investments, ranging from stocks to the bond market. Europe, in particular, is a worry as they drift back into recession with record levels of overvalued debt. At some point we see this correcting in a painful way, but it is anyone’s guess as to when this will occur.
Bond prices moved a bit lower this week (so bond yields moved higher). These yields are on the low level of the range they been in over the last year, so despite the volatility, they haven’t established a broader trend either way. With prices so high, though, it increases the chance they will fall 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.
European bonds look extremely expensive at the moment and also look like fantastic short opportunities.
Bonds to protect against inflation, or TIPs, have done well on the recent higher inflation data. We think they remain an important hedge against future inflation and are likely to do well as inflation increases. 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 good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical worries and falling once they are out of the headlines and has been stuck in the same range for over a year now. Still, it is a good hedge if things go south.
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.
