Please note: there will be no market commentary next week. Don’t worry; we’ll be back with our market commentary the following week. Thank you.
Stocks took a turn lower this week. Through the Friday close, the Dow lost 0.9%, the S&P fell 1.1%, and the Nasdaq moved slightly lower by 0.3%. Bonds were a big story this week as their prices fell sharply (so yields rose). Continued strength in the dollar sent gold lower again, this week losing 2.8%. The same was true with oil as it hit its lowest level in 16 months, falling 1.1% to $92.27 per barrel. The international Brent oil, used for much of our gas here in the east, hit its lowest price in 17 months to close at $97.80 per barrel.
Stocks took a turn lower this week. Through the Friday close, the Dow lost 0.9%, the S&P fell 1.1%, and the Nasdaq moved slightly lower by 0.3%. Bonds were a big story this week as their prices fell sharply (so yields rose). Continued strength in the dollar sent gold lower again, this week losing 2.8%. The same was true with oil as it hit its lowest level in 16 months, falling 1.1% to $92.27 per barrel. The international Brent oil, used for much of our gas here in the east, hit its lowest price in 17 months to close at $97.80 per barrel.
Source: Yahoo Finance
Stocks had a downward pressure on them nearly every day this week, though the moves were modest until Friday. There was no real news behind the declines, either. It just seemed like investors were looking to take some of their profits off the table.
The stock market itself wasn’t that big of a story this week. Instead, two less-exciting markets – the bond and currency markets – were of more interest.
With our central bank looking to cut back on its low interest rates and money-printing stimulus programs, our currency has strengthened against other countries who are starting more stimulus programs. The dollar is now at its strongest level in over a year because of this.
This stronger currency has led to lower prices for commodities like oil, which has resulted in lower prices at the pump. Oil was also helped by weaker economic data both here and abroad since a weaker economy means less demand for oil and gas. However, the strength of the dollar appears to be the primary factor for oil prices as their movements are becoming more correlated.
The stronger currency had many economic commentators on television in a panic, fearing it means lower economic growth. A goal of many governments is to lower the value of a currency in order to boost exports, since the weaker currency makes their goods look cheaper to foreigners. And the commentators are entirely correct that exports will slow with a stronger currency.
However, it overlooks exactly what we are seeing with lower oil prices. A stronger currency lowers prices for commodities like oil or food. This allows a paycheck to go further and people are able to buy more. We believe this is far more beneficial to an economy, so a stronger currency should be worth pursuing by policymakers.
The bond market was very similar to the currency market this week, also moving because of these actions from central banks. Stimulus programs are designed to push bond yields lower (and therefore, prices higher) to spur borrowing, so as the U.S. cuts back on stimulus, our bond yields rose and prices fell.
The action in the bond market seemed to be a factor in stocks moving lower this week. Money flowed out of the stocks and into bonds since the higher yields make bonds look like a more attractive investment.
Next Week
After a pretty uneventful week this week, next week looks to be far busier. For economic data, we’ll get info on industrial production, inflation at both the consumer and producer levels, leading economic indicators, and housing info.
All eyes will be on the Fed, though, as they hold another policy meeting. Many investors expect a pullback on the stimulus program mid-2015, so any language indicating otherwise will have an impact on the market.
Also, investors will be watching the independence vote in Scotland. A successful vote for independence will bring about significant changes to the region, but perhaps more importantly, encourage independence drives in other parts of the world. It could bring about a more volatile investing environment.
Investment Strategy
Still no change here. We are cautious, but not at levels where we are looking to do any selling.
Lately we have mentioned the relationship between high-yield bonds and the broader stock market. The direction of high-yield bonds has been a good leading indicator for stocks. An update through this week, we can see those bonds moving further lower (the black line) as stocks begin to move lower (orange). While no indicator is perfect, it does raise our level of caution.
The stock market itself wasn’t that big of a story this week. Instead, two less-exciting markets – the bond and currency markets – were of more interest.
With our central bank looking to cut back on its low interest rates and money-printing stimulus programs, our currency has strengthened against other countries who are starting more stimulus programs. The dollar is now at its strongest level in over a year because of this.
This stronger currency has led to lower prices for commodities like oil, which has resulted in lower prices at the pump. Oil was also helped by weaker economic data both here and abroad since a weaker economy means less demand for oil and gas. However, the strength of the dollar appears to be the primary factor for oil prices as their movements are becoming more correlated.
The stronger currency had many economic commentators on television in a panic, fearing it means lower economic growth. A goal of many governments is to lower the value of a currency in order to boost exports, since the weaker currency makes their goods look cheaper to foreigners. And the commentators are entirely correct that exports will slow with a stronger currency.
However, it overlooks exactly what we are seeing with lower oil prices. A stronger currency lowers prices for commodities like oil or food. This allows a paycheck to go further and people are able to buy more. We believe this is far more beneficial to an economy, so a stronger currency should be worth pursuing by policymakers.
The bond market was very similar to the currency market this week, also moving because of these actions from central banks. Stimulus programs are designed to push bond yields lower (and therefore, prices higher) to spur borrowing, so as the U.S. cuts back on stimulus, our bond yields rose and prices fell.
The action in the bond market seemed to be a factor in stocks moving lower this week. Money flowed out of the stocks and into bonds since the higher yields make bonds look like a more attractive investment.
Next Week
After a pretty uneventful week this week, next week looks to be far busier. For economic data, we’ll get info on industrial production, inflation at both the consumer and producer levels, leading economic indicators, and housing info.
All eyes will be on the Fed, though, as they hold another policy meeting. Many investors expect a pullback on the stimulus program mid-2015, so any language indicating otherwise will have an impact on the market.
Also, investors will be watching the independence vote in Scotland. A successful vote for independence will bring about significant changes to the region, but perhaps more importantly, encourage independence drives in other parts of the world. It could bring about a more volatile investing environment.
Investment Strategy
Still no change here. We are cautious, but not at levels where we are looking to do any selling.
Lately we have mentioned the relationship between high-yield bonds and the broader stock market. The direction of high-yield bonds has been a good leading indicator for stocks. An update through this week, we can see those bonds moving further lower (the black line) as stocks begin to move lower (orange). While no indicator is perfect, it does raise our level of caution.
While we are somewhat cautious in the short term, we have serious concerns for the longer run. Stocks and bonds appear overvalued from a longer term perspective, especially as our central bank cuts back on stimulus. Other central banks around the world are picking up the slack, but it is still reason for caution. Europe is a particular 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.
As for the bond market, bonds again fell sharply this week (so yields rose). This may be the start of a new trend lower, but only time will tell. A short position will profit in this scenario (where your profit increases if prices fall). 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 higher inflation reports. Like the rest of the bond sector, though, they have seen some weakness in the last two weeks. We think they remain an important hedge against future inflation in the longer run. 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. It hasn’t fared well lately, but remains a good hedge for the long run.
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.
As for the bond market, bonds again fell sharply this week (so yields rose). This may be the start of a new trend lower, but only time will tell. A short position will profit in this scenario (where your profit increases if prices fall). 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 higher inflation reports. Like the rest of the bond sector, though, they have seen some weakness in the last two weeks. We think they remain an important hedge against future inflation in the longer run. 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. It hasn’t fared well lately, but remains a good hedge for the long run.
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.
