Stocks continued their climb higher, turning in their best week in over a year. Through the close Friday, the Dow gained 2.6%, the S&P rose 4.1%, and the Nasdaq popped higher by 5.3%. Gold lost ground with a 0.6% decline. Oil continued to move lower, hitting the lowest level in 27 months with a 1.3% loss. The international Brent oil, used for much of our gas here in the East, closed a few cents higher at $86.25 per barrel.
Source: Google Finance (our regular chart was not cooperating this week)
The fear we saw in the markets just a week ago largely subsided this week as stocks continued to rebound nicely. The mood has improved and the market paid attention to fundamentals like corporate earnings. Global economic growth and central bank stimulus continues to be a factor, but did not play as prominently in the direction of the market this week.
Corporate earnings have been largely ignored during the sharp declines over the last few weeks. This week, however, investors paid far more attention.
Earnings have been relatively decent, growing 5.6% (per Factset) with nearly half of the companies in the S&P 500 reporting. This is above economists’ expectations from the beginning of earnings season, though it is nearly half as good as estimates from just a few months ago.
Revenue (what a company actually received in sales) continues to be modest with a gain of 3.7%. A large number of companies are reporting no growth in revenue, or at least below the level of inflation. While earnings look decent, unfortunately it is not from higher sales but more financial engineering.
A major reason for the recent market sell-off has been the reduction in stimulus from our central bank. As we pull back, though, Europe is stepping forward. This has taken a lot of fear out of the market and contributed to the gains this week.
The European Central Bank (ECB) began printing money to buy asset-backed bonds (which are backed by loans, like mortgages) this week. The market was helped even more by their announcement that they were considering printing money to buy corporate bonds. This is a step even further into unchartered territory as central banks are pulling out all the stops to send markets higher. It is likely to boost markets in the near term, but we believe this is a very dangerous path to follow.
There continues to be pressure on the ECB to buy bonds of individual countries, which so far they have resisted doing. It is creating conflicts that we feel can have substantial consequences. Germany, the strongest economy in the Euro zone, does not want to see their tax dollars going to support more irresponsible economies like France or Italy when they refuse to make reforms. This rift has the potential to break up the Euro, which as we saw in 2011, even talks about breaking up the Euro will send stocks sharply lower.
Another global growth worry to keep an eye on came from China, who reported their third quarter saw the weakest economic growth in five years. This comes as their housing sector continues to cool. It has not had much effect on our market yet, but has the potential to move stocks lower if the trend continues.
Finally, stocks moved lower only one day this week, which was a day we were reminded that radical Islam has the ability to hit us on our own shores. The terrorist attack in Canada immediately sent stocks lower and was a wake-up call that serious threats are lurking around the globe.
Next Week
Next week will be a very, very busy one. There will be a load of companies releasing their earnings and the calendar is full of economic data. We’ll get info on durable goods, consumer confidence, 3rd quarter GDP, personal income and spending, and employment costs.
The Fed will also be in the news as they hold another periodic policy meeting. They are expected an end to their money printing, bond buying stimulus program. There are hopes it may be extended, so a firm exit may be a disappointment. Investors will also be watching for clues on when interest rates may be raised.
All in all, there will be a lot of info to move the market.
Investment Strategy
Stocks continue to rebound from their lows of last week and possibly have room to run higher in the near term. We would not add new money to the market at this point, though. Momentum has shifted strongly, so the big gains have likely already been made in this rebound.
Our longer term view remains unchanged. We continue to have worries for the market in the longer run, especially as the stimulus programs wear off, or possibly when investors realize these programs have done little to help the economy as economic growth slows. Stimulus continues to propel stocks higher, but the longer it continues, the more painful the correction will be.
We’ve updated one of our leading indicator charts below. High yield bonds (the black line) continue to precede the movement in the broader stock market (the orange line). At this time, they do not appear to be signaling any fear. Keep in mind that no indicator is perfect. As we continue to see, big moves in the market have come on the words of central bankers, which are inherently unpredictable.
Corporate earnings have been largely ignored during the sharp declines over the last few weeks. This week, however, investors paid far more attention.
Earnings have been relatively decent, growing 5.6% (per Factset) with nearly half of the companies in the S&P 500 reporting. This is above economists’ expectations from the beginning of earnings season, though it is nearly half as good as estimates from just a few months ago.
Revenue (what a company actually received in sales) continues to be modest with a gain of 3.7%. A large number of companies are reporting no growth in revenue, or at least below the level of inflation. While earnings look decent, unfortunately it is not from higher sales but more financial engineering.
A major reason for the recent market sell-off has been the reduction in stimulus from our central bank. As we pull back, though, Europe is stepping forward. This has taken a lot of fear out of the market and contributed to the gains this week.
The European Central Bank (ECB) began printing money to buy asset-backed bonds (which are backed by loans, like mortgages) this week. The market was helped even more by their announcement that they were considering printing money to buy corporate bonds. This is a step even further into unchartered territory as central banks are pulling out all the stops to send markets higher. It is likely to boost markets in the near term, but we believe this is a very dangerous path to follow.
There continues to be pressure on the ECB to buy bonds of individual countries, which so far they have resisted doing. It is creating conflicts that we feel can have substantial consequences. Germany, the strongest economy in the Euro zone, does not want to see their tax dollars going to support more irresponsible economies like France or Italy when they refuse to make reforms. This rift has the potential to break up the Euro, which as we saw in 2011, even talks about breaking up the Euro will send stocks sharply lower.
Another global growth worry to keep an eye on came from China, who reported their third quarter saw the weakest economic growth in five years. This comes as their housing sector continues to cool. It has not had much effect on our market yet, but has the potential to move stocks lower if the trend continues.
Finally, stocks moved lower only one day this week, which was a day we were reminded that radical Islam has the ability to hit us on our own shores. The terrorist attack in Canada immediately sent stocks lower and was a wake-up call that serious threats are lurking around the globe.
Next Week
Next week will be a very, very busy one. There will be a load of companies releasing their earnings and the calendar is full of economic data. We’ll get info on durable goods, consumer confidence, 3rd quarter GDP, personal income and spending, and employment costs.
The Fed will also be in the news as they hold another periodic policy meeting. They are expected an end to their money printing, bond buying stimulus program. There are hopes it may be extended, so a firm exit may be a disappointment. Investors will also be watching for clues on when interest rates may be raised.
All in all, there will be a lot of info to move the market.
Investment Strategy
Stocks continue to rebound from their lows of last week and possibly have room to run higher in the near term. We would not add new money to the market at this point, though. Momentum has shifted strongly, so the big gains have likely already been made in this rebound.
Our longer term view remains unchanged. We continue to have worries for the market in the longer run, especially as the stimulus programs wear off, or possibly when investors realize these programs have done little to help the economy as economic growth slows. Stimulus continues to propel stocks higher, but the longer it continues, the more painful the correction will be.
We’ve updated one of our leading indicator charts below. High yield bonds (the black line) continue to precede the movement in the broader stock market (the orange line). At this time, they do not appear to be signaling any fear. Keep in mind that no indicator is perfect. As we continue to see, big moves in the market have come on the words of central bankers, which are inherently unpredictable.
As for the bond market, bond prices fell this week (so yields rose) as stocks rose. Many investors see bonds as overpriced have looked for them to fall in value. A short position would be the trade for this scenario (where your profit increases when prices fall), though it has done poorly recently as bond prices continued to climb. A short position may make for a nice hedge, but this should be a longer-term trade as the potential for profit seems low at this time. Floating rate bonds are another trade to consider in this scenario, but they tend to be riskier, so caution is warranted.
European bonds, especially for the profligate countries, look extremely expensive at the moment and also look like fantastic short opportunities. This trade has done well recently as some of the riskier countries saw the bonds fall in value (so yields rose).
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. They have not done well recently, but are intended to be a longer term investment. 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.
European bonds, especially for the profligate countries, look extremely expensive at the moment and also look like fantastic short opportunities. This trade has done well recently as some of the riskier countries saw the bonds fall in value (so yields rose).
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. They have not done well recently, but are intended to be a longer term investment. 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.
