There was no holding back stocks this week as they again reached new record highs. Through the Friday close, the Dow climbed 3.5%, the S&P gained 2.7%, and the Nasdaq returned 3.3%. A stronger dollar sent gold to four-year lows with a loss of 4.9% on the week. The dollar also helped oil move lower, falling 0.6% to $80.54 per barrel. The international Brent oil, used for much of our gas here in the East, closed down to $86 per barrel.
Source: Google Finance
It was only a couple weeks ago that markets were dropping and investors feared the worst. Move the clock forward to today and stocks are back at record highs. What was behind the move this week? Part was a just continuation of the rebound that began two weeks ago. The other part was relatively decent corporate earnings and actions by central banks.
The main focus this week was on the Fed’s policy meeting, where they were expected to announce an end to their latest stimulus program of printing money to buy bonds. And they did just that.
This latest round of bond buying began over two years ago, seeking to push borrowing rates down to make it easier to take out loans and spurring growth (in theory). Since the latest program began, they have printed nearly $2 trillion, but economic growth remains sluggish. In total, they have printed closer to $4 trillion and we’ve still had one of the weakest recoveries on record.
One metric whose improvement they cite is unemployment, which has fallen to its lowest level in six years. However, this has occurred largely because of people leaving the labor force. If we were to have the same size labor force as when these stimulus programs began, the unemployment rate would be closer to double-digits.
This round of stimulus was the fourth such stimulus program they have undertaken, though it was the longest. As each program wound down, markets fell strongly. It forced the Fed to come back in with another round of stimulus to prop stocks up. Investors have figured out that stocks fall without stimulus, so the markets were lower on the Fed’s announcement.
The difference today, though, is that other central banks around the globe are printing even more money. That money will flow into our markets and is likely to brunt any declines.
In fact, news out of the Japanese Central Bank sent stocks sharply higher on Friday. A sputtering economy has forced them to increase in the amount of money they will print to stimulate their economy. They also increased the amount of stocks and market indexes they will purchase – both foreign and domestic – which has a dramatic impact on increasing stock prices.
Think about that for a moment. They are creating money out of thin air to purchase stocks. There is so much wrong with this, it is difficult to even know where to begin. These markets are not healthy and clearly manipulated, but investors can’t sit on the sideline and watch prices go higher.
Additionally, if Japan has been doing stimulus in one form or another for 20 years and results remain to be seen, when will central banks realize this is not the right solution? The fact that it must continually be restarted should be a sign that it is an ineffective policy.
Getting back to fundamentals over here, economic data leaned to the positive side this week. Third quarter GDP came in at a solid pace and above expectations, though much of the beat was due to an increase in government spending on military and the war with ISIS. Home sales continue to climb, though the pace of increases is slowing. Consumer confidence stands at the highest level since 2007 and personal income has risen. On the negative side, durable goods declined.
Finally, this was one of the busiest weeks for corporate earnings as nearly a third of the companies in the S&P 500 reported results. Per Factset, nearly 75% have now reported and earnings have grown 7.3% in the past year though revenue (what a company received in sales) is much lower. Both are higher than economists projected heading into earnings season, so the results have been decent.
Next Week
Next week will be another busy one and central banks will remain a big focus. Many regional bank presidents will be making speeches, plus the European Central Bank will hold a policy meeting. There will be several important economic reports, too, including a look at employment in October and the strength of manufacturing and service sectors. Corporate earnings will come in at a steady pace, too.
Finally, we will have elections on Tuesday, but they are unlikely to have much impact on the market.
Investment Strategy
We are neutral on the market at this point. Two weeks ago, stocks look oversold (cheap) and due for a bounce. Stocks rallied strongly off those lows and are now looking expensive on a short term basis. We would not put any new money in now, but are reluctant to sell at this time, as well. With all the printed money pouring into the market, stocks continue to have the wind at their backs.
Our longer term view remains unchanged. We continue to have worries for the market in the longer run, especially due to market distortions created by the central banks and money printing. Stimulus continues to propel stocks higher, but we worry 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 are signaling a more cautious tone. 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.
The main focus this week was on the Fed’s policy meeting, where they were expected to announce an end to their latest stimulus program of printing money to buy bonds. And they did just that.
This latest round of bond buying began over two years ago, seeking to push borrowing rates down to make it easier to take out loans and spurring growth (in theory). Since the latest program began, they have printed nearly $2 trillion, but economic growth remains sluggish. In total, they have printed closer to $4 trillion and we’ve still had one of the weakest recoveries on record.
One metric whose improvement they cite is unemployment, which has fallen to its lowest level in six years. However, this has occurred largely because of people leaving the labor force. If we were to have the same size labor force as when these stimulus programs began, the unemployment rate would be closer to double-digits.
This round of stimulus was the fourth such stimulus program they have undertaken, though it was the longest. As each program wound down, markets fell strongly. It forced the Fed to come back in with another round of stimulus to prop stocks up. Investors have figured out that stocks fall without stimulus, so the markets were lower on the Fed’s announcement.
The difference today, though, is that other central banks around the globe are printing even more money. That money will flow into our markets and is likely to brunt any declines.
In fact, news out of the Japanese Central Bank sent stocks sharply higher on Friday. A sputtering economy has forced them to increase in the amount of money they will print to stimulate their economy. They also increased the amount of stocks and market indexes they will purchase – both foreign and domestic – which has a dramatic impact on increasing stock prices.
Think about that for a moment. They are creating money out of thin air to purchase stocks. There is so much wrong with this, it is difficult to even know where to begin. These markets are not healthy and clearly manipulated, but investors can’t sit on the sideline and watch prices go higher.
Additionally, if Japan has been doing stimulus in one form or another for 20 years and results remain to be seen, when will central banks realize this is not the right solution? The fact that it must continually be restarted should be a sign that it is an ineffective policy.
Getting back to fundamentals over here, economic data leaned to the positive side this week. Third quarter GDP came in at a solid pace and above expectations, though much of the beat was due to an increase in government spending on military and the war with ISIS. Home sales continue to climb, though the pace of increases is slowing. Consumer confidence stands at the highest level since 2007 and personal income has risen. On the negative side, durable goods declined.
Finally, this was one of the busiest weeks for corporate earnings as nearly a third of the companies in the S&P 500 reported results. Per Factset, nearly 75% have now reported and earnings have grown 7.3% in the past year though revenue (what a company received in sales) is much lower. Both are higher than economists projected heading into earnings season, so the results have been decent.
Next Week
Next week will be another busy one and central banks will remain a big focus. Many regional bank presidents will be making speeches, plus the European Central Bank will hold a policy meeting. There will be several important economic reports, too, including a look at employment in October and the strength of manufacturing and service sectors. Corporate earnings will come in at a steady pace, too.
Finally, we will have elections on Tuesday, but they are unlikely to have much impact on the market.
Investment Strategy
We are neutral on the market at this point. Two weeks ago, stocks look oversold (cheap) and due for a bounce. Stocks rallied strongly off those lows and are now looking expensive on a short term basis. We would not put any new money in now, but are reluctant to sell at this time, as well. With all the printed money pouring into the market, stocks continue to have the wind at their backs.
Our longer term view remains unchanged. We continue to have worries for the market in the longer run, especially due to market distortions created by the central banks and money printing. Stimulus continues to propel stocks higher, but we worry 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 are signaling a more cautious tone. 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 on the Fed announcement 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). 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.
