It was another quiet week with stocks inching to new record highs. Through the Friday close, the Dow and S&P both gained 0.4% and the Nasdaq topped them both with a 1.2% increase. Gold finally moved higher, up 1.3% on the week. Oil kept moving lower as it hit new four-year lows to close the week with a 3.6% drop. The international Brent oil, used for much of our gas here in the East, crossed into the $70’s for the first time in four years to close at $79.60 per barrel.
Source: Google Finance
Investors seem to be more cautious in making bets on the market with stocks back at all-time highs. This, combined with a quiet week in terms of news, saw stocks remain relatively flat all week.
We are on the tail-end of corporate earnings season and the results have been decent. Earnings have come in much higher than expected, though are still modest when looking from a longer-term perspective.
One trend that continues to grow is that earnings are being helped by cost cuts and companies buying back their own stock. What is missing is a growth in sales.
Revenue growth (what a company earns in sales) has been modest. Per Factset, revenue has seen year-over-year growth of 4.0%, while last quarter this figure stood at 4.4%. These figures are both under the longer-term average. Investors like to see sales increase because it is a good signal of a company’s long-term health. A lack of sales is a concern.
The lack of sales also calls into question the record high prices in stocks. The last time stocks were this expensive, revenue was growing 7%. Today it is half that level. It is one signal that stocks are overvalued.
There are other signs that stocks are on the expensive side. Investor optimism is at extremely high levels, which tends to point to a reversal in stocks. Additionally, margin levels (which is the amount of money people borrow to buy stock) are at record highs. This, too, is a signal to be cautious.
However, the one thing stocks have going for them is the money printed by central banks. Even though our Fed has stopped printing, other central banks around the world continue to print money at record paces. These banks openly put that printed money into the stock market, boosting stock prices.
It almost sounds comical and fraudulent, but it does move stocks higher. Investors can either sit on the sidelines and rightly point out how dangerous and ridiculous these policies are, or go along for the ride. The trick is getting out before it collapses.
Finally, we’ll touch on some news out of Europe this week. The European economy showed a surprising growth over the last quarter. It was only a slight growth, but many economists were expecting negative growth. Of note was Germany, whose economy grew at a slight 0.1% to escape being classified as in a recession. Greece was somehow the top performing economy, despite one-quarter of the population being out of work.
Recently many European countries adopted new items to include in the GDP calculations. The most outrageous items included drug use and prostitution, arguing that though they may be illegal, they are still economic transactions. We wonder how much impact this had on the surprising growth this quarter?
Next Week
Next week looks to be a little busier. There are no major economic reports, but we’ll get info on inflation, industrial production, and housing. Corporate earnings will continue to slow, but we’ll hear from some big names like Home Depot, Best Buy, and Target.
Investors will also pay attention to the minutes released from the last Fed meeting. This was the meeting where they ended the bond buying, money printing program, so it will be interesting to get their take on the economy at that time.
Investment Strategy
We are very cautious on the market at this point. On a short-term basis, stocks were cheap a month ago and now stand at expensive levels. We would not put new money into the broader market at this time. Though we have a cautious outlook, all the money flowing into the market from central bank money printing could keep stocks afloat.
Our longer term view remains unchanged. We continue to have worries for the market 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’re again updating one of our leading indicator charts below. High yield bonds (the black line) have done well to foreshadow the movement in the broader stock market (the orange line). At this time, they are signaling a more cautious tone. One factor that may affect this chart is lower oil prices – many energy companies issue this risky, high-yield debt and the lower oil prices are hurting their profitability. This may be part of high-yield’s decline. And remember 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.
We are on the tail-end of corporate earnings season and the results have been decent. Earnings have come in much higher than expected, though are still modest when looking from a longer-term perspective.
One trend that continues to grow is that earnings are being helped by cost cuts and companies buying back their own stock. What is missing is a growth in sales.
Revenue growth (what a company earns in sales) has been modest. Per Factset, revenue has seen year-over-year growth of 4.0%, while last quarter this figure stood at 4.4%. These figures are both under the longer-term average. Investors like to see sales increase because it is a good signal of a company’s long-term health. A lack of sales is a concern.
The lack of sales also calls into question the record high prices in stocks. The last time stocks were this expensive, revenue was growing 7%. Today it is half that level. It is one signal that stocks are overvalued.
There are other signs that stocks are on the expensive side. Investor optimism is at extremely high levels, which tends to point to a reversal in stocks. Additionally, margin levels (which is the amount of money people borrow to buy stock) are at record highs. This, too, is a signal to be cautious.
However, the one thing stocks have going for them is the money printed by central banks. Even though our Fed has stopped printing, other central banks around the world continue to print money at record paces. These banks openly put that printed money into the stock market, boosting stock prices.
It almost sounds comical and fraudulent, but it does move stocks higher. Investors can either sit on the sidelines and rightly point out how dangerous and ridiculous these policies are, or go along for the ride. The trick is getting out before it collapses.
Finally, we’ll touch on some news out of Europe this week. The European economy showed a surprising growth over the last quarter. It was only a slight growth, but many economists were expecting negative growth. Of note was Germany, whose economy grew at a slight 0.1% to escape being classified as in a recession. Greece was somehow the top performing economy, despite one-quarter of the population being out of work.
Recently many European countries adopted new items to include in the GDP calculations. The most outrageous items included drug use and prostitution, arguing that though they may be illegal, they are still economic transactions. We wonder how much impact this had on the surprising growth this quarter?
Next Week
Next week looks to be a little busier. There are no major economic reports, but we’ll get info on inflation, industrial production, and housing. Corporate earnings will continue to slow, but we’ll hear from some big names like Home Depot, Best Buy, and Target.
Investors will also pay attention to the minutes released from the last Fed meeting. This was the meeting where they ended the bond buying, money printing program, so it will be interesting to get their take on the economy at that time.
Investment Strategy
We are very cautious on the market at this point. On a short-term basis, stocks were cheap a month ago and now stand at expensive levels. We would not put new money into the broader market at this time. Though we have a cautious outlook, all the money flowing into the market from central bank money printing could keep stocks afloat.
Our longer term view remains unchanged. We continue to have worries for the market 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’re again updating one of our leading indicator charts below. High yield bonds (the black line) have done well to foreshadow the movement in the broader stock market (the orange line). At this time, they are signaling a more cautious tone. One factor that may affect this chart is lower oil prices – many energy companies issue this risky, high-yield debt and the lower oil prices are hurting their profitability. This may be part of high-yield’s decline. And remember 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 have stalled, similar to stocks. 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.
