An uneventful week saw stocks again hit new record highs. For the week, the Dow rose 1.1%, the S&P climbed 0.7%, and the Nasdaq was slightly higher by just 0.04%. Gold does well when currencies weaken, so the stronger dollar pushed gold to a four-and-a-half year low with a 0.1% drop. Oil continued its move lower, too, hitting three-year lows with a 2.4% drop to $78.65 per barrel. The international Brent oil, used for much of our gas here in the East, hit four-year lows to close at $83.60 per barrel.
Source: Google Finance
There was no major market-moving news this week, but stocks continued to creep higher. This week we saw economic data and corporate earnings come in at a decent level, plus central banks around the globe appear poised to do more stimulus. Finally, the chance for more business-friendly legislation increased with the Republican victory on Tuesday.
Starting with corporate earnings, over 80% of companies in the S&P 500 have now reported their earnings. According to Factset, earnings growth has been decent with a 7.9% increase, much higher than expected heading into earnings season. Sales have been more modest, coming in around expectations with a 3.8% increase. We’re continuing to see companies outperform not because of better sales, but by cutting costs.
As for economic data, the big story of the week came on Friday with the release of the October employment data. We saw an increase of 214,000 jobs, which was below estimates and a decline from last month. It’s not a great number, but not bad – we’d classify it more as “eh.” One would think after printing $4 trillion dollars in stimulus we’d see much higher growth.
Other economic data this week included a solid increase in the strength of US manufacturing. The service sector also strengthened, but it did so at a lower level than previous months. On the negative side, our trade deficit increased as exports fell, which was predictable as our currency strengthened, making our products look more expensive abroad. We still see a stronger currency as being a net benefit, though.
Getting back to stimulus, stocks rose on news out of the European Central Bank (ECB) this week. They held a policy meeting where they appeared more willing to expand their stimulus program. Similar to the steps taken in the US, they would print more money to buy bonds, injecting the new money into the economy. One might conclude that if an economy continues to need more stimulus, maybe it isn’t really helping the economy? Regardless, stocks like the money-printing so they rose on the news.
Finally, markets got a boost this week after the overwhelming Republican victory on Tuesday. They strengthened their hold in the House and took control in the Senate. Stocks rose as it increases the chance for more business-friendly legislation, or at least hold back new burdens.
Next Week
We’ll see a quieter week next week as the only noteworthy economic data will come on Friday with the retail sales report. Corporate earnings will slow, too, but we’ll hear from some big companies like Wal-Mart. There will also be a few more regional Fed presidents making speeches, so that may have some impact on markets.
Investment Strategy
No change here. We continue to remain neutral on the market. Stocks have quickly swung from cheap to expensive on a short term basis, so we would expect more of a pause here. We would not put any new money in now, but are reluctant to sell at this time, as well. With all the newly-printed money by central banks pouring into the market, stocks continue to have the wind at their backs.
Our longer term view remains unchanged, as well. 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) 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. 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.
Starting with corporate earnings, over 80% of companies in the S&P 500 have now reported their earnings. According to Factset, earnings growth has been decent with a 7.9% increase, much higher than expected heading into earnings season. Sales have been more modest, coming in around expectations with a 3.8% increase. We’re continuing to see companies outperform not because of better sales, but by cutting costs.
As for economic data, the big story of the week came on Friday with the release of the October employment data. We saw an increase of 214,000 jobs, which was below estimates and a decline from last month. It’s not a great number, but not bad – we’d classify it more as “eh.” One would think after printing $4 trillion dollars in stimulus we’d see much higher growth.
Other economic data this week included a solid increase in the strength of US manufacturing. The service sector also strengthened, but it did so at a lower level than previous months. On the negative side, our trade deficit increased as exports fell, which was predictable as our currency strengthened, making our products look more expensive abroad. We still see a stronger currency as being a net benefit, though.
Getting back to stimulus, stocks rose on news out of the European Central Bank (ECB) this week. They held a policy meeting where they appeared more willing to expand their stimulus program. Similar to the steps taken in the US, they would print more money to buy bonds, injecting the new money into the economy. One might conclude that if an economy continues to need more stimulus, maybe it isn’t really helping the economy? Regardless, stocks like the money-printing so they rose on the news.
Finally, markets got a boost this week after the overwhelming Republican victory on Tuesday. They strengthened their hold in the House and took control in the Senate. Stocks rose as it increases the chance for more business-friendly legislation, or at least hold back new burdens.
Next Week
We’ll see a quieter week next week as the only noteworthy economic data will come on Friday with the retail sales report. Corporate earnings will slow, too, but we’ll hear from some big companies like Wal-Mart. There will also be a few more regional Fed presidents making speeches, so that may have some impact on markets.
Investment Strategy
No change here. We continue to remain neutral on the market. Stocks have quickly swung from cheap to expensive on a short term basis, so we would expect more of a pause here. We would not put any new money in now, but are reluctant to sell at this time, as well. With all the newly-printed money by central banks pouring into the market, stocks continue to have the wind at their backs.
Our longer term view remains unchanged, as well. 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) 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. 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 continue to fall (so yields rose) as stocks rise. 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.
