Please note: Due to the Christmas and New Year’s holidays, there will be no market commentaries for the next two weeks. We hope you have a great holiday season – see you in 2015.
After turning in their worst week in years last week, stocks turned in one of their best weeks of the year. Through the Friday close, the Dow gained a solid 3.0%, the S&P rose 3.4% and the Nasdaq climbed 2.4%. Gold sold off when stocks rose, falling 2.1% on the week. Oil remained a major story and it may have found its bottom, returning -2.2% on the week to $56.52 per barrel. The international Brent oil, used for much of our gas here in the east, moved slightly higher to $62.15 per barrel.
After turning in their worst week in years last week, stocks turned in one of their best weeks of the year. Through the Friday close, the Dow gained a solid 3.0%, the S&P rose 3.4% and the Nasdaq climbed 2.4%. Gold sold off when stocks rose, falling 2.1% on the week. Oil remained a major story and it may have found its bottom, returning -2.2% on the week to $56.52 per barrel. The international Brent oil, used for much of our gas here in the east, moved slightly higher to $62.15 per barrel.
Source: Google Finance
If anyone was not convinced that the market was driven by the Fed, this week should have persuaded them otherwise. The Fed held another policy meeting this week and the outcome sent stocks to their best two-day rally in six years. We have to say, it is not healthy for the market to be a tool for policy makers, but we cannot sit out these rallies, either.
The week began with the stock and oil markets continuing their plunge of last week. Investors feared the lower oil prices would create geopolitical problems for countries dependent on oil revenues. Their shaky currencies and economies create an instability that can spill over into other weak countries, setting off a chain reaction that drags many countries down along with it.
Another factor made this drop particularly strong. The turmoil gave investors the opportunity to sell losing stocks for tax purposes before the year-end (tax-loss harvesting, using losses to offset gains). This likely increased the downward pressure on stocks.
The sour mood continued into Wednesday, where the Fed held their last policy meeting of the year. The meeting was highly anticipated as the Fed was expected to give clues on interest rate increases. This is important because low interest rates have helped fuel the stock markets rise. Therefore, an increase in rates would send stocks lower.
In the end, the Fed said nothing new. They changed some of the wording in their policy statement (we discussed the importance of this wording last week), and although the words were different, they meant the same thing (they will be “patient” before raising rates, where before they mentioned keeping rates low for a “considerable period”).
Investors were excited to see that an increase in rates was not on the horizon. This gave them the green light to go ahead and buy stocks, triggering a massive increase.
The market was also helped as other central banks got in on the action, flooding the world with stimulus. Russia and the Swiss central banks both announced new programs. Plus, comments from the European Central Bank made it clear new stimulus will be undertaken in the early part of next year.
Economic data this week also increased the odds that central banks will not pull back on stimulus any time soon. Inflation at the consumer level declined last month, mostly due to lower gas and energy prices. With central banks seeking higher inflation, they can continue with their policies until it appears.
This makes little sense to us. The Fed admitted lower gas prices are a positive for the economy, providing a boost GDP. At the same time, they lament its impact on inflation. When they openly admit lower oil prices help the economy, why would they not encourage lower prices instead of the inflation they have long sought?
This makes little sense to us. But perhaps it explains why the central banker’s quest for higher prices has not lead to the economic growth they expected all these years. The lack of results tells us they are taking the wrong steps to help the economy.
We hate devoting this much time to discussing the actions of central banks. Yet as we saw this week, unfortunately they are the biggest factor on the direction of stocks.
Next Week
The next two weeks are likely to be very quiet due to the two holidays. However, activity does pick up at the very end of the year as investors try to reposition portfolios or make last-minute trades for tax purposes. Markets typically move higher into the end of the year, but it can be a little more volatile.
Investment Strategy
We may have formed a bottom – at least in the short term – for both stocks and oil. It probably didn’t hurt to do a little nibbling in stocks and it may have been a good time to get into energy companies (we’d stick with the bigger names and avoid smaller companies who are more likely to be hurt by the lower oil prices). We’d be a little more cautious with energy companies, though, because a stronger dollar may continue to weaken oil in the new year.
As for the longer term, we still have our concerns. 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.
High yield (junk) bonds have been a big story since oil companies make up a large part of this asset class. They have also been a good leading indicator for the stock market, as you can see in the chart below (the orange line is the S&P 500 and the black line is high-yield bonds). High yield bonds have dropped and sharply rebounded (the black line), which confirms the upward move in the stock market. No indicator is perfect, but this does serve as a good guide.
The week began with the stock and oil markets continuing their plunge of last week. Investors feared the lower oil prices would create geopolitical problems for countries dependent on oil revenues. Their shaky currencies and economies create an instability that can spill over into other weak countries, setting off a chain reaction that drags many countries down along with it.
Another factor made this drop particularly strong. The turmoil gave investors the opportunity to sell losing stocks for tax purposes before the year-end (tax-loss harvesting, using losses to offset gains). This likely increased the downward pressure on stocks.
The sour mood continued into Wednesday, where the Fed held their last policy meeting of the year. The meeting was highly anticipated as the Fed was expected to give clues on interest rate increases. This is important because low interest rates have helped fuel the stock markets rise. Therefore, an increase in rates would send stocks lower.
In the end, the Fed said nothing new. They changed some of the wording in their policy statement (we discussed the importance of this wording last week), and although the words were different, they meant the same thing (they will be “patient” before raising rates, where before they mentioned keeping rates low for a “considerable period”).
Investors were excited to see that an increase in rates was not on the horizon. This gave them the green light to go ahead and buy stocks, triggering a massive increase.
The market was also helped as other central banks got in on the action, flooding the world with stimulus. Russia and the Swiss central banks both announced new programs. Plus, comments from the European Central Bank made it clear new stimulus will be undertaken in the early part of next year.
Economic data this week also increased the odds that central banks will not pull back on stimulus any time soon. Inflation at the consumer level declined last month, mostly due to lower gas and energy prices. With central banks seeking higher inflation, they can continue with their policies until it appears.
This makes little sense to us. The Fed admitted lower gas prices are a positive for the economy, providing a boost GDP. At the same time, they lament its impact on inflation. When they openly admit lower oil prices help the economy, why would they not encourage lower prices instead of the inflation they have long sought?
This makes little sense to us. But perhaps it explains why the central banker’s quest for higher prices has not lead to the economic growth they expected all these years. The lack of results tells us they are taking the wrong steps to help the economy.
We hate devoting this much time to discussing the actions of central banks. Yet as we saw this week, unfortunately they are the biggest factor on the direction of stocks.
Next Week
The next two weeks are likely to be very quiet due to the two holidays. However, activity does pick up at the very end of the year as investors try to reposition portfolios or make last-minute trades for tax purposes. Markets typically move higher into the end of the year, but it can be a little more volatile.
Investment Strategy
We may have formed a bottom – at least in the short term – for both stocks and oil. It probably didn’t hurt to do a little nibbling in stocks and it may have been a good time to get into energy companies (we’d stick with the bigger names and avoid smaller companies who are more likely to be hurt by the lower oil prices). We’d be a little more cautious with energy companies, though, because a stronger dollar may continue to weaken oil in the new year.
As for the longer term, we still have our concerns. 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.
High yield (junk) bonds have been a big story since oil companies make up a large part of this asset class. They have also been a good leading indicator for the stock market, as you can see in the chart below (the orange line is the S&P 500 and the black line is high-yield bonds). High yield bonds have dropped and sharply rebounded (the black line), which confirms the upward move in the stock market. No indicator is perfect, but this does serve as a good guide.
As for the bond market, bond prices rose sharply (so yields were lower) when investors pulled money out of stocks and put them into the safer bonds. This reversed when stocks rose, so we’ll have to see if this trend continues. At this point, it’s anyone’s guess.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. New money has flowed into them recently, but we are keeping a longer term focus with them. 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, too.
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.
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.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. New money has flowed into them recently, but we are keeping a longer term focus with them. 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, too.
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.
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.
