Commentary for the week ending 12-18-15

Please note: There will be no market commentary for the next two weeks due to the Christmas and New Year’s holidays.  We wish you all a great holiday season!

Stocks started the week with solid gains, but late-week losses saw the markets end slightly negative.  Through the Friday close, the Dow lost 0.8%, the S&P fell 0.3%, and the Nasdaq was down 0.3%.  Gold moved lower, falling 0.8% on the week to a six-year low.  Oil also moved lower, falling 2.3% to new seven-year lows of $34.55 per barrel.  The international Brent oil lost just over one dollar to close at $37.04 per barrel. 

Source: Google Finance

This week was one of the most highly anticipated weeks on Wall Street in years.  Really.  For the first time in nine years, the Fed announced an increase in interest rates.  The move was largely expected, though, with stocks rising on the announcement and falling sharply in the days after. 

Low interest rates have been an important tool used by the Fed to stimulate the economy.  It lowers borrowing costs, allowing people to borrow at cheaper rates.  This (theoretically) boosts the economy.  The problem is if left too low for too long, bubbles and distortions can form, resulting in more harm than good.  This is why the Fed needed to raise rates.

While the increase in rates is a step back from the highly stimulative policy we’ve seen the last seven years, it is still extremely stimulative.  And the Fed was quick to point this out so as to not worry markets. 

The Fed would like to continue raising rates as the economy improves, but at a very “gradual” pace.  That assumes the economy will continue to improve according to their forecasts.  The one constant about their forecasts is that they’ve always been wrong, being too optimistic on the economy.  And our economy is not that strong to begin with. 

In fact, no central bank around the world that has raised rates has kept them up – meaning all their economies have faltered.  Even this week, Japan announced more stimulus in addition to the monumental amounts of stimulus already in place. 

One positive that will hopefully come from the Fed’s actions is maybe we won’t have to talk about the Fed as much now.  These stimulus policies can be directly attributed to the rise in stocks, causing the market to hang on the Fed’s every word.  As they pull back on the stimulus, maybe the market will focus more on fundamentals.  At least we can hope. 

Switching gears, one point of caution we saw in the market this week is market breadth.  We’ve talked about this often lately – breadth refers to the amount of stocks rising compared to the amount falling.  The days we saw gains in the market this week also saw terrible breadth. 

In a rising market, you’d expect a large amount of stocks moving higher and a lesser amount moving lower – but that hasn’t been the case.  Fewer and fewer stocks are hitting new highs for the year while significantly more are hitting new lows. 

The amount of stocks hitting new lows for the year is rising:

In another example, Wednesday was strongest day for the market this week.  But on that day, only 810 companies traded on the New York Stock Exchange moved higher and 2,326 moved lower.  Those that rose, rose by a large enough amount to overcome the declining stocks – but it is still a bad signal.  It shows the market rally has been on very weak footing. 

Finally, there was an article in this week’s Wall Street Journal we felt was worth mentioning (LINK).  More and more companies are reporting earnings using non-GAAP metrics.  GAAP is “generally accepted accounting principles” and is how companies traditionally report earnings.  By using non-GAAP figures, companies can adjust their figures to appear better than they actually are. 

The WSJ reports about a quarter of the corporate earnings releases used non-GAAP accounting.  Deutsche Bank research found that the biggest U.S. companies (it didn’t say how many) reported a loss of 0.1% last quarter – but would have reported losses of 13% if using GAAP figures.  Corporate earnings have been poor in recent quarters – and may be worse than originally thought. 


Next Week

Next week will be a very quiet week for data, but judging by the big moves in the market this week, markets still may see a lot of action. 

The market is closed Friday and an early close Thursday, but in the rest of the week we’ll get information on GDP for the third quarter, personal income and spending, housing, and durable goods. 


Investment Strategy

Well, last week we reported the market was near a level we normally found to be an attractive buying point, but out of an abundance of caution would not buy at that time.  We missed out on a pretty good pop in stocks for three days and we were worried we missed the start of another rally.  Stocks gave up those gains and more later in the week, which we expected to happen after the Fed’s announcement. 

That said, we are still not at a buying opportunity in the short run and not at levels we would consider selling, either. 

Longer term, we continue to have worries.  Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored.  Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent.  Corporate earnings are lackluster and revenue has been in a declining trend.  A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends.  This indicates lower corporate growth down the road. 

Bonds prices and yields bounced around considerably this week.  In the end, yields were higher and prices lower.  We still don’t think prices are likely to fall much from here (or yields rise), despite the Fed’s rate increase.  A weak economy and demand from overseas will keep bond demand high (which keeps prices high and yields low). 

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.

Commentary for the week ending 12-11-15

The markets moved sharply lower this week.  Through the close Friday, the Dow lost 3.3%, the S&P fell 3.8%, and the Nasdaq dropped 4.1%.  Gold lost just 1%, which seems decent relative to the other markets.  Oil was a big story this week with a massive loss of 10.8% to close at $35.36 per barrel.  The international Brent oil crossed below the $40 level for the first time since 2009 to close at $38.27 per barrel. 

Source: Google Finance

There was very little news to move markets this week.  It did move a lot, though, largely because of a Fed meeting next week.  It is here they are expected to raise interest rates for the first time in nine years, making it slightly more expensive to borrow money. 

Perhaps more importantly, it signals a shift away from their stimulative policies we have seen the last seven years that have boosted the market.  This has increased market volatility, as we saw this week. 

A concern is that as the stimulus policies are removed, the market will have to fend for itself based on fundamentals.  These fundamentals have not been pretty – economic growth is steady but slow and corporate earnings have been declining.  Sales are even worse.  These fundamentals don’t justify such high valuations in the market. 

Back to the news of the week, commodities were a big story – oil in particular.  Oil prices hit their lowest level in seven years.  This was partly due to the strength of the dollar (when the dollar is worth more, you need less of them to buy a commodity) and oversupply. 

This week OPEC announced they were not reducing supply and last month saw more oil produced than any other month in the last three years.  There’s a lot of oil out there, which is great news as gas prices should move lower.

This has also had a big impact on the junk bond market.  A lot of smaller oil-producing companies are classified as junk since they are more risky (also referred to as “high yield”).  Lower oil prices hurt the profitability of these companies, which weighs on the junk bond market.  These bonds are now on track for their first losing year since the financial crisis began. 

The pain in the junk bond market is not just limited to oil companies, too, which makes it more worrisome.  Other sectors are performing poorly and defaults are now at their highest level since 2009.

We pay close attention to the junk bond market since it can be a good leading indicator for the broader stock market.  In the image below, you can see the high yield (junk) index (in black) and the S&P 500 (in orange) tend to move in tandem.  However, moves lower in the high yield index usually foreshadows a decline in stocks.  As can be seen below, there is a large gap currently – indicating either stocks will fall or these bonds will have to rise to get back in tandem.  This is something to watch closely. 

One last item of caution from this week.  CNBC reports that selling of stock by corporate insiders is hitting record levels (article).  This month is on pace to be the fourth-highest month of insider selling ever.  This is also a metric we like to follow as insiders obviously have more information about a stock than the general public. 

Interesting to note that amid this record selling by executives, the companies themselves are buying back stock at record levels.  Why would a CEO sell his stock while the company is buying them back?  That just doesn’t look good. 


Next Week

There won’t be much economic or corporate earnings data next week.  However, there will be a very highly anticipated meeting from the Fed where they are expected to announce an increase in interest rates.  Being the first rate hike in nine years, it’s likely to cause a volatile market regardless of their decision, so we could see another rocky week.


Investment Strategy

This drop in stocks puts us near a level we usually find as an attractive buying opportunity for the short run.  We will not be doing so, however.  There are the concerns we discussed above, plus the uncertainty surrounding the Fed meeting next week.  At this point, there is no harm in staying on the sidelines. 

Looking out a few weeks or months, it is a little more difficult to determine as we think it will largely be driven by the Fed.  The Fed may pull back on their stimulus, but other central banks look to add to theirs.  Stocks do tend to be higher into year-end, though.

Longer term, we continue to have worries.  Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored.  Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent.  Corporate earnings are lackluster and revenue has been in a declining trend.  A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends.  This indicates lower corporate growth down the road. 

Bonds did little this week, remaining in the middle of the range we’ve seen since early November.  Traders have huge bets out there that bond prices fall (and yields rise) in response to the Fed.  Prices are likely to fall, but we don’t think it will be that big of a move as a weak economy keeps bond demand high (keeping prices high and yields low). 

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.

Commentary for the week ending 11-20-15

Please note: there will be no market commentary for the next two weeks.  We’ll be back with our commentary for the week ending 12/11/15.  Thanks.  
 
Stocks reversed their recent decline and turned in a solid week.  Through the Friday close, the Dow rose 3.4%, the S&P gained 3.3%, and the Nasdaq added 3.6%.  Gold closed with a slight loss of 0.6%.  Oil turned in a loss of 3.3% to close at $39.39 per barrel.  The international Brent oil moved down only three cents to $44.42 per barrel. 

Source: Google Finance

This week was unusual in that events that we’d expect to send markets lower actually saw stocks turn higher. 

Monday opened fresh off the Paris attacks, which most people would conclude to be a negative for stocks.  However, the market rallied strongly.  Part of this came from an increase in oil prices on terrorism concerns.  Higher oil prices are good for energy companies, giving this sector the best gains of the day.

Stocks also rose this week when minutes from the latest Fed meeting showed an increased likelihood of an interest rate hike at the next meeting in December.  We’d normally see this as a negative for stocks as higher interest rates make it more expensive to borrow money, which then pressures the stock market.  

While stocks rose when it appeared the U.S. was moving away from stimulus, stocks also moved higher when Europe looked like they were moving towards more stimulus.  The minutes from the last European Central Bank (ECB) meeting indicated a willingness to print more money to stimulate the economy.  Comments from the head of the ECB on Friday explicitly noted an increase in stimulus was likely.  

There’s all this talk about stimulus – but is it really helping?  Japan has undertaken more stimulus than any other country and in recent years have ramped it up to unimaginable levels.  Unfortunately this week they reported another contraction in their economy, making this their fifth time in recession in the last seven years. 

Stimulus does not fundamentally help an economy.  It does make their stock market rise, but it makes their debts rise and currency weaken, too. 

The weaker currency does help companies who export their products (since it makes them appear cheaper to buyers overseas).  As we see in Japan, though, the weaker currency makes everything within the country cost more.  This hurts the people of the country and is not a path to economic growth.

Finally, we’ll bring up something we last discussed in July – market breadth.  “Breadth” is the amount of companies in the index advancing or declining.  A large number of companies moving higher is a good sign for the market and a large number of companies declining means the opposite. 

While the market has been rising, the amount of companies making new highs is trending lower:

Meanwhile, the amount of companies hit new lows is rising:

Despite the market continuing to rise, we need to be cautious.  This isn’t something that would cause us to sell, but it does tell us that if there was a sell-off, it could be larger than normal.  This is something to keep an eye on. 


Next Week

Next week will be busy in the first three days and quiet thereafter due to Thanksgiving.  We’ll get info on housing, the revision to GDP, personal income and spending, and inflation.  There will be a handful of companies reporting earnings, too.

Worth noting, the week of Thanksgiving is historically a positive one, so that is worth considering.   


Investment Strategy

Stocks are at a level where we wouldn’t consider doing any buying or selling at this point.  They quickly rallied off their somewhat-oversold levels last week, so they are more on the expensive side in the very short term. 

Looking out a few weeks or months, it is a little more difficult to determine as we think it will largely be driven by the Fed.  The Fed may pull back on their stimulus, but other central banks look to add to theirs.  Stocks do tend to be higher into year-end, but we may see more volatility as the odds of a December rate hike increases. 

Longer term, we continue to have worries.  Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored.  Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent.  Corporate earnings are lackluster and revenue has been in a declining trend.  A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends.  This indicates lower corporate growth down the road. 

Bond prices remain high (so yields are low) as they hover near the top of the range they’ve been in the last couple months.  We are likely to continue seeing relatively low yields and high prices in bonds for some time, though, so we aren’t forecasting any major changes for bonds in the near future.

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.

Commentary for the week ending 11-13-15

It was a rough week for stocks as they fell for the first time in two months.  Through the close Friday, the Dow lost 3.7%, the S&P fell 3.6%, and the Nasdaq fared the worst on a 4.3% drop.  Gold hit its lowest level since 2010.  Oil also fell, losing 8.5% to $40.73 per barrel.  The international Brent oil moved down $4 to $44.45 per barrel. 

Source: Google Finance

There was very little news to move the market this week.  Stocks have risen sharply in the last two months, so it’s not surprising to see them give up some of their gains.

It’s also fairly apparent that this sell-off was related to an increase in interest rates from the Fed.  The positive jobs report last week increased the odds of an interest rate hike from the Fed in December.  Though it is a positive development for the economy, it’s a negative for a market that has been supported by these stimulus measures. 

We’ve seen this story several times before.  The Fed indicates an interest rate hike is near and stocks sell-off as a result.  The Fed then cites the weak stock market as a reason for not raising rates and the market then turns higher.  We think it is very likely this cycle will play out again in the coming weeks.

There were a few economic reports released this week worth noting, and none were very good.  Inflation at the producer level (PPI) fell 0.4% in the last month and now stands at the lowest year-over-year level since 2009.  This is important, as the Fed needs to see higher inflation before raising interest rates.

Retail sales were also a big story this week.  They rose 0.1% last month, much less than expected.  The big story came from individual retail companies, however.  Many reported earnings this week and sales were much lower than expected.  Plus, these retailers are seeing weaker sales for the fourth quarter.  People just aren’t spending money at these stores. 

The chart below shows how several retail stocks performed this week.  Macy’s (M) down 20%, Nordstrom’s (JWN) down 18%.  JCPenny (JCP) down 15%.  TJ Max companies (TJX) down 12%.  These are significant moves that mostly occurred in a single day for these stocks.

This leads us to corporate earnings, which have been very weak.  Earnings season is nearly complete and while companies did better than expected, they still saw a negative quarter.  This is the second straight quarter of declining earnings, technically making this an earnings recession.

Revenue, or sales, were lower by 3.7%, the third-straight quarter of lower sales numbers.   As we saw in the retail companies, people just aren’t spending the money analysts expected and shows the economy isn’t as strong as many think, either. 


Next Week

Next week looks similar to this week, light on economic data and earnings, along with a few regional Fed presidents making speeches.

For economic data, we’ll get info on inflation at the consumer level (CPI), industrial production, and housing data.  Retail sales will again be in focus as several big name companies like WalMart, Target, and Home Depot report results. 

Finally, the situation in France will be a focus as attacks like these can unnerve the markets. 


Investment Strategy

We were very cautious as of last week as stocks appeared expensive in the short run.  This week’s sell-off makes them much less expensive now and they may even find a little support at this level.  We do think they have the potential to still move lower, so we are not looking to do any buying at this point. 

Looking out a few weeks or months, it is a little more difficult to determine as we think it will largely be driven by the Fed.  Stocks do tend to be higher into year-end, but we may see more volatility as the odds of a December rate hike increases. 

Longer term, we also have worries.  Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored.  Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent.  Corporate earnings are lackluster and revenue has been in a declining trend.  A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends.  This indicates lower corporate growth down the road. 

Despite pulling back a bit this week, bonds prices remain high (so yields are low) as they hover near the top of the range they’ve been in the last couple months.  We are likely to continue seeing relatively low yields and high prices in bonds for some time, though, so we aren’t forecasting any major changes for bonds in the near future.

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.

Commentary for the week ending 11-6-15

Big gains in stocks early in the week were enough to keep them in positive territory as the momentum faded.  For the week, the Dow gained 1.4%, the S&P rose 1.0%, and the Nasdaq was higher by 1.8%.  Bond yields hit their highest level since July as their price fell.  Gold trended lower all week to close with a loss of 4.6%.  Oil also saw a loss, off 4.0% to $44.52 per barrel.  The international Brent oil moved down to $48.42 per barrel. 

Source: Google Finance

This week was another one focused on the Fed and their stimulus. 

The employment report for October was released on Friday and stocks spent much of the week in a holding pattern waiting for the results.  A good report increased the likelihood of an interest rate increase at the Fed’s next meeting in December, and a poor report obviously indicated the opposite.  Low interest rates have been helpful in sending stocks higher, so an increase in rates would have a negative impact for stocks.

It turned out the report was the best all year and much better than expected.  The U.S. added 271,000 jobs in October and the unemployment rate fell to 5.0%.  A broader measure of unemployment fell below 10%.  By all accounts, it was a good report.

The news sent stocks lower, for it increased the odds of an interest rate increase later this year.  In fact, odds stood at 58% before the announcement and 70% after.  Markets spent most of the day in the red before moving into positive territory late in the day. 

One regional central bank president, Charles Evans of Chicago, appeared on TV not long after the announcement, commenting on the good jobs number.  However, he cited low wage growth, productivity, and inflation as problems he would like to see improve before rates are increased (though we still don’t agree that higher inflation is a positive).  While the market thinks a hike is likely, there is a decent chance they won’t be. 

Despite this, the chance of a rate hike later this year is still high.  Normally it would weigh on stocks, but there is something that might provide a bit of a boost to the market.

A big reason for increasing stock prices has been companies buying back their own stock.  They borrow money at cheap rates and repurchase shares with those funds.  November has historically been the biggest month for buybacks and December is third most active.  Knowing a rate hike will boost borrowing costs, companies may rush to get buybacks done before the end of the year.  This is something to keep in mind. 

Other economic data this week was mixed.  A report on the strength of the service sector in October was very strong.  However, the manufacturing sector was very weak.  Factory orders declined for the eleventh-straight month, something not seen outside of recessions. 

Finally, corporate earnings continued to come in at a steady pace, though they hardly received any attention this week.  More than half of the companies in the S&P 500 have reported so far and earnings are coming in above estimates (they always do), but are still negative.  Revenue, or sales, are down more than 4%, their third-straight quarter of declines.  This, too, is something not seen outside of recessions.  While stocks continue higher, the economy does have some weakness. 


Next Week

Next week will be another fairly busy one.  Corporate earnings are beginning to slow, but there will still be some big names reporting.

For economic data, we’ll get info on retail sales and inflation at the producer level.  There will be a few big reports out of China, too, that investors will likely play close attention to.

Many regional Fed members will be making speeches, as well, which always has the potential to move the market. 


Investment Strategy

We are very cautious at this point.  Stocks remain on the expensive side in the very short term.  While stocks may be higher into the end of the year, we may see more volatility as the odds of a December rate hike increases. 

Longer term, we also have worries.  Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored.  Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent.  Corporate earnings are lackluster and revenue has been in a declining trend.  A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends.  This indicates lower corporate growth down the road. 

Despite pulling back a bit this week, bonds prices remain high (so yields are low) as they hover near the top of the range they’ve been in the last couple months.  We are likely to continue seeing relatively low yields and high prices in bonds for some time, though, so we aren’t forecasting any major changes for bonds in the near future.

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.

Commentary for the week ending 10-30-15

It was another positive week for the market as it also closed out a solid month.  For the week, the Dow rose 2.5%, the S&P gained 2.1%, and the Nasdaq climbed 3.0%.  Bond prices fell as yields moved higher.  Gold moved opposite of stocks, falling 1.9% on the week.  Oil prices rose to $46.39 for a 3.7% gain.  The international Brent oil moved higher to $49.50 per barrel. 

Source: Google Finance

October is typically known as one of the most volatile months for stocks.  This year, however, October was the best month we’ve seen in four years.  The markets gained over 8% as they rebounded from the lows set back in September. 

Much of this gain has been on the back of the central banks and their stimulus.  Our Fed delayed a hike in interest rates and several other central banks either increased their stimulus or discussed doing so.  This helped boost stocks.

Our central bank, the Fed, was behind the moves in the market this week, too.  Stocks were lower four days this week, but the day the Fed was in the news, stocks moved sharply higher.  They held another policy meeting, announcing no changes to current policy – as expected. 

However, they did seem to talk up the chances for an increase in interest rates in December (the low rates have helped fuel the rise in stocks, so any change in this policy would be noteworthy).   In fact, before the meeting there was about a 33% chance for a rate hike in December.  The odds rose to 50% immediately after. 

Though the odds for a rate hike have increased, we’ve seen this game before – as recently as September.  The Fed will hint at a rate increase, only to step back and cite some economic concern as reason for keeping stimulus in place.  We think this scenario is likely again in December and wouldn’t be surprised to see a little extra market volatility as it approaches. 

Corporate earnings were a big story this week, though they didn’t seem to have much impact on the market.  About 40% of the companies in the S&P 500 have reported so far, with earnings and revenues (or sales) remaining on pace to decline this quarter.  According to Factset, earnings are projected to decline 2.8% and revenue is off 4%.  These numbers are an improvement from what analysts expected just a few weeks ago, but are still disappointing.   

Investors are becoming more concerned with the strength of the corporate sector.  In the past these companies had been able to boost earnings not by increasing sales, but by cutting costs.  Investors are starting to believe there is little more these companies can cut, leading to weaker earnings in the future.  Weaker earnings would result in lower stock prices.   

Economic data this week was especially poor, too.  Housing data was disappointing and durable goods (which are items that have a longer life) were down 1.2%. 

The big report was the first look at third quarter GDP, which came in at an increase of 1.5%.  This is a very soft number, below the 2% average we’ve experienced recently – which is also a weak average. 

Consumer spending was cited as a bright spot in the report as it rose a bit more than expected.  The segment with the most spending, however, was healthcare.  It’s funny that when the government requires us to buy something, it sees the highest amount of spending.  This isn’t a healthy development. 


Next Week

We’ll see a few important economic reports next week.  Employment is a major factor in the Fed’s stimulus and on Friday we’ll get a report on employment in October.  There will also be reports on the strength of the manufacturing and service sectors. 

Corporate earnings will continue to come in at a steady pace next week, too.

Finally, Fed chief Yellen and many regional Fed presidents will be out making speeches, so it will be interesting to get their outlook on the economy and the stimulus. 


Investment Strategy

Again, no change here.  Stocks remain on the expensive side in the very short term.  Looking out a little longer, we do still think the market will trend higher in the coming weeks and months, supported by central banks either keeping stimulus programs in place or increasing them. 

Longer term, we have worries.  Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored.  Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent.  Corporate earnings are lackluster and revenue has been in a declining trend.  A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends.  This indicates lower corporate growth down the road. 

Despite pulling back a bit this week, bonds prices remain high (so yields are low) as they hover near the top of the range they’ve been in the last couple months.  We are likely to continue seeing relatively low yields and high prices in stocks for some time, though, so we aren’t forecasting any major changes for bonds in the near future.

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.

Commentary for the week ending 10-23-15

The markets turned in another solid week, making this their fourth-straight week higher.  Through the Friday close, the Dow gained 2.5%, the S&P climbed 2.1%, and the Nasdaq popped higher by 3.0%.  Gold didn’t fare as well, off 1.1%.  Oil moved lower as gas prices hit their lowest level in six years, falling 5.4% on the week to close at $44.73 per barrel.  The international Brent oil closed lower to $48.10 per barrel. 

Source: Google Finance

The week started out on a fairly calm note, with corporate earnings the only news to move the market.  However, an increased likelihood for more stimulus in Europe and an announced increase in stimulus from China gave stocks a boost to close out the week. 

We’ll start with earnings, as this was the busiest week for earnings this quarter.  The results remain lackluster.  A few big tech companies – Amazon, Microsoft, and Google (which is now called Alphabet, perhaps the least creative name ever) – made headlines with very good earnings.  For the most part, though, companies are seeing a decline in sales and earnings.

Economic growth around the globe was a focus this week.  Growth remains slow, despite the massive amounts of stimulus from every major economy to boost growth.  Europe is currently in the middle of a stimulus program involving massive money printing and negative interest rates to encourage borrowing.  Growth is still lagging in the country, causing the head of the European Central Bank (ECB) to announce further stimulus is likely. 

This sent stocks sharply higher, as you can see starting on Thursday in the chart above.

Stocks were further helped on Friday when China announced an increase in their stimulus measures.  Earlier in the week, the country reported their weakest GDP figure since the start of the economic crisis. This spurred a response from the government as they lowered interest rates even further in an attempt to spur borrowing. 

We discuss this often – we find the actions of these central banks to be highly irresponsible.  If economic growth is not returning with the massive amounts of stimulus pumped into economies, wouldn’t you conclude this was not the right approach?  The stock market may love the stimulus, but we worry about the longer term consequences they are creating.  The massive amounts of debt and market bubbles could be very damaging in the long run. 


Next Week
Next week will be a very busy one, both for corporate earnings and economic data.  With the economic data, we’ll get info on the strength of the economy with the third quarter GDP figure, along with durable goods, personal income and spending, and housing. 

The Fed will again be in the news as they hold another policy meeting.  They are widely expected to announce nothing new at this meeting, so it is unlikely to have much impact on the market. 


Investment Strategy

Still no change here.  Stocks remain on the expensive side in the very short term.  Looking out a little longer, we do still think the market will trend higher in the coming weeks and months, supported by central banks either keeping stimulus programs in place or increasing them. 

Longer term, we have worries.  Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored.  Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent.  Corporate earnings are lackluster and revenue has been in a declining trend.  A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends.  This indicates lower corporate growth down the road. 

Bonds prices remain high (so yields are low) as they hover at the top of the range they’ve been in the last couple months.  We are likely to see relatively low yields and high prices in stocks for some time, though, so we aren’t forecasting any major changes for bonds in the near future.

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.

Commentary for the week ending 10-16-15

Stocks started the week with a downward move, but reversed course to close with a nice gain.  Through the close Friday, the Dow climbed 0.8%, the S&P rose 1.5%, and the Nasdaq added 1.9%.  Gold turned in another decent week, up 1.8%.  Oil moved off its highest level in three months, declining 4.5% to close at $47.26 per barrel.  The international Brent oil closed lower to $50.46 per barrel. 

Source: Google Finance

Stocks were helped higher by poor economic data this week.  Investors continue to look at the stock market in terms of the Fed and their stimulus, seeing weaker economic reports this week delaying any pullback from that stimulus. 

One of the big data points the Fed looks at is inflation.  Two inflation reports were released this week – the CPI and PPI.  Both were weaker than expected.  The lower gas prices have brought down inflation and while most people would consider this a positive, the Fed views it as a negative.  Worth noting, inflation is running higher than expected when excluding that drop in oil prices.  

Corporate earnings are starting to become a bigger story.  Third quarter reports began rolling in this week and the numbers were rather poor, though this was largely expected.  Factset is expecting a decline of 4.6% in earnings this quarter, which is an improvement from the 5.1% they saw just a week ago.  When excluding the troubled oil and commodity sectors, earnings are actually projected to rise 2.2%. 

Many banking and finance companies reported their results this week and there were a few hits and misses.  Outside of this sector, though, the results were lackluster. 

Wal-Mart was a big story as they reported much larger losses than expected, sending the stock down 10% on the day to its lowest level since 2012.  Their costs are soaring, largely due to an increase in their minimum wage.  They cite the higher wages as an “investment,” but wages have been considered an expense for as long as accounting has been around.  This should serve as a warning to investors should wages ever be increased on a larger scale. 

More broadly, the poor earnings picture has caused ratings agencies like Moody’s to downgrade the credit rating of many companies.  They have recently downgraded more companies than at any time since the start of the recession.  There are some real worries at the strength of corporate America and is something we need to keep an eye on. 

Finally, we’ll touch on one of the more obscure metrics we look at as a leading indicator for the market, called the SKEW index.  This metric hit an all-time high this week, so we feel it is worth noting. 

The Skew index comes to us from the options market.  Investors can use options to hedge their portfolios and basically the Skew index measures the amount of interest in hedging for highly unlikely moves in the market.  

By hitting a high this week, it tells us there is more interest than ever in protecting portfolios from a sharp decline in the market.  The extraordinary decline is often described as a “black swan” event, meaning it is very rare.  While no metric is perfect, it has hit high levels before many large declines, so it is something worth watching. 

Next Week

Next week will be very quiet for economic data, but very busy for corporate earnings.  20% of the companies in the S&P 500 will report results, making it the busiest week for corporate earnings. 

There will also be many regional Fed presidents making speeches, and while we expect to hear nothing new, they are always something to pay attention to. 


Investment Strategy

No change here.  Stocks are still on the expensive side in the very short term.  Looking out a little longer, we do still think the market will trend higher in the coming weeks and months, supported by the decreasing likelihood of an increase in interest rates from the Fed.

Longer term, we still have worries.  Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored.  Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent.  Corporate earnings are lackluster and revenue has been in a declining trend.  A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends.  This indicates lower corporate growth down the road. 

Bonds prices rose slightly (so yields fell) and continue to hover at the top of the range they’ve been in the last couple months.  We are likely to see relatively low yields and high prices in stocks for some time, though, so we aren’t forecasting any major changes for bonds in the near future.

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.

Commentary for the week ending 10-9-15

The markets turned in their best week in months.  Through the Friday close, the Dow rose a solid 3.7%, the S&P added 3.3%, and the Nasdaq climbed 2.6%.  A weaker dollar helped commodities this week, with gold hitting a six-week high on a gain of 1.8%.  Oil hit its highest level in three months, up 8.4% to $49.49 per barrel.  The international Brent oil added $4 to close at $52.82 per barrel. 

Source: Google Finance

We’re back to bad news on the economy being good news for the market.  The poor employment report from the previous week saw stocks move higher, as it decreased the likelihood of the Fed pulling back from its accommodative policies that have fueled the market run. 

That rise in stocks spilled into this week, with little news in the week to derail the move. 

The market was also helped when the minutes from the last Fed meeting were released, showing the Fed was not close to raising interest rates off this historically low level. 

One of the talking points after the original meeting was that it was a close call on whether to raise rates.  However, the minutes suggested it wasn’t even close – nearly all the members thought it was best to hold off on a rate increase.

The Fed cited worries about low inflation and weak economic conditions around the globe.  They were also concerned with the volatility in the market.  This is amusing, since it is the Fed’s very actions that cause this volatility. 

We’ve seen this play out many times over the last few years.  The market moves higher when their stimulus policies are in place.  When it appears the policy may be removed, stocks fall.  The Fed then frets about the fall in stocks and announces a new or continued stimulus as a result.  Stocks then rise as the cycle continues.  The Fed is stuck in this cycle with no way out.

Switching gears, corporate earnings are back in the headlines.  Third quarter results will start coming in in the weeks ahead.  The bar has been set very low, as Factset expects a decline of over 5%.  However, the bar is usually set low as it makes it an easier hurdle to beat. 

If earnings were to post a decline, though, it would mark the second straight quarter of earnings declines (and third-straight revenue decline, or sales decline).  This rarely happens outside of recessions. 

According to the bond market – usually a good leading indicator – it appears more investors are concerned of a potential recession, too. 

These record-low interest rates have encouraged companies to load up on debt, with debt levels rising over 8% just in the last year alone.  Investors appear to be worried over the amount of debt and question the ability of the companies to pay it back due to slower growth.  They are asking for more yield as compensation for the added risk (like a credit card – riskier borrowers pay a higher rate).  This is something to keep an eye on.


Next Week

Earnings will be in focus next week.  Many companies will be releasing their results from the third quarter, with a large number of banks reporting this week.  The bar is set very low, so we may see a lot of people commenting on how much better earnings were than originally thought.  This may be true, but they are still likely to be poor.

As for economic data, we’ll get reports on inflation and the producer and consumer levels, retail sales, industrial production, and the Fed’s Beige Book, which gives anecdotal accounts on the strength of the economy.


Investment Strategy

Stocks are likely due for a pause after bouncing strongly off the lows of two weeks ago.  The easy gains have probably been made and stocks are no longer at an attractive level for new money.  We do still think the market will trend higher in the coming weeks and months, supported by the Fed’s inaction.

Longer term, we still have worries.  Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored.  Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent.  Corporate earnings are lackluster and revenue has been in a declining trend.  A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends.  This indicates lower corporate growth down the road. 

Bonds prices fell (so yields rose) as money moved out of bonds and into stocks this week.  We are likely to see relatively low yields and high prices in stocks for some time, though, so we aren’t forecasting any major changes for bonds in the near future.

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.

Commentary for the week ending 10-2-15

Stocks were underwater for most of the week, but a gain Friday saw them close slightly higher.  For the week, the Dow and S&P both rose 1.0% and the Nasdaq was higher by 0.4%.  The story was similar with gold, which closed with a loss of 0.6%.  Oil also saw little change, up 0.7% to $45.66 per barrel.  The international Brent oil closed slightly higher to $48.82 per barrel. 

Source: Google Finance

This week also saw the end of the third quarter.  With a drop of nearly 7% on the S&P and 7.6% on the Dow, it was the worst quarter since 2011.  Investors have now set their sights on the fourth quarter, but with the economy stalling and corporate earnings poised for a decline, investors aren’t very optimistic.  That makes the Fed and their stimulus all the more important for stocks. 

As for the news of the week, investors were anxious for the employment report out on Friday.  Economists were looking for 200,000 jobs to be added over the past month, only to be disappointed with a gain of just 142,000.  The figures for the previous two months were revised sharply lower, too.  All-in-all, it was a very disappointing report. 

Stocks initially moved much lower on the news.  However, it looked like investors realized a poor employment picture means less chance for the Fed to pull back on its stimulus (an increase in interest rates), so stocks eventually moved higher.

Earlier in the week, several regional Fed presidents were discussing their outlook for that increase in rates.  They all believe interest rates will rise this year – as long as the economy remained on its current trajectory.  That is the key point, for it leaves the door open to keep rates low or possibly do even more stimulus.  Each poor economic report make it less likely to see an interest rate any time soon. 

One economic data point we’re keeping an eye on is the regional Fed surveys.  They don’t seem to make headlines, but these reports give a picture of the manufacturing and economic conditions in the various Fed districts. 

We discussed several of these released last week, and all were poor.  The story was the same this week.  The Dallas region posted its ninth-straight contraction while the Midwest also saw a decline.  These results show us that the economy remains sluggish.


Next Week

Next week looks a little quieter for economic data.  The most important report comes on Monday with the strength of the service sector over the last month.  We’ll also get reports on import prices, which is important for gauging inflation, and consumer credit. 

Several regional Fed presidents will be making speeches, too.  They’ve all echoed the same story of rates rising this year, but it will be interesting to see if the tone changes after the lousy employment report. 


Investment Strategy

Stocks reached an attractive level this week – at least for the short-term.  There are plenty of economic and corporate earnings worries out there, but the big worry – the Fed raising interest rates – looks highly unlikely.  We think the Fed’s stimulus programs have kept stock prices elevated and see little reason for that to change, which will give stocks some support.

Longer term, we still have worries.  Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored.  Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent.  Corporate earnings are lackluster and revenue has been in a declining trend.  A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends.  This indicates lower corporate growth down the road. 

Bonds prices rose (so yields fell) as money moved out of bonds and into stocks this week.  We are likely to see low yields and high prices in stocks for some time, so we aren’t forecasting any major changes for bonds at this time.

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.

Commentary for the week ending 9-25-15

Stocks moved lower for much of the week before reversing course to close with more modest losses.  Through the close Friday, the Dow was down 0.4%, the S&P lost 1.4%, and the Nasdaq closed down 2.9%.  Gold saw a slight gain of 0.9%.  Oil ended the week up 1.0% to $45.34 per barrel.  The international Brent oil closed slightly higher to $49.02 per barrel. 

Source: Google Finance

The week was uneventful in terms of market-moving news.  Investors continued to focus on the Fed meeting the previous week, where there was some confusion created by their refusal to change the interest rate policy. 

Several regional Fed presidents made speeches this week.  Each discussed their reason for voting against raising rates, with the weakness of the global economy cited as the top concern.  Incidentally, this concern is not a part of the mandate given to them by the government, but we digress. 

One thing all Fed members had in common was a belief the Fed would raise interest rates this year – which is important since there are only a few months left in the year (it’s gone by quick!). 

Fed chief Yellen also indicated such in a speech Thursday night.  She laid out exactly what she believes will happen with the economy in order for rates to rise.  It was good to have some clarity on the subject after the murky conference the previous week.  This helped stocks move higher. 

Inflation is the main indicator the Fed will be following.  Yellen wants to see inflation higher before raising rates and she believes inflation will move higher soon.  She thinks the weakness in the economy has prevented inflation from rising, but now our footing is more solid and inflation should follow. 

It doesn’t look like the markets share that same view.  The bond market can serve as a gauge for inflation expectations (specifically, the spread between 10-year Treasury yields and TIPs) and that reading hit the lowest level since 2009.  This, too, may have been a reason for the market rise on Friday – it means that a rate hike is unlikely any time soon. 

Getting into the economic data of the week, there was some good news and some bad news.  Sales for new homes rose to the best level since 2008, but existing home sales fell for another month.  GDP for the second quarter was revised higher to 3.9% - a respectable number.  On the other hand, durable goods fell for the seventh-straight month and are now down 20% for the past year. 

One other economic item worth noting was the economic conditions surveys from several of the regional Fed banks.  Last week we saw notably poor reports from New York and Philly and this week was more of the same.  Chicago is weaker.  Richmond hit its lowest level in almost three years.  Kansas fell for the seventh-straight month, something that has never happened outside of a recession.  Economic data is not as strong as many believe. 

Finally, some news from overseas impacted our markets.  A report from Japan showed another month of deflation.  Remember that these central banks are trying their hardest to increase inflation, so the news sent stocks higher as it raised the chances for more stimulus.  Keep in mind they have undertaken a monumental amount of stimulus and it has yet to fix their economy, so we’re not sure what more of the same would accomplish.


Next Week

It looks like next week could be a busy one.  There will be a few economic reports worth watching, like the September employment report on Friday.  We’ll also get a report on the strength of manufacturing and consumer income and spending.

The Fed, too, will be in the news as even more Fed members will make policy speeches and investors will be closely watching.

Finally, the government shutdown drama may come to a head next week and could create some volatility for the market. 


Investment Strategy

Coming in to the week, stocks looked expensive in the very short-term and we were looking for a pullback before adding new money to the market.  It’s too soon to tell if the move late this week was the start of a new leg higher, but we would have felt more comfortable if stocks moved a bit lower before this move higher. 

We still think last week’s announcement to keep rates low will give stocks some support in the coming weeks and months.  However, we’re likely to see a replay of the last few weeks as December approaches and a Fed rate hike appears likely. 

Since much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored.  Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent.  Corporate earnings are lackluster and revenue has been in a declining trend.  A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends.  This indicates lower corporate growth down the road. 

Bonds prices rose (so yields fell) as money moved out of bonds and into stocks this week.  We are likely to see low yields and high prices in stocks for some time, so we aren’t forecasting any major changes for bonds at this time.

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.

Commentary for the week ending 9-18-15

A late-week loss cut into what would have otherwise been a decent week for the market.  For the week, the Dow fell 0.3%, the S&P lost 0.2%, and the Nasdaq gained a slight 0.1%.  Gold moved higher on the policy announcement from the Fed, up 2.8%.  Oil saw a slight gain of 1.3% to $44.90 per barrel.  The international Brent oil, used to make much of our gas here in the east, closed down to $48.49 per barrel. 

Source: Google Finance

This week was all about the Fed. 

We’ve talked about it for a while – this week held the meeting where the Fed would possibly change their interest rate policy.  Rates have been at an emergency stimulus level for seven years now; so many investors believed the economy is doing well enough to move away from this policy.  Any change would be very important for the market as it has had a big impact on the rise in stocks.    

The days leading up to the Fed decision were rather uneventful as investors were hesitant to place any bets before the Thursday announcement.  As you can see in the chart above, stocks became much more volatile once the decision was announced. 

The Fed decided to keep their policy unchanged, continuing to hold rates at these record low levels. 

Investors believed it would be a close decision, with the odds close to 50-50.  Within the Fed, however, it wasn’t even close.  The regional Fed members voted 9-to-1 to keep rates unchanged.  One Fed member even wanted more stimulus.  

The announcement to keep rates low would normally be good for the market but was instead met with confusion.  The Fed’s explanation for keeping rates low added more uncertainties to the market – and the market hates uncertainty.

First, they discussed a weaker economic picture than many originally assumed. 

Problems overseas were also cited as a reason for not raising rates, which is new territory for the Fed.  The government has given the Fed a mandate for stable prices and full employment.   Focusing on international events, like a weakening Chinese economy, is outside the Fed’s mandate.  Basing economic policy on international events raised a few eyebrows.

A lack of inflation continues to be a concern for the Fed, too.  They want to see inflation nearing its 2% target before hiking rates (even though higher inflation doesn’t lead to a healthy economy).  However, an article from Bloomberg this week shows just how unlikely that is.  In the last 20 years, we’ve only reached 2% inflation 26% of the time (using the Fed’s inflation metric).  With that information, it looks like rates could be low for a long time. 

Bloomberg

Even though the Fed was in focus this week, we did see several economic reports worth noting.  Retail sales ticked higher this month and the weekly jobless picture continues to improve. 

On the other hand, Manufacturing in the New York region dropped to the worst level since April of 2009 and the Philadelphia region hit lows last seen in March, 2013.  These numbers are worth paying attention to. 


Next Week

This week was all about the Fed and they will be in focus next week, too.  Fed chair Yellen will make a speech Thursday and investors will again be closely watching for any clues on future policy and maybe more discussion on the recent rate decision.  Several other regional Fed presidents will be making speeches, as well. 

As for economic reports, we’ll get info on housing, durable goods, and the final revision to second-quarter GDP.  


Investment Strategy

Despite the weakness in stocks late this week, the announcement to keep rates low will likely give stocks some support in the coming weeks and months.  In the very short term, prices are on the high side after the rise earlier this week, but it may be worth doing some buying if they come off further.

Looking out a little longer, the odds now see December as the next likely chance for a Fed rate hike.  The drama we saw the last few weeks surrounding this rate increase will probably play out again the same way…and it will probably end in the same result from the Fed.  This pattern repeats every time the Fed steps back from its stimulus, they just refuse to see it. 

Looking at longer term fundamentals, we are concerned over the lack of companies reinvesting their earnings into their business.  Money has instead flowed into stock buybacks and dividends, not reinvested back in the company.  This signals lower corporate growth down the road. 

Bonds prices fell (so yields rose) as money moved into stocks earlier this week, but this reversed course after the Fed announcement.  We are likely to see low yields and high prices in stocks for some time, so we aren’t forecasting any major changes for bonds at this time.

Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation.  Floating-rate bonds will do well if interest rates eventually do rise. 

Some municipal bonds look attractive for the right client, too.  We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low.  Therefore, 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 issues and when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.