It was another tough week for stocks. Through the Friday close, the Dow fell 1.3%, the S&P dropped 1.2% and the Nasdaq declined 1.5%. Bonds were a big story this week as investors poured money into this sector, pushing yields on government bonds lowest level in almost two years for 10-year bonds and the lowest level ever for 30-year bonds (so refi that mortgage if you can!).
Commodities were also a big story this week. Gold hit its highest level in four months with a gain of 5.0%. Oil saw significant volatility, at one point hitting its lowest level in six years, only to close slightly higher by 0.7% to $48.69 per barrel. The international Brent oil, used for much of our gas here in the east, closed at 49.90 per barrel.
Commodities were also a big story this week. Gold hit its highest level in four months with a gain of 5.0%. Oil saw significant volatility, at one point hitting its lowest level in six years, only to close slightly higher by 0.7% to $48.69 per barrel. The international Brent oil, used for much of our gas here in the east, closed at 49.90 per barrel.
Source: Google Finance
It sure has been a volatile start to the year and this week was no exception. Much of the volatility this week could be attributed to the central banks. Since they are easily the biggest force moving the market, investors carefully watch their moves. The European Central Bank is expected to discuss a new stimulus policy at a meeting next week and the anticipation caused much of the volatility this week.
Before getting into the central banks, we must talk about commodities. We’ve discussed the plunge in oil over the last few weeks, where oil would fall and stocks would follow suit. The drop in oil continued into this week, but that oil-stock link seems to have been broken. Stocks moved higher when oil was down and vice-versa. It may be temporary, but we see this as a good sign for the market.
The other big story in commodities this week was copper. Copper plunged to its lowest level in six years and saw its worst one-day drop in three years.
Why do we care about copper? Because copper is often referred to as “Dr. Copper,” where it is viewed as a gauge on the health of an economy. Since copper is used in everything from phones to homes, an increase in copper use signals a healthy economy.
The drop in copper was concerning because it signals that the economy is not healthy. China, in particular, is a serious worry as many see their economy weakening. Since they are such a large player in the global economy, this is something to pay attention to. And maybe the drop we’ve seen over the last few months was signaling trouble ahead.
As economies around the globe continue to weaken, attention has shifted back to the central banks and the possibility of further stimulus. The European Central Bank (or ECB) is particularly in focus because of their policy meeting next week.
For years the ECB has discussed doing a new stimulus program where they would print money to buy bonds of the various governments to make it easier for them to borrow (much like what our Fed did here). Until now, it has only promised to do so at some point in the future. However, investors are saying that now is the time for you to act. Positioning by other central banks this week signaled a new European stimulus was likely, so investors are increasingly optimistic.
While further stimulus will likely boost the stock market, it is unlikely to improve the economy. We’ve discussed this often – fundamental reforms like improving taxes, regulations, labor, etc. are needed for the economy to improve. Printing money and increasing debt only papers over the problems that will eventually resurface, but at an even greater magnitude. This is why we have found ourselves at this spot many times over the years, but keep taking the same actions at a bigger and bigger scale and expecting a different result.
Switching gears and focusing on economic data here this week, corporate earnings for the fourth quarter started rolling in. Economists have predicted earnings and revenue growth both increasing 1.1%, which is the lowest level since 2012. This is a significant decrease in expectations from only a couple months ago, where in October they predicted an 8.4% growth. The good news with these very low expectations is that it makes the hurdle easier to clear, so we may see excitement over a better-than-expected earnings season, even though it is unlikely to be very strong.
Though we have only begun earnings season, the results are even worse than those low projections. According to Factset, earnings and revenue (what a company actually received in sales. Earnings are what is left when costs are subtracted) are both disappointing.
As for economic data, the story was largely negative. Retail sales and industrial production in December both showed a surprising drop. Additionally, inflation at the consumer and producer level were both lower than expected due to lower gas prices (although food prices were higher). While most people find lower gas prices a relief, central bankers adamant on increasing inflation find this a problem. Look for more activity out of the central banks to “save” us from these horrible low gas prices.
Next Week
Next week will be fairly light for economic data, but corporate earnings releases will start to pick up. However, their importance will be a distant second to the ECB meeting on Thursday. For years investors have been expecting this new stimulus plan out of Europe and the meeting this week is expected to tell us what, if any, new stimulus there will be.
It is a bit tricky to figure out what the market reaction will be. The market will certainly sell-off if no stimulus is announced. The tricky part will be figuring out the market reaction if a new plan is announced. It seems to be pricing in a large stimulus, so a smaller plan will likely result in a sell-off, too.
A big plan might see the market go up, but there is a good chance the market goes down, too (we’re really hedging our bets on this one, huh?). Remember the old Wall Street saying, “Buy the rumor, sell the news?” Stocks may still fall on a big stimulus announcement if that is the case. In the end, we really don’t know what will happen in the market – most other investors don’t, either – so it may be a quiet week until Thursday.
Investment Strategy
We are still not doing any buying or selling at this point. However, we are seeing brighter prospects for the market at this time, though this all depends on the news that comes out of the ECB next week.
More stocks are near buying levels now, too, after all this volatility – especially ones related to oil and energy – so there may be some bargains to be found. We’d be a little more cautious with energy companies, though, because a stronger dollar may continue to weaken oil in the new year.
Looking at the longer term for the market, 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.
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 how it will play out in the longer run.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. They have not fared well recently as the likelihood of inflation has waned with the lower energy prices, 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.
Before getting into the central banks, we must talk about commodities. We’ve discussed the plunge in oil over the last few weeks, where oil would fall and stocks would follow suit. The drop in oil continued into this week, but that oil-stock link seems to have been broken. Stocks moved higher when oil was down and vice-versa. It may be temporary, but we see this as a good sign for the market.
The other big story in commodities this week was copper. Copper plunged to its lowest level in six years and saw its worst one-day drop in three years.
Why do we care about copper? Because copper is often referred to as “Dr. Copper,” where it is viewed as a gauge on the health of an economy. Since copper is used in everything from phones to homes, an increase in copper use signals a healthy economy.
The drop in copper was concerning because it signals that the economy is not healthy. China, in particular, is a serious worry as many see their economy weakening. Since they are such a large player in the global economy, this is something to pay attention to. And maybe the drop we’ve seen over the last few months was signaling trouble ahead.
As economies around the globe continue to weaken, attention has shifted back to the central banks and the possibility of further stimulus. The European Central Bank (or ECB) is particularly in focus because of their policy meeting next week.
For years the ECB has discussed doing a new stimulus program where they would print money to buy bonds of the various governments to make it easier for them to borrow (much like what our Fed did here). Until now, it has only promised to do so at some point in the future. However, investors are saying that now is the time for you to act. Positioning by other central banks this week signaled a new European stimulus was likely, so investors are increasingly optimistic.
While further stimulus will likely boost the stock market, it is unlikely to improve the economy. We’ve discussed this often – fundamental reforms like improving taxes, regulations, labor, etc. are needed for the economy to improve. Printing money and increasing debt only papers over the problems that will eventually resurface, but at an even greater magnitude. This is why we have found ourselves at this spot many times over the years, but keep taking the same actions at a bigger and bigger scale and expecting a different result.
Switching gears and focusing on economic data here this week, corporate earnings for the fourth quarter started rolling in. Economists have predicted earnings and revenue growth both increasing 1.1%, which is the lowest level since 2012. This is a significant decrease in expectations from only a couple months ago, where in October they predicted an 8.4% growth. The good news with these very low expectations is that it makes the hurdle easier to clear, so we may see excitement over a better-than-expected earnings season, even though it is unlikely to be very strong.
Though we have only begun earnings season, the results are even worse than those low projections. According to Factset, earnings and revenue (what a company actually received in sales. Earnings are what is left when costs are subtracted) are both disappointing.
As for economic data, the story was largely negative. Retail sales and industrial production in December both showed a surprising drop. Additionally, inflation at the consumer and producer level were both lower than expected due to lower gas prices (although food prices were higher). While most people find lower gas prices a relief, central bankers adamant on increasing inflation find this a problem. Look for more activity out of the central banks to “save” us from these horrible low gas prices.
Next Week
Next week will be fairly light for economic data, but corporate earnings releases will start to pick up. However, their importance will be a distant second to the ECB meeting on Thursday. For years investors have been expecting this new stimulus plan out of Europe and the meeting this week is expected to tell us what, if any, new stimulus there will be.
It is a bit tricky to figure out what the market reaction will be. The market will certainly sell-off if no stimulus is announced. The tricky part will be figuring out the market reaction if a new plan is announced. It seems to be pricing in a large stimulus, so a smaller plan will likely result in a sell-off, too.
A big plan might see the market go up, but there is a good chance the market goes down, too (we’re really hedging our bets on this one, huh?). Remember the old Wall Street saying, “Buy the rumor, sell the news?” Stocks may still fall on a big stimulus announcement if that is the case. In the end, we really don’t know what will happen in the market – most other investors don’t, either – so it may be a quiet week until Thursday.
Investment Strategy
We are still not doing any buying or selling at this point. However, we are seeing brighter prospects for the market at this time, though this all depends on the news that comes out of the ECB next week.
More stocks are near buying levels now, too, after all this volatility – especially ones related to oil and energy – so there may be some bargains to be found. We’d be a little more cautious with energy companies, though, because a stronger dollar may continue to weaken oil in the new year.
Looking at the longer term for the market, 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.
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 how it will play out in the longer run.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. They have not fared well recently as the likelihood of inflation has waned with the lower energy prices, 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.
