Stocks kicked off the year in a volatile fashion. For the week, the Dow lost 0.5%, the S&P fell 0.6% and the Nasdaq declined 0.5%. Gold gained ground on the weakness in stocks, climbing 2.5% on the week. Oil continues to be a big story, hitting the lowest level in nearly six years and falling 8.2% on the week to $48.36 per barrel. The international Brent oil, used for much of our gas here in the east, also moved lower to $62.15 per barrel.
Source: Google Finance
Hopefully this week was not an indication of the volatility markets will see in 2015. Stocks got off to their worst start since 2008 before posting solid gains to briefly turn positive for the year, only to move lower again. The end result was the worst week of the year for stocks (that’s a little dry humor for you careful readers).
There were several stories behind the market moves this week. Weighing on stocks was a concern over weaker economic growth around the globe, which many see reflected in the falling oil prices. Plus, stability of the Eurozone is coming in to question as the likelihood of Greece leaving the Euro is becoming larger.
On the other hand, economic data this week was decent and central banks around world stand poised to do more stimulus, fueling a rise in stocks.
Oil continues to receive a lot of attention as prices keep falling. Some investors worry that the decline in this market is an indication of slower economic growth (a weaker economy would mean less demand for gas, for example). There is also the concern the lower prices will hurt oil companies, who have been a bright spot in hiring and capital investments. This is why big down days in oil have usually seen a similar move lower in stocks.
However, we see it more as a supply issue. The U.S. has increased production dramatically and that higher supply is bringing oil prices down. In the end, we see it as a net positive. Yes, there will be some pain in oil producing companies, but the benefits will outweigh the drawbacks.
The Fed was also a major factor in the market activity this week. The minutes from their latest meeting were released and investors liked what they heard. The Fed did not see interest rates rising any time soon (low interest rates have fueled a rise in stocks), even going so far as to say they will not rise before April.
They also mentioned weakness overseas as a reason not to pull back from their stimulative policies. With overseas economies looking shaky and deteriorating, this, too, will be a factor preventing the Fed to toughen its stance on stimulus.
One regional Fed president made news, too, with his comments sending stocks soaring. Charles Evans of the Chicago bank said raising rates any time in 2015 would be a catastrophe. Since stocks increase on lower rates, they immediately soared on the news. This was a major factor in the large market increase Thursday.
It wasn’t just the U.S. central bank in focus this week, but the European Central Bank, as well. Like all the other central banks, a major focus of the ECB is increasing inflation. Data released this week shows inflation falling and prices are actually lower on an annual basis. This is another signal to investors that the ECB will undergo further stimulus to boost inflation and the new money printed will flow into stocks. This, too, was a factor in the sharp rise in stocks.
We continue to believe this policy of higher inflation is foolish and the lack of economic growth is evidence of that. We look at it this way: if an economy is poor and the people are hurting, what sense is there in sending prices higher? How do higher gas or food prices help? It makes little sense and hurts people further. Instead, prices need to come down to help improve an economy. Unfortunately, we see little chance of that occurring.
Finally, the problems faced by European countries in 2010 are resurfacing as there is a threat of Greece leaving the Eurozone. While Greece is only a small player in the Euro, the chance that a country may leave it creates stability problems. Just remembering the volatility the Euro crisis caused five years ago makes this news significant and something to pay attention to.
2015
Taking a look at 2015, most analysts have predicted around an 8% increase for the stock market. That’s a pretty safe number – not too high, not too low. However, these analysts are always an optimistic bunch, never having forecasted a decline in stocks. So we take their estimate as more of a guess.
Where do we see stocks ending the year? We think it is pretty foolish to make such predictions since we have no idea. There are a number of factors to keep an eye on, though. Actions of the central banks are likely to still be the most dominant factor for stocks. An increase in rates will be a knock for stocks, but further stimulus measures by other central banks around the globe are likely to keep the party going. Global economies look weak, whether it is Europe or Asia (especially Japan), so more stimulus from them is likely.
The market does have a couple things going for it this year, too. Since the year 1885, a year ending in a “5” has only been lower once. Plus, the year before a Presidential election has an average return of over 15%. These are somewhat silly stats and have no bearing on our investment strategy, but are just interesting to mention.
Next Week
Next week looks to be a busy one. Corporate earnings will start streaming in, so that will give investors something to look at. Plus there will be several economic reports worth watching. Inflation at the consumer and producer levels will be reported, we’ll get retail sales for December, and also industrial production.
Investors are likely to keep an eye on oil prices and news out of Europe, so it is likely to be another busy week.
Investment Strategy
At this point we are not doing any buying or selling. Many stocks have been hit hard and are near buying levels – 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.
One of items we often discussed here is high yield bonds as a leading indicator for the market. High yield bonds (or riskier, junk bonds) tended to move higher or lower before the stock market, making it a nice leading indicator for the direction of stocks. However, that trend seems to have ended over the last couple weeks. They seem to be moving more in tandem at present, so they don’t seem to be as good of a forecasting tool. We’ll be watching to see if this reverses, but at this time it is of little help.
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.
There were several stories behind the market moves this week. Weighing on stocks was a concern over weaker economic growth around the globe, which many see reflected in the falling oil prices. Plus, stability of the Eurozone is coming in to question as the likelihood of Greece leaving the Euro is becoming larger.
On the other hand, economic data this week was decent and central banks around world stand poised to do more stimulus, fueling a rise in stocks.
Oil continues to receive a lot of attention as prices keep falling. Some investors worry that the decline in this market is an indication of slower economic growth (a weaker economy would mean less demand for gas, for example). There is also the concern the lower prices will hurt oil companies, who have been a bright spot in hiring and capital investments. This is why big down days in oil have usually seen a similar move lower in stocks.
However, we see it more as a supply issue. The U.S. has increased production dramatically and that higher supply is bringing oil prices down. In the end, we see it as a net positive. Yes, there will be some pain in oil producing companies, but the benefits will outweigh the drawbacks.
The Fed was also a major factor in the market activity this week. The minutes from their latest meeting were released and investors liked what they heard. The Fed did not see interest rates rising any time soon (low interest rates have fueled a rise in stocks), even going so far as to say they will not rise before April.
They also mentioned weakness overseas as a reason not to pull back from their stimulative policies. With overseas economies looking shaky and deteriorating, this, too, will be a factor preventing the Fed to toughen its stance on stimulus.
One regional Fed president made news, too, with his comments sending stocks soaring. Charles Evans of the Chicago bank said raising rates any time in 2015 would be a catastrophe. Since stocks increase on lower rates, they immediately soared on the news. This was a major factor in the large market increase Thursday.
It wasn’t just the U.S. central bank in focus this week, but the European Central Bank, as well. Like all the other central banks, a major focus of the ECB is increasing inflation. Data released this week shows inflation falling and prices are actually lower on an annual basis. This is another signal to investors that the ECB will undergo further stimulus to boost inflation and the new money printed will flow into stocks. This, too, was a factor in the sharp rise in stocks.
We continue to believe this policy of higher inflation is foolish and the lack of economic growth is evidence of that. We look at it this way: if an economy is poor and the people are hurting, what sense is there in sending prices higher? How do higher gas or food prices help? It makes little sense and hurts people further. Instead, prices need to come down to help improve an economy. Unfortunately, we see little chance of that occurring.
Finally, the problems faced by European countries in 2010 are resurfacing as there is a threat of Greece leaving the Eurozone. While Greece is only a small player in the Euro, the chance that a country may leave it creates stability problems. Just remembering the volatility the Euro crisis caused five years ago makes this news significant and something to pay attention to.
2015
Taking a look at 2015, most analysts have predicted around an 8% increase for the stock market. That’s a pretty safe number – not too high, not too low. However, these analysts are always an optimistic bunch, never having forecasted a decline in stocks. So we take their estimate as more of a guess.
Where do we see stocks ending the year? We think it is pretty foolish to make such predictions since we have no idea. There are a number of factors to keep an eye on, though. Actions of the central banks are likely to still be the most dominant factor for stocks. An increase in rates will be a knock for stocks, but further stimulus measures by other central banks around the globe are likely to keep the party going. Global economies look weak, whether it is Europe or Asia (especially Japan), so more stimulus from them is likely.
The market does have a couple things going for it this year, too. Since the year 1885, a year ending in a “5” has only been lower once. Plus, the year before a Presidential election has an average return of over 15%. These are somewhat silly stats and have no bearing on our investment strategy, but are just interesting to mention.
Next Week
Next week looks to be a busy one. Corporate earnings will start streaming in, so that will give investors something to look at. Plus there will be several economic reports worth watching. Inflation at the consumer and producer levels will be reported, we’ll get retail sales for December, and also industrial production.
Investors are likely to keep an eye on oil prices and news out of Europe, so it is likely to be another busy week.
Investment Strategy
At this point we are not doing any buying or selling. Many stocks have been hit hard and are near buying levels – 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.
One of items we often discussed here is high yield bonds as a leading indicator for the market. High yield bonds (or riskier, junk bonds) tended to move higher or lower before the stock market, making it a nice leading indicator for the direction of stocks. However, that trend seems to have ended over the last couple weeks. They seem to be moving more in tandem at present, so they don’t seem to be as good of a forecasting tool. We’ll be watching to see if this reverses, but at this time it is of little help.
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.
