It was another rough week for Wall Street. Through the Friday close, the Dow fell 2.9%, the S&P lost 2.8% and the Nasdaq dropped 2.6%. Bonds were a big story this week as yields fell sharply and prices rose. Gold saw a volatile week, closing with a loss of 1.1%. Oil was also volatile, with a large gain Friday pushing prices up 5.8% to $48.24 per barrel. The international Brent oil, used for much of our gas here in the east, moved up to $52.95 per barrel.
Source: Google Finance
Departing from the recent market behavior, stocks actually moved on fundamentals this week. We did have a bit of news from the central banks and Europe, but corporate earnings and economic data were big drivers of the market this week.
This week was the busiest week for corporate earnings releases and one theme has dominated: the strong dollar hurt earnings.
Earnings have been relatively lackluster, with nearly every company who reported bad earnings citing the strong dollar as the culprit. A stronger dollar makes products from the U.S. more expensive to people overseas, therefore hurting sales. The big decline in the market Tuesday came after big companies like Caterpillar, Microsoft, Procter & Gamble, Pfizer, and DuPont all reported bad earnings – and all blamed the strong dollar.
It seems that the strong dollar has become the new “blame it on the weather.” Often when a company has bad earnings, they cite the weather as being too cold, keeping shoppers indoors and preventing sales. Or in summer, the warm temperatures also kept people indoors. It usually isn’t true, but it becomes the excuse to divert attention from their shortcomings. Today, the excuse is the strong dollar. It is a much less viable excuse, too, because companies can hedge currency fluctuations to mitigate its effects.
If the currency was such a problem, we also wouldn’t have seen a record quarter from Apple. The company turned in the largest corporate profit in the history of corporations, boosted by iPhone sales in China. This news took some of the fear out of the markets and stocks moved higher as a result.
As it stands now, nearly half the companies in the S&P 500 have reported earnings and are on pace to grow 2% according to Factset. This is above the 1.1% economists were estimating at the start of earnings season. However, when excluding that record profit from Apple, earnings would show no growth at all.
Continuing with the fundamentals, fourth-quarter GDP come in on Friday with a strong disappointment. Our economy only grew 2.6% on expectations of 3-3.2%. This is below our historical average and also much lower than the 5% that was celebrated in the previous quarter. We found it funny how that 5% number was discussed for days and weeks on end, yet the poor number released this week was dismissed because it is “backwards looking.” Focus on next quarter, they say. It’s interesting how that works.
One bright spot highlighted in the GDP report was consumer spending. People are spending more money, which boosts the economy. However – and this is a big “however” – the biggest category we spend money on now is healthcare. It seems that when you are forced by law to buy something, it will boost the economy (we began work on our taxes this week, so the requirement to purchase insurance is very fresh in our minds). But that isn’t the way to grow a healthy economy.
This week was the busiest week for corporate earnings releases and one theme has dominated: the strong dollar hurt earnings.
Earnings have been relatively lackluster, with nearly every company who reported bad earnings citing the strong dollar as the culprit. A stronger dollar makes products from the U.S. more expensive to people overseas, therefore hurting sales. The big decline in the market Tuesday came after big companies like Caterpillar, Microsoft, Procter & Gamble, Pfizer, and DuPont all reported bad earnings – and all blamed the strong dollar.
It seems that the strong dollar has become the new “blame it on the weather.” Often when a company has bad earnings, they cite the weather as being too cold, keeping shoppers indoors and preventing sales. Or in summer, the warm temperatures also kept people indoors. It usually isn’t true, but it becomes the excuse to divert attention from their shortcomings. Today, the excuse is the strong dollar. It is a much less viable excuse, too, because companies can hedge currency fluctuations to mitigate its effects.
If the currency was such a problem, we also wouldn’t have seen a record quarter from Apple. The company turned in the largest corporate profit in the history of corporations, boosted by iPhone sales in China. This news took some of the fear out of the markets and stocks moved higher as a result.
As it stands now, nearly half the companies in the S&P 500 have reported earnings and are on pace to grow 2% according to Factset. This is above the 1.1% economists were estimating at the start of earnings season. However, when excluding that record profit from Apple, earnings would show no growth at all.
Continuing with the fundamentals, fourth-quarter GDP come in on Friday with a strong disappointment. Our economy only grew 2.6% on expectations of 3-3.2%. This is below our historical average and also much lower than the 5% that was celebrated in the previous quarter. We found it funny how that 5% number was discussed for days and weeks on end, yet the poor number released this week was dismissed because it is “backwards looking.” Focus on next quarter, they say. It’s interesting how that works.
One bright spot highlighted in the GDP report was consumer spending. People are spending more money, which boosts the economy. However – and this is a big “however” – the biggest category we spend money on now is healthcare. It seems that when you are forced by law to buy something, it will boost the economy (we began work on our taxes this week, so the requirement to purchase insurance is very fresh in our minds). But that isn’t the way to grow a healthy economy.
The Fed was in the news this week as they held a policy meeting, though no changes were announced. They signaled their patience in raising interest rates (low interest rates have boosted the stock market, hence the intense focus on them by investors), but many investors still believe rates will rise mid-year. We don’t see it, though, as the Fed went through a long list of concerns that we think will keep them from raising rates any time soon.
Fed chief Yellen even came out day after the meeting to say rates will not rise anytime soon, which gave stocks a boost on Thursday.
Lastly, Greece was in the news after electing a far left candidate – a self-described Marxist – to head the country. This was notable because he promised to end the austerity (the lower government spending) required by their bailout and immediately took steps to do so. It was like poking a stick in the eye of the other European countries who bailed them out. It probably isn’t the wisest idea, for Greece is beyond broke. We’re not sure how this will play out, but it is not likely to be good.
Next Week
We’ll see another busy week next week. We are past the peak for corporate earnings, but they will continue to come in at a strong pace.
The week will be loaded with economic reports, too. The most important report comes on Friday with the January employment report, but we’ll also get info on the strength of the manufacturing and service sectors, personal income and spending, factory orders, and the trade balance. There will be a lot of info that could move the markets.
Investment Strategy
No change here. It has been a pretty rocky ride so far this year. We thought the stimulus announcement out of Europe may quell some of the volatility, but since their program does not start until March, it may be some time before it has any impact. The market currently is not at a point where we would add new money to the broader index and it’s probably too late to sell. We still see a lot of undervalued individual stocks, though we did not do any buying this week.
We still have concerns for the longer term of the market. We worry about the distortions created by the central banks and money printing (just look at the recent plunge in oil prices). Stimulus continues to send stocks higher, but we worry the longer it continues, the more painful the correction will be.
As for the bond market, bond prices rose (so yields fell) this week when investors pulled money out of stocks and put them into the safer bonds. This tends to reverse when stocks go up. It’s anyone’s guess what bonds may do in the near-term, but the longer term may see bond prices continue to rise (so yields fall) as the stimulus programs push up bond prices around the globe.
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 has done well lately, but with the volatility we’ve seen in it over the years, it is better to think of it as a hedge for the portfolio.
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.
Fed chief Yellen even came out day after the meeting to say rates will not rise anytime soon, which gave stocks a boost on Thursday.
Lastly, Greece was in the news after electing a far left candidate – a self-described Marxist – to head the country. This was notable because he promised to end the austerity (the lower government spending) required by their bailout and immediately took steps to do so. It was like poking a stick in the eye of the other European countries who bailed them out. It probably isn’t the wisest idea, for Greece is beyond broke. We’re not sure how this will play out, but it is not likely to be good.
Next Week
We’ll see another busy week next week. We are past the peak for corporate earnings, but they will continue to come in at a strong pace.
The week will be loaded with economic reports, too. The most important report comes on Friday with the January employment report, but we’ll also get info on the strength of the manufacturing and service sectors, personal income and spending, factory orders, and the trade balance. There will be a lot of info that could move the markets.
Investment Strategy
No change here. It has been a pretty rocky ride so far this year. We thought the stimulus announcement out of Europe may quell some of the volatility, but since their program does not start until March, it may be some time before it has any impact. The market currently is not at a point where we would add new money to the broader index and it’s probably too late to sell. We still see a lot of undervalued individual stocks, though we did not do any buying this week.
We still have concerns for the longer term of the market. We worry about the distortions created by the central banks and money printing (just look at the recent plunge in oil prices). Stimulus continues to send stocks higher, but we worry the longer it continues, the more painful the correction will be.
As for the bond market, bond prices rose (so yields fell) this week when investors pulled money out of stocks and put them into the safer bonds. This tends to reverse when stocks go up. It’s anyone’s guess what bonds may do in the near-term, but the longer term may see bond prices continue to rise (so yields fall) as the stimulus programs push up bond prices around the globe.
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 has done well lately, but with the volatility we’ve seen in it over the years, it is better to think of it as a hedge for the portfolio.
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.
