The bipolar nature of the stock market continued this week as stocks posted impressive gains. For the week, the Dow added 3.8%, the S&P climbed 3.0% and the Nasdaq rose 2.4%. Gold fell on the stronger stock market, losing 3.5%. Oil was another big story which we will touch on below, adding 7.2% to $51.69 per barrel – its biggest weekly gain in four years. The international Brent oil, used for much of our gas here in the east, climbed more than $5 to close at $58.16 per barrel.
Source: Google Finance
There were several items moving the markets this week, from oil to economic reports, and even Greece played a part.
We’ll begin with oil, which has played a large part in the direction of the market. Many investors have worried that the sharp drop in oil prices indicates slower economic growth (less economic activity means less need for oil, and vice-versa). However, many think the drop in oil has ended and prices may be bottoming.
This has brought in new investors hoping to get in at the bottom, which has also added to the volatility. The new investors have pushed the market higher, but fundamentals still have the power to drive oil prices lower. A report this week showed the U.S. has the highest oil supply level in 80 years, causing a nearly 9% loss on Wednesday. We will not be reducing supply in a meaningful way in the immediate future, so more reports like this will not be uncommon.
Big moves in the market this week also came on news out of Greece. Last week they struck a tough tone and discussed not repaying their bailout funds, but this week the tone softened a bit. Markets rose as a result. However, the European Central Bank, who crafted and implemented the bailout, still seems to be taking a tough line on the conditions for repayment. The drama is far from over.
Economic data was another factor in the market this week. There were several important reports released and they started the week on a sour note. Our manufacturing sector showed slowing growth while the service sector showed only slight improvement. Personal spending also declined. Factory orders plunged and the trade deficit hit the worst level since 2012 as the stronger dollar and lower oil prices hurt exports and increased imports.
It wasn’t all bad, though. Friday saw an employment report come in far better than expected. The U.S. added 257,000 jobs, which was well above economists’ expectations. November and December figures were revised higher, too. The unemployment rate showed an increase, but this was due to more people entering the labor force which is generally seen as a positive.
There were some oddities that had people questioning the accuracy of that report. The decline in oil prices has forced oil companies to lay off workers. These layoffs are announced and can be seen by the public. At this point, there have been roughly 20,000 job losses announced by oil companies. Below, a screenshot from Bloomberg showing the totals.
We’ll begin with oil, which has played a large part in the direction of the market. Many investors have worried that the sharp drop in oil prices indicates slower economic growth (less economic activity means less need for oil, and vice-versa). However, many think the drop in oil has ended and prices may be bottoming.
This has brought in new investors hoping to get in at the bottom, which has also added to the volatility. The new investors have pushed the market higher, but fundamentals still have the power to drive oil prices lower. A report this week showed the U.S. has the highest oil supply level in 80 years, causing a nearly 9% loss on Wednesday. We will not be reducing supply in a meaningful way in the immediate future, so more reports like this will not be uncommon.
Big moves in the market this week also came on news out of Greece. Last week they struck a tough tone and discussed not repaying their bailout funds, but this week the tone softened a bit. Markets rose as a result. However, the European Central Bank, who crafted and implemented the bailout, still seems to be taking a tough line on the conditions for repayment. The drama is far from over.
Economic data was another factor in the market this week. There were several important reports released and they started the week on a sour note. Our manufacturing sector showed slowing growth while the service sector showed only slight improvement. Personal spending also declined. Factory orders plunged and the trade deficit hit the worst level since 2012 as the stronger dollar and lower oil prices hurt exports and increased imports.
It wasn’t all bad, though. Friday saw an employment report come in far better than expected. The U.S. added 257,000 jobs, which was well above economists’ expectations. November and December figures were revised higher, too. The unemployment rate showed an increase, but this was due to more people entering the labor force which is generally seen as a positive.
There were some oddities that had people questioning the accuracy of that report. The decline in oil prices has forced oil companies to lay off workers. These layoffs are announced and can be seen by the public. At this point, there have been roughly 20,000 job losses announced by oil companies. Below, a screenshot from Bloomberg showing the totals.
However, only 1,900 oil and gas extraction job losses were included in the employment report (or 3,000 in the non-seasonally adjusted number). This has many questioning how accurate the employment report really is.
This comes on top of highly-publicized comments from the head of Gallup, the polling agency. He points out that employment is much worse than it appears, for the percentage of working-age people holding a full-time job is at the lowest level in history. Further, we lost 13 million jobs during the recession but have added only 3 million back. The employment picture is not as good as we think.
Finally, corporate earnings came in better than expected this week. Factset reports earnings growth rising 3.0%, or 1.2% when excluding that massive gain from Apple. Last week, earnings were on pace to decline 0.5% when excluding Apple, so the results this week have been decent.
Next Week
It’s likely to be a little quieter next week, with the only notable economic report being retail sales on Thursday. There will also be an employment report we like to follow, the JOLTs report, but it has a one-month lag so it’s not very current. Corporate earnings will continue to come in at a steady pace, so they may get more attention.
Investment Strategy
Again, no change here. The market is not at a point where we would add new money to the broader index and we are not doing any selling. There are still many undervalued individual stocks, though.
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 fell (so yields rose) this week when investors pulled money out of bonds and put it into stocks. This tends to reverse when stocks go down. 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.
This comes on top of highly-publicized comments from the head of Gallup, the polling agency. He points out that employment is much worse than it appears, for the percentage of working-age people holding a full-time job is at the lowest level in history. Further, we lost 13 million jobs during the recession but have added only 3 million back. The employment picture is not as good as we think.
Finally, corporate earnings came in better than expected this week. Factset reports earnings growth rising 3.0%, or 1.2% when excluding that massive gain from Apple. Last week, earnings were on pace to decline 0.5% when excluding Apple, so the results this week have been decent.
Next Week
It’s likely to be a little quieter next week, with the only notable economic report being retail sales on Thursday. There will also be an employment report we like to follow, the JOLTs report, but it has a one-month lag so it’s not very current. Corporate earnings will continue to come in at a steady pace, so they may get more attention.
Investment Strategy
Again, no change here. The market is not at a point where we would add new money to the broader index and we are not doing any selling. There are still many undervalued individual stocks, though.
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 fell (so yields rose) this week when investors pulled money out of bonds and put it into stocks. This tends to reverse when stocks go down. 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.
