It was another quiet week on Wall Street. Through the Friday close, the Dow was lower by a slight 0.04%, the S&P fell 0.3%, and the Nasdaq rose 0.2%. Friday also marked the end of the month, which turned out to be the best month for stocks in over two years. Gold turned higher, rising 0.7%. Oil saw another decline, off 2.1% to $49.76 per barrel. The international Brent oil, used for much of our gas here in the east, actually gained $3 to $63.09 per barrel.
Source: Google Finance
The week was another relatively uneventful one. Greece has fallen from the headlines with their bailout, although questions remain if they will actually abide by the terms they agreed to. We’re sure we’ll be talking about this subject again in four months when their bailout extension ends.
The Fed was in the news this week as Fed chair Janet Yellen testified before Congress. She updated them with the Fed’s take on the economy and where their policy currently stands and where it’s expected to go in the future. Investors were again watching closely for any clues as to when the Fed would raise interest rates, which would likely hurt the stock market.
Chair Yellen sounded upbeat on the employment picture as the unemployment rate continues to improve. However, she cited concerns with other weaker economic data points and low inflation. Still, the Fed believes the economy is on the mend and an increase in interest rates is likely if it continues to improve.
Stocks rose on her comments, since many investors don’t see the economy improving enough for interest rates to rise in the near future. While many believe a June rate hike is on the table, it seems like more investors see it coming later in the year – if at all.
Supporting that view was weaker economic data this week. Two main economic points the Fed looks at – the strength of the economy and inflation – both had disappointing reports this week.
Economic growth was lower than originally thought as GDP for the fourth quarter was revised lower. For all of 2014, it looks like the economy grew at a 2.4% pace, which for some context, we averaged 3.4% in the 1990’s. The economy isn’t as strong as many think.
Inflation at the consumer level (CPI) saw its first negative year since 2009. A decline in energy prices pushed the CPI lower last month to make it negative on a year-over-year basis. Remember, the Fed wants HIGHER inflation, which it thinks (misguidedly, we believe) will lead to better economic growth.
Other economic data this week was largely negative, too. Housing data was disappointing, weekly jobless claims showed a sharp rise, and a report on economic activity in the Chicago region hit the weakest level in six years. It wasn’t all bad though, as durable goods showed a nice increase.
Corporate earnings season is wrapping up for the fourth quarter. As it stands now, nearly all of S&P 500 companies have reported earnings. At the beginning of earnings season, analysts were predicting a lackluster 1.1% increase, only to see earnings actually rose 3.7% (although that 1.1% was revised down sharply before earnings season, making the bar easy to beat).
Finally, the Nasdaq market was a big story this week. By rising 11 of the past 13 days, the index is within reach of its all-time highs reached back in 2000. The record level is 5,048, while it stood at 4,964 at Friday’s close. Of course, many of the names in the index have been replaced over the last 15 years, so it’s not an apples-to-apples comparison. It is still noteworthy, though. Is this the sign of another bubble, or are the valuations justified? Only time will tell.
Nasdaq:
The Fed was in the news this week as Fed chair Janet Yellen testified before Congress. She updated them with the Fed’s take on the economy and where their policy currently stands and where it’s expected to go in the future. Investors were again watching closely for any clues as to when the Fed would raise interest rates, which would likely hurt the stock market.
Chair Yellen sounded upbeat on the employment picture as the unemployment rate continues to improve. However, she cited concerns with other weaker economic data points and low inflation. Still, the Fed believes the economy is on the mend and an increase in interest rates is likely if it continues to improve.
Stocks rose on her comments, since many investors don’t see the economy improving enough for interest rates to rise in the near future. While many believe a June rate hike is on the table, it seems like more investors see it coming later in the year – if at all.
Supporting that view was weaker economic data this week. Two main economic points the Fed looks at – the strength of the economy and inflation – both had disappointing reports this week.
Economic growth was lower than originally thought as GDP for the fourth quarter was revised lower. For all of 2014, it looks like the economy grew at a 2.4% pace, which for some context, we averaged 3.4% in the 1990’s. The economy isn’t as strong as many think.
Inflation at the consumer level (CPI) saw its first negative year since 2009. A decline in energy prices pushed the CPI lower last month to make it negative on a year-over-year basis. Remember, the Fed wants HIGHER inflation, which it thinks (misguidedly, we believe) will lead to better economic growth.
Other economic data this week was largely negative, too. Housing data was disappointing, weekly jobless claims showed a sharp rise, and a report on economic activity in the Chicago region hit the weakest level in six years. It wasn’t all bad though, as durable goods showed a nice increase.
Corporate earnings season is wrapping up for the fourth quarter. As it stands now, nearly all of S&P 500 companies have reported earnings. At the beginning of earnings season, analysts were predicting a lackluster 1.1% increase, only to see earnings actually rose 3.7% (although that 1.1% was revised down sharply before earnings season, making the bar easy to beat).
Finally, the Nasdaq market was a big story this week. By rising 11 of the past 13 days, the index is within reach of its all-time highs reached back in 2000. The record level is 5,048, while it stood at 4,964 at Friday’s close. Of course, many of the names in the index have been replaced over the last 15 years, so it’s not an apples-to-apples comparison. It is still noteworthy, though. Is this the sign of another bubble, or are the valuations justified? Only time will tell.
Nasdaq:
Next Week
Next week looks to be a bit quieter. There won’t be any news out of the Fed and we are unlikely to hear much news from Europe. There will be several economic reports, including the strength of the manufacturing and service sectors, plus employment from February. Also, we’ll get a look at the Fed’s Beige Book, which gives anecdotal accounts on the strength of the economy.
Investment Strategy
Still no change here. We still seem to be shifting to more of a stock pickers market, where some stocks or sectors rise while others fall, so you have to pick the right stocks. Stocks used to rise or fall in unison when a news item – usually from a central bank – would send all stocks the same direction. Of course, this could all change when interest rates rise or the European stimulus starts in March.
We think stocks are still on the expensive side and we see fewer buying opportunities. We are not looking to sell at this point, though, but are not looking to put any new money in.
We still have concerns for the longer term. We worry about the distortions created by the central banks and money printing (just look at the recent plunge in oil prices or the high valuations in social media stocks we discussed above). Stimulus continues to send stocks higher, but we worry the longer it continues, the more painful the correction will be.
The bond market continues to trade in a tight range. Investors seem to be bracing for higher interest rates soon, which will be bad for bonds. It’s really 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.
Next week looks to be a bit quieter. There won’t be any news out of the Fed and we are unlikely to hear much news from Europe. There will be several economic reports, including the strength of the manufacturing and service sectors, plus employment from February. Also, we’ll get a look at the Fed’s Beige Book, which gives anecdotal accounts on the strength of the economy.
Investment Strategy
Still no change here. We still seem to be shifting to more of a stock pickers market, where some stocks or sectors rise while others fall, so you have to pick the right stocks. Stocks used to rise or fall in unison when a news item – usually from a central bank – would send all stocks the same direction. Of course, this could all change when interest rates rise or the European stimulus starts in March.
We think stocks are still on the expensive side and we see fewer buying opportunities. We are not looking to sell at this point, though, but are not looking to put any new money in.
We still have concerns for the longer term. We worry about the distortions created by the central banks and money printing (just look at the recent plunge in oil prices or the high valuations in social media stocks we discussed above). Stimulus continues to send stocks higher, but we worry the longer it continues, the more painful the correction will be.
The bond market continues to trade in a tight range. Investors seem to be bracing for higher interest rates soon, which will be bad for bonds. It’s really 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.
