It was a rocky week for the markets. For the week, the Dow lost 0.6%, the S&P dropped 0.9%, and the Nasdaq saw a 1.1% decline. Gold had a rough week, down 1.0%. Oil declined on reports of even higher oil inventories (more supply = lower prices), off a remarkable 9.6% to $44.84 per barrel. The international Brent oil, which is used to make much of our gas here in the east, lost over $5 to close at $54.89 per barrel.
Source: Google Finance
Central banks were the story of the week. A solid employment report last week increased the odds that the Fed would raise interest rates soon (low rates have fueled the stock market rise, hence the concern), and that worry spilled into this week. The Fed holds a policy meeting next week where those rates will be discussed, so the market saw big moves as investors anticipated what the Fed will announce.
This made economic data a major focus this week. Bad news was good news for stocks – and vice-versa – since bad news might postpone a rate increase. Therefore, stocks continued to slide after that solid employment report the previous week. However, they rose nicely when retail sales reported a decline for the third month in a row. This is unusual when not in a recession. The gain didn’t last long, though, as stocks resumed their move lower shortly thereafter.
The European Central Bank (ECB) was also a big story this week. Monday marked the launch of their stimulus program, where they print money to buy government bonds of various European countries. This has pushed bond prices to record highs (and yields to record lows). Since investors know the ECB will be buying these bonds at any price, they bought as many bonds as they could knowing prices will rise further. It’s like buying Apple stock at record highs, but having no fear because you knew someone would buy them from you at an even higher price.
That printed money usually works its way into the stock market, too, so European stocks have been rising as a result.
We have no doubt this stimulus program will fail to bring about economic recovery in Europe, just like it failed to do in every other place it has been tried. Significant structural reforms are the only thing that will bring about real growth and these stimulus programs prevent them from happening.
Providing an example of what is needed, this week Ireland reported strong economic growth. Their economy grew at a 4.8% pace last year, the strongest growth in all of Europe and also doubled the growth here in the U.S. Since St. Patrick’s Day is approaching, it provides us the perfect opportunity to discuss Ireland further.
This made economic data a major focus this week. Bad news was good news for stocks – and vice-versa – since bad news might postpone a rate increase. Therefore, stocks continued to slide after that solid employment report the previous week. However, they rose nicely when retail sales reported a decline for the third month in a row. This is unusual when not in a recession. The gain didn’t last long, though, as stocks resumed their move lower shortly thereafter.
The European Central Bank (ECB) was also a big story this week. Monday marked the launch of their stimulus program, where they print money to buy government bonds of various European countries. This has pushed bond prices to record highs (and yields to record lows). Since investors know the ECB will be buying these bonds at any price, they bought as many bonds as they could knowing prices will rise further. It’s like buying Apple stock at record highs, but having no fear because you knew someone would buy them from you at an even higher price.
That printed money usually works its way into the stock market, too, so European stocks have been rising as a result.
We have no doubt this stimulus program will fail to bring about economic recovery in Europe, just like it failed to do in every other place it has been tried. Significant structural reforms are the only thing that will bring about real growth and these stimulus programs prevent them from happening.
Providing an example of what is needed, this week Ireland reported strong economic growth. Their economy grew at a 4.8% pace last year, the strongest growth in all of Europe and also doubled the growth here in the U.S. Since St. Patrick’s Day is approaching, it provides us the perfect opportunity to discuss Ireland further.
The country faced a similar problem as the U.S. when the recession began; they had a housing boom collapse and mountains of debt.
Both the U.S. and Europe believe the prescription to fix the economy is to increase government spending and taxes and take on more debt to spur growth. Instead, Ireland took a different path and was sternly reprimanded for doing so.
Ireland took their medicine. They cut government spending. Cut debt. Cut welfare. Lowered taxes. And it was tough at first. But now the economy has rebounded and they are in the best shape in Europe.
This is remedy for the rest of the world to follow, yet no major economy will recognize this as they continue to move the opposite direction. It should be no wonder why growth remains elusive in these countries. Unfortunately, policymakers often think they must go even bigger for growth to appear, only to find their economies falling further behind. Leave it to the Irish to show us what needs to be done.
Next Week
All eyes will be on the Fed next week. There will be a few minor economic reports out, though they will likely have little impact on the market.
The Fed will hold another policy meeting next week where they are expected to provide more information on increasing interest rates. The language of their statement will be very important. Presently, the Fed uses the term “patient” to describe their approach to raising rates. However, many believe that term will be removed and therefore indicate a rate hike in June. If the word remains, they will likely hold off and stocks are bound to rise. Sadly, this is what our market has become.
Investment Strategy
Well, it’s no longer a stock-pickers market. The last few weeks have seen stocks move more independently of each other. This week, however, saw stocks move more in tandem with each other as they all rose or fell based on central bank activity.
The recent sell-off makes stocks look inexpensive in the short run, but a focus on central banks makes the market very unpredictable at this point. We wouldn’t do any buying now as a result. There are many undervalued individual stocks, too, but we are reluctant to put any new money in.
We continue to have concerns for the longer term. We worry about the distortions created by the central banks and money printing. Stimulus around the globe continues to send stocks higher, but we worry the longer it continues, the more painful the correction will be.
Bond prices rose this week (so yields fell). Investors seem to be bracing for higher interest rates soon, which will be bad for bonds. It’s really anyone’s guess what prices will do in the near term, but we think stimulus from global central bankers will keep our bonds attractive to investors and therefore keep yields low (and prices high).
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, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low. Therefore, we keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising when more stimulus looks likely and falling on the opposite.
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.
