Remarks from the Fed sent stocks soaring this week. Through the Friday close, the Dow gained 2.1%, the S&P rose 2.7%, and the Nasdaq had a nice 3.2% increase. Gold finally turned in a positive week, rising 2.8%. Oil hit six-year lows before currency fluctuations helped push prices higher (weaker dollar = higher oil prices), up 2.0% to $45.72 per barrel. The international Brent oil, which is used to make much of our gas here in the east, saw a slight increase to close at $55.22 per barrel.
Source: Barchart.com
This week was all about the Fed. They held a highly-anticipated meeting where we were expected to learn more about their stance on interest rates. These rates have been held at historic low levels which have helped fuel a rise in the stock market. Investors increasingly believed the Fed will raise rates as early as June (which would send stocks lower but probably help the economy), so any news from this meeting would have a significant impact on the market.
The results of the meeting, however, did not disappoint the market. While the Fed did remove a key term, “patient,” used to indicate a minimum three-month timeframe before rate increases, they stressed the need to see improving economic data before rates would rise.
This sent stocks soaring because aside from employment data, economic data has been lousy. We’re back to bad economic data boosting the stock market, for it means less chance for interest rate hikes.
The Fed even admitted economic growth has been disappointing, revising every economic projection lower. The one constant of these Fed projections has been that they are always too high. In the last several years, we don’t believe one single economic projection from the Fed has been met or exceeded. The economy continues to disappoint.
This begs the question, if nearly seven years of the largest stimulus program in the history of the world has failed to improve the economy, what makes the Fed think they are taking the right steps to fix it?
Last week we discussed how Ireland took a different path to improving their economy. They cut government spending, debt, and welfare while lowering taxes, resulting in the strongest economic growth in all of Europe and double that of the U.S. We wish a similar approach would be tried here, but that looks highly, highly unlikely.
Along the same lines, a story out of Japan caught our attention this week. Their stock market has been steadily rising and is now standing at 15-year highs. What’s troubling is how it got there.
The Japanese Central Bank is openly printing money and aggressively buying stocks with it. They currently buy nearly every day the market opens lower to push it higher, and some economists believe they will be buying stocks every day by the middle of the year.
Further, government officials have directed the government pension fund to invest more into stocks – both foreign and domestic.
At this point there is no way to say it delicately – we think this has become absolutely insane. This may make the party last a little longer, but we see dire consequences in the future. The end will be quite messy.
We’ll close this section with an un-apocalyptic story, where this week Apple was added to the Dow index. Many people don’t realize that the Dow is only 30 stocks that are believed to best represent the U.S. economy (which is why many believe the S&P 500 is a better barometer of the true market).
With the tremendous rise in Apple stock recently, many believe its addition will be a nice boon to the index. However, history has shown that stocks tend to join an index at their highs and falter, while stocks that are removed from an index tend to rise thereafter. It will be interesting to see how the Apple story will play out going forward.
Next Week
As we discussed above, any bad economic reports in the near future will be good for the stock market, and vice-versa. There will be a couple reports with the potential to move the market, too.
A major focus of the Fed is boosting inflation, so investors will keep an eye on the CPI inflation report released on Tuesday. The GDP on Friday will be a revision to the fourth quarter number, so while important, its backward-looking nature may make it less so. We’ll also get data on manufacturing, retail sales, and housing.
Investment Strategy
It looks like stocks have the wind at their back here. After this week, we see the Fed is less likely to pull the punchbowl away so stocks will certainly benefit. In the short-run, stocks are likely to rise.
In the longer-run, though, we worry the longer these stimulus programs remain in place, the greater the distortions in the market become. This makes the correction even more painful when it does correct. The “when” is anyone’s guess, however.
Bond prices rose this week (so yields fell) and we think they will likely to stay around this level or rise further. 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. However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged.
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.
The results of the meeting, however, did not disappoint the market. While the Fed did remove a key term, “patient,” used to indicate a minimum three-month timeframe before rate increases, they stressed the need to see improving economic data before rates would rise.
This sent stocks soaring because aside from employment data, economic data has been lousy. We’re back to bad economic data boosting the stock market, for it means less chance for interest rate hikes.
The Fed even admitted economic growth has been disappointing, revising every economic projection lower. The one constant of these Fed projections has been that they are always too high. In the last several years, we don’t believe one single economic projection from the Fed has been met or exceeded. The economy continues to disappoint.
This begs the question, if nearly seven years of the largest stimulus program in the history of the world has failed to improve the economy, what makes the Fed think they are taking the right steps to fix it?
Last week we discussed how Ireland took a different path to improving their economy. They cut government spending, debt, and welfare while lowering taxes, resulting in the strongest economic growth in all of Europe and double that of the U.S. We wish a similar approach would be tried here, but that looks highly, highly unlikely.
Along the same lines, a story out of Japan caught our attention this week. Their stock market has been steadily rising and is now standing at 15-year highs. What’s troubling is how it got there.
The Japanese Central Bank is openly printing money and aggressively buying stocks with it. They currently buy nearly every day the market opens lower to push it higher, and some economists believe they will be buying stocks every day by the middle of the year.
Further, government officials have directed the government pension fund to invest more into stocks – both foreign and domestic.
At this point there is no way to say it delicately – we think this has become absolutely insane. This may make the party last a little longer, but we see dire consequences in the future. The end will be quite messy.
We’ll close this section with an un-apocalyptic story, where this week Apple was added to the Dow index. Many people don’t realize that the Dow is only 30 stocks that are believed to best represent the U.S. economy (which is why many believe the S&P 500 is a better barometer of the true market).
With the tremendous rise in Apple stock recently, many believe its addition will be a nice boon to the index. However, history has shown that stocks tend to join an index at their highs and falter, while stocks that are removed from an index tend to rise thereafter. It will be interesting to see how the Apple story will play out going forward.
Next Week
As we discussed above, any bad economic reports in the near future will be good for the stock market, and vice-versa. There will be a couple reports with the potential to move the market, too.
A major focus of the Fed is boosting inflation, so investors will keep an eye on the CPI inflation report released on Tuesday. The GDP on Friday will be a revision to the fourth quarter number, so while important, its backward-looking nature may make it less so. We’ll also get data on manufacturing, retail sales, and housing.
Investment Strategy
It looks like stocks have the wind at their back here. After this week, we see the Fed is less likely to pull the punchbowl away so stocks will certainly benefit. In the short-run, stocks are likely to rise.
In the longer-run, though, we worry the longer these stimulus programs remain in place, the greater the distortions in the market become. This makes the correction even more painful when it does correct. The “when” is anyone’s guess, however.
Bond prices rose this week (so yields fell) and we think they will likely to stay around this level or rise further. 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. However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged.
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.
