Markets took a turn lower this week. Through the close Friday, the Dow fell 1.5%, the S&P lost 1.6%, while the Nasdaq fared the best on a 0.7% decline. Bonds sold off and yields rose as the potential for higher interest rates increased. Gold sold off sharply on that news, closing the week down 4.0%. Oil inventories rose to the highest levels in 80 years, sending oil prices lower by a slight 0.3% to $49.61 per barrel. The international Brent oil, which is used to make much of our gas here in the east, lost $3 to close at $60.26 per barrel.
Source: Google Finance
The week started out on a strong note – the Dow and S&P reached record highs while the Nasdaq crossed the 5,000 level it last saw 15 years ago. However, stocks trended lower from there all week, with no news we can directly point to as the culprit.
For the news of the week, we’ll start in Europe. Months ago they announced a stimulus package that would begin in March and this week we learned it will begin on Monday. They’ll print over $66 billion a month to buy government bonds, pushing bond yields lower to make borrowing easier. This is supposed to stimulate the economy, although the jury is still out on its effectiveness.
Even if it does little to help the economy, that printed money will flow into the stock market and push up stock prices. We’ve seen that everywhere it has been tried. European stocks will benefit, but it is likely to spill over into other stock markets (like the U.S.), as well.
Economic data received a lot of attention this week, too. All eyes were on the employment report that came on Friday. The numbers came in much better than expected, with the U.S. adding 295,000 jobs in February. The unemployment rate fell from 5.7% to 5.5%.
While these numbers painted a solid employment picture, the report had a lot of “Yeah, buts.” Our labor force participation (the number of people employed or looking for work) stands at figures last seen in the 1970’s, with a record 92.9 million Americans no longer in the labor force.
Plus, energy sector job losses seem to be undercounted. An employment report earlier in the week from Challenger, Gray, and Christmas noted over 16,000 job losses in the energy sector (oil, specifically). The previous month they saw more than 21,000 losses. However, Friday’s employment report only counted 1,800 job losses in this area and 1,100 in January. The difference is hard to ignore.
Regardless, stocks fell strongly after the employment report. Why? Improving employment means less need for stimulus from the Fed. This increases the chance that interest rates will be raised as soon as June, which is important since these low interest rates have helped send stocks higher.
Finally, an interesting report showed companies bought back their own stock at the fastest pace ever last month (LINK). These companies have taken advantage of low borrowing rates to cheaply borrow money to buy back their own stock. This, therefore, pushes up the value of their stock since there are fewer shares outstanding. This, too, has been a big factor in the markets rise. And it’s another reason why higher interest rates (or higher rates to borrow money) will send stocks lower.
For the news of the week, we’ll start in Europe. Months ago they announced a stimulus package that would begin in March and this week we learned it will begin on Monday. They’ll print over $66 billion a month to buy government bonds, pushing bond yields lower to make borrowing easier. This is supposed to stimulate the economy, although the jury is still out on its effectiveness.
Even if it does little to help the economy, that printed money will flow into the stock market and push up stock prices. We’ve seen that everywhere it has been tried. European stocks will benefit, but it is likely to spill over into other stock markets (like the U.S.), as well.
Economic data received a lot of attention this week, too. All eyes were on the employment report that came on Friday. The numbers came in much better than expected, with the U.S. adding 295,000 jobs in February. The unemployment rate fell from 5.7% to 5.5%.
While these numbers painted a solid employment picture, the report had a lot of “Yeah, buts.” Our labor force participation (the number of people employed or looking for work) stands at figures last seen in the 1970’s, with a record 92.9 million Americans no longer in the labor force.
Plus, energy sector job losses seem to be undercounted. An employment report earlier in the week from Challenger, Gray, and Christmas noted over 16,000 job losses in the energy sector (oil, specifically). The previous month they saw more than 21,000 losses. However, Friday’s employment report only counted 1,800 job losses in this area and 1,100 in January. The difference is hard to ignore.
Regardless, stocks fell strongly after the employment report. Why? Improving employment means less need for stimulus from the Fed. This increases the chance that interest rates will be raised as soon as June, which is important since these low interest rates have helped send stocks higher.
Finally, an interesting report showed companies bought back their own stock at the fastest pace ever last month (LINK). These companies have taken advantage of low borrowing rates to cheaply borrow money to buy back their own stock. This, therefore, pushes up the value of their stock since there are fewer shares outstanding. This, too, has been a big factor in the markets rise. And it’s another reason why higher interest rates (or higher rates to borrow money) will send stocks lower.
Next Week
Next week looks fairly uneventful for data as we will get a few smaller economic data reports. We’ll get info on trade, employment (from January), retail sales, and inflation at the producer level.
Really, the focus next week is likely to be more on a Fed meeting coming the following week. With the employment report this week, many investors are expecting to see interest rates rising soon. Next week we’ll see more investors positioning their portfolios for what they think will come from the Fed.
Investment Strategy
It’s tough to guess what the market will do from here. We saw stocks as expensive in the short-term before and while they are still on the expansive side, it’s obviously a little less expensive now. However, we are not looking to do any buying or selling at this point. It’s too early to tell if investors will continue selling-off stocks in anticipation of higher interest rates. Worth noting, there are many more individual stocks we see as being undervalued, so we’d be more likely to put any new money here rather than the broader stock market.
We still 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.
The bond market looks to have begun its move lower (so yields are rising). Investors seem to be bracing for higher interest rates soon, which will be bad for bonds. It’s really anyone’s guess if they will continue to fall (or yields rise) in the near term, but we think stimulus from global central bankers will keep our bonds attractive to investors and therefore keep yields low.
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. 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 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.
Next week looks fairly uneventful for data as we will get a few smaller economic data reports. We’ll get info on trade, employment (from January), retail sales, and inflation at the producer level.
Really, the focus next week is likely to be more on a Fed meeting coming the following week. With the employment report this week, many investors are expecting to see interest rates rising soon. Next week we’ll see more investors positioning their portfolios for what they think will come from the Fed.
Investment Strategy
It’s tough to guess what the market will do from here. We saw stocks as expensive in the short-term before and while they are still on the expansive side, it’s obviously a little less expensive now. However, we are not looking to do any buying or selling at this point. It’s too early to tell if investors will continue selling-off stocks in anticipation of higher interest rates. Worth noting, there are many more individual stocks we see as being undervalued, so we’d be more likely to put any new money here rather than the broader stock market.
We still 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.
The bond market looks to have begun its move lower (so yields are rising). Investors seem to be bracing for higher interest rates soon, which will be bad for bonds. It’s really anyone’s guess if they will continue to fall (or yields rise) in the near term, but we think stimulus from global central bankers will keep our bonds attractive to investors and therefore keep yields low.
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. 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 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.
