Stocks meandered higher this week until a sharp drop Friday pushed stocks into negative territory. For the week, the Dow fell 1.3%, the S&P lost 1.0%, and the Nasdaq was also off 1.3%. Gold again saw little change, down a slight 0.1%. Oil pushed to new highs for the year, rising 8.0% on the week to close at $55.74 per barrel. The international Brent oil, which is used to make much of our gas here in the east, moved higher to close at $63.73 per barrel.
Source: Google Finance
The week was another relatively uneventful one in terms of significant news stories, with trading volume again amongst the weakest of the year. The news we did receive came from a wide variety of topics.
We’ll start with the Fed, who now appears less likely to pull back on stimulus any time soon.
Many analysts have expected the Fed to increase interest rates starting in June (this is important because the low interest rates have fueled a rise in stocks). Several regional Fed presidents this week cited weaker economic reports as a concern, therefore the stimulus programs needed to remain in place until conditions improve. This was a boost to stocks.
Keep in mind, these stimulus programs – the largest in the history of the world – have been around for six years now and the economy continues to disappoint. We’re not sure how much more evidence would be needed that they are applying the wrong medicine, but we don’t think they’ll change anytime soon. Or ever.
Corporate earnings season really got underway this week. A significant number of the major releases came from banking companies and their earnings were decent.
Although it is still very early in the earnings season, Factset reports that companies have seen an average earnings growth of -4.1%, which is better than the -4.9 expected. The bar has been set very low here, so it won’t be difficult to beat expectations – but remember those expectations were at the lowest level in years.
Economic data was mixed this week, too. Retail sales saw their first increase in four months. However, industrial output fell for the first time since the recession ended and manufacturing in the northeast declined. Also, inflation saw a tick up last month on higher oil prices.
Finally, we had a few news stories from overseas that impacted markets. China reported their weakest economic growth since 2009, showing the country is losing momentum.
News about Greece played a large part in Friday’s decline. They are back in the news since they have made little headway in repaying their debts. The chance for default is rising, as is the chance they leave the Euro. This isn’t surprising as the bailouts only buy the country time – it provides little incentive to fix the fundamental flaws that are greatly needed.
This is the problem with all the stimulus programs and bailouts around the globe – they prevent fundamental reforms from occurring. The lack of growth should be no surprise and a lack of growth in the future appears likely.
Next Week
Next week will be much quieter for economic data, but we will see over a quarter of the companies in the S&P 500 releasing their earnings. Aside for that, there looks to be little on the calendar that could move the market.
Investment Strategy
Stocks were on the expensive side after rising steadily this month, so the decline Friday was not much of a surprise. The size of the drop was a surprise, though, as the gains for the month were entirely wiped out. We don’t think this is the start of a larger decline and are not looking to do any selling. It’s also not at levels we would start buying.
Our longer term view remains unchanged. We continue to have concerns for the long run as 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 continue to bounce around this current range. We think bonds will likely to stay around this level for some time. 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. But it does protect against negative effects from policymakers.
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.
We’ll start with the Fed, who now appears less likely to pull back on stimulus any time soon.
Many analysts have expected the Fed to increase interest rates starting in June (this is important because the low interest rates have fueled a rise in stocks). Several regional Fed presidents this week cited weaker economic reports as a concern, therefore the stimulus programs needed to remain in place until conditions improve. This was a boost to stocks.
Keep in mind, these stimulus programs – the largest in the history of the world – have been around for six years now and the economy continues to disappoint. We’re not sure how much more evidence would be needed that they are applying the wrong medicine, but we don’t think they’ll change anytime soon. Or ever.
Corporate earnings season really got underway this week. A significant number of the major releases came from banking companies and their earnings were decent.
Although it is still very early in the earnings season, Factset reports that companies have seen an average earnings growth of -4.1%, which is better than the -4.9 expected. The bar has been set very low here, so it won’t be difficult to beat expectations – but remember those expectations were at the lowest level in years.
Economic data was mixed this week, too. Retail sales saw their first increase in four months. However, industrial output fell for the first time since the recession ended and manufacturing in the northeast declined. Also, inflation saw a tick up last month on higher oil prices.
Finally, we had a few news stories from overseas that impacted markets. China reported their weakest economic growth since 2009, showing the country is losing momentum.
News about Greece played a large part in Friday’s decline. They are back in the news since they have made little headway in repaying their debts. The chance for default is rising, as is the chance they leave the Euro. This isn’t surprising as the bailouts only buy the country time – it provides little incentive to fix the fundamental flaws that are greatly needed.
This is the problem with all the stimulus programs and bailouts around the globe – they prevent fundamental reforms from occurring. The lack of growth should be no surprise and a lack of growth in the future appears likely.
Next Week
Next week will be much quieter for economic data, but we will see over a quarter of the companies in the S&P 500 releasing their earnings. Aside for that, there looks to be little on the calendar that could move the market.
Investment Strategy
Stocks were on the expensive side after rising steadily this month, so the decline Friday was not much of a surprise. The size of the drop was a surprise, though, as the gains for the month were entirely wiped out. We don’t think this is the start of a larger decline and are not looking to do any selling. It’s also not at levels we would start buying.
Our longer term view remains unchanged. We continue to have concerns for the long run as 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 continue to bounce around this current range. We think bonds will likely to stay around this level for some time. 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. But it does protect against negative effects from policymakers.
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.
