It’s that time of year again. As many of you know, our office is located at the entrance of TPC Sawgrass, home of the Players Championship. Tournament practice rounds begin Monday and we will be attending for much of the week. However, we will be in the office every day, though our hours will vary day-to-day. We will continue to monitor the market even though we may not be in the office. Any phone calls not immediately answered will be returned the same day. We foresee little to no inconvenience to our clients and hope for your understanding. Additionally, there will be no weekly market commentary next week due to Mother’s Day. Thank you.
The week was a rough one for the markets. Through the close Friday, the Dow lost 0.3%, the S&P fell 0.4%, and the Nasdaq dropped 1.7%. Gold closed the week slightly lower by just 0.03%. Oil continues to march higher, up 3.5% to close at $59.15 per barrel. The international Brent oil, which is used to make much of our gas here in the east, moved slightly higher to close at $66.51 per barrel.
The week was a rough one for the markets. Through the close Friday, the Dow lost 0.3%, the S&P fell 0.4%, and the Nasdaq dropped 1.7%. Gold closed the week slightly lower by just 0.03%. Oil continues to march higher, up 3.5% to close at $59.15 per barrel. The international Brent oil, which is used to make much of our gas here in the east, moved slightly higher to close at $66.51 per barrel.
Source: Google Finance
The month of April – and this last week in particular – saw a reversal in many profitable investing trends that had worked recently. Not only did stocks move lower, but bond prices declined (so yields rose), the dollar weakened, and oil prices rose.
Also, high-flying social media stocks moved sharply lower. Companies like Twitter, LinkedIn, and Yelp were slammed after poor earnings reports. Investors appear to have little patience with this once beloved sector.
What caused the reversal of all these trends? We see a connection to the Fed and its stimulus programs.
For months the Fed has indicated it will pull back from its stimulus programs, but left it to investors to guess as to when. Originally, many investors believed a June stimulus reduction was most likely and positioned their portfolios accordingly.
However, weaker and weaker economic reports have rolled in, making a reduction in stimulus less likely. Therefore, the investments made in anticipation of that pullback in stimulus no longer work.
Economic data this week reinforced the idea that no reduction in stimulus was on the horizon. The broadest measure of economic growth, the GDP report for the first quarter, came in much lower than expected. The economy grew at an extremely weak 0.2% on expectations of 1% or higher. This is a sharp decline from the 2.2% last quarter and the 5% we saw the quarter before that. The economy remains very weak.
The Fed held another policy meeting this week and made note of the weaker economy. However, they view the weaker conditions as temporary and see growth rebounding in the future (although they have said this for six years now). They still indicated an increase in interest rates was possible, but gave little indication as to when.
The week was also a busy one for corporate earnings. With over 70% of S&P 500 companies reporting earnings, earnings have seen a decline of 0.4%. If this number were to stand, it would mark the weakest earnings growth since 2009. However, it is much better than the -4.9% analysts saw at the beginning of earnings season.
Finally, in honor of The Players tournament next week, we have added this photo of the construction of the iconic 17th hole at TPC Sawgrass.
Also, high-flying social media stocks moved sharply lower. Companies like Twitter, LinkedIn, and Yelp were slammed after poor earnings reports. Investors appear to have little patience with this once beloved sector.
What caused the reversal of all these trends? We see a connection to the Fed and its stimulus programs.
For months the Fed has indicated it will pull back from its stimulus programs, but left it to investors to guess as to when. Originally, many investors believed a June stimulus reduction was most likely and positioned their portfolios accordingly.
However, weaker and weaker economic reports have rolled in, making a reduction in stimulus less likely. Therefore, the investments made in anticipation of that pullback in stimulus no longer work.
Economic data this week reinforced the idea that no reduction in stimulus was on the horizon. The broadest measure of economic growth, the GDP report for the first quarter, came in much lower than expected. The economy grew at an extremely weak 0.2% on expectations of 1% or higher. This is a sharp decline from the 2.2% last quarter and the 5% we saw the quarter before that. The economy remains very weak.
The Fed held another policy meeting this week and made note of the weaker economy. However, they view the weaker conditions as temporary and see growth rebounding in the future (although they have said this for six years now). They still indicated an increase in interest rates was possible, but gave little indication as to when.
The week was also a busy one for corporate earnings. With over 70% of S&P 500 companies reporting earnings, earnings have seen a decline of 0.4%. If this number were to stand, it would mark the weakest earnings growth since 2009. However, it is much better than the -4.9% analysts saw at the beginning of earnings season.
Finally, in honor of The Players tournament next week, we have added this photo of the construction of the iconic 17th hole at TPC Sawgrass.
Next Week
We’ll see more important economic reports next week with the release of April’s employment data and service sector strength, amongst others. There won’t be as many corporate earnings releases next week, but it will still be fairly busy.
Keep an eye on Europe, too, as Greek debt talks may weigh on the markets.
Investment Strategy
Stocks saw some sharp drops this week, but judging by the indicators we look at, it seems unlikely to be the start of a larger turn lower. We do see stocks as being on the expensive side in the short run, so we wouldn’t be surprised to see the market move a bit lower from here.
Our longer term view remains unchanged, too. 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 fell slightly this week (so yields rose) 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 seen an uptick in interest, so TIPs have performed well recently.
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 see more important economic reports next week with the release of April’s employment data and service sector strength, amongst others. There won’t be as many corporate earnings releases next week, but it will still be fairly busy.
Keep an eye on Europe, too, as Greek debt talks may weigh on the markets.
Investment Strategy
Stocks saw some sharp drops this week, but judging by the indicators we look at, it seems unlikely to be the start of a larger turn lower. We do see stocks as being on the expensive side in the short run, so we wouldn’t be surprised to see the market move a bit lower from here.
Our longer term view remains unchanged, too. 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 fell slightly this week (so yields rose) 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 seen an uptick in interest, so TIPs have performed well recently.
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.
