A volatile week saw stocks close slightly in positive territory. For the week, the Dow gained 0.5%, the S&P rose 0.3%, and the Nasdaq fared the best with a 0.9% gain. Gold had a nice week, up 3.1%. Oil hit its highest levels of the year before retreating to close with a 0.5% gain at $59.69 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 $66.98 per barrel.
Source: Barchart.com
Despite the volatility this week, stocks were back at or near record levels. The S&P hit a new all-time high while the Dow and Nasdaq moved to within inches of a new record.
The story lately hasn’t been as much about stocks as it has been about bonds (yes, boring old bonds). Bond prices have dropped sharply (so yields have rose) since late April and there has been no real explanation why. It looks more like the trade is unwinding – where investors initially piled into bonds because of the stimulus, they now seem to be heading towards the exits. Perhaps the bubble in bonds is starting to deflate?
That trade, plus the currency trade, stabilized a bit late this week, which we think was the reason for the rise in stocks.
Switching gears, nearly all the companies in the S&P 500 have released their earnings at this point. Remember, heading into earnings season we were looking for the biggest drop in earnings since 2009 with a decline of -4.9%. However, the actual number looks far better with a slight gain of 0.4% according to Factset.
It’s worth pointing out that only a few months ago analysts were expecting gains of over 4% before revising this lower. While we hear a lot of cheerleading over the great earnings quarter, keep in mind that the modest gain is still pretty lousy.
Also, revenue (what a company actually receives in sales. Earnings are what remain after costs are deducted) saw a sharp decline of 2.8%, indicating a decrease in sales over the last quarter. We can exclude the energy sector, which had a horrible quarter, and get a slight gain in revenue. However, they never excluded energy companies when oil prices were climbing, so we won’t do so now, either.
One common theme we’ve seen in these earnings reports is that companies are spending very little on capitol investment. This is investing their profits back in the business for future growth. Instead, they are spending it on dividends and stock buybacks (buybacks in April were the highest on record). This may boost stock prices and help earnings at present, but does little for the future growth of the company.
This is a very important issue. A lack of investing back in the company means potentially less growth in the future and they are more susceptible to downturns in the economy. It may signal less growth down the road.
Finally, there are two international stories to touch on. The first comes from Europe, where they reported their best economic growth in two years. However, Germany slowed over the recent quarter and Greece officially returned to recession.
We always have a level of skepticism when it comes to European economic data. They have added questionable items like drug use and prostitution to the GDP calculations (seriously), making their numbers less credible. So take that GDP number with a grain of salt.
Also, China announced new stimulus programs designed to get their economy out of a slump. News of more stimulus boosted stocks, however, their economy is not doing well and is something to keep an eye on.
Next Week
The Fed will be a focus next week as the minutes from their latest meeting are released. This was the meeting they lowered their expectations for the economy, so investors will want to take a look at the discussions surrounding this decision. Plus, a few Fed members will be making speeches next week, which always has the potential to move the market.
There will also be a handful of economic reports to watch. We’ll get info on housing and the level of inflation at the consumer level.
Investment Strategy
No change here. We’re not seeing signs of a larger drop in the market. Stocks may be a bit expensive in the short run, so we wouldn’t be surprised to see the market move a bit lower from here. However, the trend seems to be higher at this time.
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.
We discussed bonds above, whose prices have seen a strong drop. We think we’ll stay in this range for some time, however. 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.
The story lately hasn’t been as much about stocks as it has been about bonds (yes, boring old bonds). Bond prices have dropped sharply (so yields have rose) since late April and there has been no real explanation why. It looks more like the trade is unwinding – where investors initially piled into bonds because of the stimulus, they now seem to be heading towards the exits. Perhaps the bubble in bonds is starting to deflate?
That trade, plus the currency trade, stabilized a bit late this week, which we think was the reason for the rise in stocks.
Switching gears, nearly all the companies in the S&P 500 have released their earnings at this point. Remember, heading into earnings season we were looking for the biggest drop in earnings since 2009 with a decline of -4.9%. However, the actual number looks far better with a slight gain of 0.4% according to Factset.
It’s worth pointing out that only a few months ago analysts were expecting gains of over 4% before revising this lower. While we hear a lot of cheerleading over the great earnings quarter, keep in mind that the modest gain is still pretty lousy.
Also, revenue (what a company actually receives in sales. Earnings are what remain after costs are deducted) saw a sharp decline of 2.8%, indicating a decrease in sales over the last quarter. We can exclude the energy sector, which had a horrible quarter, and get a slight gain in revenue. However, they never excluded energy companies when oil prices were climbing, so we won’t do so now, either.
One common theme we’ve seen in these earnings reports is that companies are spending very little on capitol investment. This is investing their profits back in the business for future growth. Instead, they are spending it on dividends and stock buybacks (buybacks in April were the highest on record). This may boost stock prices and help earnings at present, but does little for the future growth of the company.
This is a very important issue. A lack of investing back in the company means potentially less growth in the future and they are more susceptible to downturns in the economy. It may signal less growth down the road.
Finally, there are two international stories to touch on. The first comes from Europe, where they reported their best economic growth in two years. However, Germany slowed over the recent quarter and Greece officially returned to recession.
We always have a level of skepticism when it comes to European economic data. They have added questionable items like drug use and prostitution to the GDP calculations (seriously), making their numbers less credible. So take that GDP number with a grain of salt.
Also, China announced new stimulus programs designed to get their economy out of a slump. News of more stimulus boosted stocks, however, their economy is not doing well and is something to keep an eye on.
Next Week
The Fed will be a focus next week as the minutes from their latest meeting are released. This was the meeting they lowered their expectations for the economy, so investors will want to take a look at the discussions surrounding this decision. Plus, a few Fed members will be making speeches next week, which always has the potential to move the market.
There will also be a handful of economic reports to watch. We’ll get info on housing and the level of inflation at the consumer level.
Investment Strategy
No change here. We’re not seeing signs of a larger drop in the market. Stocks may be a bit expensive in the short run, so we wouldn’t be surprised to see the market move a bit lower from here. However, the trend seems to be higher at this time.
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.
We discussed bonds above, whose prices have seen a strong drop. We think we’ll stay in this range for some time, however. 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.
