Stocks closed with little change on a very quiet week. Through the Friday close, the Dow was off 0.2%, the S&P was higher by 0.2%, and the Nasdaq actually had a decent week with a 0.8% gain. The run in gold prices ended this week with a loss of 1.7%. Oil closed the week slightly lower from where it began, down 1.4% to $59.72 per barrel. The international Brent oil, which is used to make much of our gas here in the east, moved down to $65.55 per barrel.
Source: Google Finance
The week was a very quiet, unremarkable one, with trading volumes hitting the lowest level since New Year’s. It looks like many investors got a head start on the long weekend. Really, with corporate earnings largely complete and little in the way of economic data, there was very little to trade on to move stocks.
Despite the quiet week, stock indexes continued to hit new highs. This isn’t difficult when an index is already sitting at record highs – even a slight tick higher qualifies as a record.
There is one item we see that points to some caution in stocks, though.
The “Dow Theory” was formed well over 100 years ago and suggests that when the index hits new highs, stocks in the transportation sector should be moving in the same direction to confirm the record high. It is a warning sign the transports are moving a different direction than the overall index. Of course, this doesn’t always work, but a stock market predictor doesn’t hang around for that long if it’s not right more often than not.
As we can see in the chart below (courtesy Zerohedge.com), the Dow index and the transports stopped moving in tandem in February. This is something to keep an eye on.
Despite the quiet week, stock indexes continued to hit new highs. This isn’t difficult when an index is already sitting at record highs – even a slight tick higher qualifies as a record.
There is one item we see that points to some caution in stocks, though.
The “Dow Theory” was formed well over 100 years ago and suggests that when the index hits new highs, stocks in the transportation sector should be moving in the same direction to confirm the record high. It is a warning sign the transports are moving a different direction than the overall index. Of course, this doesn’t always work, but a stock market predictor doesn’t hang around for that long if it’s not right more often than not.
As we can see in the chart below (courtesy Zerohedge.com), the Dow index and the transports stopped moving in tandem in February. This is something to keep an eye on.
The Fed was back in the news this week with the release of the minutes from their April meeting. As expected, it told us little we didn’t already know. The poor economic data has taken the chance of a June interest rate increase off the table (this is important because low interest rates have helped fuel a rise in stocks).
There have been additional negative economic reports since this April meeting, so a rate increase looks unlikely in the coming months.
The subject of economic data itself was a hot topic this week. First quarter GDP growth came in at a weak 0.2% and is likely to be revised lower. It turns out, the first quarter of the last several years have been pretty weak compared to the other quarters. It could just be that the economy was weak at those times. The government doesn’t like to see weak economic growth, so it must be something more.
These reports are supposed to be seasonally adjusted to account for winter weather, so some people think there is an error in the adjustments keeping this figure low. Therefore, the BLS (Bureau of Labor and Statistics) announced they will make another adjustment to first quarter GDP figures. Of course, this will revise economic growth higher.
If this GDP number has an unreliable calculation, it should mean other economic reports would require adjustment, too. However, these other economic reports have not been bad and these “adjustments” only seem to happen when governments get disappointing data. Good economic metrics never get revised.
We saw this not long ago when European countries began including prostitution and drug use in GDP calculations to boost growth higher.
The U.S. already made questionable adjustments to GDP a couple years ago, adding items like research and development costs and pension payout promises. R&D costs are already included in the sale price of an item, so it is now double counted. Plus, the current payouts to pensioners are included in the GDP, so adding future payouts to pensioners in today’s GDP figures acts as a double-count, too.
Economic data always has some level of unreliability. However, looking from one month to the next we can see the change in its direction, reliable or not. The more that governments around the world fiddle with the calculations, the less and less reliable these become.
Next Week
We’ll see a few economic reports to watch next week, with durable goods coming on Tuesday and the revision to GDP on Friday. There will also be some data on housing.
Aside from this, it will likely be another quiet week. Summertime usually sees less trading volume and if this past week was any indication, it could be a quiet season.
Investment Strategy
Still no change. 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. There was that red flag with the transports we discussed earlier, so that is something to keep in mind. However, other indicators we follow don’t seem to be showing similar red flags. The trend in the market seems to be to the upside.
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.
Bonds have been trading at the low end of its price range (and high end of its yield range) all month. The same was true this week and we think they’ll stay in this range 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.
There have been additional negative economic reports since this April meeting, so a rate increase looks unlikely in the coming months.
The subject of economic data itself was a hot topic this week. First quarter GDP growth came in at a weak 0.2% and is likely to be revised lower. It turns out, the first quarter of the last several years have been pretty weak compared to the other quarters. It could just be that the economy was weak at those times. The government doesn’t like to see weak economic growth, so it must be something more.
These reports are supposed to be seasonally adjusted to account for winter weather, so some people think there is an error in the adjustments keeping this figure low. Therefore, the BLS (Bureau of Labor and Statistics) announced they will make another adjustment to first quarter GDP figures. Of course, this will revise economic growth higher.
If this GDP number has an unreliable calculation, it should mean other economic reports would require adjustment, too. However, these other economic reports have not been bad and these “adjustments” only seem to happen when governments get disappointing data. Good economic metrics never get revised.
We saw this not long ago when European countries began including prostitution and drug use in GDP calculations to boost growth higher.
The U.S. already made questionable adjustments to GDP a couple years ago, adding items like research and development costs and pension payout promises. R&D costs are already included in the sale price of an item, so it is now double counted. Plus, the current payouts to pensioners are included in the GDP, so adding future payouts to pensioners in today’s GDP figures acts as a double-count, too.
Economic data always has some level of unreliability. However, looking from one month to the next we can see the change in its direction, reliable or not. The more that governments around the world fiddle with the calculations, the less and less reliable these become.
Next Week
We’ll see a few economic reports to watch next week, with durable goods coming on Tuesday and the revision to GDP on Friday. There will also be some data on housing.
Aside from this, it will likely be another quiet week. Summertime usually sees less trading volume and if this past week was any indication, it could be a quiet season.
Investment Strategy
Still no change. 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. There was that red flag with the transports we discussed earlier, so that is something to keep in mind. However, other indicators we follow don’t seem to be showing similar red flags. The trend in the market seems to be to the upside.
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.
Bonds have been trading at the low end of its price range (and high end of its yield range) all month. The same was true this week and we think they’ll stay in this range 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.
