We saw another week with big swings in the market. By the close Friday, the Dow was higher by 0.7%, the S&P gained 0.8%, and the Nasdaq topped them both on a 1.3% rise. Gold was higher on international worries, climbing a solid 1.9%. Oil prices closed the week down slightly, off 0.6% to $59.61 per barrel. The international Brent oil, which is used to make much of our gas here in the east, lost about a dollar to close at $63.62 per barrel.
Source: Barchart.com (a lower open Monday skewed this week’s chart)
This week had two main items moving the market, the Fed and issues overseas.
We’ll start with the Fed, who held another policy meeting this week. Investors have been waiting to see if there would be any change in their stimulus policies, since the current policy of zero interest rates has helped send stocks higher.
The Fed announced no increase in interest rates, citing weaker economic growth than originally expected. This pleased investors, since stimulus matters more than the economy in boosting stocks. So yes, people are happy about a poor economy, and unfortunately this is what our markets have become.
While the Fed won’t raise rates now or in the coming months, they still seem adamant about raising them later this year. Many analysts believe a September or December rate hike is the most likely scenario in that case. However, many months ago they seemed adamant about a June rate hike, and we just saw how well that panned out.
Regardless, the news gave a green light to stocks, since a reduction in stimulus was not on the horizon.
As for the overseas troubles affecting stocks, Greece was yet again in the headlines. Greek leaders continue to show little willingness to give in to demands of their creditors – “defiant” was the term used most often. Failure to reach a deal means they are unlikely to get any additional bailout money.
This is very important because the country is nearly out of money. It raises the chance Greece will not pay back their debts and makes them more likely to leave the Euro, throwing the whole structure of the Euro into doubt. This uncertainty is likely to send our markets lower.
We also saw troubling news out of China this week. We haven’t talked about them much lately, but their stock market has been soaring. Their main index is up over 50% this year and well over 100% for the past 12 months. An index of smaller stocks is up even more. The chart below shows just how fast the rise has been - and how similar it looks to 2007.
We’ll start with the Fed, who held another policy meeting this week. Investors have been waiting to see if there would be any change in their stimulus policies, since the current policy of zero interest rates has helped send stocks higher.
The Fed announced no increase in interest rates, citing weaker economic growth than originally expected. This pleased investors, since stimulus matters more than the economy in boosting stocks. So yes, people are happy about a poor economy, and unfortunately this is what our markets have become.
While the Fed won’t raise rates now or in the coming months, they still seem adamant about raising them later this year. Many analysts believe a September or December rate hike is the most likely scenario in that case. However, many months ago they seemed adamant about a June rate hike, and we just saw how well that panned out.
Regardless, the news gave a green light to stocks, since a reduction in stimulus was not on the horizon.
As for the overseas troubles affecting stocks, Greece was yet again in the headlines. Greek leaders continue to show little willingness to give in to demands of their creditors – “defiant” was the term used most often. Failure to reach a deal means they are unlikely to get any additional bailout money.
This is very important because the country is nearly out of money. It raises the chance Greece will not pay back their debts and makes them more likely to leave the Euro, throwing the whole structure of the Euro into doubt. This uncertainty is likely to send our markets lower.
We also saw troubling news out of China this week. We haven’t talked about them much lately, but their stock market has been soaring. Their main index is up over 50% this year and well over 100% for the past 12 months. An index of smaller stocks is up even more. The chart below shows just how fast the rise has been - and how similar it looks to 2007.
The success of the stock market is attracting more and more newcomers. Rural villagers with no investing experience are opening accounts. The Wall Street Journal had an article about the owner of a manufacturing company pulling back on his business and instead focusing on the stock market. Apparently it is easier to make money in the stock market than in manufacturing.
Many see this as a bubble. Their economy has been cooling. Economic growth is at its lowest level since 2009. Corporate profits are down over the past year. Clearly, things are not going well and such a rise in their market is not justified.
Well, this week saw some cracks forming. The market had its worst performance in seven years, off 13% this week. Friday alone saw a drop of 6%. This is an area to keep an eye on, for the bursting of the bubble is likely to spill over into our markets.
Next Week
The ongoing drama in Greece is likely to be the big story next week. An important meeting is scheduled for Monday, so investors will be watching that closely.
There will also be a few economic reports to keep an eye on. We’ll get info on housing, durable goods, personal income and spending, and the final revision to first quarter GDP.
Investment Strategy
With the market stuck in this range over past several months, there has been little to change our investment strategy. We just haven’t seen momentum in either direction. If anything, the market may be a bit more on the cheap side in the short-term, so stocks may move a little higher from here. This isn’t the most attractive entry point for new money into the broader market, though, but there are many individual stocks the look undervalued.
Our longer term view remains unchanged, too. The market is on the expensive side from a longer-term perspective. Also, 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, though. Further, companies have shown little interest in reinvesting in themselves, which signals less growth down the road.
The volatility in the bond market continued this week, with yields on the high side and prices on the low side. Bonds, like stocks, have traded in a range over the last several months, though yields are currently on the high end of the range. We think foreign issues will keep our bonds attractive to foreign investors, so this will keep yields low and prices high, so we see little change in bonds at this time.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates eventually do rise.
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 on geopolitical issues and 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. 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.
Many see this as a bubble. Their economy has been cooling. Economic growth is at its lowest level since 2009. Corporate profits are down over the past year. Clearly, things are not going well and such a rise in their market is not justified.
Well, this week saw some cracks forming. The market had its worst performance in seven years, off 13% this week. Friday alone saw a drop of 6%. This is an area to keep an eye on, for the bursting of the bubble is likely to spill over into our markets.
Next Week
The ongoing drama in Greece is likely to be the big story next week. An important meeting is scheduled for Monday, so investors will be watching that closely.
There will also be a few economic reports to keep an eye on. We’ll get info on housing, durable goods, personal income and spending, and the final revision to first quarter GDP.
Investment Strategy
With the market stuck in this range over past several months, there has been little to change our investment strategy. We just haven’t seen momentum in either direction. If anything, the market may be a bit more on the cheap side in the short-term, so stocks may move a little higher from here. This isn’t the most attractive entry point for new money into the broader market, though, but there are many individual stocks the look undervalued.
Our longer term view remains unchanged, too. The market is on the expensive side from a longer-term perspective. Also, 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, though. Further, companies have shown little interest in reinvesting in themselves, which signals less growth down the road.
The volatility in the bond market continued this week, with yields on the high side and prices on the low side. Bonds, like stocks, have traded in a range over the last several months, though yields are currently on the high end of the range. We think foreign issues will keep our bonds attractive to foreign investors, so this will keep yields low and prices high, so we see little change in bonds at this time.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates eventually do rise.
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 on geopolitical issues and 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. 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.
