Stocks turned in another negative week, hitting their lowest levels in a month. Through the Friday close, the Dow lost 0.9%, the S&P fell 0.7%, and the Nasdaq fared the best with a slight 0.03% drop. Bonds were a big story this week as prices plunged and yields hit the highest level of the year. Gold was lower again, too, down 1.8%. Oil prices declined this week by 1.9% to $59.13 per barrel. The international Brent oil, which is used to make much of our gas here in the east, moved lower to $63.90 per barrel.
Source: Barchart.com
The story this week was much the same as last week. Investors are keeping an eye on economic data, looking at it in terms of the Fed and their stimulus. Plus, news from Europe and Greece added to the volatility of the market.
While stocks had some big moves this week, the story was really in the bond market. Bond prices dropped sharply and the speed at which they moved was highly unusual. The move was strong here in U.S. bonds, but even stronger in Europe. Germany, for example, saw the biggest move since these records began back in the year 2000.
So what’s going on and why should we care? First, the bond market often picks up signals before the stock market, so a big move in bonds could be indicating something to the stock market. Bonds may be boring, but this is why we care about the bond market.
There were a few reasons for the activity in the bond market. It started with Europe, where two big stories impacted markets. First, economic data in Europe came in a bit better than expected, with inflation rising (they still see inflation as a positive – we don’t), employment improving, and retail sales rising. Their central bank is printing tons of money in stimulus that is flowing into the markets, so an improving economy means less need for stimulus and therefore less printed money pushing up the market.
Another European factor rattling the market was Greece. They had a debt repayment scheduled for Friday, which no surprise to us, they found a way to not pay. They found a little known provision that allows them to take this week’s payment and the other three due this month and make one lump sum at the end of the month. This was not what the provision was intended for, but regardless, it bought them some time.
We are sure there will be more drama surrounding Greece and their debts once this new due date approaches.
While these stories are enough to move the market, they didn’t seem big enough to move the market as dramatically as it did. That brings up another factor than many hadn’t considered – new regulation.
New regulations on banks (like Dodd-Frank) prevent them from being active and taking positions in some of these markets. Normally they can dampen volatility by stepping in to place trades when markets were experiencing big swings. This is important because we may now see bigger swings in the market than we otherwise would.
Switching gears, we saw some important economic reports this week. As mentioned above, investors are closely watching the data, for good reports would mean less stimulus and vice-versa.
The big report of the week came on Friday with the May employment figures. Jobs were better than expected with a solid gain of 280,000. While the unemployment rate ticked up, it did so because more people entered the labor force, generally a good sign.
Of course, good news is bad news for the market, so stocks were lower on the report.
Other economic data this week was mixed, but leaned to the negative side. The strength of the manufacturing sector improved, but the service sector – which is a larger part of our economy – came in at the weakest level in more than a year. Personal income saw a decent increase, but spending was flat. Factory orders were down and an inflation report showed little in the way of inflation.
In the end, the mixed data was enough to keep us guessing on what the response would be from the Fed.
Next Week
We’ll see a few more economic reports next week, but nothing too significant. There will be a report on retail sales, which will be interesting to see since the last several months have been rather poor. There will also be a report on employment, inflation at the producer level, and import prices.
The story this week was the volatility in the bond market, so that’s what many traders will be keeping an eye on next week. Volatility in the bond market could spill over into the stock market.
Investment Strategy
Still no change here. While stocks have trended lower the last three weeks, they are not at a level we would consider doing any buying. From a slightly longer-term perspective, stocks have been stuck in a range since February and we haven’t seen any clear buy or sell signals over that time. While we wouldn’t put any new money in the broader index at this time, there are many individual stocks the look undervalued.
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. Plus, a lack of companies reinvesting in themselves signals less growth down the road.
While bond prices fell sharply recently (and yields higher) they still remain in a range we’ve seen over the past year. Granted, they are at the top of that range, but we don’t see a breakout from that range occurring. 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 and floating-rate bonds will do well if interest rates 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 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.
While stocks had some big moves this week, the story was really in the bond market. Bond prices dropped sharply and the speed at which they moved was highly unusual. The move was strong here in U.S. bonds, but even stronger in Europe. Germany, for example, saw the biggest move since these records began back in the year 2000.
So what’s going on and why should we care? First, the bond market often picks up signals before the stock market, so a big move in bonds could be indicating something to the stock market. Bonds may be boring, but this is why we care about the bond market.
There were a few reasons for the activity in the bond market. It started with Europe, where two big stories impacted markets. First, economic data in Europe came in a bit better than expected, with inflation rising (they still see inflation as a positive – we don’t), employment improving, and retail sales rising. Their central bank is printing tons of money in stimulus that is flowing into the markets, so an improving economy means less need for stimulus and therefore less printed money pushing up the market.
Another European factor rattling the market was Greece. They had a debt repayment scheduled for Friday, which no surprise to us, they found a way to not pay. They found a little known provision that allows them to take this week’s payment and the other three due this month and make one lump sum at the end of the month. This was not what the provision was intended for, but regardless, it bought them some time.
We are sure there will be more drama surrounding Greece and their debts once this new due date approaches.
While these stories are enough to move the market, they didn’t seem big enough to move the market as dramatically as it did. That brings up another factor than many hadn’t considered – new regulation.
New regulations on banks (like Dodd-Frank) prevent them from being active and taking positions in some of these markets. Normally they can dampen volatility by stepping in to place trades when markets were experiencing big swings. This is important because we may now see bigger swings in the market than we otherwise would.
Switching gears, we saw some important economic reports this week. As mentioned above, investors are closely watching the data, for good reports would mean less stimulus and vice-versa.
The big report of the week came on Friday with the May employment figures. Jobs were better than expected with a solid gain of 280,000. While the unemployment rate ticked up, it did so because more people entered the labor force, generally a good sign.
Of course, good news is bad news for the market, so stocks were lower on the report.
Other economic data this week was mixed, but leaned to the negative side. The strength of the manufacturing sector improved, but the service sector – which is a larger part of our economy – came in at the weakest level in more than a year. Personal income saw a decent increase, but spending was flat. Factory orders were down and an inflation report showed little in the way of inflation.
In the end, the mixed data was enough to keep us guessing on what the response would be from the Fed.
Next Week
We’ll see a few more economic reports next week, but nothing too significant. There will be a report on retail sales, which will be interesting to see since the last several months have been rather poor. There will also be a report on employment, inflation at the producer level, and import prices.
The story this week was the volatility in the bond market, so that’s what many traders will be keeping an eye on next week. Volatility in the bond market could spill over into the stock market.
Investment Strategy
Still no change here. While stocks have trended lower the last three weeks, they are not at a level we would consider doing any buying. From a slightly longer-term perspective, stocks have been stuck in a range since February and we haven’t seen any clear buy or sell signals over that time. While we wouldn’t put any new money in the broader index at this time, there are many individual stocks the look undervalued.
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. Plus, a lack of companies reinvesting in themselves signals less growth down the road.
While bond prices fell sharply recently (and yields higher) they still remain in a range we’ve seen over the past year. Granted, they are at the top of that range, but we don’t see a breakout from that range occurring. 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 and floating-rate bonds will do well if interest rates 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 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.
