The markets calmed down this week and closed with decent gains. For the week, the Dow added 1.8%, the S&P rose 2.4%, and the Nasdaq gained an impressive 4.3%. Gold continued to fare poorly, off 2.2% this week. Oil also continues to decline, down 3.5% to $50.89 per barrel. The international Brent oil, which is used to make much of our gas here in the east, closed down to $57.10 per barrel.
Source: Google Finance
China and Greece began to fade from the headlines this week as investors turned their focus to more domestic matters.
You’ll remember, last week Greece agreed to conditions for a bailout, promising to take steps like raising taxes, lowering spending, and reforming pensions (which were all conditions the Greek people just voted against). The details were ironed out over the weekend and approved by the Greek Parliament this week. It put to rest the fear that Greece will leave the Euro any time soon.
However, there are still some issues that may derail the bailout. Greece actually has to implement the reforms – something many Euro leaders doubt will happen. While they may be closer to getting a bailout, they are not out of the woods yet. Unfortunately, this cloud may be around for some time.
China also faded from the headlines as their markets found some stability this week, closing with a gain. There were still some big moves in the market, but nowhere near the magnitude of the previous weeks. Investors were encouraged to see the Chinese government putting hundreds of billions of dollars into the market as they promised to make stocks go higher. Unfortunately it shows what a farce the markets have become as they are no longer markets, just tools of the government. .
As these stories faded from the headlines, the focus turned to domestic issues like corporate earnings. Earnings season really got underway this week, with many large names reporting their second quarter results.
The earnings were better than expected – although expectations are very low – with many of those big name companies turning in solid results. For example, the Nasdaq index hit a record high this week largely due to Google earnings, which helped the stock to a 25% gain in just one week.
Though it is still early in the earnings season with only 61 of the 500 companies in the S&P reporting earnings, Factset reports earnings have come in at a -3.7% pace. Yes, this is still a negative number, but analysts were looking for a -4.5% growth in earnings at the start of earnings season.
Revenue (what a company received in sales, earnings are what remain after costs are subtracted) was lower by 4%, which would make this the second straight quarter of declining revenue. You don’t see that in a healthy economy.
The Fed was also in the news as Fed chief Janet Yellen testified in front of Congress this week. The big takeaway (other than the fact that some politicians have a cringe-worthy grasp of economic matters) is that the Fed still expects to raise interest rates this year, possibly as soon as September. The market shrugged off the news, probably because we’ve heard this story many times before.
Finally, we’ll touch on a technical (or the charts) matter in the markets we’re keeping an eye on. One metric some investors use to judge the momentum of the market is the market “breadth” or the amount of companies advancing or declining. Without getting too technical, a large number of companies moving higher is a good sign for the market, where a large number of companies declining means the opposite.
Since last November, the number of companies hitting new highs for the year (a gauge of breadth) has been trending lower. This is not a good sign.
You’ll remember, last week Greece agreed to conditions for a bailout, promising to take steps like raising taxes, lowering spending, and reforming pensions (which were all conditions the Greek people just voted against). The details were ironed out over the weekend and approved by the Greek Parliament this week. It put to rest the fear that Greece will leave the Euro any time soon.
However, there are still some issues that may derail the bailout. Greece actually has to implement the reforms – something many Euro leaders doubt will happen. While they may be closer to getting a bailout, they are not out of the woods yet. Unfortunately, this cloud may be around for some time.
China also faded from the headlines as their markets found some stability this week, closing with a gain. There were still some big moves in the market, but nowhere near the magnitude of the previous weeks. Investors were encouraged to see the Chinese government putting hundreds of billions of dollars into the market as they promised to make stocks go higher. Unfortunately it shows what a farce the markets have become as they are no longer markets, just tools of the government. .
As these stories faded from the headlines, the focus turned to domestic issues like corporate earnings. Earnings season really got underway this week, with many large names reporting their second quarter results.
The earnings were better than expected – although expectations are very low – with many of those big name companies turning in solid results. For example, the Nasdaq index hit a record high this week largely due to Google earnings, which helped the stock to a 25% gain in just one week.
Though it is still early in the earnings season with only 61 of the 500 companies in the S&P reporting earnings, Factset reports earnings have come in at a -3.7% pace. Yes, this is still a negative number, but analysts were looking for a -4.5% growth in earnings at the start of earnings season.
Revenue (what a company received in sales, earnings are what remain after costs are subtracted) was lower by 4%, which would make this the second straight quarter of declining revenue. You don’t see that in a healthy economy.
The Fed was also in the news as Fed chief Janet Yellen testified in front of Congress this week. The big takeaway (other than the fact that some politicians have a cringe-worthy grasp of economic matters) is that the Fed still expects to raise interest rates this year, possibly as soon as September. The market shrugged off the news, probably because we’ve heard this story many times before.
Finally, we’ll touch on a technical (or the charts) matter in the markets we’re keeping an eye on. One metric some investors use to judge the momentum of the market is the market “breadth” or the amount of companies advancing or declining. Without getting too technical, a large number of companies moving higher is a good sign for the market, where a large number of companies declining means the opposite.
Since last November, the number of companies hitting new highs for the year (a gauge of breadth) has been trending lower. This is not a good sign.
Meanwhile, the number of companies hitting new lows for the year has been trending higher since this spring. Also, not a good sign.
Despite the market continuing to rise, we need to be cautious. This isn’t something that would cause us to sell, but it does tell us that if there was a sell-off, it could be larger than normal. This is something to keep an eye on.
Next Week
Next week will be very quiet for economic data, only getting some reports on housing and leading economic indicators. However, it will be extremely busy for corporate earnings as one-quarter of the companies in the S&P 500 will release their results.
Investment Strategy
Last week the market looked cheap in the short run (which we consider a week or two or three), the sharp run-up this week now makes it look more expensive in the short run. We wouldn’t be surprised to see it take a little breather here. There are many individual stocks that still appear on the cheap side – again, in the short run.
In the longer run, our view remains unchanged. The market still looks expensive. There are large distortions created by these stimulus programs and we worry that as the stimulus comes off, so will stocks.
From a fundamental standpoint, we are concerned over the lack of companies reinvesting their earnings into their business. Money has instead flowed into stock buybacks and dividends, not reinvested back in the company. This signals lower corporate growth down the road.
As for bonds, their price has hovered around these recent low levels (and yields around the relatively high levels), and we expect little change in the near term. We would avoid longer-term bonds at this point.
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.
Next Week
Next week will be very quiet for economic data, only getting some reports on housing and leading economic indicators. However, it will be extremely busy for corporate earnings as one-quarter of the companies in the S&P 500 will release their results.
Investment Strategy
Last week the market looked cheap in the short run (which we consider a week or two or three), the sharp run-up this week now makes it look more expensive in the short run. We wouldn’t be surprised to see it take a little breather here. There are many individual stocks that still appear on the cheap side – again, in the short run.
In the longer run, our view remains unchanged. The market still looks expensive. There are large distortions created by these stimulus programs and we worry that as the stimulus comes off, so will stocks.
From a fundamental standpoint, we are concerned over the lack of companies reinvesting their earnings into their business. Money has instead flowed into stock buybacks and dividends, not reinvested back in the company. This signals lower corporate growth down the road.
As for bonds, their price has hovered around these recent low levels (and yields around the relatively high levels), and we expect little change in the near term. We would avoid longer-term bonds at this point.
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.
