Last week the market posted nice gains on a solid move higher, but unfortunately this week wiped out those gains as it moved sharply lower. For the week, the Dow lost 2.9%, the S&P fell 2.2%, and the Nasdaq returned -2.3%. Gold hit five year lows on a 4.1% decline this week. Oil continues to move lower, off 6.0% to $48.14 per barrel. The international Brent oil, which is used to make much of our gas here in the east, closed down to $54.64 per barrel. We should finally start seeing some lower prices at the pump.
Source: Google Finance
Greece and China faded even further from the headlines as more domestic issues grabbed investors’ attention. Corporate earnings, in particular, dominated the headlines this week.
The earnings picture from this week had a bipolar nature to it. Some companies have done very well. Others, the exact opposite. Overall, earnings have been better than expected, although expectations were very low from the onset.
According to Factset, nearly 40% of the companies in the S&P 500 have reported so far and earnings are on pace to decline 2.2%. That doesn’t sound great – and it’s not – but analysts were originally expecting earnings to decline 4.5%. Revenue (or sales) have come in at a -4.0% pace, which is really not good after being solidly negative last quarter, too.
The poor performances spanned all sectors, but industrial companies have fared the worst. These are the companies like Caterpillar, whose bottom line is closely tied to global economic growth. This tells us the global economy is not as strong as many believe.
On the other hand, the companies that did well have been handsomely rewarded. We saw this last week when Google gained 25% and Netflix was higher by 18%. It was no different this week when Amazon added 10% after their earnings were reported.
A stock gaining more than 10% after an earnings report is very rare. We think more and more investors are chasing these names with decent earnings simply because there are so few investment opportunities out there. We see this type of behavior in bubbles, so it is something to keep an eye on.
Another big story this week has been commodities. We reported above how gold hit a five-year low this week. Many other commodities are in the same boat and have moved lower. The Bloomberg Commodity Index – which is a basket of 22 different commodities – hit its lowest level since 2002.
Why? Part of it is weakness in the global economy. China, in particular, is a worry as their growth continues to weaken.
The other part is the strength of our dollar. When our currency strengthens, it means it is worth more. Therefore, you need less of them to buy a commodity, which means lower prices for that commodity.
The dollar is strengthening now as investors see the Fed pulling back from its stimulus program this year. The stimulus program weakens our currency, therefore a retreat from stimulus results in a stronger currency. When it seems like every other country is embarking on some sort of stimulus program, our currency looks even stronger as a result.
We often hear companies and the government lament the stronger currency. True, it makes exporting more difficult since our products look more expensive to foreign buyers. However, it is a net positive for the country and a stronger currency should be encouraged.
Finally, last week we discussed how the stock prices of many companies are hitting new lows for the year despite the overall market continuing to rise. The sell-off this week really exaggerated this trend as even more companies hit new lows for the year. This is not a positive sign for the market and is something to keep a close eye on.
Next Week
Next week looks to be a busy one. Corporate earnings will continue to come in at a steady pace, with another quarter of the companies in the S&P 500 reporting results.
There will be some economic data to watch this week, including our first look at second-quarter GDP. We’ll also get info on durable goods, consumer confidence, and housing.
The Fed will also be in the news as it holds another policy meeting. We are not expecting any changes in their policy at this time, but investors will be closely listening for any clues as to when that policy will change.
Investment Strategy
We thought the market looked a little expensive in the short run after last week and expected to see a pause or slight pullback. We certainly didn’t expect the drop in the market we saw this week. The broader market is not yet at a level where we’d put any new money in for a short-term trade. There are many individual stocks that still appear on the cheap side – again, in the short run – but this volatile earnings season keeps us cautious.
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 prices rose this week (and yields fell) as investors sought a safe place to park their money as stocks fell. However, they are still trading around levels we’ve seen the last three months 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.
The earnings picture from this week had a bipolar nature to it. Some companies have done very well. Others, the exact opposite. Overall, earnings have been better than expected, although expectations were very low from the onset.
According to Factset, nearly 40% of the companies in the S&P 500 have reported so far and earnings are on pace to decline 2.2%. That doesn’t sound great – and it’s not – but analysts were originally expecting earnings to decline 4.5%. Revenue (or sales) have come in at a -4.0% pace, which is really not good after being solidly negative last quarter, too.
The poor performances spanned all sectors, but industrial companies have fared the worst. These are the companies like Caterpillar, whose bottom line is closely tied to global economic growth. This tells us the global economy is not as strong as many believe.
On the other hand, the companies that did well have been handsomely rewarded. We saw this last week when Google gained 25% and Netflix was higher by 18%. It was no different this week when Amazon added 10% after their earnings were reported.
A stock gaining more than 10% after an earnings report is very rare. We think more and more investors are chasing these names with decent earnings simply because there are so few investment opportunities out there. We see this type of behavior in bubbles, so it is something to keep an eye on.
Another big story this week has been commodities. We reported above how gold hit a five-year low this week. Many other commodities are in the same boat and have moved lower. The Bloomberg Commodity Index – which is a basket of 22 different commodities – hit its lowest level since 2002.
Why? Part of it is weakness in the global economy. China, in particular, is a worry as their growth continues to weaken.
The other part is the strength of our dollar. When our currency strengthens, it means it is worth more. Therefore, you need less of them to buy a commodity, which means lower prices for that commodity.
The dollar is strengthening now as investors see the Fed pulling back from its stimulus program this year. The stimulus program weakens our currency, therefore a retreat from stimulus results in a stronger currency. When it seems like every other country is embarking on some sort of stimulus program, our currency looks even stronger as a result.
We often hear companies and the government lament the stronger currency. True, it makes exporting more difficult since our products look more expensive to foreign buyers. However, it is a net positive for the country and a stronger currency should be encouraged.
Finally, last week we discussed how the stock prices of many companies are hitting new lows for the year despite the overall market continuing to rise. The sell-off this week really exaggerated this trend as even more companies hit new lows for the year. This is not a positive sign for the market and is something to keep a close eye on.
Next Week
Next week looks to be a busy one. Corporate earnings will continue to come in at a steady pace, with another quarter of the companies in the S&P 500 reporting results.
There will be some economic data to watch this week, including our first look at second-quarter GDP. We’ll also get info on durable goods, consumer confidence, and housing.
The Fed will also be in the news as it holds another policy meeting. We are not expecting any changes in their policy at this time, but investors will be closely listening for any clues as to when that policy will change.
Investment Strategy
We thought the market looked a little expensive in the short run after last week and expected to see a pause or slight pullback. We certainly didn’t expect the drop in the market we saw this week. The broader market is not yet at a level where we’d put any new money in for a short-term trade. There are many individual stocks that still appear on the cheap side – again, in the short run – but this volatile earnings season keeps us cautious.
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 prices rose this week (and yields fell) as investors sought a safe place to park their money as stocks fell. However, they are still trading around levels we’ve seen the last three months 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.
