Stocks halted their decline this week, closing with a decent gain. Through the Friday close, the Dow rose 0.7%, the S&P gained 1.2%, and the Nasdaq added 0.8%. Gold ended the week with a little pop, up 0.9%. Oil saw another nice decline, off by 2.1% to $47.12 per barrel. The international Brent oil, used to make much of our gas here in the east, lost $3 to close at $51.81 per barrel.
Source: Google Finance
The Dow hit a six-month low this week before turning the corner and heading higher. There wasn’t any news we could point to as being responsible for the rise in stocks, either. It was a relatively uneventful week with no market-moving news to steer stocks.
Unfortunately, China was back in the headlines as the week opened with a sharp drop in their markets. Monday saw the worst one-day drop in more than eight years. The government was quick to announce an increase in their stock buying – taking them even further from the free-market reforms they once touted – but investors are increasingly doubtful they will be able to push stocks higher. Their market closed the month down 15%, making it the worst month since 2009.
As for our markets, we saw some news from the Fed as they held another policy meeting. We weren’t expecting to hear anything new and that’s exactly what we got. The Fed still looks poised to raise interest rates this year (low interest rates have fueled the stock market rally), with September looking like the most likely target. However, they are quick to point out their dependence on economic data, giving them an excuse if they decide to delay the much-needed rate increase.
Economic data this week was rather modest. Durable goods showed a nice increase while housing reports were more subdued. A report on wages posted an increase of 0.2% over the past quarter, a bad sign since it was the lowest increase ever during the second quarter.
The big economic report was the GDP figure for the second quarter. Coming in at 2.3%, it’s a number that’s not too hot and not too cold, though economists were expecting something closer to 3%.
Revisions to the GDP calculation were the big story, though. The Bureau of Labor and Statistics made adjustments to the methodology for calculating GDP and published revised numbers for past periods. Cynics (like us) point out these revisions are almost always done to make the data look better. However, that wasn’t the case this time.
The revisions did make the quarters of colder periods (fourth and first quarters) look better, but the warmer periods (second and third quarter) were revised lower. This netted out to a decline from the previous numbers, so economic growth was weaker than originally estimated. The economy just can’t break out of this funk.
Finally, the breadth of the market we’ve discussed so much lately was again a hot topic this week. The “breadth” is a metric investors use to judge the momentum of the market by counting the amount of companies advancing or declining. A large number of companies moving higher is a good sign for the market, where a large number of companies declining means the opposite.
Currently, more and more companies are hitting new lows for the year, but the markets have moved higher. This is a concern because more money chasing fewer names usually happens before market downturns. We saw this in the dot-com bubble and in 2007 before the market collapse.
We even saw it last fall before stocks dropped over 7%. In that case, though, they bounced back sharply from the decline and eventually moved even higher.
With corporate earnings slowing and revenue (what a company made in sales. Earnings are what remain after costs are subtracted) down for the second-straight quarter, this is something to keep an eye on.
Next Week
Next week looks to be an average week. Corporate earnings will continue to come in at a steady pace while we’ll get a few noteworthy economic reports.
All eyes will be on the monthly employment report out Friday, since it is important for timing the Fed’s pullback from the stimulus program. We’ll also get reports on the strength of the manufacturing and service sectors and personal income and spending.
Investment Strategy
We’re neutral on the market at this point. This week it hit levels we consider oversold (or cheap) in the short run before bouncing higher, so it currently stands at a level where we are not looking to do any buying or selling of the broader index. There are many individual stocks that still appear on the cheap side, 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.
Unfortunately, China was back in the headlines as the week opened with a sharp drop in their markets. Monday saw the worst one-day drop in more than eight years. The government was quick to announce an increase in their stock buying – taking them even further from the free-market reforms they once touted – but investors are increasingly doubtful they will be able to push stocks higher. Their market closed the month down 15%, making it the worst month since 2009.
As for our markets, we saw some news from the Fed as they held another policy meeting. We weren’t expecting to hear anything new and that’s exactly what we got. The Fed still looks poised to raise interest rates this year (low interest rates have fueled the stock market rally), with September looking like the most likely target. However, they are quick to point out their dependence on economic data, giving them an excuse if they decide to delay the much-needed rate increase.
Economic data this week was rather modest. Durable goods showed a nice increase while housing reports were more subdued. A report on wages posted an increase of 0.2% over the past quarter, a bad sign since it was the lowest increase ever during the second quarter.
The big economic report was the GDP figure for the second quarter. Coming in at 2.3%, it’s a number that’s not too hot and not too cold, though economists were expecting something closer to 3%.
Revisions to the GDP calculation were the big story, though. The Bureau of Labor and Statistics made adjustments to the methodology for calculating GDP and published revised numbers for past periods. Cynics (like us) point out these revisions are almost always done to make the data look better. However, that wasn’t the case this time.
The revisions did make the quarters of colder periods (fourth and first quarters) look better, but the warmer periods (second and third quarter) were revised lower. This netted out to a decline from the previous numbers, so economic growth was weaker than originally estimated. The economy just can’t break out of this funk.
Finally, the breadth of the market we’ve discussed so much lately was again a hot topic this week. The “breadth” is a metric investors use to judge the momentum of the market by counting the amount of companies advancing or declining. A large number of companies moving higher is a good sign for the market, where a large number of companies declining means the opposite.
Currently, more and more companies are hitting new lows for the year, but the markets have moved higher. This is a concern because more money chasing fewer names usually happens before market downturns. We saw this in the dot-com bubble and in 2007 before the market collapse.
We even saw it last fall before stocks dropped over 7%. In that case, though, they bounced back sharply from the decline and eventually moved even higher.
With corporate earnings slowing and revenue (what a company made in sales. Earnings are what remain after costs are subtracted) down for the second-straight quarter, this is something to keep an eye on.
Next Week
Next week looks to be an average week. Corporate earnings will continue to come in at a steady pace while we’ll get a few noteworthy economic reports.
All eyes will be on the monthly employment report out Friday, since it is important for timing the Fed’s pullback from the stimulus program. We’ll also get reports on the strength of the manufacturing and service sectors and personal income and spending.
Investment Strategy
We’re neutral on the market at this point. This week it hit levels we consider oversold (or cheap) in the short run before bouncing higher, so it currently stands at a level where we are not looking to do any buying or selling of the broader index. There are many individual stocks that still appear on the cheap side, 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.
