A volatile week saw stocks end not far from where they started. Through the Friday close, the Dow added 0.6%, the S&P rose 0.7%, and the Nasdaq gained a slight 0.1%. Currency worries sent gold higher, up 1.7% this week. Oil prices hit six-year lows to close the week down 3.1% at $42.50 per barrel. The international Brent oil, used to make much of our gas here in the east, actually rose slightly to close at $48.74 per barrel.
Source: Google Finance
This week had a little bit of everything, sending the market on a wild ride.
We opened the week strongly to the upside, which was a welcomed relief after the decline we’ve experienced recently. A couple events were credited for the gain.
One was a deal completed by Warren Buffett’s company, Berkshire Hathaway, which was their largest on record. Big deals are done when there is optimism for the future, so this was seen as a bullish sign by the market.
Another reason for the increase in stocks was poor economic data out of China. Yes, it’s another case of “good news is bad news,” because investors believed it would lead to more stimulus from the Chinese government to prop up the economy and market.
And those investors were right, though not in the way they expected. Instead of more stimulus, on Tuesday the government weakened their currency by the most in over 20 years. This will help their sagging export sector, since a weaker currency makes their exports look cheaper and more attractive to foreign buyers.
Unfortunately it also makes their imports more expensive. American companies who sell their products in China will now face a headwind as the higher prices will cause sales to drop. This weighed on our markets for the remainder of the week.
Investors are also worried because it seemed like an act of desperation. The Chinese claim it to be a step towards making the currency more “market-driven,” but this was a radical step that is not taken if their economy is performing well. It again raises the concerns over a weaker Chinese economy.
Another concern is the increased likelihood of a currency war, especially in the Asia region. Japan has already made comments indicating as much. These countries are all large exporters, so they lose ground to the cheaper Chinese products. A currency war ends up hurting all countries, since it reduces trade and causes higher prices for everyone.
The chance for an interest rate increase from the Fed also came into question this week. Until now, it was widely believed the Fed would raise interest rates in September (this is important, because record low interest rates have fueled the rise in the stock market). The chance of a currency war, along with the stronger dollar weighing on our exports, adds two new issues that may give the Fed pause.
Economic data this week continued to be “good, but not great,” though showing a steady improvement. Retail sales finally ticked higher and the weekly employment report continues to be solid. Inflation at the producer level ticked higher, and while we don’t consider this a positive, the Fed likes to see rising prices as it believes it shows signs of growth (though history shows this is not true).
Finally, this week also had something from the charts. The recent decline in the Dow caused it to achieve the ominous-sounding “death cross.” This occurs when the Dow’s short-term moving average crosses the long-term average (the 50-day and 200-day moving averages), which can best be understood by the chart below.
This usually signals a downward trend in the market, though this failed to be the case last time it occurred.
We opened the week strongly to the upside, which was a welcomed relief after the decline we’ve experienced recently. A couple events were credited for the gain.
One was a deal completed by Warren Buffett’s company, Berkshire Hathaway, which was their largest on record. Big deals are done when there is optimism for the future, so this was seen as a bullish sign by the market.
Another reason for the increase in stocks was poor economic data out of China. Yes, it’s another case of “good news is bad news,” because investors believed it would lead to more stimulus from the Chinese government to prop up the economy and market.
And those investors were right, though not in the way they expected. Instead of more stimulus, on Tuesday the government weakened their currency by the most in over 20 years. This will help their sagging export sector, since a weaker currency makes their exports look cheaper and more attractive to foreign buyers.
Unfortunately it also makes their imports more expensive. American companies who sell their products in China will now face a headwind as the higher prices will cause sales to drop. This weighed on our markets for the remainder of the week.
Investors are also worried because it seemed like an act of desperation. The Chinese claim it to be a step towards making the currency more “market-driven,” but this was a radical step that is not taken if their economy is performing well. It again raises the concerns over a weaker Chinese economy.
Another concern is the increased likelihood of a currency war, especially in the Asia region. Japan has already made comments indicating as much. These countries are all large exporters, so they lose ground to the cheaper Chinese products. A currency war ends up hurting all countries, since it reduces trade and causes higher prices for everyone.
The chance for an interest rate increase from the Fed also came into question this week. Until now, it was widely believed the Fed would raise interest rates in September (this is important, because record low interest rates have fueled the rise in the stock market). The chance of a currency war, along with the stronger dollar weighing on our exports, adds two new issues that may give the Fed pause.
Economic data this week continued to be “good, but not great,” though showing a steady improvement. Retail sales finally ticked higher and the weekly employment report continues to be solid. Inflation at the producer level ticked higher, and while we don’t consider this a positive, the Fed likes to see rising prices as it believes it shows signs of growth (though history shows this is not true).
Finally, this week also had something from the charts. The recent decline in the Dow caused it to achieve the ominous-sounding “death cross.” This occurs when the Dow’s short-term moving average crosses the long-term average (the 50-day and 200-day moving averages), which can best be understood by the chart below.
This usually signals a downward trend in the market, though this failed to be the case last time it occurred.
Next Week
Next week looks to be a little quieter. Corporate earnings season is nearly wrapped up and the only economic data reports will be on inflation at the consumer level (CPI) and housing.
A few more regional Fed presidents will be speaking, too. We don’t expect to hear anything new, but investors will be closely watching anything from the Fed as their September meeting nears.
Investment Strategy
No change here. The market is near a level we usually find attractive for putting some new money in. We say usually, because it has worked well until this point. This time, however, there is the near-term prospect of the Fed announcing a hike in interest rates, which will be a drag on the markets. The market may be worth a nibble at this point.
In the longer run, our view remains unchanged. The market still looks expensive from a long-term perspective. 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 – though currently on the low end – 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 looks to be a little quieter. Corporate earnings season is nearly wrapped up and the only economic data reports will be on inflation at the consumer level (CPI) and housing.
A few more regional Fed presidents will be speaking, too. We don’t expect to hear anything new, but investors will be closely watching anything from the Fed as their September meeting nears.
Investment Strategy
No change here. The market is near a level we usually find attractive for putting some new money in. We say usually, because it has worked well until this point. This time, however, there is the near-term prospect of the Fed announcing a hike in interest rates, which will be a drag on the markets. The market may be worth a nibble at this point.
In the longer run, our view remains unchanged. The market still looks expensive from a long-term perspective. 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 – though currently on the low end – 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.
