There’s no way to sugarcoat it, it was an ugly week for the market. Through the close Friday, the Dow and S&P both fell 5.8%, and the Nasdaq plunged 6.8%. Gold had another good week, up 4.2% to a seven-week high. Oil hit new six-and-a-half year lows, off 6.2% to close at $40.45 per barrel. The international Brent oil, used to make much of our gas here in the east, closed down to $45.34 per barrel.
Source: Google Finance
Fears about the weakness of the global economy and uncertainties as to when the Fed pulls back on its stimulus broke the market this week. Stocks had their worst week since 2011 and the major indexes are now negative on the year.
We must say, the drop wasn’t a total surprise. We’ve seen many warning signs recently, like the “death cross” we discussed last week and the weakening breadth in the market (where the amount of companies making new highs declined as the new lows increased) discussed a couple weeks ago. The problem is, we’ve seen these warnings several times in the past, only for no decline to appear. It’s been a very tricky market.
It’s also been an unusual market in that this year stocks have traded in one of the tightest ranges (from the high to low in stock prices) on record. A glimpse at the charts below shows us how that range was broken to the downside this week.
The bottom of a range is called “support,” where the market tends to find buyers that keep it from falling further. Breaking thorough that range is usually a bad sign for the market. Without that support, you can keep falling for a long time.
We must say, the drop wasn’t a total surprise. We’ve seen many warning signs recently, like the “death cross” we discussed last week and the weakening breadth in the market (where the amount of companies making new highs declined as the new lows increased) discussed a couple weeks ago. The problem is, we’ve seen these warnings several times in the past, only for no decline to appear. It’s been a very tricky market.
It’s also been an unusual market in that this year stocks have traded in one of the tightest ranges (from the high to low in stock prices) on record. A glimpse at the charts below shows us how that range was broken to the downside this week.
The bottom of a range is called “support,” where the market tends to find buyers that keep it from falling further. Breaking thorough that range is usually a bad sign for the market. Without that support, you can keep falling for a long time.
Looking back even further, we can clearly see the tight range of the market. We can see how the rise stalled out this year after steadily moving higher in the prior years. The next chart shows us clearly breaking out of that range.
So what happened this week to send markets sharply lower? Like the last few weeks, there wasn’t one story we could point to as the culprit. Instead, it looks like an accumulation of the malaise from the last few weeks. Global growth is slowing, led by weakness in China, while the Fed seems unsure of its path forward.
Plus, technical factors like those discussed above play an important role in the market’s direction. These tend not to make headlines, but cannot be overlooked.
As for the news of the week, the Fed made headlines with the release of the minutes from their latest meeting. They see the economy improving and expressed a desire to raise interest rates this year.
The “when” remains the question, however. Some Fed members called for a September rate increase, while others cited weaknesses around the globe as reason for pause. This indecision is weighing on the credibility of the Fed and likely played a part in the market decline.
The slowing growth in China was also a story this week. Economic data from the country continued to disappoint, sending their markets down more than 11% on the week.
This also impacted commodity markets as a slowdown in China means less need for commodities, sending commodity prices lower. That, in turn, sent companies correlated to commodities much lower, including names like companies Exxon, Alcoa, or even Caterpillar.
The weakness in China raised talks of more stimulus in the country, but we continue to ask, if it hasn’t worked yet, what makes them think it will work now?
Case in point is Japan. This week we learned their economy shrunk for yet another quarter. This comes after more than 15 years of stimulus programs, with the last two years seeing a significant increase in the amount of stimulus. Yet the economy has yet to improve.
Countless countries around the globe – including ours – are taking this wrong approach to fix their economies. Central planning and stimulus doesn’t work – fundamental reforms are needed. This includes measures like liberalizing labor markets, reducing regulations, reforming tax codes, and stabilizing currencies. All have proven to work in the past. Until fundamental reforms like these are made, we see no reason to break out of the economic malaise that has enveloped the globe.
Next Week
Next week looks to be another relatively uneventful one – in terms of scheduled economic data. As we saw this week, that doesn’t necessarily mean the market will be any quieter.
As for the economic data, we’ll get more info on housing, durable goods, personal income and spending, and the revision to second quarter GDP.
The Fed will also be in the news as they hold a retreat in Jackson Hole, WY. This is an annual event and we often hear new Fed policies being discussed or introduced. Investors will be closely watching for any surprises this year, especially after the week we had.
Investment Strategy
Well, last week clearly wasn’t an ideal time to buy. However, we are near a point where we would consider putting new money in the market. We don’t want to catch a falling knife, so we need to see the market stabilize or move higher before committing any new funds, though.
Further, we aren’t sure if this is the start of the “end-of-stimulus” decline we’ve feared. Stimulus programs from the Fed have been propping up the market in the face of a stagnant economy and lackluster corporate earnings. As the stimulus comes off, these flaws are revealed and rightly send the market lower. If this is the case, we may be in for a bumpy ride.
As for bonds, their prices rose this week (and yields fell) as investors sought a safe place to park their money as stocks plunged. Prices are on the high end of the range we have seen, meaning they are an expensive hedge at this point. Cash may be a better option and we would avoid longer-term bonds.
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. It did very well this week, though.
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.
Plus, technical factors like those discussed above play an important role in the market’s direction. These tend not to make headlines, but cannot be overlooked.
As for the news of the week, the Fed made headlines with the release of the minutes from their latest meeting. They see the economy improving and expressed a desire to raise interest rates this year.
The “when” remains the question, however. Some Fed members called for a September rate increase, while others cited weaknesses around the globe as reason for pause. This indecision is weighing on the credibility of the Fed and likely played a part in the market decline.
The slowing growth in China was also a story this week. Economic data from the country continued to disappoint, sending their markets down more than 11% on the week.
This also impacted commodity markets as a slowdown in China means less need for commodities, sending commodity prices lower. That, in turn, sent companies correlated to commodities much lower, including names like companies Exxon, Alcoa, or even Caterpillar.
The weakness in China raised talks of more stimulus in the country, but we continue to ask, if it hasn’t worked yet, what makes them think it will work now?
Case in point is Japan. This week we learned their economy shrunk for yet another quarter. This comes after more than 15 years of stimulus programs, with the last two years seeing a significant increase in the amount of stimulus. Yet the economy has yet to improve.
Countless countries around the globe – including ours – are taking this wrong approach to fix their economies. Central planning and stimulus doesn’t work – fundamental reforms are needed. This includes measures like liberalizing labor markets, reducing regulations, reforming tax codes, and stabilizing currencies. All have proven to work in the past. Until fundamental reforms like these are made, we see no reason to break out of the economic malaise that has enveloped the globe.
Next Week
Next week looks to be another relatively uneventful one – in terms of scheduled economic data. As we saw this week, that doesn’t necessarily mean the market will be any quieter.
As for the economic data, we’ll get more info on housing, durable goods, personal income and spending, and the revision to second quarter GDP.
The Fed will also be in the news as they hold a retreat in Jackson Hole, WY. This is an annual event and we often hear new Fed policies being discussed or introduced. Investors will be closely watching for any surprises this year, especially after the week we had.
Investment Strategy
Well, last week clearly wasn’t an ideal time to buy. However, we are near a point where we would consider putting new money in the market. We don’t want to catch a falling knife, so we need to see the market stabilize or move higher before committing any new funds, though.
Further, we aren’t sure if this is the start of the “end-of-stimulus” decline we’ve feared. Stimulus programs from the Fed have been propping up the market in the face of a stagnant economy and lackluster corporate earnings. As the stimulus comes off, these flaws are revealed and rightly send the market lower. If this is the case, we may be in for a bumpy ride.
As for bonds, their prices rose this week (and yields fell) as investors sought a safe place to park their money as stocks plunged. Prices are on the high end of the range we have seen, meaning they are an expensive hedge at this point. Cash may be a better option and we would avoid longer-term bonds.
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. It did very well this week, though.
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.
