Stocks took another turn lower this week, with the Dow hitting its lowest level in six months. For the week, the Dow fell 1.8%, the S&P lost 1.3%, and the Nasdaq moved lower by 1.7%. A late-week surge sent gold to a slightly lower close, off 0.1%. Oil continues to move lower, which is great news for gas prices. It lost 6.9% this week to close at $43.87 per barrel, the lowest price since March. The international Brent oil, used to make much of our gas here in the east, lost more than $3 to close at $48.56 per barrel.
Source: Google Finance
The week was another rough one for the markets and there still wasn’t one single item we could point to as being responsible for the decline. However, the threat of an interest rate increase has been weighing on investors’ minds and may be putting pressure on the market.
Economic data was a major focus this week as several important reports were released. The results were mixed, but have been consistent with the theme of “good, but not great” we’ve seen over the last several months. However, “good, but not great” may just be enough for the Fed to begin raising interest rates as soon as September, which many fear will signal the end of the remarkable run the market has seen the last several years.
The big economic report came on Friday with the employment report for July. The economy added 215,000 jobs, right in line with estimates. This figure is lower than the recent average, but an increase of more than 200,000 makes it “good, but not great.” With employment a major focus of the Fed, this string of “good, but not great” reports have raised the prospect of a rate increase in the coming months.
We also had reports on the strength of the manufacturing and service sectors in July. Manufacturing hit its worst level since March, but the service sector stood at the strongest level in a decade. Since economic data is now viewed through the lens of the Fed and their stimulus, the solid service sector report sent stocks lower.
The odds of a September rate hike were further increased when Atlanta regional Fed president Dennis Lockhart stated he favored a rate hike at that time. Though he is but one of many members, his statement is indicative of a broader line of thinking at the Fed.
Another factor weighing on the market this week was media-sector stocks. Comments out of Disney (who own the ABC and ESPN networks) confirmed what many have speculated – cord-cutting is eating into their revenue. People are shunning cable packages in favor of lower cost options, like Netflix. This slammed the media sector stocks like Disney, Viacom, Fox, and Time Warner and dragged the market lower.
Corporate earnings season is entering the ninth inning as about 90% of companies in the S&P 500 have reported results so far. The results have been better than expected, but are still nothing to cheer about. Analysts originally expected a decline of 4.5% in earnings, so the current print of -2.3% looks better in comparison. It’s still a decline though.
Further, revenue (what a company made in sales. Earnings are what remain after costs are subtracted) is down 4.5%, the second straight quarter of a revenue decline. This rarely happens outside of recessions, so it is something to keep an eye on.
Next Week
We’ll see another fairly busy week next week. Corporate earnings releases are starting to slow, but we’ll see a few economic reports to keep an eye on. There will be info on retail sales, productivity, employment, and inflation at the producer level.
Investors will also be closely watching the speeches from a few more regional Fed presidents for any clues as to when interest rates will rise. As mentioned above, the market moved this week on comments from a regional president, so it will be something to keep an eye on.
Investment Strategy
The market is approaching 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 if it moves lower from here, but we are very cautious 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 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.
Economic data was a major focus this week as several important reports were released. The results were mixed, but have been consistent with the theme of “good, but not great” we’ve seen over the last several months. However, “good, but not great” may just be enough for the Fed to begin raising interest rates as soon as September, which many fear will signal the end of the remarkable run the market has seen the last several years.
The big economic report came on Friday with the employment report for July. The economy added 215,000 jobs, right in line with estimates. This figure is lower than the recent average, but an increase of more than 200,000 makes it “good, but not great.” With employment a major focus of the Fed, this string of “good, but not great” reports have raised the prospect of a rate increase in the coming months.
We also had reports on the strength of the manufacturing and service sectors in July. Manufacturing hit its worst level since March, but the service sector stood at the strongest level in a decade. Since economic data is now viewed through the lens of the Fed and their stimulus, the solid service sector report sent stocks lower.
The odds of a September rate hike were further increased when Atlanta regional Fed president Dennis Lockhart stated he favored a rate hike at that time. Though he is but one of many members, his statement is indicative of a broader line of thinking at the Fed.
Another factor weighing on the market this week was media-sector stocks. Comments out of Disney (who own the ABC and ESPN networks) confirmed what many have speculated – cord-cutting is eating into their revenue. People are shunning cable packages in favor of lower cost options, like Netflix. This slammed the media sector stocks like Disney, Viacom, Fox, and Time Warner and dragged the market lower.
Corporate earnings season is entering the ninth inning as about 90% of companies in the S&P 500 have reported results so far. The results have been better than expected, but are still nothing to cheer about. Analysts originally expected a decline of 4.5% in earnings, so the current print of -2.3% looks better in comparison. It’s still a decline though.
Further, revenue (what a company made in sales. Earnings are what remain after costs are subtracted) is down 4.5%, the second straight quarter of a revenue decline. This rarely happens outside of recessions, so it is something to keep an eye on.
Next Week
We’ll see another fairly busy week next week. Corporate earnings releases are starting to slow, but we’ll see a few economic reports to keep an eye on. There will be info on retail sales, productivity, employment, and inflation at the producer level.
Investors will also be closely watching the speeches from a few more regional Fed presidents for any clues as to when interest rates will rise. As mentioned above, the market moved this week on comments from a regional president, so it will be something to keep an eye on.
Investment Strategy
The market is approaching 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 if it moves lower from here, but we are very cautious 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 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.
