Stocks moved lower for much of the week before reversing course to close with more modest losses. Through the close Friday, the Dow was down 0.4%, the S&P lost 1.4%, and the Nasdaq closed down 2.9%. Gold saw a slight gain of 0.9%. Oil ended the week up 1.0% to $45.34 per barrel. The international Brent oil closed slightly higher to $49.02 per barrel.
Source: Google Finance
The week was uneventful in terms of market-moving news. Investors continued to focus on the Fed meeting the previous week, where there was some confusion created by their refusal to change the interest rate policy.
Several regional Fed presidents made speeches this week. Each discussed their reason for voting against raising rates, with the weakness of the global economy cited as the top concern. Incidentally, this concern is not a part of the mandate given to them by the government, but we digress.
One thing all Fed members had in common was a belief the Fed would raise interest rates this year – which is important since there are only a few months left in the year (it’s gone by quick!).
Fed chief Yellen also indicated such in a speech Thursday night. She laid out exactly what she believes will happen with the economy in order for rates to rise. It was good to have some clarity on the subject after the murky conference the previous week. This helped stocks move higher.
Inflation is the main indicator the Fed will be following. Yellen wants to see inflation higher before raising rates and she believes inflation will move higher soon. She thinks the weakness in the economy has prevented inflation from rising, but now our footing is more solid and inflation should follow.
It doesn’t look like the markets share that same view. The bond market can serve as a gauge for inflation expectations (specifically, the spread between 10-year Treasury yields and TIPs) and that reading hit the lowest level since 2009. This, too, may have been a reason for the market rise on Friday – it means that a rate hike is unlikely any time soon.
Getting into the economic data of the week, there was some good news and some bad news. Sales for new homes rose to the best level since 2008, but existing home sales fell for another month. GDP for the second quarter was revised higher to 3.9% - a respectable number. On the other hand, durable goods fell for the seventh-straight month and are now down 20% for the past year.
One other economic item worth noting was the economic conditions surveys from several of the regional Fed banks. Last week we saw notably poor reports from New York and Philly and this week was more of the same. Chicago is weaker. Richmond hit its lowest level in almost three years. Kansas fell for the seventh-straight month, something that has never happened outside of a recession. Economic data is not as strong as many believe.
Finally, some news from overseas impacted our markets. A report from Japan showed another month of deflation. Remember that these central banks are trying their hardest to increase inflation, so the news sent stocks higher as it raised the chances for more stimulus. Keep in mind they have undertaken a monumental amount of stimulus and it has yet to fix their economy, so we’re not sure what more of the same would accomplish.
Next Week
It looks like next week could be a busy one. There will be a few economic reports worth watching, like the September employment report on Friday. We’ll also get a report on the strength of manufacturing and consumer income and spending.
The Fed, too, will be in the news as even more Fed members will make policy speeches and investors will be closely watching.
Finally, the government shutdown drama may come to a head next week and could create some volatility for the market.
Investment Strategy
Coming in to the week, stocks looked expensive in the very short-term and we were looking for a pullback before adding new money to the market. It’s too soon to tell if the move late this week was the start of a new leg higher, but we would have felt more comfortable if stocks moved a bit lower before this move higher.
We still think last week’s announcement to keep rates low will give stocks some support in the coming weeks and months. However, we’re likely to see a replay of the last few weeks as December approaches and a Fed rate hike appears likely.
Since much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored. Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent. Corporate earnings are lackluster and revenue has been in a declining trend. A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends. This indicates lower corporate growth down the road.
Bonds prices rose (so yields fell) as money moved out of bonds and into stocks this week. We are likely to see low yields and high prices in stocks for some time, so we aren’t forecasting any major changes for bonds at this time.
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.
Several regional Fed presidents made speeches this week. Each discussed their reason for voting against raising rates, with the weakness of the global economy cited as the top concern. Incidentally, this concern is not a part of the mandate given to them by the government, but we digress.
One thing all Fed members had in common was a belief the Fed would raise interest rates this year – which is important since there are only a few months left in the year (it’s gone by quick!).
Fed chief Yellen also indicated such in a speech Thursday night. She laid out exactly what she believes will happen with the economy in order for rates to rise. It was good to have some clarity on the subject after the murky conference the previous week. This helped stocks move higher.
Inflation is the main indicator the Fed will be following. Yellen wants to see inflation higher before raising rates and she believes inflation will move higher soon. She thinks the weakness in the economy has prevented inflation from rising, but now our footing is more solid and inflation should follow.
It doesn’t look like the markets share that same view. The bond market can serve as a gauge for inflation expectations (specifically, the spread between 10-year Treasury yields and TIPs) and that reading hit the lowest level since 2009. This, too, may have been a reason for the market rise on Friday – it means that a rate hike is unlikely any time soon.
Getting into the economic data of the week, there was some good news and some bad news. Sales for new homes rose to the best level since 2008, but existing home sales fell for another month. GDP for the second quarter was revised higher to 3.9% - a respectable number. On the other hand, durable goods fell for the seventh-straight month and are now down 20% for the past year.
One other economic item worth noting was the economic conditions surveys from several of the regional Fed banks. Last week we saw notably poor reports from New York and Philly and this week was more of the same. Chicago is weaker. Richmond hit its lowest level in almost three years. Kansas fell for the seventh-straight month, something that has never happened outside of a recession. Economic data is not as strong as many believe.
Finally, some news from overseas impacted our markets. A report from Japan showed another month of deflation. Remember that these central banks are trying their hardest to increase inflation, so the news sent stocks higher as it raised the chances for more stimulus. Keep in mind they have undertaken a monumental amount of stimulus and it has yet to fix their economy, so we’re not sure what more of the same would accomplish.
Next Week
It looks like next week could be a busy one. There will be a few economic reports worth watching, like the September employment report on Friday. We’ll also get a report on the strength of manufacturing and consumer income and spending.
The Fed, too, will be in the news as even more Fed members will make policy speeches and investors will be closely watching.
Finally, the government shutdown drama may come to a head next week and could create some volatility for the market.
Investment Strategy
Coming in to the week, stocks looked expensive in the very short-term and we were looking for a pullback before adding new money to the market. It’s too soon to tell if the move late this week was the start of a new leg higher, but we would have felt more comfortable if stocks moved a bit lower before this move higher.
We still think last week’s announcement to keep rates low will give stocks some support in the coming weeks and months. However, we’re likely to see a replay of the last few weeks as December approaches and a Fed rate hike appears likely.
Since much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored. Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent. Corporate earnings are lackluster and revenue has been in a declining trend. A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends. This indicates lower corporate growth down the road.
Bonds prices rose (so yields fell) as money moved out of bonds and into stocks this week. We are likely to see low yields and high prices in stocks for some time, so we aren’t forecasting any major changes for bonds at this time.
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.
