Commentary for the week ending 10-23-15

The markets turned in another solid week, making this their fourth-straight week higher.  Through the Friday close, the Dow gained 2.5%, the S&P climbed 2.1%, and the Nasdaq popped higher by 3.0%.  Gold didn’t fare as well, off 1.1%.  Oil moved lower as gas prices hit their lowest level in six years, falling 5.4% on the week to close at $44.73 per barrel.  The international Brent oil closed lower to $48.10 per barrel. 

Source: Google Finance

The week started out on a fairly calm note, with corporate earnings the only news to move the market.  However, an increased likelihood for more stimulus in Europe and an announced increase in stimulus from China gave stocks a boost to close out the week. 

We’ll start with earnings, as this was the busiest week for earnings this quarter.  The results remain lackluster.  A few big tech companies – Amazon, Microsoft, and Google (which is now called Alphabet, perhaps the least creative name ever) – made headlines with very good earnings.  For the most part, though, companies are seeing a decline in sales and earnings.

Economic growth around the globe was a focus this week.  Growth remains slow, despite the massive amounts of stimulus from every major economy to boost growth.  Europe is currently in the middle of a stimulus program involving massive money printing and negative interest rates to encourage borrowing.  Growth is still lagging in the country, causing the head of the European Central Bank (ECB) to announce further stimulus is likely. 

This sent stocks sharply higher, as you can see starting on Thursday in the chart above.

Stocks were further helped on Friday when China announced an increase in their stimulus measures.  Earlier in the week, the country reported their weakest GDP figure since the start of the economic crisis. This spurred a response from the government as they lowered interest rates even further in an attempt to spur borrowing. 

We discuss this often – we find the actions of these central banks to be highly irresponsible.  If economic growth is not returning with the massive amounts of stimulus pumped into economies, wouldn’t you conclude this was not the right approach?  The stock market may love the stimulus, but we worry about the longer term consequences they are creating.  The massive amounts of debt and market bubbles could be very damaging in the long run. 


Next Week
Next week will be a very busy one, both for corporate earnings and economic data.  With the economic data, we’ll get info on the strength of the economy with the third quarter GDP figure, along with durable goods, personal income and spending, and housing. 

The Fed will again be in the news as they hold another policy meeting.  They are widely expected to announce nothing new at this meeting, so it is unlikely to have much impact on the market. 


Investment Strategy

Still no change here.  Stocks remain on the expensive side in the very short term.  Looking out a little longer, we do still think the market will trend higher in the coming weeks and months, supported by central banks either keeping stimulus programs in place or increasing them. 

Longer term, we have worries.  Being that 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 remain high (so yields are low) as they hover at the top of the range they’ve been in the last couple months.  We are likely to see relatively low yields and high prices in stocks for some time, though, so we aren’t forecasting any major changes for bonds in the near future.

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.

Commentary for the week ending 10-16-15

Stocks started the week with a downward move, but reversed course to close with a nice gain.  Through the close Friday, the Dow climbed 0.8%, the S&P rose 1.5%, and the Nasdaq added 1.9%.  Gold turned in another decent week, up 1.8%.  Oil moved off its highest level in three months, declining 4.5% to close at $47.26 per barrel.  The international Brent oil closed lower to $50.46 per barrel. 

Source: Google Finance

Stocks were helped higher by poor economic data this week.  Investors continue to look at the stock market in terms of the Fed and their stimulus, seeing weaker economic reports this week delaying any pullback from that stimulus. 

One of the big data points the Fed looks at is inflation.  Two inflation reports were released this week – the CPI and PPI.  Both were weaker than expected.  The lower gas prices have brought down inflation and while most people would consider this a positive, the Fed views it as a negative.  Worth noting, inflation is running higher than expected when excluding that drop in oil prices.  

Corporate earnings are starting to become a bigger story.  Third quarter reports began rolling in this week and the numbers were rather poor, though this was largely expected.  Factset is expecting a decline of 4.6% in earnings this quarter, which is an improvement from the 5.1% they saw just a week ago.  When excluding the troubled oil and commodity sectors, earnings are actually projected to rise 2.2%. 

Many banking and finance companies reported their results this week and there were a few hits and misses.  Outside of this sector, though, the results were lackluster. 

Wal-Mart was a big story as they reported much larger losses than expected, sending the stock down 10% on the day to its lowest level since 2012.  Their costs are soaring, largely due to an increase in their minimum wage.  They cite the higher wages as an “investment,” but wages have been considered an expense for as long as accounting has been around.  This should serve as a warning to investors should wages ever be increased on a larger scale. 

More broadly, the poor earnings picture has caused ratings agencies like Moody’s to downgrade the credit rating of many companies.  They have recently downgraded more companies than at any time since the start of the recession.  There are some real worries at the strength of corporate America and is something we need to keep an eye on. 

Finally, we’ll touch on one of the more obscure metrics we look at as a leading indicator for the market, called the SKEW index.  This metric hit an all-time high this week, so we feel it is worth noting. 

The Skew index comes to us from the options market.  Investors can use options to hedge their portfolios and basically the Skew index measures the amount of interest in hedging for highly unlikely moves in the market.  

By hitting a high this week, it tells us there is more interest than ever in protecting portfolios from a sharp decline in the market.  The extraordinary decline is often described as a “black swan” event, meaning it is very rare.  While no metric is perfect, it has hit high levels before many large declines, so it is something worth watching. 

Next Week

Next week will be very quiet for economic data, but very busy for corporate earnings.  20% of the companies in the S&P 500 will report results, making it the busiest week for corporate earnings. 

There will also be many regional Fed presidents making speeches, and while we expect to hear nothing new, they are always something to pay attention to. 


Investment Strategy

No change here.  Stocks are still on the expensive side in the very short term.  Looking out a little longer, we do still think the market will trend higher in the coming weeks and months, supported by the decreasing likelihood of an increase in interest rates from the Fed.

Longer term, we still have worries.  Being that 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 slightly (so yields fell) and continue to hover at the top of the range they’ve been in the last couple months.  We are likely to see relatively low yields and high prices in stocks for some time, though, so we aren’t forecasting any major changes for bonds in the near future.

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.

Commentary for the week ending 10-9-15

The markets turned in their best week in months.  Through the Friday close, the Dow rose a solid 3.7%, the S&P added 3.3%, and the Nasdaq climbed 2.6%.  A weaker dollar helped commodities this week, with gold hitting a six-week high on a gain of 1.8%.  Oil hit its highest level in three months, up 8.4% to $49.49 per barrel.  The international Brent oil added $4 to close at $52.82 per barrel. 

Source: Google Finance

We’re back to bad news on the economy being good news for the market.  The poor employment report from the previous week saw stocks move higher, as it decreased the likelihood of the Fed pulling back from its accommodative policies that have fueled the market run. 

That rise in stocks spilled into this week, with little news in the week to derail the move. 

The market was also helped when the minutes from the last Fed meeting were released, showing the Fed was not close to raising interest rates off this historically low level. 

One of the talking points after the original meeting was that it was a close call on whether to raise rates.  However, the minutes suggested it wasn’t even close – nearly all the members thought it was best to hold off on a rate increase.

The Fed cited worries about low inflation and weak economic conditions around the globe.  They were also concerned with the volatility in the market.  This is amusing, since it is the Fed’s very actions that cause this volatility. 

We’ve seen this play out many times over the last few years.  The market moves higher when their stimulus policies are in place.  When it appears the policy may be removed, stocks fall.  The Fed then frets about the fall in stocks and announces a new or continued stimulus as a result.  Stocks then rise as the cycle continues.  The Fed is stuck in this cycle with no way out.

Switching gears, corporate earnings are back in the headlines.  Third quarter results will start coming in in the weeks ahead.  The bar has been set very low, as Factset expects a decline of over 5%.  However, the bar is usually set low as it makes it an easier hurdle to beat. 

If earnings were to post a decline, though, it would mark the second straight quarter of earnings declines (and third-straight revenue decline, or sales decline).  This rarely happens outside of recessions. 

According to the bond market – usually a good leading indicator – it appears more investors are concerned of a potential recession, too. 

These record-low interest rates have encouraged companies to load up on debt, with debt levels rising over 8% just in the last year alone.  Investors appear to be worried over the amount of debt and question the ability of the companies to pay it back due to slower growth.  They are asking for more yield as compensation for the added risk (like a credit card – riskier borrowers pay a higher rate).  This is something to keep an eye on.


Next Week

Earnings will be in focus next week.  Many companies will be releasing their results from the third quarter, with a large number of banks reporting this week.  The bar is set very low, so we may see a lot of people commenting on how much better earnings were than originally thought.  This may be true, but they are still likely to be poor.

As for economic data, we’ll get reports on inflation and the producer and consumer levels, retail sales, industrial production, and the Fed’s Beige Book, which gives anecdotal accounts on the strength of the economy.


Investment Strategy

Stocks are likely due for a pause after bouncing strongly off the lows of two weeks ago.  The easy gains have probably been made and stocks are no longer at an attractive level for new money.  We do still think the market will trend higher in the coming weeks and months, supported by the Fed’s inaction.

Longer term, we still have worries.  Being that 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 fell (so yields rose) as money moved out of bonds and into stocks this week.  We are likely to see relatively low yields and high prices in stocks for some time, though, so we aren’t forecasting any major changes for bonds in the near future.

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.

Commentary for the week ending 10-2-15

Stocks were underwater for most of the week, but a gain Friday saw them close slightly higher.  For the week, the Dow and S&P both rose 1.0% and the Nasdaq was higher by 0.4%.  The story was similar with gold, which closed with a loss of 0.6%.  Oil also saw little change, up 0.7% to $45.66 per barrel.  The international Brent oil closed slightly higher to $48.82 per barrel. 

Source: Google Finance

This week also saw the end of the third quarter.  With a drop of nearly 7% on the S&P and 7.6% on the Dow, it was the worst quarter since 2011.  Investors have now set their sights on the fourth quarter, but with the economy stalling and corporate earnings poised for a decline, investors aren’t very optimistic.  That makes the Fed and their stimulus all the more important for stocks. 

As for the news of the week, investors were anxious for the employment report out on Friday.  Economists were looking for 200,000 jobs to be added over the past month, only to be disappointed with a gain of just 142,000.  The figures for the previous two months were revised sharply lower, too.  All-in-all, it was a very disappointing report. 

Stocks initially moved much lower on the news.  However, it looked like investors realized a poor employment picture means less chance for the Fed to pull back on its stimulus (an increase in interest rates), so stocks eventually moved higher.

Earlier in the week, several regional Fed presidents were discussing their outlook for that increase in rates.  They all believe interest rates will rise this year – as long as the economy remained on its current trajectory.  That is the key point, for it leaves the door open to keep rates low or possibly do even more stimulus.  Each poor economic report make it less likely to see an interest rate any time soon. 

One economic data point we’re keeping an eye on is the regional Fed surveys.  They don’t seem to make headlines, but these reports give a picture of the manufacturing and economic conditions in the various Fed districts. 

We discussed several of these released last week, and all were poor.  The story was the same this week.  The Dallas region posted its ninth-straight contraction while the Midwest also saw a decline.  These results show us that the economy remains sluggish.


Next Week

Next week looks a little quieter for economic data.  The most important report comes on Monday with the strength of the service sector over the last month.  We’ll also get reports on import prices, which is important for gauging inflation, and consumer credit. 

Several regional Fed presidents will be making speeches, too.  They’ve all echoed the same story of rates rising this year, but it will be interesting to see if the tone changes after the lousy employment report. 


Investment Strategy

Stocks reached an attractive level this week – at least for the short-term.  There are plenty of economic and corporate earnings worries out there, but the big worry – the Fed raising interest rates – looks highly unlikely.  We think the Fed’s stimulus programs have kept stock prices elevated and see little reason for that to change, which will give stocks some support.

Longer term, we still have worries.  Being that 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.