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.
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.
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.
