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.
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.
