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.
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.
