Commentary for the week ending 11-20-15

Please note: there will be no market commentary for the next two weeks.  We’ll be back with our commentary for the week ending 12/11/15.  Thanks.  
 
Stocks reversed their recent decline and turned in a solid week.  Through the Friday close, the Dow rose 3.4%, the S&P gained 3.3%, and the Nasdaq added 3.6%.  Gold closed with a slight loss of 0.6%.  Oil turned in a loss of 3.3% to close at $39.39 per barrel.  The international Brent oil moved down only three cents to $44.42 per barrel. 

Source: Google Finance

This week was unusual in that events that we’d expect to send markets lower actually saw stocks turn higher. 

Monday opened fresh off the Paris attacks, which most people would conclude to be a negative for stocks.  However, the market rallied strongly.  Part of this came from an increase in oil prices on terrorism concerns.  Higher oil prices are good for energy companies, giving this sector the best gains of the day.

Stocks also rose this week when minutes from the latest Fed meeting showed an increased likelihood of an interest rate hike at the next meeting in December.  We’d normally see this as a negative for stocks as higher interest rates make it more expensive to borrow money, which then pressures the stock market.  

While stocks rose when it appeared the U.S. was moving away from stimulus, stocks also moved higher when Europe looked like they were moving towards more stimulus.  The minutes from the last European Central Bank (ECB) meeting indicated a willingness to print more money to stimulate the economy.  Comments from the head of the ECB on Friday explicitly noted an increase in stimulus was likely.  

There’s all this talk about stimulus – but is it really helping?  Japan has undertaken more stimulus than any other country and in recent years have ramped it up to unimaginable levels.  Unfortunately this week they reported another contraction in their economy, making this their fifth time in recession in the last seven years. 

Stimulus does not fundamentally help an economy.  It does make their stock market rise, but it makes their debts rise and currency weaken, too. 

The weaker currency does help companies who export their products (since it makes them appear cheaper to buyers overseas).  As we see in Japan, though, the weaker currency makes everything within the country cost more.  This hurts the people of the country and is not a path to economic growth.

Finally, we’ll bring up something we last discussed in July – market breadth.  “Breadth” is the amount of companies in the index advancing or declining.  A large number of companies moving higher is a good sign for the market and a large number of companies declining means the opposite. 

While the market has been rising, the amount of companies making new highs is trending lower:

Meanwhile, the amount of companies hit new lows is rising:

Despite the market continuing to rise, we need to be cautious.  This isn’t something that would cause us to sell, but it does tell us that if there was a sell-off, it could be larger than normal.  This is something to keep an eye on. 


Next Week

Next week will be busy in the first three days and quiet thereafter due to Thanksgiving.  We’ll get info on housing, the revision to GDP, personal income and spending, and inflation.  There will be a handful of companies reporting earnings, too.

Worth noting, the week of Thanksgiving is historically a positive one, so that is worth considering.   


Investment Strategy

Stocks are at a level where we wouldn’t consider doing any buying or selling at this point.  They quickly rallied off their somewhat-oversold levels last week, so they are more on the expensive side in the very short term. 

Looking out a few weeks or months, it is a little more difficult to determine as we think it will largely be driven by the Fed.  The Fed may pull back on their stimulus, but other central banks look to add to theirs.  Stocks do tend to be higher into year-end, but we may see more volatility as the odds of a December rate hike increases. 

Longer term, we continue to 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. 

Bond prices remain high (so yields are low) as they hover near the top of the range they’ve been in the last couple months.  We are likely to continue seeing relatively low yields and high prices in bonds 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 11-13-15

It was a rough week for stocks as they fell for the first time in two months.  Through the close Friday, the Dow lost 3.7%, the S&P fell 3.6%, and the Nasdaq fared the worst on a 4.3% drop.  Gold hit its lowest level since 2010.  Oil also fell, losing 8.5% to $40.73 per barrel.  The international Brent oil moved down $4 to $44.45 per barrel. 

Source: Google Finance

There was very little news to move the market this week.  Stocks have risen sharply in the last two months, so it’s not surprising to see them give up some of their gains.

It’s also fairly apparent that this sell-off was related to an increase in interest rates from the Fed.  The positive jobs report last week increased the odds of an interest rate hike from the Fed in December.  Though it is a positive development for the economy, it’s a negative for a market that has been supported by these stimulus measures. 

We’ve seen this story several times before.  The Fed indicates an interest rate hike is near and stocks sell-off as a result.  The Fed then cites the weak stock market as a reason for not raising rates and the market then turns higher.  We think it is very likely this cycle will play out again in the coming weeks.

There were a few economic reports released this week worth noting, and none were very good.  Inflation at the producer level (PPI) fell 0.4% in the last month and now stands at the lowest year-over-year level since 2009.  This is important, as the Fed needs to see higher inflation before raising interest rates.

Retail sales were also a big story this week.  They rose 0.1% last month, much less than expected.  The big story came from individual retail companies, however.  Many reported earnings this week and sales were much lower than expected.  Plus, these retailers are seeing weaker sales for the fourth quarter.  People just aren’t spending money at these stores. 

The chart below shows how several retail stocks performed this week.  Macy’s (M) down 20%, Nordstrom’s (JWN) down 18%.  JCPenny (JCP) down 15%.  TJ Max companies (TJX) down 12%.  These are significant moves that mostly occurred in a single day for these stocks.

This leads us to corporate earnings, which have been very weak.  Earnings season is nearly complete and while companies did better than expected, they still saw a negative quarter.  This is the second straight quarter of declining earnings, technically making this an earnings recession.

Revenue, or sales, were lower by 3.7%, the third-straight quarter of lower sales numbers.   As we saw in the retail companies, people just aren’t spending the money analysts expected and shows the economy isn’t as strong as many think, either. 


Next Week

Next week looks similar to this week, light on economic data and earnings, along with a few regional Fed presidents making speeches.

For economic data, we’ll get info on inflation at the consumer level (CPI), industrial production, and housing data.  Retail sales will again be in focus as several big name companies like WalMart, Target, and Home Depot report results. 

Finally, the situation in France will be a focus as attacks like these can unnerve the markets. 


Investment Strategy

We were very cautious as of last week as stocks appeared expensive in the short run.  This week’s sell-off makes them much less expensive now and they may even find a little support at this level.  We do think they have the potential to still move lower, so we are not looking to do any buying at this point. 

Looking out a few weeks or months, it is a little more difficult to determine as we think it will largely be driven by the Fed.  Stocks do tend to be higher into year-end, but we may see more volatility as the odds of a December rate hike increases. 

Longer term, we also 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. 

Despite pulling back a bit this week, bonds prices remain high (so yields are low) as they hover near the top of the range they’ve been in the last couple months.  We are likely to continue seeing relatively low yields and high prices in bonds 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 11-6-15

Big gains in stocks early in the week were enough to keep them in positive territory as the momentum faded.  For the week, the Dow gained 1.4%, the S&P rose 1.0%, and the Nasdaq was higher by 1.8%.  Bond yields hit their highest level since July as their price fell.  Gold trended lower all week to close with a loss of 4.6%.  Oil also saw a loss, off 4.0% to $44.52 per barrel.  The international Brent oil moved down to $48.42 per barrel. 

Source: Google Finance

This week was another one focused on the Fed and their stimulus. 

The employment report for October was released on Friday and stocks spent much of the week in a holding pattern waiting for the results.  A good report increased the likelihood of an interest rate increase at the Fed’s next meeting in December, and a poor report obviously indicated the opposite.  Low interest rates have been helpful in sending stocks higher, so an increase in rates would have a negative impact for stocks.

It turned out the report was the best all year and much better than expected.  The U.S. added 271,000 jobs in October and the unemployment rate fell to 5.0%.  A broader measure of unemployment fell below 10%.  By all accounts, it was a good report.

The news sent stocks lower, for it increased the odds of an interest rate increase later this year.  In fact, odds stood at 58% before the announcement and 70% after.  Markets spent most of the day in the red before moving into positive territory late in the day. 

One regional central bank president, Charles Evans of Chicago, appeared on TV not long after the announcement, commenting on the good jobs number.  However, he cited low wage growth, productivity, and inflation as problems he would like to see improve before rates are increased (though we still don’t agree that higher inflation is a positive).  While the market thinks a hike is likely, there is a decent chance they won’t be. 

Despite this, the chance of a rate hike later this year is still high.  Normally it would weigh on stocks, but there is something that might provide a bit of a boost to the market.

A big reason for increasing stock prices has been companies buying back their own stock.  They borrow money at cheap rates and repurchase shares with those funds.  November has historically been the biggest month for buybacks and December is third most active.  Knowing a rate hike will boost borrowing costs, companies may rush to get buybacks done before the end of the year.  This is something to keep in mind. 

Other economic data this week was mixed.  A report on the strength of the service sector in October was very strong.  However, the manufacturing sector was very weak.  Factory orders declined for the eleventh-straight month, something not seen outside of recessions. 

Finally, corporate earnings continued to come in at a steady pace, though they hardly received any attention this week.  More than half of the companies in the S&P 500 have reported so far and earnings are coming in above estimates (they always do), but are still negative.  Revenue, or sales, are down more than 4%, their third-straight quarter of declines.  This, too, is something not seen outside of recessions.  While stocks continue higher, the economy does have some weakness. 


Next Week

Next week will be another fairly busy one.  Corporate earnings are beginning to slow, but there will still be some big names reporting.

For economic data, we’ll get info on retail sales and inflation at the producer level.  There will be a few big reports out of China, too, that investors will likely play close attention to.

Many regional Fed members will be making speeches, as well, which always has the potential to move the market. 


Investment Strategy

We are very cautious at this point.  Stocks remain on the expensive side in the very short term.  While stocks may be higher into the end of the year, we may see more volatility as the odds of a December rate hike increases. 

Longer term, we also 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. 

Despite pulling back a bit this week, bonds prices remain high (so yields are low) as they hover near the top of the range they’ve been in the last couple months.  We are likely to continue seeing relatively low yields and high prices in bonds 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 10-30-15

It was another positive week for the market as it also closed out a solid month.  For the week, the Dow rose 2.5%, the S&P gained 2.1%, and the Nasdaq climbed 3.0%.  Bond prices fell as yields moved higher.  Gold moved opposite of stocks, falling 1.9% on the week.  Oil prices rose to $46.39 for a 3.7% gain.  The international Brent oil moved higher to $49.50 per barrel. 

Source: Google Finance

October is typically known as one of the most volatile months for stocks.  This year, however, October was the best month we’ve seen in four years.  The markets gained over 8% as they rebounded from the lows set back in September. 

Much of this gain has been on the back of the central banks and their stimulus.  Our Fed delayed a hike in interest rates and several other central banks either increased their stimulus or discussed doing so.  This helped boost stocks.

Our central bank, the Fed, was behind the moves in the market this week, too.  Stocks were lower four days this week, but the day the Fed was in the news, stocks moved sharply higher.  They held another policy meeting, announcing no changes to current policy – as expected. 

However, they did seem to talk up the chances for an increase in interest rates in December (the low rates have helped fuel the rise in stocks, so any change in this policy would be noteworthy).   In fact, before the meeting there was about a 33% chance for a rate hike in December.  The odds rose to 50% immediately after. 

Though the odds for a rate hike have increased, we’ve seen this game before – as recently as September.  The Fed will hint at a rate increase, only to step back and cite some economic concern as reason for keeping stimulus in place.  We think this scenario is likely again in December and wouldn’t be surprised to see a little extra market volatility as it approaches. 

Corporate earnings were a big story this week, though they didn’t seem to have much impact on the market.  About 40% of the companies in the S&P 500 have reported so far, with earnings and revenues (or sales) remaining on pace to decline this quarter.  According to Factset, earnings are projected to decline 2.8% and revenue is off 4%.  These numbers are an improvement from what analysts expected just a few weeks ago, but are still disappointing.   

Investors are becoming more concerned with the strength of the corporate sector.  In the past these companies had been able to boost earnings not by increasing sales, but by cutting costs.  Investors are starting to believe there is little more these companies can cut, leading to weaker earnings in the future.  Weaker earnings would result in lower stock prices.   

Economic data this week was especially poor, too.  Housing data was disappointing and durable goods (which are items that have a longer life) were down 1.2%. 

The big report was the first look at third quarter GDP, which came in at an increase of 1.5%.  This is a very soft number, below the 2% average we’ve experienced recently – which is also a weak average. 

Consumer spending was cited as a bright spot in the report as it rose a bit more than expected.  The segment with the most spending, however, was healthcare.  It’s funny that when the government requires us to buy something, it sees the highest amount of spending.  This isn’t a healthy development. 


Next Week

We’ll see a few important economic reports next week.  Employment is a major factor in the Fed’s stimulus and on Friday we’ll get a report on employment in October.  There will also be reports on the strength of the manufacturing and service sectors. 

Corporate earnings will continue to come in at a steady pace next week, too.

Finally, Fed chief Yellen and many regional Fed presidents will be out making speeches, so it will be interesting to get their outlook on the economy and the stimulus. 


Investment Strategy

Again, 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. 

Despite pulling back a bit this week, bonds prices remain high (so yields are low) as they hover near the top of the range they’ve been in the last couple months.  We are likely to continue seeing 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.