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.
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.
