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.
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.
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.
