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.
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.
