The markets managed to close in the green for yet another week. Through the Friday close, the Dow rose a solid 2.3%, the S&P gained 1.7%, though the Nasdaq was slightly higher by 0.4%. Gold was again positive, up 1.8%. Oil closed the week with a strong gain of 4.6% to $33.74 per barrel while the international Brent oil rose to $35.87.
Source: Google Finance
Even though stocks only saw modest gains this week, the performance was a good sign. It signals we may be turning the corner for stocks to move higher.
Of course, this comes after the worst January performance for stocks since 2009. As the old Trader’s Almanac says, “As goes January, so goes the year.” While this saying has proved fairly accurate – being correct 75% of the time – the last four January's that were lower (2009, 10, 14, and 15) saw stocks end the year higher. We don’t put much faith in these sayings, but it’s pretty much obligatory to note this phenomenon after every January.
As for the markets this week, there were a few stories helping stocks move higher. Central banks continue to make news and corporate earnings had their busiest week of results.
Starting with the central banks, news from our central bank, the Fed, actually drove stocks sharply lower Wednesday.
They held the first policy meeting of the year and the first since raising interest rates last year. Since then, economic growth has weakened and stock markets have fallen. This had many investors hoping the Fed would indicate a willingness to support the market again, possibly by expressing an openness to more stimulus and backing off future interest rate increases.
That wasn’t the case. The Fed did acknowledge weaknesses, but showed no signs of backing off future rate increases. This disappointed the market – which loves stimulus – and stocks moved lower as a result.
While the Fed may talk about future rate increases, the market doesn’t believe it. Especially as nearly every other major central bank is committed to more stimulus.
Case in point, Japan made headlines as their central bank introduced negative interest rates for the first time. The goal is to get money out of banks and into the economy by charging a penalty to those who leave money in the bank.
To us, it shows a desperation on their part. The central bank already prints massive amounts of money to buy stocks and bonds to prop up the economy, but it has failed to produce any results.
Like we mentioned above, stocks like stimulus and rose as a result of the news. With all these other banks moving towards more stimulus, it also makes higher interest rates from the Fed less likely.
Switching to corporate earnings, which had their busiest week of the season as 27% of companies in the S&P 500 reported results. Earnings have been described as positive on the business TV channels and there were some large names reporting decent results. Overall, though, earnings have been very poor.
Coming in to earnings season, Factset reports that estimates were for a 4.7% decline in earnings. At this point, however, earnings are coming in worse than expected at -5.7%. This marks the third quarter of lower earnings, meaning we are in a recession for earnings. The earnings picture just isn’t very good.
Finally, economic data this week was on the poor side. Reports on housing were decent, but retail sales were strongly lower and GDP in the fourth quarter was very weak. Relating this back to the Fed, these weak reports mean less chance of pulling back from stimulus, which helped push markets higher.
One last note, we came across an article on an “artist” who painted the charts of several stocks in the recent decline. Nothing but a black line on a white canvas, 12 of these paintings were created and each sold for $10,000. If the stock market keeps declining, we may consider a career change as we could easily paint something better than that!
Of course, this comes after the worst January performance for stocks since 2009. As the old Trader’s Almanac says, “As goes January, so goes the year.” While this saying has proved fairly accurate – being correct 75% of the time – the last four January's that were lower (2009, 10, 14, and 15) saw stocks end the year higher. We don’t put much faith in these sayings, but it’s pretty much obligatory to note this phenomenon after every January.
As for the markets this week, there were a few stories helping stocks move higher. Central banks continue to make news and corporate earnings had their busiest week of results.
Starting with the central banks, news from our central bank, the Fed, actually drove stocks sharply lower Wednesday.
They held the first policy meeting of the year and the first since raising interest rates last year. Since then, economic growth has weakened and stock markets have fallen. This had many investors hoping the Fed would indicate a willingness to support the market again, possibly by expressing an openness to more stimulus and backing off future interest rate increases.
That wasn’t the case. The Fed did acknowledge weaknesses, but showed no signs of backing off future rate increases. This disappointed the market – which loves stimulus – and stocks moved lower as a result.
While the Fed may talk about future rate increases, the market doesn’t believe it. Especially as nearly every other major central bank is committed to more stimulus.
Case in point, Japan made headlines as their central bank introduced negative interest rates for the first time. The goal is to get money out of banks and into the economy by charging a penalty to those who leave money in the bank.
To us, it shows a desperation on their part. The central bank already prints massive amounts of money to buy stocks and bonds to prop up the economy, but it has failed to produce any results.
Like we mentioned above, stocks like stimulus and rose as a result of the news. With all these other banks moving towards more stimulus, it also makes higher interest rates from the Fed less likely.
Switching to corporate earnings, which had their busiest week of the season as 27% of companies in the S&P 500 reported results. Earnings have been described as positive on the business TV channels and there were some large names reporting decent results. Overall, though, earnings have been very poor.
Coming in to earnings season, Factset reports that estimates were for a 4.7% decline in earnings. At this point, however, earnings are coming in worse than expected at -5.7%. This marks the third quarter of lower earnings, meaning we are in a recession for earnings. The earnings picture just isn’t very good.
Finally, economic data this week was on the poor side. Reports on housing were decent, but retail sales were strongly lower and GDP in the fourth quarter was very weak. Relating this back to the Fed, these weak reports mean less chance of pulling back from stimulus, which helped push markets higher.
One last note, we came across an article on an “artist” who painted the charts of several stocks in the recent decline. Nothing but a black line on a white canvas, 12 of these paintings were created and each sold for $10,000. If the stock market keeps declining, we may consider a career change as we could easily paint something better than that!
Next Week
We’ll see another busy week next week. About a fifth of the companies in the S&P 500 will be reporting results, plus there will be several important economic reports, like the strength of the manufacturing and service sectors, productivity, factory data, and the always important employment report.
Central banks will also be in the news as several of our Fed members will be making speeches, plus the heads of several banks around the globe. This always has a chance to move the markets.
Investment Strategy
We believed stocks were strongly oversold (cheap) – at least in the short run – so it wasn’t surprising to see them turn higher. Only time will tell if this marked the beginning of a turn higher or if it was just a pause before turning lower again.
While we think the market is likely to rise in the short term, longer term we have concerns. There are three things moving against stocks – lower earnings, poor economic growth, and the Fed pulling back from stimulus. Since much of this rally has been on the back of the Fed’s stimulus, those fundamental problems were ignored. These issues become more apparent now as the stimulus is pulled back.
Bonds prices rose (so yields fell) again this week when investors sought safety. Prices have been in this range for months now and we continue to believe they will stay in this range for the foreseeable future. A weak economy and demand from overseas will keep bond demand high (which keeps prices high and yields low).
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. 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.
We’ll see another busy week next week. About a fifth of the companies in the S&P 500 will be reporting results, plus there will be several important economic reports, like the strength of the manufacturing and service sectors, productivity, factory data, and the always important employment report.
Central banks will also be in the news as several of our Fed members will be making speeches, plus the heads of several banks around the globe. This always has a chance to move the markets.
Investment Strategy
We believed stocks were strongly oversold (cheap) – at least in the short run – so it wasn’t surprising to see them turn higher. Only time will tell if this marked the beginning of a turn higher or if it was just a pause before turning lower again.
While we think the market is likely to rise in the short term, longer term we have concerns. There are three things moving against stocks – lower earnings, poor economic growth, and the Fed pulling back from stimulus. Since much of this rally has been on the back of the Fed’s stimulus, those fundamental problems were ignored. These issues become more apparent now as the stimulus is pulled back.
Bonds prices rose (so yields fell) again this week when investors sought safety. Prices have been in this range for months now and we continue to believe they will stay in this range for the foreseeable future. A weak economy and demand from overseas will keep bond demand high (which keeps prices high and yields low).
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. 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.
