Stocks managed to halt their decline this week. Through the close Friday, the Dow was higher by 0.7%, the S&P rose 1.4%, and the Nasdaq returned 2.3%. Gold turned in a gain of 0.9%. Oil again hit new lows of more than a dozen years but closed the week with a gain. U.S. oil (WTI) rose 8.6% to $32.25 per barrel and the international Brent oil closed at $32.77.
Source: Google Finance
This week was very similar to last week in that there was little news driving the markets, just the same push and pull we’ve seen since the beginning of the year. One notable difference this week, though, was more central banks around the globe discussing the possibility of more stimulus. This likely gave some relief to worried investors.
Markets were closed here Monday, but opened the week higher on Tuesday after disappointing economic data out of China. Yes, bad news was good news again.
China reported an “official” economic growth rate of 6.8% in the fourth quarter, which is the weakest figure in 25 years. We put quotes around “official,” since very few people believe the data coming out of the government. Most analysts believe growth could be half that.
This poor report brought speculation that the Chinese central bank would again step in with more stimulus to prop up the economy – and more importantly for investors, the stock market.
Other central banks made headlines, too, with talk of further stimulus. The European Central Bank helped markets Thursday when they indicated a willingness to step in with more stimulus, if needed.
Japan also made headlines when the head of their central bank said “conditions for additional easing have fallen into place.” They will hold a policy meeting next week where they may announce further stimulus measures, likely printing more money to buy stocks.
Keep in mind, based on the size of their economy, they have already undertaken the largest stimulus program in the history of the world, printing colossal amounts of money to prop up their stock market. If it hasn’t worked yet, it never will.
While foreign central banks are discussing the potential for more stimulus, our central bank, the Fed, doesn’t appear to be in that camp. They cite improving economic conditions, especially in employment, as the basis for their shift away from stimulus.
The decline we have seen in the stock market has many investors hoping the Fed will provide more stimulus, but we hope that will not be the case. It may mean some pain in the short run, but in the end we believe it will be best for the economy.
As for economic data this week, results were again mixed. Inflation ticked down a notch, helped by lower oil prices. Worth noting, core inflation – which excludes food and energy and is a favorite of the Fed – rose to 2.1%. This is important because it is above the 2% threshold the Fed wants to see.
Other economic data included a slight improvement in manufacturing and nice increase in home sales, but also an increase in the amount of people filing for unemployment claims last week.
Next Week
Next week will be a much more active one for data. It will be the busiest week for fourth quarter corporate earnings with about one-quarter of companies in the S&P 500 reporting. We’ll get a good picture of the state of corporate America after this week.
There will also be several important economic reports. Most important will be the GDP report for the fourth quarter, but there will also be info on durable goods, housing, and consumer confidence.
Also, the Fed will be holding another policy meeting. No changes in policy are expected, so any changes in policy will have an impact on the markets.
Investment Strategy
We still believe markets are oversold (or on the cheap side), especially in the short term. The turn higher this week – especially after the sharp drop Wednesday – was a reassuring sign. Only time will tell if this marked the beginning of a turn higher or if it was just a pause before turning lower again.
Our concerns for the longer term remain unchanged. Since much of this multi-year rally has been on the back of the Fed’s stimulus, fundamental problems were ignored. Economic growth is slow, corporate earnings are poor, and debt is high. 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. 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.
Markets were closed here Monday, but opened the week higher on Tuesday after disappointing economic data out of China. Yes, bad news was good news again.
China reported an “official” economic growth rate of 6.8% in the fourth quarter, which is the weakest figure in 25 years. We put quotes around “official,” since very few people believe the data coming out of the government. Most analysts believe growth could be half that.
This poor report brought speculation that the Chinese central bank would again step in with more stimulus to prop up the economy – and more importantly for investors, the stock market.
Other central banks made headlines, too, with talk of further stimulus. The European Central Bank helped markets Thursday when they indicated a willingness to step in with more stimulus, if needed.
Japan also made headlines when the head of their central bank said “conditions for additional easing have fallen into place.” They will hold a policy meeting next week where they may announce further stimulus measures, likely printing more money to buy stocks.
Keep in mind, based on the size of their economy, they have already undertaken the largest stimulus program in the history of the world, printing colossal amounts of money to prop up their stock market. If it hasn’t worked yet, it never will.
While foreign central banks are discussing the potential for more stimulus, our central bank, the Fed, doesn’t appear to be in that camp. They cite improving economic conditions, especially in employment, as the basis for their shift away from stimulus.
The decline we have seen in the stock market has many investors hoping the Fed will provide more stimulus, but we hope that will not be the case. It may mean some pain in the short run, but in the end we believe it will be best for the economy.
As for economic data this week, results were again mixed. Inflation ticked down a notch, helped by lower oil prices. Worth noting, core inflation – which excludes food and energy and is a favorite of the Fed – rose to 2.1%. This is important because it is above the 2% threshold the Fed wants to see.
Other economic data included a slight improvement in manufacturing and nice increase in home sales, but also an increase in the amount of people filing for unemployment claims last week.
Next Week
Next week will be a much more active one for data. It will be the busiest week for fourth quarter corporate earnings with about one-quarter of companies in the S&P 500 reporting. We’ll get a good picture of the state of corporate America after this week.
There will also be several important economic reports. Most important will be the GDP report for the fourth quarter, but there will also be info on durable goods, housing, and consumer confidence.
Also, the Fed will be holding another policy meeting. No changes in policy are expected, so any changes in policy will have an impact on the markets.
Investment Strategy
We still believe markets are oversold (or on the cheap side), especially in the short term. The turn higher this week – especially after the sharp drop Wednesday – was a reassuring sign. Only time will tell if this marked the beginning of a turn higher or if it was just a pause before turning lower again.
Our concerns for the longer term remain unchanged. Since much of this multi-year rally has been on the back of the Fed’s stimulus, fundamental problems were ignored. Economic growth is slow, corporate earnings are poor, and debt is high. 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. 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.
