The market closed a volatile week with modest losses. For the week, the Dow was lower by 1.4%, the S&P 500 fell 0.8%, and the Nasdaq declined 0.6%. Treasury bonds hit their highest prices in four years as investors sought safety. Gold also rose for this reason, hitting its highest level in a year on a 5.5% gain. A big gain in oil Friday cut into a large loss, but still closed the week off 6.4% to $29.02 per barrel. The international Brent oil, which is used to make much of the gas here on the East Coast, fell to $33.23.
Source: Google Finance
The week was a rocky one, with stocks at one point hitting their lowest level in two years. A “confluence of bad news,” as we aptly heard it described this week, is weighing on the market and investors.
We still have the same worries of weeks and months ago, like slower economic growth around the globe, poor corporate earnings, and massive government debt levels. The odds of a recession have really picked up lately, though. Markets are starting to price in a recession (specifically the bond market) and a survey out this week indicated CEO’s see increasing chance of a recession.
Perhaps most importantly, we are now starting to see investors lose faith in central bankers and their stimulus programs.
Negative interest rates from the central banks were a big topic this week. The goal of negative rates is to get money out of banks and into the economy by charging a penalty to those who leave money in the bank. Japan and several European countries now have negative rates and they seem to be doing more harm than good.
First, these rates signal desperation on the part of the central banks. It’s telling investors that they have reached the limit of all they can do to stimulate the economy and negative rates are one last Hail Mary. It appears investors have already lost faith, though.
Case in point is what unfolded in Japan this week. The stimulus and low rates are supposed to push up stock prices and weaken the currency, making their exports look more attractive to foreign buyers. The opposite happened this week.
Their currency, the Yen, surged to its strongest level in a year. Their stock market hit the lowest level in a year. All the “gains” achieved through this Abenomics stimulus program have been lost.
Even sadder, the government directed their pension plans to buy more stocks to push the market higher. Unfortunately this occurred at the height of the market and stocks have since tumbled. This will cause additional problems in an already troubled country.
Negative rates also hurt banks. Investors are already worried about banks due to the loans they made to the oil industry and the chances of default. Without getting into the details, negative rates would crimp their profitability. Investors remember how the banking collapse in 2007/2008 triggered the recession and they are watching this sector very closely.
Finally, about three-quarters of the companies in the S&P 500 have reported earnings so far. According to Factset, earnings are on pace to decline 3.7% over the past year. While it is better than the -4.7% originally expected, it does mark the second straight quarter of declines, making it a recession in corporate earnings.
Further, we have seen four straight quarters of declining sales, or revenue, which we suppose technically makes that a sales depression.
Economic fundamentals are rather poor – it looks like the market may be catching on to that.
Next Week
Next week will be a short one with the market closed on Monday. We’ll get a few important economic reports, including inflation at the producer and consumer levels, housing data, and the minutes from the latest Fed meeting.
Corporate earnings releases are starting to slow, but we’ll still hear from a few big names like Wal-Mart, Nordstrom, Discovery Communications, and MGM Resorts.
Something else to watch, the Chinese market was closed all last week due to their New Year holiday, so we may see some extra volatility as they get back to trading.
Investment Strategy
While economic fundamentals look extremely poor, we may be due for a gain in the stock market. We are again near a level we normally find an attractive buying point – at least for the short term. It doesn’t look as attractive of a buy opportunity as we thought we saw in late January – but look how well that turned out. We may very well see a little pop here, but we are still very cautious.
In the longer term we have concerns and they may be starting to manifest themselves in a longer term downtrend in the market. These are the issues we discussed above – lower earnings, poor economic growth and potential recession, and a loss of faith in central banks. The stimulus of the last several years masked many problems and caused a misallocation of resources, and at some point the market must correct itself. The questions is, when?
Bonds prices rose again this week (so yields fell) when investors sought safety. Yields are much lower than their recent range, but don’t see them bouncing back in any meaningful way in the near term. 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 and has showed it in recent weeks. It is only a hedge at this point – rising on geopolitical issues and a flight to safety.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.
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 still have the same worries of weeks and months ago, like slower economic growth around the globe, poor corporate earnings, and massive government debt levels. The odds of a recession have really picked up lately, though. Markets are starting to price in a recession (specifically the bond market) and a survey out this week indicated CEO’s see increasing chance of a recession.
Perhaps most importantly, we are now starting to see investors lose faith in central bankers and their stimulus programs.
Negative interest rates from the central banks were a big topic this week. The goal of negative rates is to get money out of banks and into the economy by charging a penalty to those who leave money in the bank. Japan and several European countries now have negative rates and they seem to be doing more harm than good.
First, these rates signal desperation on the part of the central banks. It’s telling investors that they have reached the limit of all they can do to stimulate the economy and negative rates are one last Hail Mary. It appears investors have already lost faith, though.
Case in point is what unfolded in Japan this week. The stimulus and low rates are supposed to push up stock prices and weaken the currency, making their exports look more attractive to foreign buyers. The opposite happened this week.
Their currency, the Yen, surged to its strongest level in a year. Their stock market hit the lowest level in a year. All the “gains” achieved through this Abenomics stimulus program have been lost.
Even sadder, the government directed their pension plans to buy more stocks to push the market higher. Unfortunately this occurred at the height of the market and stocks have since tumbled. This will cause additional problems in an already troubled country.
Negative rates also hurt banks. Investors are already worried about banks due to the loans they made to the oil industry and the chances of default. Without getting into the details, negative rates would crimp their profitability. Investors remember how the banking collapse in 2007/2008 triggered the recession and they are watching this sector very closely.
Finally, about three-quarters of the companies in the S&P 500 have reported earnings so far. According to Factset, earnings are on pace to decline 3.7% over the past year. While it is better than the -4.7% originally expected, it does mark the second straight quarter of declines, making it a recession in corporate earnings.
Further, we have seen four straight quarters of declining sales, or revenue, which we suppose technically makes that a sales depression.
Economic fundamentals are rather poor – it looks like the market may be catching on to that.
Next Week
Next week will be a short one with the market closed on Monday. We’ll get a few important economic reports, including inflation at the producer and consumer levels, housing data, and the minutes from the latest Fed meeting.
Corporate earnings releases are starting to slow, but we’ll still hear from a few big names like Wal-Mart, Nordstrom, Discovery Communications, and MGM Resorts.
Something else to watch, the Chinese market was closed all last week due to their New Year holiday, so we may see some extra volatility as they get back to trading.
Investment Strategy
While economic fundamentals look extremely poor, we may be due for a gain in the stock market. We are again near a level we normally find an attractive buying point – at least for the short term. It doesn’t look as attractive of a buy opportunity as we thought we saw in late January – but look how well that turned out. We may very well see a little pop here, but we are still very cautious.
In the longer term we have concerns and they may be starting to manifest themselves in a longer term downtrend in the market. These are the issues we discussed above – lower earnings, poor economic growth and potential recession, and a loss of faith in central banks. The stimulus of the last several years masked many problems and caused a misallocation of resources, and at some point the market must correct itself. The questions is, when?
Bonds prices rose again this week (so yields fell) when investors sought safety. Yields are much lower than their recent range, but don’t see them bouncing back in any meaningful way in the near term. 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 and has showed it in recent weeks. It is only a hedge at this point – rising on geopolitical issues and a flight to safety.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.
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.
