Gaines early in the week helped stocks to best performance of the year. Through the Friday close, the Dow rose 2.6%, the S&P 500 climbed 2.8%, and the Nasdaq added 3.8%. Gold’s run ended this week with a 1.0% loss. Oil turned higher this week, up 2.4% to $29.72 per barrel. The international Brent oil, which is used to make much of the gas here on the East Coast, added just 60 cents to close at $33.81.
Source: Google Finance
Stocks saw some nice gains on this holiday-shortened week. News from the central banks helped stocks higher, but economic data later in the week tempered the enthusiasm.
Beginning Monday while our markets were closed, foreign markets moved higher on expectations for more stimulus from the European and Japanese central banks.
In Europe, the head of the European Central Bank cited weak economic growth as a reason to possibly announce more stimulus at their next economic meeting in March.
The poor economy was also the story in Japan, who saw their GDP come in at -1.4% on the year despite monumental amounts of stimulus. The poor number actually sent stocks to their biggest gain of the year as investors believed more stimulus was likely in Japan, too.
Continuing this theme of poor economic growth, our cooling economy here in the U.S. has led many to believe our Fed’s pullback in stimulus will be short-lived.
Minutes from their latest meeting were released this week and reflected that view. They expressed a reluctance to raise interest rates in this volatile market and deteriorating economic outlook. Investors see no chance of a rate hike at their next meeting in March and very little chance of a hike at any point this year.
Comments from a regional Fed president, James Bullard, further supported this view. Mr. Bullard has typically encouraged the Fed to pull back from its stimulus, at one time noting the Fed should raise rates four times in 2016. Comments this week, though, signal a shift in this thinking. He said it would be “unwise” to raise rates in this environment. This encouraged investors that the Fed’s accommodative stance would be with us for some time.
Last week it appeared investors were losing faith in the central banks. The market reaction this week showed stocks are still likely to rise on more stimulus – even though investors know it will do little to help the actual economy.
Despite the expectations for more stimulus early in the week, economic data released later this week may force the Fed to pull back on its stimulus.
The Fed has two main focuses: employment and inflation. Employment figures have been decent for some time, but inflation has been lower than the Fed wants to see.
Inflation data this week shows a steady increase as prices are rising. Inflation at both the producer and consumer levels was relatively flat, but core inflation (which excludes food and energy and is a favorite of the Fed) is running hot. This may prompt the Fed to raise interest rates to prevent inflation from overheating.
The potential for less stimulus put the brakes on a rebound in the stock market.
Finally, we’re on the tail end of corporate earnings releases. While earnings haven’t been as bad as expected, they are still bad. Earnings are lower for the third quarter and revenue, or sales, are lower for their fourth. We hear a lot about how poorly energy companies have fared due to lower oil prices, but little about any other sectors. Here is a breakdown from investment company Hedgeye:
Beginning Monday while our markets were closed, foreign markets moved higher on expectations for more stimulus from the European and Japanese central banks.
In Europe, the head of the European Central Bank cited weak economic growth as a reason to possibly announce more stimulus at their next economic meeting in March.
The poor economy was also the story in Japan, who saw their GDP come in at -1.4% on the year despite monumental amounts of stimulus. The poor number actually sent stocks to their biggest gain of the year as investors believed more stimulus was likely in Japan, too.
Continuing this theme of poor economic growth, our cooling economy here in the U.S. has led many to believe our Fed’s pullback in stimulus will be short-lived.
Minutes from their latest meeting were released this week and reflected that view. They expressed a reluctance to raise interest rates in this volatile market and deteriorating economic outlook. Investors see no chance of a rate hike at their next meeting in March and very little chance of a hike at any point this year.
Comments from a regional Fed president, James Bullard, further supported this view. Mr. Bullard has typically encouraged the Fed to pull back from its stimulus, at one time noting the Fed should raise rates four times in 2016. Comments this week, though, signal a shift in this thinking. He said it would be “unwise” to raise rates in this environment. This encouraged investors that the Fed’s accommodative stance would be with us for some time.
Last week it appeared investors were losing faith in the central banks. The market reaction this week showed stocks are still likely to rise on more stimulus – even though investors know it will do little to help the actual economy.
Despite the expectations for more stimulus early in the week, economic data released later this week may force the Fed to pull back on its stimulus.
The Fed has two main focuses: employment and inflation. Employment figures have been decent for some time, but inflation has been lower than the Fed wants to see.
Inflation data this week shows a steady increase as prices are rising. Inflation at both the producer and consumer levels was relatively flat, but core inflation (which excludes food and energy and is a favorite of the Fed) is running hot. This may prompt the Fed to raise interest rates to prevent inflation from overheating.
The potential for less stimulus put the brakes on a rebound in the stock market.
Finally, we’re on the tail end of corporate earnings releases. While earnings haven’t been as bad as expected, they are still bad. Earnings are lower for the third quarter and revenue, or sales, are lower for their fourth. We hear a lot about how poorly energy companies have fared due to lower oil prices, but little about any other sectors. Here is a breakdown from investment company Hedgeye:
Next Week
Next week looks to be a busy one. We’ll get economic reports on housing, durable goods, personal income and spending, and GDP for the fourth quarter.
There will be several Fed speakers, too, which always has the potential to move the markets.
Investment Strategy
The large gains early this week and late last week very quickly pushed us to expensive territory in the very short term (a few days to a week-or-so). Looking out a little longer, we may still have more room to rise.
In the longer term we have concerns. The stimulus of the last several years masked many problems and caused a misallocation of resources and bubbles to form. It also prevented necessary changes from occurring at both a corporate and political level. As the stimulus is pulled back, those flaws become more apparent. We’re now seeing lower corporate earnings, massive debt levels, poor economic growth, and potential for recession. This will weigh on the market at some point, but the question is, when?
Bond prices have been very high (and yields very low). We think demand will keep prices high, though maybe not that high. We don’t expect much change in prices in this sector.
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.
Next week looks to be a busy one. We’ll get economic reports on housing, durable goods, personal income and spending, and GDP for the fourth quarter.
There will be several Fed speakers, too, which always has the potential to move the markets.
Investment Strategy
The large gains early this week and late last week very quickly pushed us to expensive territory in the very short term (a few days to a week-or-so). Looking out a little longer, we may still have more room to rise.
In the longer term we have concerns. The stimulus of the last several years masked many problems and caused a misallocation of resources and bubbles to form. It also prevented necessary changes from occurring at both a corporate and political level. As the stimulus is pulled back, those flaws become more apparent. We’re now seeing lower corporate earnings, massive debt levels, poor economic growth, and potential for recession. This will weigh on the market at some point, but the question is, when?
Bond prices have been very high (and yields very low). We think demand will keep prices high, though maybe not that high. We don’t expect much change in prices in this sector.
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.
