Stocks took a turn lower this week. Through the close Friday, the Dow was off 1.6%, the S&P lost 3.1%, and the Nasdaq fared the worst with a 5.4% drop. Gold continues to climb, rising a solid 5.0% to reach a three-month high. Oil lost ground, falling 8.1% to $31.00 per barrel. The international Brent oil, which is used to make much of the gas here on the East Coast, fell to $34.13.
Source: Google Finance
This week saw a lot of volatility, but again there wasn’t one thing we could point to as the reason for the moves in the market. Economic data was overwhelmingly negative, but we didn’t see it directly correlate to the market this week. Instead, it seems like investors are wondering what impact it will have on the Fed and their stimulus policies – and therefore the market.
We saw a number of poor economic reports this week. The manufacturing sector continues to contract and the service sector is slowing, hitting it worst level in two years. Worker productivity fell for yet another month. Factory orders were their worst in two years. Income and spending were up, but people aren’t buying “stuff,” the extra spending is going to the rising costs of things like homes, education, and healthcare.
Employment has typically been a bright spot in this lackluster economy, but it is beginning to slow, too. The January employment report released this week came in much lower than expected, adding 151,000 jobs when estimates were for north of 185,000. The unemployment rate did hit its lowest level since 2008 at 4.9%, but this was more a function of people who have left the labor force and are not counted.
It isn’t only economic data that is weak, but corporate earnings continue to disappoint. This week was another busy one for earnings, with about one-fifth of the companies in the S&P 500 reporting results. Earnings are coming in lower than expected and revenue – what the company actually made in sales – is also sharply lower.
This poor economic data has many investors shifting their focus to the Fed. Remember, they raised interest rates back in December citing the improving economy and projected three to four rate increases over the next year.
Another rate hike was expected in March, but now appears to be off the table due to the weaker economy. A more stimulative stance from the Fed, or at least less chance of pulling back on the stimulus, has sharply weakened our currency and pushed gold prices higher. These are good indicators to watch for estimates on future actions from the Fed.
Outside our normal discussions here, other indicators signal that a bubble may be deflating. The art and collectibles market – particularly classic cars – have seen solid, steady growth in recent years. They now appear to be turning lower.
We saw a number of poor economic reports this week. The manufacturing sector continues to contract and the service sector is slowing, hitting it worst level in two years. Worker productivity fell for yet another month. Factory orders were their worst in two years. Income and spending were up, but people aren’t buying “stuff,” the extra spending is going to the rising costs of things like homes, education, and healthcare.
Employment has typically been a bright spot in this lackluster economy, but it is beginning to slow, too. The January employment report released this week came in much lower than expected, adding 151,000 jobs when estimates were for north of 185,000. The unemployment rate did hit its lowest level since 2008 at 4.9%, but this was more a function of people who have left the labor force and are not counted.
It isn’t only economic data that is weak, but corporate earnings continue to disappoint. This week was another busy one for earnings, with about one-fifth of the companies in the S&P 500 reporting results. Earnings are coming in lower than expected and revenue – what the company actually made in sales – is also sharply lower.
This poor economic data has many investors shifting their focus to the Fed. Remember, they raised interest rates back in December citing the improving economy and projected three to four rate increases over the next year.
Another rate hike was expected in March, but now appears to be off the table due to the weaker economy. A more stimulative stance from the Fed, or at least less chance of pulling back on the stimulus, has sharply weakened our currency and pushed gold prices higher. These are good indicators to watch for estimates on future actions from the Fed.
Outside our normal discussions here, other indicators signal that a bubble may be deflating. The art and collectibles market – particularly classic cars – have seen solid, steady growth in recent years. They now appear to be turning lower.
The talks of a recession are getting louder and louder.
Next Week
Next week will be a very slow one for economic data. We’ll get a report on retail sales, import prices, and an employment report for December. There will be a large amount of companies reporting their earnings, but the pace of these releases is beginning to slow.
More investors will probably be watching the Fed chief Janet Yellen as she testifies before Congress. Sometimes we learn new information from these hearings, but more often we are reminded how clueless our Congressmen are on economic matters.
Investment Strategy
Above we discussed many reasons why the economy was weak and likely to stay weak. However, the economy and stock market have behaved largely independently of each other in recent years. We think that still may be the case, at least in the short run and as long as central banks around the world continue their experiment in central planning.
In the very short run, we would be cautious and are not looking to put any new money into the market at this time.
Looking a little farther out (a few weeks), we could see a move higher as stocks are still relatively oversold (cheap).
Graphically, it would resemble something like this (the blue dotted line):
Next Week
Next week will be a very slow one for economic data. We’ll get a report on retail sales, import prices, and an employment report for December. There will be a large amount of companies reporting their earnings, but the pace of these releases is beginning to slow.
More investors will probably be watching the Fed chief Janet Yellen as she testifies before Congress. Sometimes we learn new information from these hearings, but more often we are reminded how clueless our Congressmen are on economic matters.
Investment Strategy
Above we discussed many reasons why the economy was weak and likely to stay weak. However, the economy and stock market have behaved largely independently of each other in recent years. We think that still may be the case, at least in the short run and as long as central banks around the world continue their experiment in central planning.
In the very short run, we would be cautious and are not looking to put any new money into the market at this time.
Looking a little farther out (a few weeks), we could see a move higher as stocks are still relatively oversold (cheap).
Graphically, it would resemble something like this (the blue dotted line):
Looking even further out, 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. 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. 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.
Bonds prices rose (so yields fell) again this week 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. 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.
