Commentary for the week ending 3-18-16

Please note: there will be no market commentary next week due to the Easter holiday.  Thank you. 

News from the Fed sent stocks sharply higher this week and are now positive on the year.  Through Friday’s close, the Dow was higher by a solid 2.2%, the S&P gained 1.3%, and the Nasdaq rose 1.0%.  The strength of the dollar fell sharply which is normally good for gold, but it lost 1.3% on the week.  Oil keeps moving higher, adding another 3.5% this week to $39.35 per barrel – again its highest level in three months.  The international Brent oil added $2 to close at $42.09.

Source: Google Finance

Stocks were very quiet early in the week as investors were in no rush to place any bets before a Fed policy meeting on Wednesday.  In fact, Monday saw the least amount of stocks traded all year and Tuesday was the second-lowest. 

Many investors believed the Fed would take another step back from its stimulative policies as economic data has been improving.  That would mean the economy is doing better, but it would be bad for stocks which are so dependent on stimulus. 

Recent economic data has been improving, too.  The Fed is focused on increasing inflation and employment, and both have surpassed levels the Fed indicated it would like to see.  Employment is at the best levels in eight years and this week we learned inflation (the core CPI, which excludes food and energy) was at the highest level since 2008.

Judging by the Fed’s own guidance, they should be pulling back on stimulus by raising interest rates. 

However, on Wednesday the Fed indicated it was less likely to raise interest rates.  They cited weakening economic conditions and concerns with overseas markets.  The four interest rate hikes anticipated for this year have been reduced to just two. 

Stocks soared on the news and continued higher for the remainder of the week. 

Investors are starting to realize the Fed will never allow the stock market to decline.  Seriously.  The market has fallen every time the Fed has stepped back from its stimulus program, which then forces them to do another round of stimulus. 

The introduction of “concerns over foreign markets” is what caught investors’ attention.  This is something far beyond the Fed’s responsibilities.  There are always problems occurring at some place on the globe at any given time, so this will always provide an excuse to continue their stimulus program. 

This may sound overdramatic.  After all, a market is a collection of individual stocks, each of which trades by its own idiosyncrasies.  They should move on earnings and outlook or changes in economic conditions.  But the chart below shows something remarkable.  It shows how much impact the Fed has on our markets – far more than any piece of economic data or corporate earnings.  

Stifel created this chart with one line showing the performance of the S&P 500 since 1997 (red line) and another line showing the performance if we excluded just the day-before and the day-of a Fed meeting (blue line).  That would be like excluding Tuesday and Wednesday of this week.  

The chart is a bit blurry, but it shows the market would be at the same level as 1997, which is about half the level it is now.  See, the day-of and day-before a Fed meeting are generally positive as they announce some kind of accommodative policy.  This has had more impact on the market than any other factor.  

Next Week

Next week will be a very quiet week for data.  We’ll get reports on housing, durable goods, and a revision to last quarter’s GDP.  None are likely to have much impact on the market. 


Investment Strategy

There is no change in our investment strategy for yet another week.  We appear to be in 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 as the Fed has practically guaranteed the market will move higher.

In the longer term we have concerns.   The stimulus of the last several years masked many problems, causing a misallocation of resources and allowing bubbles to form.  It also prevented necessary changes from occurring at both a corporate and political level.  If the stimulus is ever forced to end, 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) and they lost some ground again this week.  This was not surprising as prices have been very high and a pullback was due.  We think demand will keep prices high, though maybe not as high as we are currently seeing.

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.

Commentary for the week ending 3-11-16

A strong performance Friday put stocks into positive territory for the week.  Through the Friday close, the Dow gained 1.2%, the S&P rose 1.1%, and the Nasdaq added 0.7%.  Gold closed slightly lower, off 0.6%.  It was another higher week for oil, up 11.3% to $38.49 per barrel – its highest level in three months.  The international Brent oil, which is used to make much of the gas here on the East Coast, moved higher to close at $40.38.

Source: Google Finance

Stimulus was the topic of the week.  And the reaction in the markets shows stocks are still addicted to stimulus.

All eyes were on the European Central Bank (ECB) as they held a policy meeting this week.  The European economy is faltering, so an announcement for more stimulus was expected.

Markets were fairly quiet leading up to the Thursday ECB meeting, with investors reluctant to place any big bets before the meeting.  The ECB has made promises to do more stimulus in the past, but then failed to meet expectations.  Investors appeared more cautious this time around.  

The actual announcement, though, was for a much more aggressive stimulus plan than investors expected.  The ECB will lower already-negative interest rates in a bid to get more money out into the economy.  They will also print even more money to buy bonds, which is also supposed to get more money into the economy.  They’re even paying banks to loan out money. 

The market jumped higher on the news. 

However, stocks quickly reversed course and headed lower as investors started to wonder if this was all the ECB will be able to do to stimulate the economy.  After all, the need for such a large stimulus indicates something is wrong with the economy and they have had little success in fixing it so far.  The ECB said rates probably can’t move any lower from here, so were we at the end of all the central bank can do?

By Friday it appeared these concerns were forgotten and stocks were up sharply.  Some commentary indicated investors were relieved by fact that the ECB will pay banks to lend out money.  These low interest rates are a headwind for banks and their stocks have suffered.   The fact that the ECB will pay the banks to lend alleviated that concern.  Bank stocks were the best performers on Friday and lead the market higher. 

As we have constantly said – the fact that continued rounds of stimulus are necessary shows just how big of a failure this policy is.  The stimulus does pump up the stock market but does very little to actually help the economy. 

Switching gears, recession fears appear to be fading here in the U.S.  High yield bonds (or junk bonds) have performed well recently and turned positive on the year.  These are the bonds of riskier companies and their success shows investors are less anxious and willing to take on more risk.  Junk bonds are usually a good leading indicator for the market, so this is a positive sign.


Next Week

There will be a few economic reports investors will be watching next week – inflation at the producer and consumer levels, retail sales, and housing.

However, the focus is likely to be on another Fed policy meeting.  No change in the policy is expected, but investors will be watching for clues as to when any changes may occur – and if they will indicate less or more stimulus is likely next. 


Investment Strategy

There is still no change in our investment strategy.  We appear to be in 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) and they lost some ground this week.  This was not surprising as prices have been very high and a pullback was due.  We think demand will keep prices high, though maybe not as high as we are currently seeing.

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.

Commentary for the week ending 3-4-16

Markets turned in solid gains this week.  Through the close Friday, the Dow rose 2.2%, the S&P gained 2.7%, and the Nasdaq was higher by 2.8%.  Gold turned positive on the week, up 1.7% to its highest level in a year.  Oil rose yet again this week, up 9.9% to $36.33 per barrel.  The international Brent oil, which is used to make much of the gas here on the East Coast, moved higher to close at $38.93.

Source: Google Finance

The focus was on economic data this week.  Several important economic reports were released, with investors paying extra-close attention since these are the last set of reports before a Fed meeting in two weeks.  This is important because positive reports would increase the odds of another interest rate hike from the Fed and higher interest rates are bad for stocks. 

The economic data released this week continued a trend we’ve seen for a number of months and quarters.  Reports showing the strength of the economy were generally poor while employment unusually positive. 

Starting with the negative, the manufacturing sector remained in contraction last month, though it improved to stand at the best level since September.  The services sector is expanding, but at a much lower rate than the previous month.  Employment in the services sector report also showed a decline.  Factory orders fell.  Pending home sales fell.  Worker productivity fell, having one of the worst years in decades.

All of these reports are poor.  Yet the employment report released this week showed a surprisingly solid amount of jobs added.  We added 242,000 jobs in February when only 200,000 were expected. 

While it was a solid number, most of these jobs created were low-paying ones.  The BLS noted "job growth occurred in health care and social assistance, retail trade, food services and drinking places, and private educational services."  It’s worth considering that higher paying jobs are being lost and replaced with lower paying ones, which is how employment can be so strong when all other economic indicators are poor. 

So what did the data mean for the market this week?  It’s tough to tell.  Even the news media had a hard time figuring it out.  Below are two headlines from Reuters on Tuesday. 

As stocks rose on Tuesday, the first headline points to the poor economic data reducing the chance of a pullback in stimulus, therefore sending the market higher.  

Not two hours later, the headline changed.  The poor economic data was actually seen as positive data, since it was better than expected.  And that was the reason for the rise in stocks.  

The data this week probably confused the Fed members, too.  With some reports bad and some good, it’s tough to tell if it changed the Fed’s stance on stimulus.  The market does see a higher chance the Fed will pull back further on its stimulus by the end of this year, but really at this point, it’s anyone’s guess.


Next Week

Next week looks to be a much quieter week with very little economic data or corporate earnings releases. 

However, investors will likely be focused on Europe, where the European Central Bank will be meeting.  They have pledged more stimulus to help the economy (although it doesn’t help the economy!), so investors will be curious as to what they announce.  In the past, the ECB has made grand promises and failed to deliver, so investors are worried of another disappointment. 


Investment Strategy

There is still no change in our investment strategy.  We appear to be in 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) and they lost some ground this week.  This was not surprising as prices have been very high and a pullback was due.  We think demand will keep prices high, though maybe not as high as we are currently seeing.

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.