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.
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.
