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.
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.
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.
