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.
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.
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.
