Stocks hit their highest levels of the year this week. Through the Friday close, the Dow rose 1.6%, the S&P gained 1.8%, and the Nasdaq added a solid 3.0%. Gold closed up a slight 0.01%, but this week also closed out its best quarter ever. Oil moved lower this week, down 7.5% to $36.63 per barrel. The international Brent oil moved lower to $38.75.
Source: Google Finance
This week also marked the end to the first quarter of 2016 – and it was a pretty wild ride for the stock market. We started out with the worst January in history (which is pretty remarkable when you think about how long a time that actually is), only to see stocks reverse course for one of the strongest rally’s in history to put stocks back to even on the year.
As for the week, stocks got off to a very quiet start. However, markets perked up on comments from Fed chief Janet Yellen on Tuesday.
Making a speech at the New York Economic Club, she discussed how global economic issues and uncertainties warranted a slower pace in raising interest rates. It was noteworthy how many times she used the word “cautious” during this speech.
Since low interest rates help stocks move higher, the market rose sharply on the news.
Mrs. Yellen also went further into what the Fed will be looking for before raising rates, summarized here by Bloomberg:
As for the week, stocks got off to a very quiet start. However, markets perked up on comments from Fed chief Janet Yellen on Tuesday.
Making a speech at the New York Economic Club, she discussed how global economic issues and uncertainties warranted a slower pace in raising interest rates. It was noteworthy how many times she used the word “cautious” during this speech.
Since low interest rates help stocks move higher, the market rose sharply on the news.
Mrs. Yellen also went further into what the Fed will be looking for before raising rates, summarized here by Bloomberg:
•Foreign economies and their financial markets need to stabilize.
•The dollar can’t appreciate further. That would depress inflation and exports, and hurt U.S. manufacturing.
•Commodity prices need to stabilize to help foreign producers find a better footing for growth.
•The housing sector needs to make a larger contribution to U.S. output.
•Inflation is a two-sided risk: Yellen is skeptical that the recent rise in core inflation, which strips out food and energy, “will prove durable.” She is watching closely.
There are many concerns listed there. But remember, the Fed was only given two mandates by Congress: full employment (which we are at) and steady prices (which means 0% inflation, not 2%). The list above shows just how far they have strayed from their assigned responsibilities.
As for economic data this week, we only had a couple reports, but they were important. Consumer spending rose 0.1% last month, in line with estimates. However, January was revised much lower, which brought down GDP expectations for the first quarter.
On the positive side, manufacturing came in better than expected and March’s employment report was solid, though in line with expectations.
Also with the quarter end, first quarter corporate earnings will start rolling in soon. The bar has been set very low here (although the bar is usually set low to make it easier to beat). According to Factset, a near-record amount of companies are warning of negative earnings.
Worth noting, much of the past weakness in earnings was attributed to a stronger dollar (which makes our exports less attractive) and low oil prices (which hurts energy companies). Both of these trends reversed this quarter – the dollar was weaker and oil higher – so they can no longer be used as an excuse. We’re interested in what the excuses will be for this quarter.
Next Week
Next week won’t be very busy for economic data. We’ll get info on factory orders, the strength of the service sector, and another report on employment (though with a one-month lag). Corporate earnings from the first quarter will start trickling, too.
We’ll also hear from several regional Fed presidents and they always have the potential to move the market.
Investment Strategy
There is still no change in our investment strategy. We appear to be in expensive territory in the short term (looking out a few weeks or so). From a medium-term perspective, we may still have more room to rise since the Fed is fixated on sending markets 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 yields moved lower again this week. We think demand will keep prices high and yields low, 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.
As for economic data this week, we only had a couple reports, but they were important. Consumer spending rose 0.1% last month, in line with estimates. However, January was revised much lower, which brought down GDP expectations for the first quarter.
On the positive side, manufacturing came in better than expected and March’s employment report was solid, though in line with expectations.
Also with the quarter end, first quarter corporate earnings will start rolling in soon. The bar has been set very low here (although the bar is usually set low to make it easier to beat). According to Factset, a near-record amount of companies are warning of negative earnings.
Worth noting, much of the past weakness in earnings was attributed to a stronger dollar (which makes our exports less attractive) and low oil prices (which hurts energy companies). Both of these trends reversed this quarter – the dollar was weaker and oil higher – so they can no longer be used as an excuse. We’re interested in what the excuses will be for this quarter.
Next Week
Next week won’t be very busy for economic data. We’ll get info on factory orders, the strength of the service sector, and another report on employment (though with a one-month lag). Corporate earnings from the first quarter will start trickling, too.
We’ll also hear from several regional Fed presidents and they always have the potential to move the market.
Investment Strategy
There is still no change in our investment strategy. We appear to be in expensive territory in the short term (looking out a few weeks or so). From a medium-term perspective, we may still have more room to rise since the Fed is fixated on sending markets 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 yields moved lower again this week. We think demand will keep prices high and yields low, 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.
