It was a rough week for stocks as the market sold off strongly late in the week. Through the Friday close, the Dow and S&P both fell 1.3% and the Nasdaq was hit hard with a 3.6% drop (not sure why our chart is not accurate this week). Gold had a nice week on a 3.6% rise. Oil prices reached new highs for the year, gaining 6.5% to close at $46 per barrel. The international Brent oil climbed to $47.32.
Source: Google Finance
This week had a little of everything. We had news from the central banks, from economic data, and from corporate earnings. All played a small part in the action of the market this week.
We’ll start with earnings, as a little more than half of the companies in the S&P 500 have reported earnings at this point. The results remain poor, coming in at the worst level since the financial crisis.
Remember, though, that the bar was set very low here so while the results are bad, more companies are able to beat their low estimates. According to Factset, 75% of companies beat their estimates, higher than the average of 67%. Expectations are important in guiding a share price, so the higher results helped share prices move higher.
Tech companies were a notable exception as the sector’s results were very weak. Amazon and Facebook had a solid quarter, but for the most part, tech looks lousy.
Economic data saw very poor reports this week. Starting with the GDP report from the first quarter, which came in at the weakest level in two years, signaling a weakening economy. We also saw disappointing reports on housing, durable goods, business investment, and personal spending.
Our Fed was in the news this week as they held another policy meeting. They weren’t expected to announce any changes in their policy – and they didn’t – but investors paid close attention to their commentary to see if it provided any guidance on future rate hikes.
The commentary was ambiguous as to their intentions for a rate hike (probably intentionally). They’d mention the economy preforming well in some areas, but was poor in others. Still, investors interpreted their commentary as less optimistic on the economy and were therefore less likely to raise interest rates. This gave a boost to stocks.
The Japanese central bank (the BOJ) was also in the news. Their economy is faltering despite doing the most stimulus in the history of the world. They, too, held a policy meeting this week and investors were largely expecting additional stimulus to be announced as a result.
In the end, the BOJ announced no additions to their stimulus policy and stocks plunged on the news.
Worth noting, a part of their stimulus program is to print money to buy stocks indirectly by purchasing index funds. The intention is to push up the stock market so people feel wealthier. A Bloomberg article this week reported that through these purchases, the BOJ is the top-10 shareholder in 90% of the stocks in their index. Imagine that, the government is one of the largest owners of companies in Japan!
We think this is a very dangerous activity by the BOJ and is likely to be severely harmful in the long run. These central banks are really in unchartered waters here and it will not end well.
Next Week
With the start of the new month, next week looks to be fairly busy as we get economic data for April. We’ll see reports on the strength of the manufacturing and service sectors, plus the important monthly employment report will come on Friday.
It will also be a busy week for corporate earnings, though we have passed the peak of earnings season.
Many regional Fed presidents will be making speeches, too, and they always have the potential to move the market.
Investment Strategy
Despite the late-week selloff, there is no change in our investment strategy. Stocks are still on the expensive side, though a little less so after this week.
There may still be room for the market to move lower from here, but we don’t see this as the start of another big decline like we saw at the beginning of the year. Breadth remains strong, with the amount of advancing stocks well above declining ones and new highs vastly outnumbering new lows. High yield bonds, small cap stocks, and transportation-sector stocks are all good leading indicators for the market, and they also remain strong.
From a medium-term perspective, we may still have more room to rise since the Fed is fixated on sending markets higher and they will do anything in their power to do so.
It’s the longer-term where we have the most 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 remains as to when.
Bond prices rose this week (so yields fell) and are at a very high level. We think demand will keep prices high and yields low, though.
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. 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.
We’ll start with earnings, as a little more than half of the companies in the S&P 500 have reported earnings at this point. The results remain poor, coming in at the worst level since the financial crisis.
Remember, though, that the bar was set very low here so while the results are bad, more companies are able to beat their low estimates. According to Factset, 75% of companies beat their estimates, higher than the average of 67%. Expectations are important in guiding a share price, so the higher results helped share prices move higher.
Tech companies were a notable exception as the sector’s results were very weak. Amazon and Facebook had a solid quarter, but for the most part, tech looks lousy.
Economic data saw very poor reports this week. Starting with the GDP report from the first quarter, which came in at the weakest level in two years, signaling a weakening economy. We also saw disappointing reports on housing, durable goods, business investment, and personal spending.
Our Fed was in the news this week as they held another policy meeting. They weren’t expected to announce any changes in their policy – and they didn’t – but investors paid close attention to their commentary to see if it provided any guidance on future rate hikes.
The commentary was ambiguous as to their intentions for a rate hike (probably intentionally). They’d mention the economy preforming well in some areas, but was poor in others. Still, investors interpreted their commentary as less optimistic on the economy and were therefore less likely to raise interest rates. This gave a boost to stocks.
The Japanese central bank (the BOJ) was also in the news. Their economy is faltering despite doing the most stimulus in the history of the world. They, too, held a policy meeting this week and investors were largely expecting additional stimulus to be announced as a result.
In the end, the BOJ announced no additions to their stimulus policy and stocks plunged on the news.
Worth noting, a part of their stimulus program is to print money to buy stocks indirectly by purchasing index funds. The intention is to push up the stock market so people feel wealthier. A Bloomberg article this week reported that through these purchases, the BOJ is the top-10 shareholder in 90% of the stocks in their index. Imagine that, the government is one of the largest owners of companies in Japan!
We think this is a very dangerous activity by the BOJ and is likely to be severely harmful in the long run. These central banks are really in unchartered waters here and it will not end well.
Next Week
With the start of the new month, next week looks to be fairly busy as we get economic data for April. We’ll see reports on the strength of the manufacturing and service sectors, plus the important monthly employment report will come on Friday.
It will also be a busy week for corporate earnings, though we have passed the peak of earnings season.
Many regional Fed presidents will be making speeches, too, and they always have the potential to move the market.
Investment Strategy
Despite the late-week selloff, there is no change in our investment strategy. Stocks are still on the expensive side, though a little less so after this week.
There may still be room for the market to move lower from here, but we don’t see this as the start of another big decline like we saw at the beginning of the year. Breadth remains strong, with the amount of advancing stocks well above declining ones and new highs vastly outnumbering new lows. High yield bonds, small cap stocks, and transportation-sector stocks are all good leading indicators for the market, and they also remain strong.
From a medium-term perspective, we may still have more room to rise since the Fed is fixated on sending markets higher and they will do anything in their power to do so.
It’s the longer-term where we have the most 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 remains as to when.
Bond prices rose this week (so yields fell) and are at a very high level. We think demand will keep prices high and yields low, though.
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. 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.
