Stocks turned in solid gains on the week. Through the close Friday, the Dow rose 2.1%, the S&P 500 gained 2.3%, and the Nasdaq had an impressive 3.4% rise. Gold continued to trend lower, down 3.0%. Oil prices reached the highest level since September, rising 4.0% to close at $49.56 per barrel. The international Brent oil, which is used in much of our gas here in the East, rose to $50.08.
Source: Google Finance
The week started out very similarly to the last two. Early in the week we saw a strong market and the Dow rise by more than 200 points. The past two weeks, however, saw the Dow reverse course and immediately fall by more than 200 points the next day. That didn’t happen this week and stocks continued to rise after that initial strong gain.
Unfortunately the volume of trades was very light this week, seeing three of the four lightest trading days of the year. We like to see stocks rising on a high volume of trades as it shows conviction in the trade. This was likely due to traders getting a head start on vacation, but still, it shows there wasn’t a lot of conviction behind the higher market.
There was very little news moving the markets this week. Several economic reports released were positive, but didn’t seem to have much impact on the market. The focus still looks to be squarely on the Fed and their upcoming policy meeting in June.
The odds of an interest rate increase were raised last week as several regional Fed presidents suggested a pullback in stimulus at the June meeting was likely. Stocks fell on the news. A few more presidents making similar comments this week but it didn’t seem to rattle the market. Instead, it looks like the odds of an interest rate increase held steady over the week (LINK).
Even comments late Friday from Fed chief Janet Yellen suggested an increase in interest rates was likely in the coming months if the economic data permits, but this was little changed from her previous comments and didn’t alarm the market.
As for economic data this week, the reports were pretty positive. Housing is especially strong, with new home sales at eight-year highs and record highs in prices. Existing home sales are at the best level in ten years. GDP for the first quarter was revised higher to 0.8%, up from 0.5%. Durable goods also showed an improvement.
Worth noting, a good gauge of business investment can be found by stripping out military and aircraft orders from the durable goods number. If we were to do so, we’d see that this level has steadily declined since September. This is something to keep an eye on.
Lastly, the Wall Street Journal put out an article on the lack of growth in temp workers. As you can see in the chart below, this metric is important because the amount of temp workers tends to move lower just before recessions (the grayed area on the chart). This dynamic happens because companies tend to hire them first when the outlook is positive and terminate them first when the future looks less certain. It’s a good leading indicator to follow and the pause here is also something to keep an eye on.
Unfortunately the volume of trades was very light this week, seeing three of the four lightest trading days of the year. We like to see stocks rising on a high volume of trades as it shows conviction in the trade. This was likely due to traders getting a head start on vacation, but still, it shows there wasn’t a lot of conviction behind the higher market.
There was very little news moving the markets this week. Several economic reports released were positive, but didn’t seem to have much impact on the market. The focus still looks to be squarely on the Fed and their upcoming policy meeting in June.
The odds of an interest rate increase were raised last week as several regional Fed presidents suggested a pullback in stimulus at the June meeting was likely. Stocks fell on the news. A few more presidents making similar comments this week but it didn’t seem to rattle the market. Instead, it looks like the odds of an interest rate increase held steady over the week (LINK).
Even comments late Friday from Fed chief Janet Yellen suggested an increase in interest rates was likely in the coming months if the economic data permits, but this was little changed from her previous comments and didn’t alarm the market.
As for economic data this week, the reports were pretty positive. Housing is especially strong, with new home sales at eight-year highs and record highs in prices. Existing home sales are at the best level in ten years. GDP for the first quarter was revised higher to 0.8%, up from 0.5%. Durable goods also showed an improvement.
Worth noting, a good gauge of business investment can be found by stripping out military and aircraft orders from the durable goods number. If we were to do so, we’d see that this level has steadily declined since September. This is something to keep an eye on.
Lastly, the Wall Street Journal put out an article on the lack of growth in temp workers. As you can see in the chart below, this metric is important because the amount of temp workers tends to move lower just before recessions (the grayed area on the chart). This dynamic happens because companies tend to hire them first when the outlook is positive and terminate them first when the future looks less certain. It’s a good leading indicator to follow and the pause here is also something to keep an eye on.
Next Week
Next week looks to be a little busier. We’ll see economic data reports on the strength of the manufacturing and service sectors, personal income and spending, and the always important employment report on Friday. The jobs number will be particularly important because of the upcoming Fed meeting, where an overly positive number would increase the odds a pullback in stimulus.
Investment Strategy
The gains in the market this week very quickly sent stocks from cheap to somewhat expensive in the very short run (a few days to a couple weeks). We may have a little room to move higher, but are on the cautious side and would not look to put any new money in the market at this point.
We’d need to see the market move much lower from here before putting any significant amount of new money in. Much of the direction of the market depends on economic data and the Fed, though, as a decision whether or not to raise rates will have more impact on the market than any other factor. This is inherently unpredictable.
We remain very cautious on market in the longer-term. This could be a year or more out, though. 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 were relatively unchanged this week. They remain within the range we’ve seen over the last three months and we don’t see any significant moves happening any time soon as demand will keep prices high and yields low.
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.
Next week looks to be a little busier. We’ll see economic data reports on the strength of the manufacturing and service sectors, personal income and spending, and the always important employment report on Friday. The jobs number will be particularly important because of the upcoming Fed meeting, where an overly positive number would increase the odds a pullback in stimulus.
Investment Strategy
The gains in the market this week very quickly sent stocks from cheap to somewhat expensive in the very short run (a few days to a couple weeks). We may have a little room to move higher, but are on the cautious side and would not look to put any new money in the market at this point.
We’d need to see the market move much lower from here before putting any significant amount of new money in. Much of the direction of the market depends on economic data and the Fed, though, as a decision whether or not to raise rates will have more impact on the market than any other factor. This is inherently unpredictable.
We remain very cautious on market in the longer-term. This could be a year or more out, though. 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 were relatively unchanged this week. They remain within the range we’ve seen over the last three months and we don’t see any significant moves happening any time soon as demand will keep prices high and yields low.
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.
