Commentary for the week ending 6-24-16

Please note: there will be no market commentary next week due to the 4th of July holiday.  We hope you have a great weekend. 

A sizeable loss Friday put stocks into negative territory for the week.  Through Friday’s close, the Dow and S&P 500 both lost 1.6% and the Nasdaq was down 1.9%.  U.S. bond yields rose off four-year lows this week (so prices fell), but strongly reversed course Friday to again close near four year lows.  Gold hit its highest level in two years with a 1.54% rise.  Oil fell 1.4% close at $47.57.  The international Brent oil declined to 49.04.

Source: Google Finance

By now you’ve probably heard about the “Brexit” vote, where Britain voted to leave the European Union.  The result sent markets into a panic and only safe-haven assets like gold or the dollar made it out unscathed.  Stocks had their worst day since August 2015.

The polls leading up to the vote increasingly showed a “remain” outcome was likely, though it was still a close race.  A “leave” vote would bring uncertainty to the markets – and the market hates uncertainty – so the polls showing “remain” reassured the markets and they rose steadily through Thursday.  

Of course, the vote did not go the way mot expected.  The markets face a new uncertainty since no one knows how the unwinding of Britain from the E.U. will play out.  The exit won’t happen overnight, though, as they have a couple years to work it out.

There are also concerns of an entire unraveling of the E.U. experiment.  There are many unhappy countries in the E.U.  Now knowing it is possible to leave, they may looking into doing so, or at least trying to renegotiate better terms to prevent them from leaving.  This can cause a domino effect that no one knows how will play out. 

We think this will be a positive in the long run for both England and Europe, but it could get pretty messy in the meantime.

Getting to the other news of the week, Fed chief Janet Yellen made her semi-annual testimony in front of Congress this week.  It was mostly a non-event as she told us little we didn’t expect. 

However, the tone was quite a remarkable change from just a few weeks ago.  At that time, we were talking about how an interest rate increase looked likely.  A few poor economic reports in the meantime and there isn’t a hint of an increase in interest rates in the coming months.  In fact, the odds show a greater chance of lower interest rates in the coming months rather than higher ones. 

Finally, economic data this week leaned to the negative side.  Existing home sales are at their strongest pace since 2007, but the pace of new home sales fell sharply.  Also, durable goods fell much more than expected last month. 


Next Week

The focus next week is likely to still be on the effects of the British vote.  It could be another volatile week for the markets.

We will get a couple economic reports worth watching, including the revision to first quarter GDP and the strength of the manufacturing sector.  We’ll also get info on housing and personal income and spending.

Central bank leaders from around the world, including our Fed, are also holding a meeting in Europe next week and we’re sure investors will be closely watching what they have to say. 


Investment Strategy

The question now is, did Friday’s decline provide a good buying opportunity?  Of course, no one knows for sure and it’s likely the next few weeks will be more volatile than average. 

However, next week marks the end of the quarter and you often see buying at that time as investors try to squeeze out some extra returns to help their performance metrics.  That might help support stocks for the next several days. 

Either way, we are bracing for a more volatile, active market in the coming weeks.

We can say we are very cautious in the longer-term.  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.

Bonds saw a lot of activity this week.  We think prices will remain high and yields low.  They are at extraordinary levels now so the trend may reverse, but we don’t think by much.  Our relatively higher-yielding bonds are seen as more attractive to other bonds around the world.  We think this dynamic and a “flight to safety” will keep prices high for a considerable time. 

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.

Commentary for the week ending 6-17-16

Market volatility picked up sharply this week as stocks moved lower.  For the week, the Dow fell 1.1%, the S&P lost 1.2%, and the Nasdaq fared the worst on a 1.9% drop.  U.S. government bond yields continue to fall and hit their lowest level in nearly four years (so prices rose).  Yields around the globe also hit new record lows.  Gold continued to move higher with a 1.9% gain.  Oil declined 2.2% close at $48.26.  The international Brent oil declined to 49.84.

Source: Google Finance

Investors have become a little more anxious over the last two weeks, with stocks now being down six of the last seven trading days.

One issue has been the strength of the economy.  The Fed cited the weak economy in their policy meeting this week as a reason to keep their policy unchanged and not raise interest rates. 

More concerning to investors was a lowering of future projections.  The Fed sees the headwinds facing the economy as the “new normal” and have revised down their longer-term economic growth estimates.  Having sub-2% economic growth as normal is a disconcerting thought.

Two other central banks, the Banks of England and Japan, also held policy meetings this week.  They, too, announced no changes to their economic policies.  This disappointed investors who thought they might increase stimulus as their economies also falter.

Another factor that has weighed on the market is the upcoming British election on whether to remain in the European Union.  Polls showed the “leave” vote has become more popular, which is a worry to the markets.   The benefits of remaining in the Union are debatable, but leaving would create an uncertainty in the near term – and markets hate uncertainty.

It’s sad to say, but the tragic death of the U.K. lawmaker who favored remaining in the EU likely garnered more support for her position.  The odds for “remain” immediately rose, which was a reassurance to the markets. 

Economic data this week was mixed.  Retail sales rose and inflation ticked higher, but a red flag came with industrial production, which was lower for yet another month.  It has been in negative territory for nine months now, something that has never happened outside of a recession. 

One last concern is an increase in bankruptcies.  Bloomberg keeps a “Bankruptcy Index,” which now stands at its highest level in six years.  Though the bulk of the bankruptcies are energy companies hurt by the drop in oil prices, it still signals the economy is not headed in the right direction. 

Next Week

Next week will be a little quieter for economic data.  There will be reports on housing and durable goods.

The vote in England on whether to leave or remain in the European Union will get a lot of attention.  As we discussed above, a vote to leave would rattle the markets as it introduces a new uncertainty for investors.

Fed chief Janet Yellen will testify before Congress on policy matters.  We don’t expect to hear anything new, but investors will be closely watching, anyway. 


Investment Strategy

The drop in stocks has made them a more interesting investment at this point.  There may still be some room to move lower, but it is approaching an attractive buying level for a short-term trade (a week or two or so). 

The poor economy is a concern, but it’s been a poor economy for some time now.  The market has risen primarily on stimulus and the poor economy means stimulus will be around for a while.  We think this will be a positive for stocks. 

We remain very cautious on market in the longer-term, though just how far in the future remains anyone’s guess.  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 again this week and yields fell as foreign investors flocked to our market.  Our relatively higher-yielding bonds are seen as more attractive to other bonds around the world.  We think this dynamic and a “flight to safety” will keep prices high for a considerable time. 

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.

Commentary for the week ending 6-10-16

A drop in the market Friday put a damper on what would have otherwise been a good week for stocks.  Through Friday’s close, the Dow was higher by 0.3%, the S&P fell a slight 0.1%, and the Nasdaq lost 1.0%.  U.S. government bond yields hit their lowest level in three years (so prices rose).  Gold turned in another nice week with a 2.4% gain.  Oil lost just two cents to close at $48.88.  The international Brent oil, which is used in much of our gas here in the East, rose 60 cents to $50.48.

Source: Google Finance

The week opened with an almost all-out of buying after the poor employment report last Friday.  Stocks rose.  Bonds rose (yields fell).  Gold rose.  Commodities rose.  Everything went higher.  At least until Friday, where fears of England leaving the Eurozone rattled markets.

What was behind the all-out buying early in the week?  The poor employment number significantly decreased the chances of the Fed pulling back on its stimulative policies and raising interest rates.  This market rise has been fueled by stimulus so its continuation is seen as a positive for the market, leading to all the buying.  The strong reaction in the market after the report shows how important these central bank policies are.

Fed chief Yellen also gave a speech on Monday that touched on the economy.  She concluded that rates will not rise until the “uncertainties” in the market are resolved (note: there are always uncertainties in the market).  She also reaffirmed that the Fed is committed to raising rates, but gave no indication as to when.  This gave a green light to investors. 

The bond market has been particularly impacted by the activity of these central banks and bonds were a big story this week. 

Central banks around the globe are printing money to buy bonds in an effort to create inflation and lower borrowing costs.  As they buy more and more, the prices of bonds continue to rise and yields fall. 

It’s had an especially strong impact in Europe.  Yields on bonds for European countries have fallen to all-time lows.  This is quite remarkable when you think about it – these countries have been borrowing for centuries.  The Bank of England first issued debt when it was formed in 1694 to finance wars against France.  To think that we are currently at a level never seen in this amount of time is incredible – and scary. 

It’s not just the yields of government bonds that have fallen, but corporations, as well. 

The European Central Bank began printing money to buy bonds of corporations this week.  Companies are able to issue bonds to raise money at very little cost to them.  In theory this should help companies grow, but companies have had no problem borrowing at very cheap costs in recent years and it has done little to help growth. 

This unprecedented intervention in the markets has caused concerns about bubbles brewing.  With markets at such high levels, a turn in the tide can see a swift reversal in the market. 

CNN puts out an interesting real-time metric (LINK) that looks at several pieces of market data to determine if investors are “fearful” or “greedy.”  We hit the highest “greed” level in two years this week.   As a wise investor once said, “be fearful when others are greedy and greedy when others are fearful.”

We included the chart below to see how the market behaved when compared to the fear and greed levels (the top chart is the S&P 500 and the bottom is the “greed & fear” indicator).  The vertical blue lines signal “extremely greedy” periods.  It didn’t always coincide with an immediate reversal in the markets, but a decline usually followed in the coming months.  This is something to keep an eye on. 

Next Week

We’ll see a few important economic reports next week, including retail sales, industrial production, and inflation.

The much-anticipated Fed policy meeting will be next week, too.  There is little chance the Fed will announce an increase in interest rates, but investors will be closely watching for their take on the economy in light of the poor employment reports. 


Investment Strategy

The market still appears to be on the expensive side in the short run, but all the activity by these central banks to manipulate the market makes any market predictions an exercise in futility. 

We remain very cautious on market in the longer-term, though just how far in the future remains anyone’s guess.  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 and yields fell as foreign investors flocked to our market.  Our relatively higher-yielding bonds are seen as more attractive to other bonds around the world.  We think this dynamic and a “flight to safety” will keep prices high for a considerable time. 

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.

Commentary for the week ending 6-3-16

Stocks saw some volatile days this week but closed with little change.  For the four-day week, the Dow fell 0.4%, the S&P rose a slight 0.1%, and the Nasdaq was higher by 0.2%.  Gold shot higher Friday to put it up 2.6% on the week.  Oil prices treaded water for much of the week and closed down 1.4% to $48.90 per barrel.  The international Brent oil, which is used in much of our gas here in the East, lost about 20 cents to $49.84.

Source: Google Finance

The holiday-shortened week was mostly uneventful until the jobs report was released on Friday.

The May employment report was much worse than anyone predicted.  The economy added only 38,000 jobs last month, well below expected and the lowest level in nearly six years.  The amount of jobs added the two previous months were also revised much lower. 

The unemployment rate hit 4.7%, which appears good on the surface, but comes from more people leaving the labor force and skewing the calculation.  So many people have left the labor force that the U.S. now has 94.7 million people not working, the highest amount ever. 

Many people saw employment as a bright spot in the economy, but that bright spot is really fading.

This employment report was also important because it is one of the primary metrics the Fed bases its economic policy on.  The Fed policy meeting in two weeks has increased the focus on these data points and the improving employment picture was thought to be a reason for the Fed to pull back on its stimulative policies.  This report decreased the chances of that happening.

Just last week, we mentioned the odds of an interest rate increase stood at 30%.  By Thursday, the odds were closer to 20%.  After the employment report, the odds fell to 4% (here’s a link to the current odds). 

We think the lack of a rate hike should help stocks and was surprised to see them fall as strongly as they did after the employment report.  While it is a red flag on the strength of the economy, the economy and markets have been disconnected for years, driven primarily by central bank policy.  Less stimulus, lower stocks.  More stimulus, higher stocks.  We think that trend is likely to continue here, despite Friday’s losses. 

Other economic data this week was mostly positive.  Another housing report showed home prices are within inches of their all-time highs.  Personal spending is higher, but that’s more due to higher gas prices.  The manufacturing sector also ticked higher over the past month.  However, the services sector fell to the lowest level in over two years. 


Next Week

We’ll see a quieter week for economic data next week.  There will be info on productivity, consumer credit, and an employment report, though it has a month delay.

Fed chief Janet Yellen will also be making a speech on Monday, which will be closely watched in light of the diminished odds of a rate hike this week.


Investment Strategy

As mentioned above, we were surprised to see stocks fall as sharply as they did after the employment report.  More stimulus is typically good for the market and may give it some support here. 

However, we still think stocks are on the expensive side from a short-term perspective, so we still remain cautious.  We will say, the direction of the market is so dependent on these central banks and their stimulus policies, making a call on the direction of the market very difficult.

We’d need to see the market move much lower from here before putting any significant amount of new money in. 

We remain very cautious on market in the longer-term, which 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 ticked higher this week as yields fell as those rate hike odds fell.  Bonds remain within the range we’ve seen over the last three months, though, and we don’t see any significant moves happening any time soon. 

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.