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.
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.
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.
