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.
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.
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.
