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.
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.
