Commentary for the week ending 7-29-16

Excitement for stocks wore off this week as rally stalled.  Through the Friday close, the Dow was off 0.8%, the S&P 500 fell a slight 0.08%, but the Nasdaq was positive with a gain of 1.2%.  Gold turned higher to close with a 2.4% return.  Oil hit its lowest level in 3 months with a 6.5% loss to close at $41.38.  The international Brent oil closed down to $42.49.

Source: Google Finance

We saw very little volatility this week as stocks traded in a narrow range on light volume.  Corporate earnings were in focus, with some news from the central banks and a few poor economic data reports, as well.

Starting with earnings, this week was the busiest one of corporate earnings season.  More than half of the companies in the S&P 500 have now reported results and while still negative, they have been better than expected.  Better-than-expected doesn’t mean they are good, however.

Economic data released this week was mostly poor.  Sales of durable goods, which are items with a longer life like a phone or refrigerator, fell by the most in two years. 

GDP for the second quarter was surprisingly poor, too.  Expectations were for well over 2% growth, only to see the number come in at 1.2%.  Adding insult to injury, the first quarter was revised down to 0.8%.

This has been one of the weakest first-halves in years and the weakest economy recovery since WWII.  It’s quite a contrast to the positive picture we heard at the political convention this week. 

The poor economic data has reduced the chance the Fed pulls back on its stimulus any time soon.  They held a policy meeting this week where they saw an improving economy but showed little interest in raising interest rates.  It’s very unlikely they raise rates any time this year. 

The Japanese Central Bank was also out this week with an announcement on their stimulus program.  Expectations were high that new stimulus would be announced.  While they announced they will be printing twice as much money to buy stocks through ETF’s, it disappointed investors who were expecting more (although printing money to buy stocks and bonds is still madness). 

We’re seeing so much stimulus around the globe but so little economic growth.  We wonder if they will ever conclude they are applying the wrong prescription. 


Next Week

Next week will be a busy one.  We’ll get another load of corporate earnings, plus noteworthy economic reports like the strength of the manufacturing and service sectors and employment for July. 


Investment Strategy

Still no change here.  Stocks are near expensive territory and we would hesitate to put any new money in at this point.  We don’t think a significant drop is likely and stocks may even continue higher from here, but we see less upside potential at this point. 

Looking out a little further, we see headwinds for stocks but the response from central banks will have the most influence on the direction of the market.  Additional support, whether it is stimulus from printing money or lowering interest rates, will reassure the markets and likely see them head higher – or at least stem the decline. 

Looking out a little further, we remain very cautious.  All this stimulus has masked many problems, causing a misallocation of resources and allowing bubbles to form.  It prevented necessary changes from occurring at both a corporate and political level – changes that would actually help the economy.  Just how far out this day of reckoning is remains anyone’s guess, however. 

Bonds were relatively quiet this week as yields fell slightly (so prices rose slightly).  We think prices will remain high and yields low, though, as demand from investors will continue to be strong.   

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 as 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 7-22-16

Stocks notched new record highs again this week.  Through Friday’s close, the Dow was up a slight 0.3%, the S&P 500 gained 0.6%, and the Nasdaq turned in a relatively strong performance of 1.4%.  Gold moved lower for a second week, off 0.6%.  Oil declined 4.4% to close at $44.26.  The international Brent oil lost $4 to close at $45.74.

Source: Google Finance

The week was another one for the record books as both the Dow and S&P 500 hit new highs.  The Dow even notched nine-straight days of gains, something that hasn’t happened since 2013 and 1996 before that. 

However, the market seems to be stalling as the recent gains have been much smaller than when the rally began.  The volume of trades has fallen off, too, as this week saw the lightest trading volume since December.

A pause in the market here wasn’t all that surprising after stocks rapidly gained more than 8% since the Brexit bottom,

The week was fairly uneventful for news.  We saw many headlines early in the week surrounding Turkey’s failed coup and subsequent government retaliation.  It had little impact on our markets, though it did affect the emerging market sector. 

Events like this can be a wake-up call to investors seeking higher returns thru riskier investments.  These risky investments can turn on a dime.  

Several central banks around the world were in the news this week, mostly because they surprisingly announced no additional stimulus. 

The market loves stimulus, so investors were disappointed when the Bank of England announced it was waiting for more data before lowering rates further, the European Central Bank announced no increase in stimulus (though it will do so if they deem necessary), and the Bank of Japan also tapped the brakes on additional stimulus.  The BOJ has a policy meeting next week, though, so investors will be watching that closely.

Our Fed will also hold a policy meeting next week.  No changes in their stimulative policies are expected, but investors will be watching for any clues about their next meeting in September.  Economic data has improved and the market is at record highs, so there’s a chance the Fed could pull back on their stimulus and raise interest rates at that time (Updated odds).  This will weigh on the markets.

Finally, close to 30% of companies in the S&P 500 have reported earnings so far.  They’ve averaged a decline of 4.2%, which is better than the -5.3% analysts expected at the beginning of earnings season.  Of course, it is still another negative quarter, which makes it odd to see stocks at record highs.


Next Week

Next week we’ll see another relatively quiet week for economic data, with reports on housing, durable goods, and a revision to GDP.

Central banks will be a focus with both our Fed and the Bank of Japan holding policy meetings.

The week will also be busy for corporate earnings as about 35% of the companies in the S&P 500 reporting, including some big names like Apple, Caterpillar, McDonalds, and several oil companies. 


Investment Strategy

No change here.  Stocks are near expensive territory and we would hesitate to put any new money in at this point.  We don’t think a significant drop is likely and stocks may even continue higher from here, but we see less upside potential at this point. 

The Fed and BOJ meetings next week make things more unpredictable as they could have an impact with any changes to their stimulus programs. 

Looking out a little further, we remain very cautious.  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 were relatively quiet this week.  We think prices will remain high and yields low, though, as demand from investors will continue to be strong.   

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 as 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 7-15-16

It was a record-setting week for stocks.  Through the close Friday, the Dow gained 2.0%, the S&P 500 rose 1.5%, and the Nasdaq was higher by 1.5%.  Bond prices finally turned lower as yields rose.  Gold also saw a lower week, off 2.2%.  Oil moved higher by 2.6% to close at $46.28.  The international Brent oil added $3 to close at $49.56.

Source: Google Finance

Stocks had a great week – the Dow hit a record high four days this week and the S&P 500 nearly hit a high every day until a slight loss Friday.  This been a remarkable turnaround since the sharp drop after the “Brexit” vote.  Since then, both the Dow and S&P have risen more than 8% in very rapid fashion. 

What’s pushing stocks to these record highs?  A couple things, in our view.

First, these record highs could look surprising as individual investors keep pulling money out of the market.    They’ve sold for the last 17-straight weeks and at twice the level of a year ago. 

However, companies have taken advantage of low borrowing costs to take on debt in order to buy back their own stock   They’ve done so at a level far greater than the individual investors who pulled money out of the market.  The first half of the year has seen the second-highest amount of buying ever in a six-month period.  There are fewer shares outstanding of S&P 500 stocks, the first time since 2011.  Fewer stocks and more money in the market equals higher stock prices. 

Economic data has been better this month, too, which has helped the market.  Even further, the improving economy looks to have had little impact on the Fed and their stimulative policies.  They still seem set on keeping interest rates low, so low rates and an improving economy is good for the market. 

Other central banks also played a big part in the rise of the market this week.  Monday morning opened with news from Japan that the current ruling party under Shinzo Abe won a strong majority in a recent election.  Abe has supercharged the stimulus in Japan and with an even stronger majority, he’ll have an easier time pushing through even more stimulus.

Adding to this, former Fed chief Ben Bernanke was in Japan on Monday to meet with Abe and the head of the Bank of Japan.  They reportedly talked about new methods for additional stimulus, which excited the markets and sent stocks higher. 

Stocks were also helped this week when the Bank of England reported it was working on another round of stimulus by August. 

We see a lot of stimulus around the world, but haven’t seen a lot of economic growth.

Finally, corporate earnings started rolling in this week.  They are expected to decline over 5% this quarter, which would be their fifth-straight quarter of declines.  However, investors think this may be the bottom in earnings and they will start to improve in the coming quarters.  This is probably true as earnings are compared on a year-over-year basis and the very poor quarters recently make them an easy comparison to beat.  This, too, likely helped stocks this week. 


Next Week

Next week looks fairly quiet for economic data, as the most releases will be housing data.  The big news will come from corporate earnings releases, which includes some big names like Microsoft and GE. 

News of a military coup in Turkey late Friday increases political uncertainty and could add some volatility to markets next week.


Investment Strategy

Stocks are rapidly approaching expensive levels in the short run here.  We would hesitate to put any new money in at this point.  We don’t think a significant drop is likely, but we think a pause or slight decline wouldn’t be surprising. 

Looking out a little further, we remain very cautious.  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 took a turn lower this week as yields turned higher.  We think prices will remain high and yields low, though, as demand from investors will continue to be strong.   

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 as 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 7-8-16

A short week saw stocks close with a nice gain.  For the week, the Dow rose 1.1%, the S&P 500 added 1.3%, and the Nasdaq gained 1.9%.  U.S. bond yields again hit all-time lows, so bond prices are at all-time highs.  Gold again moved higher on the week with a 1.6% gain.  Oil was lower by 6.4% to close at $45.12.  The international Brent oil declined to 46.44.

Source: Google Finance

The stock market has rebounded nicely from the “Brexit” drop two weeks ago.  The sharp drop in stocks was met with nearly as sharp a bounce in the market.  The pace of the rebound moderated somewhat this week, but it still continued higher. 

An interesting note, the stock and bond markets have diverged significantly here.  While stocks rebounded, the bond market has continued to move lower (the yields have moved lower, prices higher). 

Usually investors pour money into bonds when they are worried, since bonds are seen as a safe place to park your money.  Right now money is flowing into bonds like the world is on fire. 

We aren’t sure what to make of this.  It could be an underlying fear driving investors to bonds, or it could be because central banks have so distorted bond markets around the world.  Either way, it’s something to keep an eye on.  

As for the news of the week, the big economic report came on Friday with the June employment report.  Expectations were fairly low since the previous month showed the worst amount of jobs added in six years. 

The low expectation gave the markets a surprise when the June report showed 287,000 jobs added, the best amount since October.  This number was well above even the highest estimate. 

Stocks rose on the news as it signaled a recession was not imminent.  However, it does raise the chance that the Fed raises interest rates as soon as September (LINK).  This will weigh on the market if we hear the Fed talk about raising interest rates soon. 

The Fed was also in the news this week with a release of the minutes from their latest meeting.  It told us little new.  The Fed was holding off on raising interest rates until they had more clarity on the direction of the economy.  They also wanted to see how the British vote to leave the EU would play out in the market.  They’re always looking for an excuse to not raise rates, so we don’t think they will be higher any time soon.


Next Week

Corporate earnings will be the big story next week as second quarter results start coming in.  Like always, the bar is set low here.  Factset currently expects a 5.3% decline in earnings.  They are likely to beat this figure but still be negative – the sixth quarter in a row of negative earnings. 

The week will be relatively quiet for economic data.  The big reports we’ll see next week includes data on inflation and retail sales.

There will also be many regional Fed presidents making speeches and public appearances, but little new is expected from them. 


Investment Strategy

Stocks look to be more on the expensive side in the short-term, though it still has momentum to the upside.  They could continue moving higher here, though at a more subdued pace than we have seen over the last two weeks.  Many of the indicators we follow don’t signal a sharp drop is looming. 

Despite the market rebound after the “Brexit” vote, we don’t think everything is all clear.  This process will take time to play out and it will continue to rattle markets for some time.  We think it will ultimately be a positive, but the transition process is likely to be ugly, especially if other EU countries attempt to leave.

Looking out a little further, we remain very cautious.  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 again saw a lot of attention 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.