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.
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.
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.
