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.
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.
