Stocks turned in their worst week in two months, though they were not down by much. Through Friday’s close, the Dow fell 0.8%, the S&P lost 0.7%, and the Nasdaq was off 0.4%. Gold lost 1.6%. Oil was down, too, off 2.6% to close at $47.29 per barrel. The international Brent oil lost a little more than $1 to close at $49.57.
Source: Google Finance
The week was mostly a quiet one as investors waited on Friday’s speech from Fed chair Yellen on their economic policy. Few investors wanted to place any big bets and be caught on the wrong side of the trade if she said something to move the market. Monday saw the second-lowest trading volume of the year while Thursday saw the third-lowest volume.
Needless to say, it’s been quiet out there. Just how quiet? According to the Wall Street Journal, the past month has been the least volatile in 20 years.
Needless to say, it’s been quiet out there. Just how quiet? According to the Wall Street Journal, the past month has been the least volatile in 20 years.
There is an old adage in the investment community – never short a dull market (a “short” is a bet on the market going down). History has shown this to be accurate as the market typically rises over the next year. Although the data also shows the markets often rise after a volatile period, so maybe that adage isn’t very insightful.
At any rate, investors were anxious to hear from Janet Yellen at their annual symposium in Jackson Hole. Ultimately she told us little new. She cited the improving economy strengthening the case for raising interest rates and pulling back on their stimulative policy. But then she noted they are “data dependent” and economic data could sway their decisions.
We’ve heard this speech many times before and the market saw it as a signal no rate hike was imminent. Stocks rose on the news.
Shortly thereafter, other regional Fed Presidents hit the airwaves and indicated an interest rate increase was near. Stocks then fell on the news.
This is one of the frustrations with the Fed. They have many different voices painting different pictures, making it difficult to get a grasp on their policy. They say this indicates their transparency, but it has been of little help.
Some interesting comments came from long-time economist and current Stanford professor John Taylor (LINK). He noted he was probably the only person to have attended the first policy conference in Jackson Hole in 1982 and all years since.
He commented on the differences between the initial event versus today. For example, at that time, no one cared what Fed officials would say. No other central bankers participated. Only four reporters covered the event.
Today is the opposite. Central bankers from all over the world participate and scores of reporters cover the event. Significant economy policy approaches can emerge.
The change shows how important the Fed has become in establishing economic policy – something that was never the intent of its establishment. In our view, this increasing role has contributed to the weak economies we currently see around the world.
Next Week
With the chance of an interest rate hike on the table, investors will be closely watching economic data and evaluating its influence on Fed policy.
Next week has a few reports to watch, including data on inflation and the monthly employment report. We’ll also get info on personal income and spending, the strength of the manufacturing sector. Many regional Fed presidents will be making speeches, too.
We could see volatility return to the markets next week.
Investment Strategy
The slow drift lower of stocks has put them at a fairly cheap level in the short-term (a week to a few weeks). There may be room to move a bit lower, but we wouldn’t be surprised to see stocks start to move higher soon.
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 ease the decline.
In the long term we remain very cautious. The money printed through 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 again quiet this week as yields rose slightly (so prices fell 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.
At any rate, investors were anxious to hear from Janet Yellen at their annual symposium in Jackson Hole. Ultimately she told us little new. She cited the improving economy strengthening the case for raising interest rates and pulling back on their stimulative policy. But then she noted they are “data dependent” and economic data could sway their decisions.
We’ve heard this speech many times before and the market saw it as a signal no rate hike was imminent. Stocks rose on the news.
Shortly thereafter, other regional Fed Presidents hit the airwaves and indicated an interest rate increase was near. Stocks then fell on the news.
This is one of the frustrations with the Fed. They have many different voices painting different pictures, making it difficult to get a grasp on their policy. They say this indicates their transparency, but it has been of little help.
Some interesting comments came from long-time economist and current Stanford professor John Taylor (LINK). He noted he was probably the only person to have attended the first policy conference in Jackson Hole in 1982 and all years since.
He commented on the differences between the initial event versus today. For example, at that time, no one cared what Fed officials would say. No other central bankers participated. Only four reporters covered the event.
Today is the opposite. Central bankers from all over the world participate and scores of reporters cover the event. Significant economy policy approaches can emerge.
The change shows how important the Fed has become in establishing economic policy – something that was never the intent of its establishment. In our view, this increasing role has contributed to the weak economies we currently see around the world.
Next Week
With the chance of an interest rate hike on the table, investors will be closely watching economic data and evaluating its influence on Fed policy.
Next week has a few reports to watch, including data on inflation and the monthly employment report. We’ll also get info on personal income and spending, the strength of the manufacturing sector. Many regional Fed presidents will be making speeches, too.
We could see volatility return to the markets next week.
Investment Strategy
The slow drift lower of stocks has put them at a fairly cheap level in the short-term (a week to a few weeks). There may be room to move a bit lower, but we wouldn’t be surprised to see stocks start to move higher soon.
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 ease the decline.
In the long term we remain very cautious. The money printed through 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 again quiet this week as yields rose slightly (so prices fell 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.
