Stocks spent most of the week in negative territory before a strong gain Friday pushed them higher for the week. Through Friday’s close, the Dow rose 0.6%, the S&P gained 0.4%, and the Nasdaq rose a nice 1.1%. Gold followed the opposite path to close with a 1.2% loss. Oil saw a lot of movement but closed the week with a 1.5% gain at $41.98 per barrel. The international Brent oil closed up to $44.42.
Source: Google Finance
The market had been stuck in a rut recently. It’s trended lower the last few weeks and through this week, the Dow had been lower eight of the previous nine trading days, which hasn’t happened in a year. However, a positive jobs report on Friday sent stocks sharply higher and may have broken it out of its funk.
The employment report showed a strong 255,000 jobs added, well above the 180,000 estimated. Combined with a solid 292,000 added last month, the employment picture is picking up.
Other economic data this week was decent, though not exceptional. The strength of our service and manufacturing sectors was lower than expected, but still showed growth. Personal spending and income showed improvement, too, though at a weaker level.
This news did increase the chance of the Fed pulling back on its stimulus, but the odds still remain low. Continued stimulus combined with better economic data is good for stocks.
We saw more stimulus from other central banks this week, too.
The Bank of England (BOE) announced a stimulus plan well above what the market was expecting. They lowered interest rates to the lowest level in their history and are expanding the money they print to buy government and corporate bonds.
The expanded stimulus program is a response to the concerns surrounding “Brexit.” It raised a few eyebrows since there has not been any evidence of problems. The economy still looks decent and markets have been higher, so some wonder if the response was justified.
Japan also laid out the details of their recently-expanded stimulus program. They will print more money for increased stock and bond purchases, plus they will embark on new infrastructure spending and introduce new welfare programs like cash handouts to low-income people, creating new child care facilities, and increasing college scholarships.
Of course, this is the 26th stimulus program the Japanese have announced since their real estate bubble popped in 1990. After decades of stimulus programs being ineffective in reviving the economy, we think a logical person would conclude this was the wrong prescription. Unfortunately, not a single policy maker in the world has made this conclusion and we are all following the same path as Japan. We don’t see why the results will be any different.
Other economic data this week was decent, though not exceptional. The strength of our service and manufacturing sectors was lower than expected, but still showed growth. Personal spending and income showed improvement, too, though at a weaker level.
This news did increase the chance of the Fed pulling back on its stimulus, but the odds still remain low. Continued stimulus combined with better economic data is good for stocks.
We saw more stimulus from other central banks this week, too.
The Bank of England (BOE) announced a stimulus plan well above what the market was expecting. They lowered interest rates to the lowest level in their history and are expanding the money they print to buy government and corporate bonds.
The expanded stimulus program is a response to the concerns surrounding “Brexit.” It raised a few eyebrows since there has not been any evidence of problems. The economy still looks decent and markets have been higher, so some wonder if the response was justified.
Japan also laid out the details of their recently-expanded stimulus program. They will print more money for increased stock and bond purchases, plus they will embark on new infrastructure spending and introduce new welfare programs like cash handouts to low-income people, creating new child care facilities, and increasing college scholarships.
Of course, this is the 26th stimulus program the Japanese have announced since their real estate bubble popped in 1990. After decades of stimulus programs being ineffective in reviving the economy, we think a logical person would conclude this was the wrong prescription. Unfortunately, not a single policy maker in the world has made this conclusion and we are all following the same path as Japan. We don’t see why the results will be any different.
Lastly, we are now past the peak in corporate earnings season. The numbers continue to be better than expected though are still weak. Of course, the numbers are always better than expected. The WSJ had an interesting article on the process where analysts lower their estimates just before these earnings announcements, an example seen in the nearby chart (ANALYSTS STEERED TO ‘SURPRISES’ - Companies’ nudges and phone calls lead to lower estimates that are easier to beat. LINK).
Many analysts believe this quarter and last quarter are the bottom in earnings and see higher earnings from here. However, there is an increasing worry that earnings next quarter will be negative yet again. Lower oil prices will weigh on energy companies and poor outlook from retailers show less spending is likely. This is a possibility, or like we just discussed, it’s another attempt to lower expectations so earnings will come in better than expected.
Many analysts believe this quarter and last quarter are the bottom in earnings and see higher earnings from here. However, there is an increasing worry that earnings next quarter will be negative yet again. Lower oil prices will weigh on energy companies and poor outlook from retailers show less spending is likely. This is a possibility, or like we just discussed, it’s another attempt to lower expectations so earnings will come in better than expected.
Next Week
Next week won’t be as busy as this one, but we’ll still see some important info. Retail sales, employment info, and inflation at the producer level will be economic reports worth watching. We’ll also get corporate earnings from companies like Disney and Macy’s.
Investment Strategy
The decline of the past few weeks has given stocks a little breathing room here. They are still on the expensive side overall, but we wouldn’t be surprised to see them trend a little higher from here.
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.
Next week won’t be as busy as this one, but we’ll still see some important info. Retail sales, employment info, and inflation at the producer level will be economic reports worth watching. We’ll also get corporate earnings from companies like Disney and Macy’s.
Investment Strategy
The decline of the past few weeks has given stocks a little breathing room here. They are still on the expensive side overall, but we wouldn’t be surprised to see them trend a little higher from here.
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.
