It was another volatile week that saw stocks end not far from where they started. For the week, the Dow rose 0.2%, the S&P was up 0.5%, while the Nasdaq added a solid 2.3%. Bonds prices have fallen the last two weeks as yields have risen. Gold moved steadily lower all week, falling 1.4%. Oil was also lower, down 5.5% to close at $43.19 per barrel. The international Brent oil fell to $46.05.
Source: Google Finance
Until last week, stocks had not seen a daily move of more than 1% in almost two months. Just this week we had three days with moves of more than 1%. It’s safe to say volatility has returned to the market.
The volatility has increased recently due to the upcoming Fed policy meeting. Last week, several regional Fed presidents suggested the Fed may pull back on their stimulative policy by increasing interest rates. This triggered the strong selling in the market.
Speeches from regional Fed presidents this week indicated the Fed was unlikely to raise interest rates any time soon. The news helped send stocks higher.
The mixed messages we hear from the Fed can be frustrating. They are “committed to transparency,” but sometimes this transparency can be a little too much. The strong reaction in the market the last two weeks is a perfect example of why.
Inflation data out this week also helped the markets. This is another important metric in terms of the Fed since they need to see higher inflation before pulling back on their stimulus. Inflation at the producer level (PPI) was flat over the past month and inflation at the consumer level (CPI) ticked slightly higher. On an annual basis, both are below the Fed’s target of 2%.
However, a version of inflation that doesn’t include food and energy prices – referred to as “core” inflation – has been above 2% for 10 months now. We don’t think this is an accurate measure of inflation, but it has been the preferred method for the Fed in the past, making it something to keep an eye on.
Other economic data this week was generally poor. Sales at retail companies were lower over the past month. Plus, businesses are not increasing their inventory, a signal they don’t see higher growth and sales in the future.
Poor economic data seems to be the trend around the globe. We’re hearing more concerns from investors that the central banks have gone to enormous lengths to stimulate economies but have been unable to produce results. They fear the central banks are running out of bullets and will not be able to support the markets any longer.
While we do believe these central banks will ultimately be ineffective, we think they will try to go even bigger before it ultimately unravels.
Next Week
The Fed will be in focus next week as they hold another policy meeting. There is a small chance they could raise interest rates at this meeting, but we believe it is unlikely. The language from the Fed will be important – suggestions a rate hike is near will weigh on stocks. A “patient” approach will probably give stocks a reason to move higher.
The Japanese central bank will also be holding a policy meeting. This may have even more impact on the market. They are expected to announce even more stimulus – despite doing unfathomable amounts already. The market has been greatly distorted by these policies, so any changes will see a reaction in the market.
Investment Strategy
No change here. The direction of the market is still heavily dependent on Fed policy, so it is difficult to make any predictions. It is a frustrating investing environment when the direction of the market is dependent not on economic fundamentals, but the actions – or even just the words – of central bankers.
That said, we are near an oversold (cheap) level for stocks. The market has been lower on the potential for higher interest rates, but we don’t believe the Fed will raise rates any time soon. This would be a positive for stocks and could help send them higher.
Looking out a little longer, we are very worried about the market. 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 prices fell this week as yields rose and have been trending this way for the last two months. There are talks of the bubble bursting in the bond market (where prices would fall further) and we do agree that bond prices are very high. However, we think prices will remain relatively high and yields low as demand from investors will keep prices elevated.
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.
The volatility has increased recently due to the upcoming Fed policy meeting. Last week, several regional Fed presidents suggested the Fed may pull back on their stimulative policy by increasing interest rates. This triggered the strong selling in the market.
Speeches from regional Fed presidents this week indicated the Fed was unlikely to raise interest rates any time soon. The news helped send stocks higher.
The mixed messages we hear from the Fed can be frustrating. They are “committed to transparency,” but sometimes this transparency can be a little too much. The strong reaction in the market the last two weeks is a perfect example of why.
Inflation data out this week also helped the markets. This is another important metric in terms of the Fed since they need to see higher inflation before pulling back on their stimulus. Inflation at the producer level (PPI) was flat over the past month and inflation at the consumer level (CPI) ticked slightly higher. On an annual basis, both are below the Fed’s target of 2%.
However, a version of inflation that doesn’t include food and energy prices – referred to as “core” inflation – has been above 2% for 10 months now. We don’t think this is an accurate measure of inflation, but it has been the preferred method for the Fed in the past, making it something to keep an eye on.
Other economic data this week was generally poor. Sales at retail companies were lower over the past month. Plus, businesses are not increasing their inventory, a signal they don’t see higher growth and sales in the future.
Poor economic data seems to be the trend around the globe. We’re hearing more concerns from investors that the central banks have gone to enormous lengths to stimulate economies but have been unable to produce results. They fear the central banks are running out of bullets and will not be able to support the markets any longer.
While we do believe these central banks will ultimately be ineffective, we think they will try to go even bigger before it ultimately unravels.
Next Week
The Fed will be in focus next week as they hold another policy meeting. There is a small chance they could raise interest rates at this meeting, but we believe it is unlikely. The language from the Fed will be important – suggestions a rate hike is near will weigh on stocks. A “patient” approach will probably give stocks a reason to move higher.
The Japanese central bank will also be holding a policy meeting. This may have even more impact on the market. They are expected to announce even more stimulus – despite doing unfathomable amounts already. The market has been greatly distorted by these policies, so any changes will see a reaction in the market.
Investment Strategy
No change here. The direction of the market is still heavily dependent on Fed policy, so it is difficult to make any predictions. It is a frustrating investing environment when the direction of the market is dependent not on economic fundamentals, but the actions – or even just the words – of central bankers.
That said, we are near an oversold (cheap) level for stocks. The market has been lower on the potential for higher interest rates, but we don’t believe the Fed will raise rates any time soon. This would be a positive for stocks and could help send them higher.
Looking out a little longer, we are very worried about the market. 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 prices fell this week as yields rose and have been trending this way for the last two months. There are talks of the bubble bursting in the bond market (where prices would fall further) and we do agree that bond prices are very high. However, we think prices will remain relatively high and yields low as demand from investors will keep prices elevated.
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.
