The markets spent all week in negative territory, though a decent gain Friday reduced much of the losses. For the week, the Dow fell 0.5%, the S&P lost 0.4%, and the Nasdaq fared the best with a slight decline of 0.2%. Bonds were again a big story as their prices fell and yields rose. Gold moved steadily lower all week, off 1.7%. Oil hit its lowest price since December as supply rose, falling 9.2% this week to $48.39 per barrel. The international Brent oil fell to $51.27.
Source: Google Finance
Stocks closed the week lower for the first time in seven weeks, though this wasn’t too surprising as stocks have been on the expensive side while continuing to reach new highs.
This week was also notable in that it marked the 8th anniversary of the stock market rally. The S&P 500 bottomed-out on March 9th, 2009 and has risen over 250% since that time. The rally is getting a little long in the tooth, but we aren’t seeing the crazy euphoria we saw at market tops in the past.
We have seen one noteworthy change in the market over the last few months, however. Much of the rally saw stocks very closely correlated, meaning that they would generally rise and fall in unison. Last month saw the second-least amount of correlation amongst stocks since the rally began. This is a healthy development, since companies that do well are rewarded and those that do poorly are punished. This is how investing is supposed to work.
There was not a lot of news driving the markets this week. The focus for investors was instead on next week, where the Fed will be meeting to decide on the level for interest rates. There is a near-100% chance they raise borrowing rates next week as they step back from their stimulative policies. At one time, this announcement would have weighed on the market, but it looks like investors are more focused on pro-business policies than rising rates.
This week was also notable in that it marked the 8th anniversary of the stock market rally. The S&P 500 bottomed-out on March 9th, 2009 and has risen over 250% since that time. The rally is getting a little long in the tooth, but we aren’t seeing the crazy euphoria we saw at market tops in the past.
We have seen one noteworthy change in the market over the last few months, however. Much of the rally saw stocks very closely correlated, meaning that they would generally rise and fall in unison. Last month saw the second-least amount of correlation amongst stocks since the rally began. This is a healthy development, since companies that do well are rewarded and those that do poorly are punished. This is how investing is supposed to work.
There was not a lot of news driving the markets this week. The focus for investors was instead on next week, where the Fed will be meeting to decide on the level for interest rates. There is a near-100% chance they raise borrowing rates next week as they step back from their stimulative policies. At one time, this announcement would have weighed on the market, but it looks like investors are more focused on pro-business policies than rising rates.
Helping to up the rate hike odds this week was the employment report for February. The economy added 235,000 jobs last month, above the 200,000 economists expected. The unemployment rate now stands at 4.7%. These positive reports mean less stimulus from the Fed is needed, which increased the odds of the rate hike.
Lastly, we’ll take a look at how the various sectors of the market have performed so far this year. The sectors performing the poorest are the ones that performed well when interest rates were low (they were attractive because they offer a higher yield). Investors are now fleeing those investments as interest rates increase.
Lastly, we’ll take a look at how the various sectors of the market have performed so far this year. The sectors performing the poorest are the ones that performed well when interest rates were low (they were attractive because they offer a higher yield). Investors are now fleeing those investments as interest rates increase.
Next Week
Next week looks to be a busy one. As mentioned earlier, the big news will come from the Fed as they announce the level of interest rates. Investors are expecting an increase and will also be watching for clues about how soon the next increase could come.
We’ll also see a handful of economic reports, including inflation, retail sales, housing, and industrial production.
Investment Strategy
No change here. The market is still on the expensive side in the short-term and we still believe there is greater risk to the downside than potential to move higher. We aren’t overly concerned about a significant drop, but market is long overdue for a correction.
Instead of investing in the broader market, there are a number of companies trading at attractive levels at this time. It is worth noting that the “breadth” of the market looks to be deteriorating as there are many companies are trading at discounted levels while the market is near record highs. This is something to keep an eye on.
While we are cautious in the short term, we are more optimistic in the longer run. We had been cautious on the long term – and still are to some degree – because much of the rise in the market over the past few years has been due to the central banks and their stimulus. It may have caused markets to rise, but has also distorted markets and created bubbles, which usually ends badly.
Our optimism comes from the new pro-business policies that may balance out or negate the distortions caused by the stimulus. We are unsure how this will eventually play out, but pro-growth policies will be a net positive for the economy.
Bond prices are falling and are likely to continue if interest rates rise, though bonds will begin to offer attractive yields.
As for the rest of the portfolio, 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, though they are looking cheap.
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 looks to be a busy one. As mentioned earlier, the big news will come from the Fed as they announce the level of interest rates. Investors are expecting an increase and will also be watching for clues about how soon the next increase could come.
We’ll also see a handful of economic reports, including inflation, retail sales, housing, and industrial production.
Investment Strategy
No change here. The market is still on the expensive side in the short-term and we still believe there is greater risk to the downside than potential to move higher. We aren’t overly concerned about a significant drop, but market is long overdue for a correction.
Instead of investing in the broader market, there are a number of companies trading at attractive levels at this time. It is worth noting that the “breadth” of the market looks to be deteriorating as there are many companies are trading at discounted levels while the market is near record highs. This is something to keep an eye on.
While we are cautious in the short term, we are more optimistic in the longer run. We had been cautious on the long term – and still are to some degree – because much of the rise in the market over the past few years has been due to the central banks and their stimulus. It may have caused markets to rise, but has also distorted markets and created bubbles, which usually ends badly.
Our optimism comes from the new pro-business policies that may balance out or negate the distortions caused by the stimulus. We are unsure how this will eventually play out, but pro-growth policies will be a net positive for the economy.
Bond prices are falling and are likely to continue if interest rates rise, though bonds will begin to offer attractive yields.
As for the rest of the portfolio, 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, though they are looking cheap.
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.
