Markets found some stability this week after several rough weeks. Through the Friday close, the Dow rose 0.6%, the S&P gained 0.7%, and the Nasdaq was higher by 0.8%. Bond prices did not see a lot of activity as they remained on the high side and yields on the low side. Gold closed not far from where it started, up 0.3%. Oil saw a lot of activity and closed down 1.3% to $47.86 per barrel. The international Brent oil ended the week at $52.35.
Source: Google Finance
Markets were much calmer this week and the big moves we had were to the upside. This provided some time for the wounds of the last two week to heal.
Interestingly enough, the market still looks to be trading in-line with its historical average. This could be a problem if the trend holds as we are entering what is historically the weakest part of the year.
Interestingly enough, the market still looks to be trading in-line with its historical average. This could be a problem if the trend holds as we are entering what is historically the weakest part of the year.
The week was fairly uneventful in terms of market-moving news. Washington continued to have an impact on the market as stocks rose on talks of possible tax reforms and fell on concerns about the approaching debt ceiling and a potential government shutdown.
The Fed was a focus, too, as all eyes were on their annual Jackson Hole symposium Friday and Saturday. This symposium is important because new central bank policy ideas have been announced here in the past, so investors were paying attention for anything new.
In particular, central banks have expressed a desire to pull back on their stimulus programs, so investors were looking for any new details on policy tightening. Investors don’t seem to think further tightening will come this year as the odds of another Fed interest rate hike stands at just 40%.
By the conclusion of the event we learned little new. Fed chief Janet Yellen gave a speech on the financial crisis and the regulatory reforms that were implemented as a response while avoiding discussion of current Fed policy. The head of the European Central Bank made similar comments while suggesting they will have stimulus for longer than many expect.
Switching gears, economic data this week was light but the data we received was disappointing. Home sales continue to fall, but interestingly enough, home prices continue to rise. Also, durable goods sales saw a large drop from the previous month of 6.8%, though it didn’t look that bad when you break down the individual components.
Despite the poor data this week, the economic picture looks to be improving. We’ve talked recently about the Citi Economic Surprise Index, which tracks how economic data is faring relative to expectations. The index rises when economic data is better than economist expectations and falls on the opposite
As you can see in the chart below, the index has seen a significant improvement, which means economic data has been well above expectations.
The Fed was a focus, too, as all eyes were on their annual Jackson Hole symposium Friday and Saturday. This symposium is important because new central bank policy ideas have been announced here in the past, so investors were paying attention for anything new.
In particular, central banks have expressed a desire to pull back on their stimulus programs, so investors were looking for any new details on policy tightening. Investors don’t seem to think further tightening will come this year as the odds of another Fed interest rate hike stands at just 40%.
By the conclusion of the event we learned little new. Fed chief Janet Yellen gave a speech on the financial crisis and the regulatory reforms that were implemented as a response while avoiding discussion of current Fed policy. The head of the European Central Bank made similar comments while suggesting they will have stimulus for longer than many expect.
Switching gears, economic data this week was light but the data we received was disappointing. Home sales continue to fall, but interestingly enough, home prices continue to rise. Also, durable goods sales saw a large drop from the previous month of 6.8%, though it didn’t look that bad when you break down the individual components.
Despite the poor data this week, the economic picture looks to be improving. We’ve talked recently about the Citi Economic Surprise Index, which tracks how economic data is faring relative to expectations. The index rises when economic data is better than economist expectations and falls on the opposite
As you can see in the chart below, the index has seen a significant improvement, which means economic data has been well above expectations.
Another sign of economic growth is the performance of “base” metals. These metals are commonly used in commercial and industrial purposes and include metals like copper, lead, zinc, nickel, and others. Investors see demand for these metals as a sign of economic growth since they are used to make so many things.
These base metals have been climbing over the last several months and many are trading at the highest level in several years. The chart below shows the performance of copper, which is trading at its highest level in three years. This is a positive development.
These base metals have been climbing over the last several months and many are trading at the highest level in several years. The chart below shows the performance of copper, which is trading at its highest level in three years. This is a positive development.
Next Week
With the month ending next week, we’ll get a few important economic reports, including the monthly employment figures and data on the manufacturing sector. We’ll also get info on personal income and spending, consumer confidence, and inventories.
Investment Strategy
Stocks still appear to be on the cheap side on a short term basis. We think a move higher looks more likely than a further decline. We are cautious, though, since we are entering a historically volatile part of the year for stocks.
As for our longer term view, our outlook is a little less rosy but still positive. We were hoping to see some pro-business reforms being implemented in Washington – lower taxes, regulations, etc. – but the likelihood of any significant reforms has diminished. The overall business climate is still favorable, which we think will still help the market.
Bond prices are around the high end of the range they have been trading in (so yields are on the low end). We believe yields will stay low and prices high for the foreseeable future, but don’t see a lot of upside potential in their prices at this time.
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.
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.
With the month ending next week, we’ll get a few important economic reports, including the monthly employment figures and data on the manufacturing sector. We’ll also get info on personal income and spending, consumer confidence, and inventories.
Investment Strategy
Stocks still appear to be on the cheap side on a short term basis. We think a move higher looks more likely than a further decline. We are cautious, though, since we are entering a historically volatile part of the year for stocks.
As for our longer term view, our outlook is a little less rosy but still positive. We were hoping to see some pro-business reforms being implemented in Washington – lower taxes, regulations, etc. – but the likelihood of any significant reforms has diminished. The overall business climate is still favorable, which we think will still help the market.
Bond prices are around the high end of the range they have been trading in (so yields are on the low end). We believe yields will stay low and prices high for the foreseeable future, but don’t see a lot of upside potential in their prices at this time.
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.
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.
