Commentary for the week ending 6-3-16

Stocks saw some volatile days this week but closed with little change.  For the four-day week, the Dow fell 0.4%, the S&P rose a slight 0.1%, and the Nasdaq was higher by 0.2%.  Gold shot higher Friday to put it up 2.6% on the week.  Oil prices treaded water for much of the week and closed down 1.4% to $48.90 per barrel.  The international Brent oil, which is used in much of our gas here in the East, lost about 20 cents to $49.84.

Source: Google Finance

The holiday-shortened week was mostly uneventful until the jobs report was released on Friday.

The May employment report was much worse than anyone predicted.  The economy added only 38,000 jobs last month, well below expected and the lowest level in nearly six years.  The amount of jobs added the two previous months were also revised much lower. 

The unemployment rate hit 4.7%, which appears good on the surface, but comes from more people leaving the labor force and skewing the calculation.  So many people have left the labor force that the U.S. now has 94.7 million people not working, the highest amount ever. 

Many people saw employment as a bright spot in the economy, but that bright spot is really fading.

This employment report was also important because it is one of the primary metrics the Fed bases its economic policy on.  The Fed policy meeting in two weeks has increased the focus on these data points and the improving employment picture was thought to be a reason for the Fed to pull back on its stimulative policies.  This report decreased the chances of that happening.

Just last week, we mentioned the odds of an interest rate increase stood at 30%.  By Thursday, the odds were closer to 20%.  After the employment report, the odds fell to 4% (here’s a link to the current odds). 

We think the lack of a rate hike should help stocks and was surprised to see them fall as strongly as they did after the employment report.  While it is a red flag on the strength of the economy, the economy and markets have been disconnected for years, driven primarily by central bank policy.  Less stimulus, lower stocks.  More stimulus, higher stocks.  We think that trend is likely to continue here, despite Friday’s losses. 

Other economic data this week was mostly positive.  Another housing report showed home prices are within inches of their all-time highs.  Personal spending is higher, but that’s more due to higher gas prices.  The manufacturing sector also ticked higher over the past month.  However, the services sector fell to the lowest level in over two years. 


Next Week

We’ll see a quieter week for economic data next week.  There will be info on productivity, consumer credit, and an employment report, though it has a month delay.

Fed chief Janet Yellen will also be making a speech on Monday, which will be closely watched in light of the diminished odds of a rate hike this week.


Investment Strategy

As mentioned above, we were surprised to see stocks fall as sharply as they did after the employment report.  More stimulus is typically good for the market and may give it some support here. 

However, we still think stocks are on the expensive side from a short-term perspective, so we still remain cautious.  We will say, the direction of the market is so dependent on these central banks and their stimulus policies, making a call on the direction of the market very difficult.

We’d need to see the market move much lower from here before putting any significant amount of new money in. 

We remain very cautious on market in the longer-term, which could be a year or more out, though.  The stimulus of the last several years masked many problems, causing a misallocation of resources and allowing bubbles to form.  It also prevented necessary changes from occurring at both a corporate and political level.  If the stimulus is ever forced to end, those flaws become more apparent.  We’re now seeing lower corporate earnings, massive debt levels, poor economic growth, and potential for recession.  This will weigh on the market at some point, but the question remains as to when.

Bond prices ticked higher this week as yields fell as those rate hike odds fell.  Bonds remain within the range we’ve seen over the last three months, though, and we don’t see any significant moves happening any time soon. 

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 and 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.

Commentary for the week ending 5-27-16

Stocks turned in solid gains on the week.  Through the close Friday, the Dow rose 2.1%, the S&P 500 gained 2.3%, and the Nasdaq had an impressive 3.4% rise.  Gold continued to trend lower, down 3.0%.  Oil prices reached the highest level since September, rising 4.0% to close at $49.56 per barrel.  The international Brent oil, which is used in much of our gas here in the East, rose to $50.08.

Source: Google Finance

The week started out very similarly to the last two.  Early in the week we saw a strong market and the Dow rise by more than 200 points.  The past two weeks, however, saw the Dow reverse course and immediately fall by more than 200 points the next day.  That didn’t happen this week and stocks continued to rise after that initial strong gain. 

Unfortunately the volume of trades was very light this week, seeing three of the four lightest trading days of the year.  We like to see stocks rising on a high volume of trades as it shows conviction in the trade.  This was likely due to traders getting a head start on vacation, but still, it shows there wasn’t a lot of conviction behind the higher market. 

There was very little news moving the markets this week.  Several economic reports released were positive, but didn’t seem to have much impact on the market.  The focus still looks to be squarely on the Fed and their upcoming policy meeting in June.

The odds of an interest rate increase were raised last week as several regional Fed presidents suggested a pullback in stimulus at the June meeting was likely.  Stocks fell on the news.  A few more presidents making similar comments this week but it didn’t seem to rattle the market.  Instead, it looks like the odds of an interest rate increase held steady over the week (LINK). 

Even comments late Friday from Fed chief Janet Yellen suggested an increase in interest rates was likely in the coming months if the economic data permits, but this was little changed from her previous comments and didn’t alarm the market. 

As for economic data this week, the reports were pretty positive.  Housing is especially strong, with new home sales at eight-year highs and record highs in prices.  Existing home sales are at the best level in ten years.  GDP for the first quarter was revised higher to 0.8%, up from 0.5%.  Durable goods also showed an improvement.

Worth noting, a good gauge of business investment can be found by stripping out military and aircraft orders from the durable goods number.  If we were to do so, we’d see that this level has steadily declined since September.  This is something to keep an eye on. 

Lastly, the Wall Street Journal put out an article on the lack of growth in temp workers.  As you can see in the chart below, this metric is important because the amount of temp workers tends to move lower just before recessions (the grayed area on the chart).  This dynamic happens because companies tend to hire them first when the outlook is positive and terminate them first when the future looks less certain.  It’s a good leading indicator to follow and the pause here is also something to keep an eye on. 

Next Week

Next week looks to be a little busier.  We’ll see economic data reports on the strength of the manufacturing and service sectors, personal income and spending, and the always important employment report on Friday.  The jobs number will be particularly important because of the upcoming Fed meeting, where an overly positive number would increase the odds a pullback in stimulus. 


Investment Strategy

The gains in the market this week very quickly sent stocks from cheap to somewhat expensive in the very short run (a few days to a couple weeks).  We may have a little room to move higher, but are on the cautious side and would not look to put any new money in the market at this point. 

We’d need to see the market move much lower from here before putting any significant amount of new money in.  Much of the direction of the market depends on economic data and the Fed, though, as a decision whether or not to raise rates will have more impact on the market than any other factor.  This is inherently unpredictable.

We remain very cautious on market in the longer-term.  This could be a year or more out, though.  The stimulus of the last several years masked many problems, causing a misallocation of resources and allowing bubbles to form.  It also prevented necessary changes from occurring at both a corporate and political level.  If the stimulus is ever forced to end, those flaws become more apparent.  We’re now seeing lower corporate earnings, massive debt levels, poor economic growth, and potential for recession.  This will weigh on the market at some point, but the question remains as to when.

Bond prices were relatively unchanged this week.  They remain within the range we’ve seen over the last three months and we don’t see any significant moves happening any time soon as demand will keep prices high and yields low. 

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 and 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.

Commentary for the week ending 5-20-16

The market opened the week with a strong gain, only to trend lower thereafter.  For the week, the Dow was slightly lower by 0.2%, the S&P was up 0.3%, and the Nasdaq fared the best with a 1.1% gain.  Gold moved lower, off 2.0%.  Oil prices were higher, gaining 1.8% to close at $47.67 per barrel.  The international Brent oil, which is used in much of our gas here in the East, rose to $49.29.

Source: Google Finance

Before we get into the week, we should first note that it was exactly one year ago when the markets last reached new all-time highs.  Over the past year stocks have seen very large swings and now stand about 4% below those highs of a year ago. 

This volatile period is a stark contrast to the previous five years where the market rarely moved lower.  Of course, those previous five years also saw unprecedented Fed involvement in boosting the market.  They have since begun pulling back from these policies and it’s not a coincidence the market is volatile when the stimulus is pulled back.

As for the week, it was oddly similar to last week.  Early on, we saw the Dow rising over 200 points, only for it to lose over 200 points the next day and trend lower thereafter.  This week it was news from the Fed causing the volatility. 

Minutes from the last Fed meeting were released and the tone was much different than many traders expected.  The Fed’s discussions suggested an increase in interest rates at their next meeting in June is very possible. 

Very few investors thought a June rate hike was possible.  The CME puts out a handy tool which analyzes bond market data to determine the odds the market is giving to a Fed rate hike (LINK).  On Monday, the odds of a June rate increase stood at 4%.  Immediately after the release of the Fed minutes, the odds rose above 50%.  The level has since moderated and now stands at 30%, but it is still a significant increase from the beginning of the week.  

Low interest rates have helped the stock market rise, so stocks sold off as rate-hike odds increased. 

Continuing with bonds, the behavior of the bond market was a big story this week.  Bonds can be boring, but the bond market can be a very good leading indicator so stay with us here as this can be a little dry. 

The yield curve is an important metric in the bond market, where a graph is drawn to show the relationship between Interest rates (yields) and maturities.  Short term bonds generally pay a lower interest rate and longer term bonds pay a higher rate.  This is shown graphically where the line slopes upward to the right.

Why is this important?  Sometimes the slope of the line is flat or down (also referred to as inverted), which signals trouble is ahead.  Shorter-term bonds have higher yields than longer-term ones.  The yield curve is trending that way right now and is at its flattest level since 2007.  We all remember how much the market fell shortly thereafter. 

To see this visually, below is a chart showing the slope of the yield curve at present.  Also are two other charts with inverted curves – sloping downward from left to right – which came right before market collapses.

The bond market is important to keep an eye on.  However, we believe the market is skewed due to the massive involvement of central banks printing money and buying bonds.  This distorts the market, we just aren’t sure to what extent.  


Next Week

Next week looks to be a little quieter.  We’ll get economic data on housing, retail sales, and the revision to first quarter GDP.  All economic data will be closely scrutinized now, with positive reports likely weighing on the market since it increases the chances of a Fed rate hike in June. 

There will also be a handful of regional Fed presidents making speeches, plus Fed Chief Janet Yellen will be speaking on Friday.  These always have the potential to move the market. 


Investment Strategy

It looks to us like the stock market is at a slightly oversold level in the short-term and wouldn’t be surprised if stocks moved a little higher. 

We are still cautious as the slightly-longer term trend looks to be lower.  We’d need to see the market move much lower from here before putting any significant amount of new money in.  Much of the direction of the market depends on economic data and the Fed, though, as a decision whether or not to raise rates will have more impact on the market than any other factor.  This is inherently unpredictable.

We are very cautious on market in the longer-term, though.  This could be a year or more out, though.  The stimulus of the last several years masked many problems, causing a misallocation of resources and allowing bubbles to form.  It also prevented necessary changes from occurring at both a corporate and political level.  If the stimulus is ever forced to end, those flaws become more apparent.  We’re now seeing lower corporate earnings, massive debt levels, poor economic growth, and potential for recession.  This will weigh on the market at some point, but the question remains as to when.

Bond prices fell this week (so yields rose) as the odds of a Fed rate hike increased.  However, bond yields are still within the range we’ve seen over the last three months and we don’t see any significant moves happening any time soon as demand will keep prices high and yields low. 

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 and 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.

Commentary for the week ending 5-6-16

It’s that time of year again.  As many of you know, our office is located at the entrance of TPC Sawgrass, home of the Players Championship. Tournament practice rounds begin Monday and we will be attending for much of the week. However, we will be in the office every day, though our hours will vary day-to-day. We will continue to monitor the market even though we may not be in the office.  Any phone calls not immediately answered will be returned the same day. We foresee little to no inconvenience to our clients and hope for your understanding. There will be no market commentary next week.  Thank you.

Stocks kicked off the week on a strong note but trended lower thereafter.  Through Friday’s close, the Dow lost 0.2%, the S&P 500 fell 0.4%, and the Nasdaq had another very poor week falling 0.8%.  Gold was slightly lower, down 0.4%.  Oil prices finally had a losing week, lower by 3.1% to close at $44.56 per barrel.  The international Brent oil, which is used in much of our gas here in the east, fell to $45.28.

Source: Google Finance

The momentum in the market has been to the downside since mid-April and poor economic data released this week helped continue that downtrend.

The big report came on Friday with the employment data for April.  The figure was a disappointing 160,000 jobs added, well below expectations of over 200,000.  This was the weakest level in seven months. 

Stocks were initially lower on the report, but poor employment means less chance for the Fed to pull back on its stimulus and raise interest rates, so this helped stocks move higher.  We can’t forget how important that stimulus has been for the market.

Other data this week was disappointing, too.  One important metric we don’t talk much about is productivity, which measures the output of a worker. 

We are in one of the worst stretches ever for productivity.  First quarter data shows workers are putting in more hours and their wages are rising, but the amount of output from each employee is declining.

This is important because it could help explain why hiring has been so strong (until this month, that is).  Employers get little out of the workers they have and must hire more workers to keep up with demand.  This hurts a company’s profitability as the new workers add to costs, which hurts even more with the recent minimum wage hikes. 

The lower productivity is a factor weighing on the bottom line of businesses. 

We also had data on the strength of the manufacturing and service sectors this week.  Manufacturing was slightly lower over last month and the service sector was slightly stronger.  They both remain below levels of last December, however.

Economic data from China was also disappointing.  With global factors weighing more on our market these days, this also had an impact on stocks this week.  Despite adding roughly $1 trillion in stimulus in the first quarter (as new debt issuance), Chinese manufacturing remains weak.  Australia acknowledged their commodity exports to China were slowing, confirming a slowdown in China. 

Finally, we are in the latter part of corporate earnings season for the first quarter.  Earnings are on pace to decline just over 7%, making this the fourth-straight quarter of declines. 

This 7% figure is slightly better than the 7.5% drop analysts were expecting, so this earnings season was seen as a success despite being the worst level since the financial crisis.  We will note, this low level in earnings may mark a bottom so earnings going forward may look better. 


Next Week

It will be fairly quiet for economic data with the only notable reports coming on Friday with data on retail sales and inflation at the producer level.  Earnings releases are slowing, but we’ll still hear from some big names like Disney, Macy’s, and Honda.

Many regional Fed presidents will be making speeches.  These usually have the potential to move the market, but the poor economic data has decreased the chances of a rate hike any time soon.   Any tough talk from the Fed presidents will likely be ignored. 


Investment Strategy

The sell-off over the last two weeks has pushed the market to a slightly oversold level where we think it’s possible to see a bit of a bounce higher.  It would probably be more short-lived and not the start of another leg higher, though.  Stocks will need to sell-off further before we commit any significant new money to the market. 

Looking out a few months, we may still have more room to rise since the Fed is fixated on sending markets higher and they will do anything in their power to do so. 

It’s the longer-term where we have the most concerns.   The stimulus of the last several years masked many problems, causing a misallocation of resources and allowing bubbles to form.  It also prevented necessary changes from occurring at both a corporate and political level.  If the stimulus is ever forced to end, those flaws become more apparent.  We’re now seeing lower corporate earnings, massive debt levels, poor economic growth, and potential for recession.  This will weigh on the market at some point, but the question remains as to when.

Bond prices rose this week (so yields fell) and remain near a very high level.  We don’t see any significant moves happening any time soon, though, as demand will keep prices high and yields low. 

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 and 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.