Stocks bounced around a narrow range this week to close with a modest gain. For the week, the Dow added 0.6%, the S&P rose 0.8%, and the Nasdaq gained 0.9%. Gold turned higher on geopolitical worries, up 0.6%. Oil moved higher off its lows of the year, gaining 2.5% to $96 per barrel. The international Brent oil, used for much of our gas here in the east, moved up to $103 per barrel.
Source: Yahoo Finance
With the modest gains, stocks again hit new all-time high levels this week. Just like the last several weeks, though, stocks have risen on very light trading volume. This shows a lack of conviction in the new highs, so this is something to consider.
There was little in the way of market moving news this week, with geopolitical events and central banks grabbing the headlines.
The conflict in Ukraine intensified this week as more Russian forces entered the country. Stocks moved down on the news, although slightly. Also adding to the worries, the threat from Islamic extremists in Iraq and Syria are rising, prompting the UK to increase its terror threat level.
Having more impact on the market this week, investors are increasing their focus on the potential actions of the central banks. In particular, comments from the head of the European Central Bank, or ECB, have investors believing a new stimulus program will soon be implemented.
During the Central Bank conference in Jackson Hole last week, the ECB signaled a willingness to embark on new stimulus programs to boost stagnant economies. They would print money to buy government bonds, which would then make it easier to borrow money and therefore spur growth (theoretically). This had previously been off the table since the ECB is prevented by law from buying these bonds, so we’re not exactly sure how it is possible. However, just discussing this made bond yields fall and stock and bond prices rise.
Poor economic data from Europe this week reinforced the idea that an ECB stimulus was likely. European inflation data came in very weak, some of the weakest on record. Central banks see inflation as a positive, so they will be more likely to implement a stimulus program to boost inflation.
Printing money to buy bonds is fraught with danger, but we also wonder how effective it will be. European borrowing costs are already at the lowest levels in history in some cases and the lowest in hundreds of years in others, so how will even lower borrowing costs help? We’re pretty sure they won’t. Debts will rise and growth will stagnate further, ultimately setting the table for a bigger correction in the future.
Switching gears, economic data here in the U.S. was mixed this week. GDP figures for the second quarter were revised to show a stronger gain over that period. Consumer confidence hit new highs and existing home sales rose. A somewhat funny situation occurred with the durable goods report, which showed a very strong increase of over 22%. However, this gain came entirely from new airplane sales from a recent air show. Stripping that out, durable goods actually fell over the last month.
Finally, a couple stories this week further raised concerns that stocks are overvalued. First, the instant messaging service, Snapchat, earned a valuation of $10 billion, despite having never made a single cent.
Our second concern involves Jessica Alba. Yes, the actress. In 2011 she started a company that made organic diapers, calling it the Honest Company. The company is preparing to go public and is valued at nearly $1 billion (LINK). At least it actually earns money – though very little.
These are the types of stories we heard in the late 1990’s and we all know how that ended. We worry the same story is playing out today.
Next Week
Next week looks to be a little busier as data for August begins rolling in. We’ll get reports on the strength of the manufacturing and service sectors, factory orders, the trade balance, and most importantly, August employment data.
Trading volume usually picks up after the Labor Day holiday, so we’ll see if we can keep these new highs in stocks. Remember from the above section, the highs have been on light trading volume, so we’ll see if there is a conviction in the new highs.
Investment Strategy
Still no change here. We aren’t actively buying or selling the broader market at this time. Everything looks expensive and bargains are harder to find, even in individual names that we would hold for a shorter time period.
Despite everything being expensive, we aren’t actively selling at this time. We are cautious, though, as we worry about a correction in the near-term as trading picks up in the fall. Looking further out, we worry about significant overvaluations in riskier investments, ranging from stocks to the bond market. Europe, in particular, is a worry as they drift back into recession with record levels of overvalued debt. At some point we see this correcting in a painful way, but it is anyone’s guess as to when this will occur.
Bond prices continue to move higher (so bond yields moved lower) as more investors see central banks as increasing stimulus (especially outside the U.S.). These yields are on the low level of the range they been in over the last year, so despite the volatility, they are still within a range. With prices so high, though, it increases the chance they will fall in the future. A position to profit in this scenario (a short position, where your profit increases if prices fall) acts as a nice hedge in that case. Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted.
European bonds look extremely expensive at the moment and also look like fantastic short opportunities.
Bonds to protect against inflation, or TIPs, have done well on the recent higher inflation data. We think they remain an important hedge against future inflation and are likely to do well as inflation increases. Some municipal bonds look attractive for the right client, but not as good as they did several months ago. 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 worries and falling once they are out of the headlines and has been stuck in the same range for over a year now. Still, it is a good hedge for the long run.
We like other commodities for the long term, especially due to weaker currencies around the globe. This is a longer-term play, so buying on the dips may work with a longer time horizon.
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.
There was little in the way of market moving news this week, with geopolitical events and central banks grabbing the headlines.
The conflict in Ukraine intensified this week as more Russian forces entered the country. Stocks moved down on the news, although slightly. Also adding to the worries, the threat from Islamic extremists in Iraq and Syria are rising, prompting the UK to increase its terror threat level.
Having more impact on the market this week, investors are increasing their focus on the potential actions of the central banks. In particular, comments from the head of the European Central Bank, or ECB, have investors believing a new stimulus program will soon be implemented.
During the Central Bank conference in Jackson Hole last week, the ECB signaled a willingness to embark on new stimulus programs to boost stagnant economies. They would print money to buy government bonds, which would then make it easier to borrow money and therefore spur growth (theoretically). This had previously been off the table since the ECB is prevented by law from buying these bonds, so we’re not exactly sure how it is possible. However, just discussing this made bond yields fall and stock and bond prices rise.
Poor economic data from Europe this week reinforced the idea that an ECB stimulus was likely. European inflation data came in very weak, some of the weakest on record. Central banks see inflation as a positive, so they will be more likely to implement a stimulus program to boost inflation.
Printing money to buy bonds is fraught with danger, but we also wonder how effective it will be. European borrowing costs are already at the lowest levels in history in some cases and the lowest in hundreds of years in others, so how will even lower borrowing costs help? We’re pretty sure they won’t. Debts will rise and growth will stagnate further, ultimately setting the table for a bigger correction in the future.
Switching gears, economic data here in the U.S. was mixed this week. GDP figures for the second quarter were revised to show a stronger gain over that period. Consumer confidence hit new highs and existing home sales rose. A somewhat funny situation occurred with the durable goods report, which showed a very strong increase of over 22%. However, this gain came entirely from new airplane sales from a recent air show. Stripping that out, durable goods actually fell over the last month.
Finally, a couple stories this week further raised concerns that stocks are overvalued. First, the instant messaging service, Snapchat, earned a valuation of $10 billion, despite having never made a single cent.
Our second concern involves Jessica Alba. Yes, the actress. In 2011 she started a company that made organic diapers, calling it the Honest Company. The company is preparing to go public and is valued at nearly $1 billion (LINK). At least it actually earns money – though very little.
These are the types of stories we heard in the late 1990’s and we all know how that ended. We worry the same story is playing out today.
Next Week
Next week looks to be a little busier as data for August begins rolling in. We’ll get reports on the strength of the manufacturing and service sectors, factory orders, the trade balance, and most importantly, August employment data.
Trading volume usually picks up after the Labor Day holiday, so we’ll see if we can keep these new highs in stocks. Remember from the above section, the highs have been on light trading volume, so we’ll see if there is a conviction in the new highs.
Investment Strategy
Still no change here. We aren’t actively buying or selling the broader market at this time. Everything looks expensive and bargains are harder to find, even in individual names that we would hold for a shorter time period.
Despite everything being expensive, we aren’t actively selling at this time. We are cautious, though, as we worry about a correction in the near-term as trading picks up in the fall. Looking further out, we worry about significant overvaluations in riskier investments, ranging from stocks to the bond market. Europe, in particular, is a worry as they drift back into recession with record levels of overvalued debt. At some point we see this correcting in a painful way, but it is anyone’s guess as to when this will occur.
Bond prices continue to move higher (so bond yields moved lower) as more investors see central banks as increasing stimulus (especially outside the U.S.). These yields are on the low level of the range they been in over the last year, so despite the volatility, they are still within a range. With prices so high, though, it increases the chance they will fall in the future. A position to profit in this scenario (a short position, where your profit increases if prices fall) acts as a nice hedge in that case. Floating rate bonds are also gaining popularity for this same reason, but they tend to be riskier, so caution is warranted.
European bonds look extremely expensive at the moment and also look like fantastic short opportunities.
Bonds to protect against inflation, or TIPs, have done well on the recent higher inflation data. We think they remain an important hedge against future inflation and are likely to do well as inflation increases. Some municipal bonds look attractive for the right client, but not as good as they did several months ago. 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 worries and falling once they are out of the headlines and has been stuck in the same range for over a year now. Still, it is a good hedge for the long run.
We like other commodities for the long term, especially due to weaker currencies around the globe. This is a longer-term play, so buying on the dips may work with a longer time horizon.
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.
