Commentary for the week ending 9-11-15

Stocks saw some relative calm this week.  Through the Friday close, the Dow and S&P both gained 2.1% and the Nasdaq added 3.0%.  Gold saw some weakness, off 1.5%.  Oil stayed in a pretty small range to close off 3.1% to $44.03 per barrel.  The international Brent oil, used to make much of our gas here in the east, closed down to $49.92 per barrel. 

Source: Google Finance

The holiday-shortened week was a rather uneventful one.  There were a few economic reports and some news out of Asia, but the focus was really on the Fed meeting coming next week. 

We opened the week with a solid gain on good news out of Asia.  Well, the news was good for the market, anyway.  The poor economy in China and Japan has caused government officials to indicate more stimulus may be on the way.  Remember, stimulus is good for the market as the new money flows into stocks, but the results show it does little to help the economy. 

This leads to the other factor moving the market this week – the Fed and their stimulus.  They are holding a policy meeting next week where they are expected to announce a decision on the level of interest rates. 

Why is this so important?  As mentioned above, these stimulus programs are great for the market.  For example, the image below shows the market rising in lockstep with a Fed stimulus program.  The blue line represents the money printed by the Fed in their QE program and the red line indicates the stock market (the S&P 500).  If the Fed announces a reduction in stimulus, stocks are widely expected to fall. 

https://research.stlouisfed.org/fred2/graph/?g=1OxB

With the Fed relying on economic data to make this decision, the market has reacted strongly to recent economic reports. 

An employment report (the JOLTs report) showed job openings at a record high level.  This positive report saw stocks immediately move lower, since it increased the odds of a reduction in stimulus. 

A higher-than-expected inflation level in the PPI report also pressured stocks, since the Fed is looking for higher inflation before raising interest rates.  The inflation rate is still below their target, however, so this may give them some pause before raising rates.

It is frustrating that the market is so dependent on the Fed for direction, but that is one of the consequences of their intervention in the market.  The volatility in the market we are seeing shows just how hard it will be for the Fed to eventually get out.


Next Week

All eyes will be on the Fed next week.  We’ll see a few economic reports, like retail sales, inflation at the consumer level, and housing stats.  However, they are unlikely to have as much impact on the market as the Fed will have. 

If the Fed does announce an increase in interest rates, we believe stocks will fall.  Conversely, they will probably rise if rates are held unchanged.   We suspect it won’t be that cut-and-dry though.  We wouldn’t be surprised to see some sort of offsetting comments designed to confuse the market, probably because the Fed is confused what to do, too.  

On a positive note, next week has been the best week of the year over the past 10 years according to market strategist Ryan Detrick.  Unfortunately, the following three weeks are the worst of the year.  We’ll see if that is the case again this year. 


Investment Strategy

No change here.  It’s not bad to do some nibbling on these down markets.  However, it’s all about the Fed now more than ever.  The direction of the market hinges on their stimulus policy and without a clear idea of what they will do, it is difficult to tell where the market will move in the short run. 

In the longer run, we think some of our long-run fears are being realized with the recent market action.  The distortions created in the market by the Fed’s stimulus program will cause large downturns when the stimulus comes off.

Looking at longer term fundamentals, we are concerned over the lack of companies reinvesting their earnings into their business.  Money has instead flowed into stock buybacks and dividends, not reinvested back in the company.  This signals lower corporate growth down the road. 

Bonds didn’t fare well this week as money left bonds and moved into stocks (so prices fell and yields rose).  Prices are still on the high end of the range we have seen, which makes them an expensive hedge at this point.  Cash may be a better option and we would avoid longer-term bonds. 

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. They have not done well recently as a record supply has kept prices low.  Therefore, 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 when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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 9-4-15

The volatility did not subside this week as stocks ended lower.  Through the close Friday, the Dow lost 3.3%, the S&P fell 3.4%, and the Nasdaq was off 3.0%.  Normally gold does well when stocks decline, but instead sold off by 1.1%.  Oil saw a lot of movement, closing the week with a 1.8% gain at $46.05 per barrel.  The international Brent oil, used to make much of our gas here in the east, added just over $1 to close at $50.99 per barrel. 

Source: Google Finance

We could take the same thing we wrote the last two weeks and use it again this week.  The volatile market is increasingly focused on the Fed and this week was no exception. 

The Fed will be holding a much-anticipated policy meeting later this month and the closer we get, the more anxious the market gets.  The topic of the meeting will be whether the economy has improved enough to begin raising interest rates from this historically low level (low interest rates have helped fuel the rise in stocks, so an increase in interest rates will likely send stocks lower).

Therefore, Friday’s employment report was the center of attention this week.  We added just 173,000 jobs last month, a very poor number and the second-worst report in 19 months.  Alone, this would likely keep the Fed from raising rates and cause stocks to rise. 

However, other employment details were positive, causing stocks to fall.  The unemployment rate improved to a seven-year best of 5.1%, though the number was more a function of people leaving the labor force than unemployment actually improving (the amount of Americans not working hit 94 million, a record high).  Regardless, a 5.1% rate grabs headlines and makes it difficult to support emergency-level stimulus.

These employment reports are but one of many reports the Fed looks at.  Lesser-known, but in our eyes far more accurate, is the employment-to-population ratio.  Simply, it is the amount of people employed compared to the total population.  As you can see in the chart below, employment has a long way to go to reach pre-recession levels.  This will give the Fed pause before raising rates, which will be good for the market.   

https://research.stlouisfed.org/fred2/graph/?g=1Lo1

While the employment report dominated headlines, several other economic reports were released and were mostly negative.  The strength of the manufacturing sector hit its lowest level in two years and exports contracted.  The service sector showed an expansion, though at a weaker level than the previous month.  These, too, will give the Fed pause before raising rates. 

More stimulus was also the talk in Europe this week.  The head of the European Central Bank (or ECB, which is the European version of our Fed) indicated they were open to doing more stimulus in light of weaker economic reports.  Stocks moved higher on the news.

With economic growth stagnating despite record amounts of stimulus, we keep wondering why no one questions whether this stimulus is the right prescription in fixing the economy.  Japan has done stimulus in one form or another for over 20 years.  We’ve done it for six.  Europe, too.  Yet the economy continues to stagnate. 

We discuss this often.  Stimulus is not the cure to an ailing economy.  It acts as a painkiller that prevents meaningful change from occurring.  Until fundamental reforms are made, we see no reason to break out of this economic funk. 

We’ll conclude this section with a look at China.  They, too, had very poor economic reports this week.  However, this wasn’t the most troubling thing we heard out of the country.

With their stock markets plunging, the government has cracked down on people selling stock.  It looks like they have begun arresting (or “detaining”) people who have done so.  Like, hundreds of people.  This includes prominent figures like heads of banks, reporters, and fund managers.  It is a scary environment to be in. 

The country has made remarkable strides in liberalizing their economy in recent years, attracting massive amounts of new investment.   We think this action by the government puts a serious chill on the reforms they have made and is a major setback for the country. 


Next Week

Next week looks to be a quiet one for economic data, but that doesn’t mean the markets will be any quieter.  We’ll get a report on employment, trade, and inflation at the producer level. 

China will have several economic reports out, too, and with the worries about their economy, these reports may receive more attention than usual. 


Investment Strategy

It’s not bad to nibble on some of these downturns.  However, at present we’re sitting tight as it’s all about the Fed now more than ever.  The direction of the market hinges on their stimulus policy and without a clear path forward, it is difficult to tell where the market will move in the short run. 

In the longer run, we think some of our long-run fears are being realized with the recent market action.  The distortions created in the market by the Fed’s stimulus program will cause large downturns when the stimulus comes off.

Looking at longer term fundamentals, we are concerned over the lack of companies reinvesting their earnings into their business.  Money has instead flowed into stock buybacks and dividends, not reinvested back in the company.  This signals lower corporate growth down the road. 

Bonds continued to be a popular alternative this week as stocks fell, so bond prices rose and yields fell.  However, that trend reversed when stocks found support.  Prices are still on the high end of the range we have seen, which makes them an expensive hedge at this point.  Cash may be a better option and we would avoid longer-term bonds. 

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. They have not done well recently as a record supply has kept prices low.  Therefore, 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 when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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 8-28-15

The most volatile week we’ve seen in years closed with a gain.  For the week, the Dow rose 1.1%, the S&P gained 0.9%, and the Nasdaq added a solid 2.6%.  Gold lost some of the gains it achieved recently, off 2.2%.  A late-week surge sent oil higher on the week, up nearly 12% to $45.22 per barrel.  The international Brent oil, used to make much of our gas here in the east, added $4 to $49.93 per barrel.  

Source: Google Finance

The markets continued to lose ground as we opened the week, but reversed course sharply as the week went on and bargain hunters stepped in to snap up stocks.  Like the past few weeks, there wasn’t one trigger we could point to as the cause of the swings in the market.  A malaise had been building, leaving investors very uncertain about the direction of the market and creating a volatile trading environment.

We’ll start with Monday’s open, which was like walking right into a buzz saw.  The Dow immediately opened down over 1,000 points, which was a loss of more than 6%.  Panic selling at the open after last week’s losses was the likely culprit for such a big move (remember – never sell on panic, especially at the open!). 

Thankfully, stocks moderated from there on Monday, with the Dow closing down a more modest 588 points.  Any other day, that large of a move would be bemoaned.  After falling more than 1,000 points, though, investors seemed content with a 588-point move lower. 

Many investors have been looking for a pullback in stocks to begin putting new money in (count us among them), so the big move lower brought out the bargain hunters.  This lead to a tug-of-war between the bears and the bulls (bears are investors who think the market will move lower and bulls believe it will move higher) for the remainder of the week.

While the volatility in the market was probably driven more by the battle between the bulls and the bears, there were a few news items that investors had their eyes on.

China continues to be a concern.  Their markets opened the week with the worst one-day drop on record as anxieties about the weakness in their economy accelerate.  The Chinese government responded by announcing several new stimulus measures designed to pump more money into the economy and boost spending.  The stimulus currently in place had yet to produce any growth, but more of the same should do the trick, right?

This round of stimulus created a new worry as the government ordered pension plans to buy more stocks to boost prices.  This will create a serious problem for pensioners if stocks were to fall further.  It is a very irresponsible policy, but we live in very irresponsible times.  

Also in the news was the Fed.  This week they held their annual retreat in Jackson Hole, Wyoming.  The turmoil in the market gave them plenty to discuss. 

Only a few weeks ago, investors believed an increase in interest rates was likely to come in September.  This had been a significant factor in the markets decline.  However, Fed officials this week seemed to suggest a September rate hike was unlikely, which was a contributing factor to the markets increase. 

Postponing the withdrawal of stimulus will help the markets in the near term, but this week shows just how volatile the market can be when rates do move higher. 

Finally, this week offered a good opportunity to engage in some tax-loss harvesting.  The sale of a stock triggers a tax on the profits.  However, losses in your portfolio can offset these gains.  Therefore, this was a good time to sell losing stocks to offset those gains.  If it is a position you intend to keep for a long time, you can immediately buy back a similar – but not identical – position. 

For example, one of the more popular positions in our portfolios is the Vanguard Total Stock Market Index fund.  We can sell some of this fund and buy, say, the Schwab US Broad Market Index fund since it is a similar – but not identical – fund as they track slightly different indexes. 

Tax-loss harvesting is something to remember when markets move lower. 


Next Week

We’ll see some important economic reports next week, especially in light of the recent market volatility.  One of the metrics the Fed is focused on is employment, making this week’s report on employment all that more important.  We’ll also get reports on the strength of the manufacturing and service sectors.

These reports are important for their impact on the Fed’s stimulus.  We may see the market move lower if these reports beat expectations, since it means we are a step closer to having the stimulus programs withdrawn. 


Investment Strategy

We did some buying on the weakness in the market this week.  One concern is that it seemed like everyone was also buying this week.  Buy-to-sell ratios were at all-time highs.  When too many investors get on one side of the trade, the market tends to do the opposite.

Another concern still surrounds the Fed and their stimulus program.  We think the direction of the market hinges on their stimulus policy.  Without a clear path forward, it is difficult to tell where the market will move in the short run. 

Some of our longer-run fears were realized with the recent market action.  The distortions created in the market by the Fed’s stimulus program will cause large downturns when the stimulus comes off.

Looking at longer term fundamentals, we are concerned over the lack of companies reinvesting their earnings into their business.  Money has instead flowed into stock buybacks and dividends, not reinvested back in the company.  This signals lower corporate growth down the road. 

Bonds were a popular alternative this week as stocks fell, so bond prices rose and yields fell.  However, that trend reversed when stocks found support.  Prices are still on the high end of the range we have seen, which makes them an expensive hedge at this point.  Cash may be a better option and we would avoid longer-term bonds. 

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. They have not done well recently as a record supply has kept prices low.  Therefore, 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 when more stimulus looks likely and falling on the opposite. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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 8-21-15

There’s no way to sugarcoat it, it was an ugly week for the market.  Through the close Friday, the Dow and S&P both fell 5.8%, and the Nasdaq plunged 6.8%.  Gold had another good week, up 4.2% to a seven-week high.  Oil hit new six-and-a-half year lows, off 6.2% to close at $40.45 per barrel.  The international Brent oil, used to make much of our gas here in the east, closed down to $45.34 per barrel. 

Source: Google Finance

Fears about the weakness of the global economy and uncertainties as to when the Fed pulls back on its stimulus broke the market this week.  Stocks had their worst week since 2011 and the major indexes are now negative on the year. 

We must say, the drop wasn’t a total surprise.  We’ve seen many warning signs recently, like the “death cross” we discussed last week and the weakening breadth in the market (where the amount of companies making new highs declined as the new lows increased) discussed a couple weeks ago.  The problem is, we’ve seen these warnings several times in the past, only for no decline to appear.  It’s been a very tricky market. 

It’s also been an unusual market in that this year stocks have traded in one of the tightest ranges (from the high to low in stock prices) on record.  A glimpse at the charts below shows us how that range was broken to the downside this week. 

The bottom of a range is called “support,” where the market tends to find buyers that keep it from falling further.  Breaking thorough that range is usually a bad sign for the market.  Without that support, you can keep falling for a long time. 

Looking back even further, we can clearly see the tight range of the market.  We can see how the rise stalled out this year after steadily moving higher in the prior years.  The next chart shows us clearly breaking out of that range.

So what happened this week to send markets sharply lower?  Like the last few weeks, there wasn’t one story we could point to as the culprit.  Instead, it looks like an accumulation of the malaise from the last few weeks.  Global growth is slowing, led by weakness in China, while the Fed seems unsure of its path forward. 

Plus, technical factors like those discussed above play an important role in the market’s direction.  These tend not to make headlines, but cannot be overlooked.

As for the news of the week, the Fed made headlines with the release of the minutes from their latest meeting.  They see the economy improving and expressed a desire to raise interest rates this year. 

The “when” remains the question, however.  Some Fed members called for a September rate increase, while others cited weaknesses around the globe as reason for pause.  This indecision is weighing on the credibility of the Fed and likely played a part in the market decline. 

The slowing growth in China was also a story this week.  Economic data from the country continued to disappoint, sending their markets down more than 11% on the week. 

This also impacted commodity markets as a slowdown in China means less need for commodities, sending commodity prices lower.  That, in turn, sent companies correlated to commodities much lower, including names like companies Exxon, Alcoa, or even Caterpillar.

The weakness in China raised talks of more stimulus in the country, but we continue to ask, if it hasn’t worked yet, what makes them think it will work now?

Case in point is Japan.  This week we learned their economy shrunk for yet another quarter.  This comes after more than 15 years of stimulus programs, with the last two years seeing a significant increase in the amount of stimulus.  Yet the economy has yet to improve. 

Countless countries around the globe – including ours – are taking this wrong approach to fix their economies.  Central planning and stimulus doesn’t work – fundamental reforms are needed.  This includes measures like liberalizing labor markets, reducing regulations, reforming tax codes, and stabilizing currencies.  All have proven to work in the past.  Until fundamental reforms like these are made, we see no reason to break out of the economic malaise that has enveloped the globe. 


Next Week

Next week looks to be another relatively uneventful one – in terms of scheduled economic data.  As we saw this week, that doesn’t necessarily mean the market will be any quieter.

As for the economic data, we’ll get more info on housing, durable goods, personal income and spending, and the revision to second quarter GDP. 

The Fed will also be in the news as they hold a retreat in Jackson Hole, WY.  This is an annual event and we often hear new Fed policies being discussed or introduced.  Investors will be closely watching for any surprises this year, especially after the week we had.  


Investment Strategy

Well, last week clearly wasn’t an ideal time to buy.  However, we are near a point where we would consider putting new money in the market.  We don’t want to catch a falling knife, so we need to see the market stabilize or move higher before committing any new funds, though. 

Further, we aren’t sure if this is the start of the “end-of-stimulus” decline we’ve feared.  Stimulus programs from the Fed have been propping up the market in the face of a stagnant economy and lackluster corporate earnings.  As the stimulus comes off, these flaws are revealed and rightly send the market lower.  If this is the case, we may be in for a bumpy ride. 

As for bonds, their prices rose this week (and yields fell) as investors sought a safe place to park their money as stocks plunged.  Prices are on the high end of the range we have seen, meaning they are an expensive hedge at this point.  Cash may be a better option and  we would avoid longer-term bonds. 

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. They have not done well recently as a record supply has kept prices low.  Therefore, 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 when more stimulus looks likely and falling on the opposite.  It did very well this week, though. 

Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.  However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged. 

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.