Please note: There will be no market commentary for the next two weeks due to the Christmas and New Year’s holidays. We wish you all a great holiday season!
Stocks started the week with solid gains, but late-week losses saw the markets end slightly negative. Through the Friday close, the Dow lost 0.8%, the S&P fell 0.3%, and the Nasdaq was down 0.3%. Gold moved lower, falling 0.8% on the week to a six-year low. Oil also moved lower, falling 2.3% to new seven-year lows of $34.55 per barrel. The international Brent oil lost just over one dollar to close at $37.04 per barrel.
Stocks started the week with solid gains, but late-week losses saw the markets end slightly negative. Through the Friday close, the Dow lost 0.8%, the S&P fell 0.3%, and the Nasdaq was down 0.3%. Gold moved lower, falling 0.8% on the week to a six-year low. Oil also moved lower, falling 2.3% to new seven-year lows of $34.55 per barrel. The international Brent oil lost just over one dollar to close at $37.04 per barrel.
Source: Google Finance
This week was one of the most highly anticipated weeks on Wall Street in years. Really. For the first time in nine years, the Fed announced an increase in interest rates. The move was largely expected, though, with stocks rising on the announcement and falling sharply in the days after.
Low interest rates have been an important tool used by the Fed to stimulate the economy. It lowers borrowing costs, allowing people to borrow at cheaper rates. This (theoretically) boosts the economy. The problem is if left too low for too long, bubbles and distortions can form, resulting in more harm than good. This is why the Fed needed to raise rates.
While the increase in rates is a step back from the highly stimulative policy we’ve seen the last seven years, it is still extremely stimulative. And the Fed was quick to point this out so as to not worry markets.
The Fed would like to continue raising rates as the economy improves, but at a very “gradual” pace. That assumes the economy will continue to improve according to their forecasts. The one constant about their forecasts is that they’ve always been wrong, being too optimistic on the economy. And our economy is not that strong to begin with.
In fact, no central bank around the world that has raised rates has kept them up – meaning all their economies have faltered. Even this week, Japan announced more stimulus in addition to the monumental amounts of stimulus already in place.
One positive that will hopefully come from the Fed’s actions is maybe we won’t have to talk about the Fed as much now. These stimulus policies can be directly attributed to the rise in stocks, causing the market to hang on the Fed’s every word. As they pull back on the stimulus, maybe the market will focus more on fundamentals. At least we can hope.
Switching gears, one point of caution we saw in the market this week is market breadth. We’ve talked about this often lately – breadth refers to the amount of stocks rising compared to the amount falling. The days we saw gains in the market this week also saw terrible breadth.
In a rising market, you’d expect a large amount of stocks moving higher and a lesser amount moving lower – but that hasn’t been the case. Fewer and fewer stocks are hitting new highs for the year while significantly more are hitting new lows.
The amount of stocks hitting new lows for the year is rising:
Low interest rates have been an important tool used by the Fed to stimulate the economy. It lowers borrowing costs, allowing people to borrow at cheaper rates. This (theoretically) boosts the economy. The problem is if left too low for too long, bubbles and distortions can form, resulting in more harm than good. This is why the Fed needed to raise rates.
While the increase in rates is a step back from the highly stimulative policy we’ve seen the last seven years, it is still extremely stimulative. And the Fed was quick to point this out so as to not worry markets.
The Fed would like to continue raising rates as the economy improves, but at a very “gradual” pace. That assumes the economy will continue to improve according to their forecasts. The one constant about their forecasts is that they’ve always been wrong, being too optimistic on the economy. And our economy is not that strong to begin with.
In fact, no central bank around the world that has raised rates has kept them up – meaning all their economies have faltered. Even this week, Japan announced more stimulus in addition to the monumental amounts of stimulus already in place.
One positive that will hopefully come from the Fed’s actions is maybe we won’t have to talk about the Fed as much now. These stimulus policies can be directly attributed to the rise in stocks, causing the market to hang on the Fed’s every word. As they pull back on the stimulus, maybe the market will focus more on fundamentals. At least we can hope.
Switching gears, one point of caution we saw in the market this week is market breadth. We’ve talked about this often lately – breadth refers to the amount of stocks rising compared to the amount falling. The days we saw gains in the market this week also saw terrible breadth.
In a rising market, you’d expect a large amount of stocks moving higher and a lesser amount moving lower – but that hasn’t been the case. Fewer and fewer stocks are hitting new highs for the year while significantly more are hitting new lows.
The amount of stocks hitting new lows for the year is rising:
In another example, Wednesday was strongest day for the market this week. But on that day, only 810 companies traded on the New York Stock Exchange moved higher and 2,326 moved lower. Those that rose, rose by a large enough amount to overcome the declining stocks – but it is still a bad signal. It shows the market rally has been on very weak footing.
Finally, there was an article in this week’s Wall Street Journal we felt was worth mentioning (LINK). More and more companies are reporting earnings using non-GAAP metrics. GAAP is “generally accepted accounting principles” and is how companies traditionally report earnings. By using non-GAAP figures, companies can adjust their figures to appear better than they actually are.
The WSJ reports about a quarter of the corporate earnings releases used non-GAAP accounting. Deutsche Bank research found that the biggest U.S. companies (it didn’t say how many) reported a loss of 0.1% last quarter – but would have reported losses of 13% if using GAAP figures. Corporate earnings have been poor in recent quarters – and may be worse than originally thought.
Next Week
Next week will be a very quiet week for data, but judging by the big moves in the market this week, markets still may see a lot of action.
The market is closed Friday and an early close Thursday, but in the rest of the week we’ll get information on GDP for the third quarter, personal income and spending, housing, and durable goods.
Investment Strategy
Well, last week we reported the market was near a level we normally found to be an attractive buying point, but out of an abundance of caution would not buy at that time. We missed out on a pretty good pop in stocks for three days and we were worried we missed the start of another rally. Stocks gave up those gains and more later in the week, which we expected to happen after the Fed’s announcement.
That said, we are still not at a buying opportunity in the short run and not at levels we would consider selling, either.
Longer term, we continue to have worries. Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored. Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent. Corporate earnings are lackluster and revenue has been in a declining trend. A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends. This indicates lower corporate growth down the road.
Bonds prices and yields bounced around considerably this week. In the end, yields were higher and prices lower. We still don’t think prices are likely to fall much from here (or yields rise), despite the Fed’s rate increase. A weak economy and demand from overseas will keep bond demand high (which keeps 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. 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.
Finally, there was an article in this week’s Wall Street Journal we felt was worth mentioning (LINK). More and more companies are reporting earnings using non-GAAP metrics. GAAP is “generally accepted accounting principles” and is how companies traditionally report earnings. By using non-GAAP figures, companies can adjust their figures to appear better than they actually are.
The WSJ reports about a quarter of the corporate earnings releases used non-GAAP accounting. Deutsche Bank research found that the biggest U.S. companies (it didn’t say how many) reported a loss of 0.1% last quarter – but would have reported losses of 13% if using GAAP figures. Corporate earnings have been poor in recent quarters – and may be worse than originally thought.
Next Week
Next week will be a very quiet week for data, but judging by the big moves in the market this week, markets still may see a lot of action.
The market is closed Friday and an early close Thursday, but in the rest of the week we’ll get information on GDP for the third quarter, personal income and spending, housing, and durable goods.
Investment Strategy
Well, last week we reported the market was near a level we normally found to be an attractive buying point, but out of an abundance of caution would not buy at that time. We missed out on a pretty good pop in stocks for three days and we were worried we missed the start of another rally. Stocks gave up those gains and more later in the week, which we expected to happen after the Fed’s announcement.
That said, we are still not at a buying opportunity in the short run and not at levels we would consider selling, either.
Longer term, we continue to have worries. Being that much of this rally has been on the back of the Fed’s stimulus, fundamentals like the strength of the corporate sector have been ignored. Once the stimulus is pulled back, we fear markets will sell-off when the deterioration in fundamentals becomes apparent. Corporate earnings are lackluster and revenue has been in a declining trend. A lack of reinvestment into their business signals trouble as money has instead flowed into stock buybacks and dividends. This indicates lower corporate growth down the road.
Bonds prices and yields bounced around considerably this week. In the end, yields were higher and prices lower. We still don’t think prices are likely to fall much from here (or yields rise), despite the Fed’s rate increase. A weak economy and demand from overseas will keep bond demand high (which keeps 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. 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.
