My two rules of investing: Rule one – never lose money. Rule two – never forget rule one. – Warren Buffett
In a holiday-shortened week that was marked by mixed economic data, both the S&P 500 Index and the Dow Jones Industrial Average closed down slightly, ending a two-week winning streak. The previous week was obviously a tough act to follow as stocks surged over 2% on stronger than expected earnings and dovish remarks from Fed Chair Janet Yellen. Relying on a myriad of conflicting economic reports, the stock market struggled to find direction as our wicked winter weather continues to hold our economy hostage. On the negative side, the New York Fed’s manufacturing index was very weak while construction of new homes and existing home sales in January were both well below expectations. A monthly home builder’s sentiment index also registered the largest drop in the history of the survey, adding to the bad news in the housing sector. But there were some bright spots among the economic data that cheered investors. The preliminary purchasing managers index for manufacturing registered the highest reading in four years while the index of leading economic indicators also rose, signaling that the economy is expanding moderately. Jobless claims also dipped last week as the labor market continued to improve. With such confusing economic signals, it’s no wonder the market seesawed back and forth and ultimately finished the week slightly lower. After quickly rebounding from a nearly 6% correction earlier in the year to almost get back to even, the stock market may be stuck in neutral for the time being. In the absence of consistently positive economic data and favorable earnings guidance by corporations, stocks are unlikely to regain their momentum and establish new highs in the near term.
Although the severe winter weather may be partly to blame for the poor housing data that was released last week, another factor contributing to the weakness may be affordability as home prices continue to rise. Inflation data that was reported continued to suggest that prices remain under control. The producer price index (PPI) that measures wholesale prices increased just 0.2% while the consumer price index (CPI) rose only 0.1%. Over the past year, wholesale prices were up 1.2% while consumer prices rose 1.6%, both lower than the Fed’s target inflation rate of 2%.
Overseas, China, the world’s second largest economy, reported that its preliminary manufacturing index fell more than expected and was at the lowest level in seven months. Recent weak economic data from that country has caused concern among investors that other emerging market economies may also be affected as a result. On the earnings front, Wal Mart Stores reported a weaker than expected profit for the quarter and issued a disappointing outlook going forward.
For the week, the Dow Jones Industrial Average shed 0.3% to close at 16,103 while the S&P 500 Index eased 0.1% to close at 1,836. The Nasdaq Composite Index bucked the trend and gained 0.5% to close at 4,263.
Weather again will be the topic of conversation this week as it is seen affecting new home sales, durable goods orders, manufacturing and fourth quarter GDP. January new home sales and durable goods orders are expected to decline modestly from the previous month while the second revision of fourth quarter GDP is likely to show a decline to 2.5% from the initial reading of 3.2%. The February Chicago Purchasing Managers Index (PMI), a measure of manufacturing activity, is forecast to decline slightly but still indicate a sector that is expanding. The December S&P/Case-Shiller Home-Price Indices will also be released.
Retailers will dominate the earnings calendar this week as Home Depot, Lowe’s, Macy’s, Target, Kohl’s, Best Buy, Gap and TJX are among the companies scheduled to report.
While domestic and international stocks have recovered from their recent correction and are only down slightly for the year, other asset classes have performed well and provide clear evidence of the need for diversification in portfolios. On the fixed income side, intermediate corporate and municipal bonds have been very stable and have posted year-to-date total returns in excess of 2%. After posting disappointing results last year, real estate investments trusts or REITs have sprung to life and are up almost 8% on average this year. Similarly, precious metals, mining stocks and other commodities have also rebounded after a disastrous year in 2013 and have risen over 10% this year. Depending on one’s investment objective and asset allocation, most portfolios have sufficient exposure to fixed income investments and modest exposure to REITs and commodities, all of which help to diversify the portfolio and reduce the overall risk. With the stock market apparently running into some resistance at the 1,850 level on the S&P 500 Index, stocks may be stuck in a trading range until there are clear signs that both the economy and earnings are poised to improve. In the meantime, investors can take comfort in the fact that other parts of their portfolio are performing well enough to produce an overall positive return.