Archive for ND&S Updates

Rate Hike 2.0

May 31, 2016 

Global equities rallied last week as investors processed the possibility of a rate hike from the US Federal Reserve at either their June or July meeting.  Assuming that the economic data stay close to the FOMC forecasts, a 0.25bps hike should be expected in the coming months.  According to Bloomberg calculations, the probability of a June fed hike as of Friday was 34% but up significantly from earlier this month when it was in the low single digits.  The May employment number is slated to be released on Friday (June 3rd) and will provide economists with another measure of whether a rate hike is imminent.

US equities had their strongest week since early March and are now within 2.0% of all-time highs.  For the week, the S&P 500 closed up 2.32% while the DJIA finished the week higher by 2.15%.  International markets were also strong as the MSCI EAFE and MSCI EM closed the week higher by 2.67% and 2.42%, respectively.  Oil had its highest close of the year this past week as it closed over $50 for the first time since November.

Deja Vu? … Rate chatter will most likely dominate the headlines in the coming weeks. The market’s reaction last week seems to imply: if the Fed wants to raise rates … things must be good. We all know how volatility picked up around the last rate hike in December, but don’t forget that was the first hike in 9.5 years. We expect volatility to pick up again but not as much as earlier in the year.  As always we encourage everyone to Stay The Course.

“Ask not what your country can do for you; ask what you can do for your country.”  –  John F. Kennedy

The Hawkish Fed

May 23, 2016 

The stock market modestly advanced last week with the S&P 500 rising .3%, the Nasdaq, with AAPL up 5%, increased 1.1% while the Dow slipped .2%. Investors were caught off guard by the Fed’s hawkish comments and suggestion of a possibility of raising rates at the upcoming June meeting. As a result, interest sensitive stocks lost ground.

The housing market is improving, job growth is steady, and wages are increasing. Consumer prices rose 3% in April, which is the largest monthly gain in three years, though core inflation is rather tame at 2.1%.

International markets are jittery as global economies remain sluggish. Developed markets were up .33% as evidenced by the EAFE index but still down -5.9% year to date. The EM, emerging markets index, was off -1.3%. There is evidence that investors are growing weary of no earnings growth for 10 years in Europe, especially with bank stocks, which have so far this year fallen -19%.

The fixed income markets reacted negatively to the possibility of a June interest rate hike by the Fed. The 10-year Treasury yield rose 14 basis points to 1.85%. Economists are worried about the flattening yield curve and its affect on economic growth. A flat yield curve implies a lack of growth while an inverted curve can imply an upcoming recession. All eyes and ears are on the Fed’s comments and decision.

~“The four most dangerous words in investing are: “this time is different.” –Sir John Templeton

Near-term Caution, Long-term Opportunities

May 16, 2016 

The S&P 500 fell 0.5% last week, while the Dow and the small-cap Russell 2000 both registered a more significant -1.1% decline.  This marks the third consecutive weekly decline, the longest since the year-opening 10.3% air-pocket.  Commodities were mixed, with gold falling by 1.6% to $1,272/oz., while crude oil rose by 3.5% for the week.

The earnings reporting season was particularly depressing last week. Brick-and-mortar retailers like Macy’s, Kohl’s, and then Nordstrom all reported less-than-expected results, which resulted in double-digit stock declines.  Fortunately, total retail sales [much broader than just department stores] increased 1.3% for the month of April. Autos, gasoline and internet were important upside catalysts.

briefing 051616

We have now had a chance to review ~92% of the S&P 500 corporate results. So far, earnings have declined 7%, and further declines are expected in the second quarter. The good news is that this should reverse in the second half of the year.

“Plus ça change, plus c’est la même chose” – Jean-Baptiste Alphonse Karr

Lower For Longer

May 9, 2016 

Equity markets were negative across the board last week as global growth concerns, tepid earnings, and soft economic data weighed on the markets. For the week, the DJIA declined 0.10% while the broader-based S&P 500 finished down 0.33%. International markets also struggled as the MSCI EAFE declined 2.99% and MSCI EM was off 4.1%. U.S. bond prices generally improved for the week as the yield on the 10 Year U.S. Treasury declined from 1.83% to 1.79%. Oil closed the week lower over supply concerns, and gold finished a volatile trading week roughly where it started.

The jobs report released Friday reported the U.S. economy added 160,000 non-farm jobs in April, much less than expectations of 202,000. February and March were also revised lower while the unemployment rate held steady at 5%.  The bright spot in the report was an increase in hourly wages, which could indicate higher consumer spending in coming months. Look for evidence of improving consumer spending on Friday when retail sales numbers are reported for April.

With weak GDP growth in the 1st Quarter and a soft April employment report, it is unlikely that the Fed will raise interest rates at their June meeting. Futures markets are now pricing in a 4% chance of a rate hike next month. In addition, several economists are now forecasting that the Fed will only raise interest rates once this year. So as far as interest rates go … lower for longer.

Stay The Course

“All that I am, or hope to be, I owe to my angel mother.”  –  Abraham Lincoln

Stocks Give Back Ground … Fond Memories

May 2, 2016 

Equity markets gave back ground last week mostly as a result of weak earnings from major technology companies (Apple, in particular) and disappointing action out of the Bank of Japan (which voted to keep its monetary policy unchanged).   Tepid first quarter GDP growth of 0.5% didn’t help matters either (growth should pick up as the year advances).  The Federal Reserve continued its dovish tone as they decided to leave rates unchanged at their mid-week meeting.  The next Fed meeting is in June when the Fed will likely take no action to raise rates.   Interestingly, the dollar weakened as gold and crude prices moved higher on the week.

For the week, the DJIA finished lower by 1.28% while the broader-based S&P500 closed down 1.24%.  For the month of April, the S&P 500 advanced by 0.39%.  International markets were down less than domestic markets as the MSCI EAFE Index closed lower by 0.40% for the week.   Fixed income, represented by the Barclays Aggregate, finished the week slightly higher by 0.4%.  As a result, the 10 YR US Treasury closed at a yield of 1.81% (down 10 bps from the previous week).

Sell in May and Go Away … will it work this year?  It worked last year as the S&P500 declined 7.4% between Memorial Day and Labor Day; however, history points out that the markets tend to rise 1%, on average, between those two days.

Lastly, we remember with fond hearts our co-founder and friend, Paul Dignan, who passed away 14 years ago today (May 2, 2002).  We miss him dearly, and we are grateful for the precious time that he shared with us.

Enjoy every day …