Archive for ND&S Updates
“Brexit” Dominates
June 20, 2016
The market broke out of a two-week sideways pattern on the downside last week, with the S&P 500 declining 1.2%. The Russell 2000 and the tech-heavy Nasdaq fell even further, as Fed fumbles and “Brexit” fears weighed on markets. Note that the Mail’s Brexit survey favoring “remain” circulated on Sunday, and investor sentiment improved dramatically on Monday morning.
This week offers several significant events. This includes Yellen’s monetary testimony on Tuesday, bank stress-test results on Thursday, and most significantly the British vote to leave the European Union. Finally, the annual rebalancing of the Russell 1000 and Russell 2000 will occur on Friday.
GDP growth of only ~2% has been characterized as the new normal, seemingly implying that slow growth is inevitable. This ignores several self-inflicted obstacles, including the dramatic increase in the corporate regulatory burden. One particularly egregious example is the FCC’s recently upheld decision to turn the 1996 Telecom Act on its head and to start regulating the internet as if it was a natural monopoly. This has already produced a noticeable slowing of investments by Internet Service Providers.
“…the government solution to a problem is usually as bad as the problem and very often makes the problem worse” – Milton Friedman
ND&S Weekly Commentary
June 13, 2016
Last week, equity prices mostly declined as concerns rose about global growth and Britain’s June 23rd referendum on whether to remain in the European Union. For the week, the S&P 500 finished down 0.1%, the NASDAQ declined 0.95%, and the MSCI EAFE fell 1.72%. Federal Reserve Chairwomen Janet Yellen took a more dovish tone during Monday’s speech distancing the Fed from an expected rate hike at their June policy meeting. As a result, interest rates moved lower across the board with the 10 year U.S. Treasury yield closing the week at 1.64%, the lowest since May 2013. Government bond yields hit record lows in Japan, Germany, and the U.K. with many issues now having negative yields.
This is a packed week of macroeconomic reports including CPI, retail sales and housing starts. In addition, the FOMC will conclude its June policy meeting on Wednesday.
Our hearts and prayers are with the victims and their families of the horrific terrorist attack in Orlando on Sunday morning…
Dismal Jobs Report … Fed Likely on Hold
June 6, 2016
Equity markets finished relatively flat during last week’s holiday-shortened trading despite the release of a number of important economic data.
For the week, the DJIA finished lower by 0.37% while the broader-based S&P500 was flat (0.00%). International markets moved slightly higher as the Dow Jones Global ex U.S. index gained 0.55% for the week. Fixed income, represented by the Barclays Aggregate, finished the week higher by 0.67%. As a result, the 10 YR US Treasury closed at a yield of 1.71% (down 14 bps from the previous week).
A plethora of economic news provided added volatility to the markets last week. On Tuesday, the Commerce Department reported that consumer spending jumped 1% in April … expectations had been for an increase of 0.7%. On Wednesday, the May Markit manufacturing PMI came in at 50.7 … down from 50.8 in April. Markit indicated that new business growth fell to its lowest level in 2016 (regulatory drag?). Construction spending fell in April by 1.8% versus consensus of a 0.6% increase (this was the biggest drop since January 2011). Lastly, on Friday the Department of Labor reported that the U.S. economy added only 38,000 jobs in May while expectations had been for a gain in jobs of 158,000. The dismal jobs report, combined with the other disappointing economic news, will likely keep the Fed on hold during its June 14-15 meeting. A July rate hike is still a possibility.
On the earnings front, the news is a bit better. First quarter earnings, although sluggish, have been better than expected. With earnings season just about over, 72.4% of companies have beaten expectations.
The week ahead holds the potential for a number of market-moving events. Most notably, Janet Yellen will speak on Monday in Philadelphia as she reviews the current economic climate … we suspect that Friday’s sobering jobs report will temper her enthusiasm for the economy.
Enjoy the summer …
“It’s the repetition of affirmations that leads to belief. And once that belief becomes a deep conviction, things begin to happen.” – Muhammad Ali
Uncertainties Abound Post-Brexit
June 27, 2016
Despite a strong start to the week, the “Brexit” black swan became a reality Thursday evening. Global equity markets were caught flat-footed following the U.K.’s decision to leave the European Union (EU). For the week, the DJIA closed down 1.55% while the broader-based S&P 500 finished lower by 1.62%. Smaller US companies reflecting the Russell 2000, closed 1.48% lower. Developed international markets finished the volatile week with the MSCI EAFE shedding 1.72% while MSCI EM closed up 0.14% for the week. With an investor flight to quality, treasury yields moved lower, the dollar strengthened against the (€) Euro, and gold moved higher closing at a 2yr high.
The U.K. decision to leave the EU came as a surprise to the markets, especially the “smart money” that bet on the “Remain”. In addition to the immediate market declines, we will most likely see continued volatility in equities and a number of currencies. S&P has downgraded the U.K. credit rating to AA and markets do not like uncertainty. There are many questions; will there be another U.K. referendum … Scottish referendum … who will succeed Cameron … who might be next … in addition to the uncertainty of how a country exits the EU which has never happened before. The fall out could result in an endless number of scenarios which is adding to the uncertainty. Experience has taught us that macroeconomic or geopolitical shocks generally create opportunities in specific businesses or entire sectors. The market price shocks tend to be much more inflated than the actual change in value of a company. Companies will continue to adapt to the political uncertainty around the globe and maximize profits/value for their shareholders, employees, and businesses. We do not see this event being any different.
Although “Brexit” dominated the headlines, there was positive news last week. Importantly, the U.S. banks all passed the stress tests of their capital requirements. This is a positive, with the banks finally being able to increase their dividends as well as commence share buy backs. This, after years of banks boosting their capital reserves and paying enormous ex post facto fines and legal settlements following the 2008/09 financial crisis.
We encourage everyone to take the longer view and avoid the knee-jerk reactions that come in uncertain times.
“In investing, what is comfortable is rarely profitable.” – Robert Arnott