Archive for ND&S Updates
Commentary (9/19/16) – Volatility Returns
September 19, 2016
After trading for nearly 50 days without a move of +/- 1%, the S&P 500 saw moves of greater than 1% four times in the past six days. Seasonality (August/September/October tend to be more volatile than other months) along with chatter from various Fed Governors contributed to the market volatility. Weak retail sales numbers (first decline in five months) combined with tepid industrial production numbers (-0.4% m/m) more-or-less cemented the feeling among investors that the Fed would remain on hold for their September meeting.
For the week, the DJIA finished higher by 0.25% while the broader-based S&P500 gained 0.59%. Interestingly, the S&P 500 is at roughly the same level that it reached in July 2015 (i.e., little overall movement in the S&P 500 average in over 14 months). International markets were weaker as the EAFE Index lost 2.48% for the week while emerging markets gave up 2.59%. Fixed income, represented by the Barclays Aggregate, finished the week slightly lower by 0.11%. As a result, the 10 YR US Treasury closed at a yield of 1.70% (up 3 bps from the previous week’s closing yield of 1.67%). Gold fell by $24.50 to close at $1,306.20/oz. Oil prices trended a bit lower on the week to close at $43.03/bbl … the International Energy Agency released their September report highlighting a slowdown in the growth of global demand (we see oil prices between $40 – $50 per barrel until at least year-end).
We expect volatility to remain high as investors digest conflicting economic and political news in the week ahead. All eyes will be on the Federal Reserve’s Wednesday meeting and rate announcement. We expect the Fed to remain on hold, but Fed comments will likely point to a December rate hike (of course, being data dependent). As always, we plan to look through the day-to-day news and focus on longer-term objectives.
How ‘bout those Sox!
Enjoy the last few days summer …
“Don’t watch the clock; do what it does. Keep going.” – Sam Levenson
The Bear Growls
September 12, 2016
The S&P 500 closed out the week on a sour note as it fell 2.45% on Friday, mostly a result of hawkish comments by Fed officials. For the week, the DJIA fell 2.15% while the broader-based S&P 500 closed down 2.38%. International equities were mixed with the MSCI EAFE off slightly (-0.13%) for the week while the MSCI EM closed higher by 1.12%. Bonds closed the week in the red as yields backed up across the board on “Fed talk”. The 10Yr Treasury closed the week at a yield of 1.67%, 20 bps higher than the week before.
Eric Rosengren, the Boston Fed President and a voting member on the Fed’s interest rate setting board, said that low interest rates are increasing the chance of overheating the U S economy. Gradual tightening monetary policy is appropriate to maintaining full employment, he added. Fed officials will meet on Sept 20-21 to decide on interest rates, and the quiet period when the Fed will not speak begins tomorrow.
One of the tell-tale signs of a bullish stock market is sector rotation where money-flows move from one industry sector to another, but not out of the market itself. Last week money flowed out of stocks and into money market funds. The sectors most hit were the so called defensive stocks – utilities, telecoms, and consumer staples, which are a little disconcerting, and energy shares amid a decline in crude oil futures. We expect a bouncy ride until the Fed meeting and let reasonable asset allocations and global diversification carry the day.
“Better to keep quiet and only let people think you’re an idiot than to speak up and confirm it.” – Rodney Dangerfield
Rate Hike Likely on Hold
September 6, 2016
Equity indices moved higher last week as the calendar turned to fall. For the week, the S&P 500 and DJIA finished higher by 0.56% and 0.61% respectively, with financial stocks leading the charge. Smaller US companies representing the Russell 2000 finished the week up 1.15%. International equities were mixed with the MSCI EAFE up 0.48% and MSCI EM down 0.10%. Although yields gravitated higher earlier in the week on hawkish statements from FOMC chair Janet Yellen, they ultimately finished the week roughly where they started after a lighter-than-expected jobs report on Friday.
On Monday, the Commerce Department reported personal consumption expenditures (PCE) rose 0.3% in July, marking the 4th straight month of increases. Consumer spending continues to show signs of strength, otherwise offsetting the weak manufacturing sector. Consumer spending remains the most important aspect of economic strength with roughly 2/3 of US economic activity directly related to it. Perhaps industries will begin to try and build inventories to meet demand, which would in turn help manufacturing and continue to support job growth. Also in the report, the PCE price index was (Fed’s preferred inflation measure) was flat in July and only up 0.8% compared to 12 months prior. This is well under the Fed’s desired target of 2% and has been for more than four years.
On Friday, the Department of Labor reported that U.S. employers added 151,000 jobs in August, below expectations of an 181,000 increase. Revisions for June and July were negligible as an increase in June’s number was offset by a reduction in July’s. For the past three months, the US has added a very solid 232,000 jobs per month. The jobless rate held steady at 4.9%, while the U6, a broader measure commonly referred to as “underemployment” is also holding steady at 9.7%.
The jobs report is notable in that it is the last significant report before the FOMC is scheduled to hold their September meeting. While the numbers weren’t bad, the report didn’t have the blowout numbers needed to nudge the doves off the fence and raise rates. The decision to do that was likely pushed back to December when they will have additional data to help support that decision.
Enjoy the Fall and Go Pats!
“A dream doesn’t become reality through magic; it takes sweat, determination and hard work.” – Colin Powell
Fed Stays on Hold
September 26, 2016
Financial markets rallied on the news that the Fed decided to leave rates on hold at last week’s policy meeting … at least for the time being. Any chance of a rate increase won’t come until the FOMC gathers for their December policy meeting with the decision of course being data dependent. Equities ultimately finished the week higher with the DJIA and the S&P 500 up 0.76% and 1.2% respectively. International stocks responded positively with the MSCI EAFE index rising 3.15% while emerging markets finished higher by 3.65%. Fixed income also finished the week positive as the yield on the 10 year U. S. Treasury dropped from 1.7% to 1.62%.
This week look for economic reports on durable goods and the 3rd revision to second quarter GDP which is expected to come in at 1.3%. Interestingly, the Fed now only sees long term rates reaching 2.88% vs a prior estimate of 3.0%. This lower projection indicates that the Fed likely believes that the growth rate for the economy is lower than previously thought.
Next month, corporations will begin reporting earnings for the 3rd quarter and expectations are for a decline of 2.3% according to FactSet, which would mark the 6th consecutive quarterly decline. The 3rd quarter was supposed to be when earnings growth returned … lets hope the analysts are wrong. The energy sector will likely be the largest culprit with an expected drop of 66%. On the positive side, revenue growth is expected to be positive.
“Education is the most powerful weapon which can use to change the world.” – Nelson Mandela