Archive for ND&S Updates

Growth Picking Up

October 31, 2016 

Last week, both equity and fixed income markets were generally weak. The DJIA was slightly positive, up .09% for the week, while the broader-based S&P 500 closed down 0.67%. International markets were also off with international indexes finishing the week in the red (MSCI EAFE -0.38% and MSCI EM -0.84%). Fixed income markets also declined with the 10 year U.S. Treasury yield moving from 1.74% to 1.86%. With rates migrating higher, the Barclays U.S. bond aggregate index finished down 0.50% for the week.

Markets were down despite a good headline GDP number of 2.9% growth reported for the 3rd quarter, beating expectations of 2.3%. This marks the strongest growth rate since the third quarter of 2014. Looking into the report, growth was boosted by a rise in inventory levels (breaking a string of 5 quarters of shrinking inventories) and a narrower trade deficit (exports increased 10% in the quarter led by a giant move in soybean shipments). Consumer spending increased at a 2.1% clip, slower than the second quarter’s 4.3% rise but still positive. With the economic news we have been getting, it would appear the FOMC is still on track to lift rates in December.

We expect volatility to remain elevated this week due to political backdrop and company earnings reports with 129 companies in the S&P 500 set to report. In addition, look for economic reports on manufacturing, productivity and the monthly jobs report on Friday which is estimated to be for 173,000 new jobs. Stronger numbers will only strengthen the case for a rate increase.

“I can live for two months on a good compliment.” – Mark Twain

Election Anxiety … almost over!

October 24, 2016 

The presidential campaign (among two of the most unpopular candidates in modern politics) remains ugly and nasty. The good news is that the election is just over two weeks away. Markets and recent polling seem to agree that Hillary Clinton will be the next president. The country’s currently polarized political backdrop will likely continue as the White House and at least one house of Congress will be divided. The good news – history shows that markets can do quite well during divided governments. Both parties will be incented to move forward with fiscal policies that are somewhat incremental and not sweeping (markets despise absolute power and uncertainty). No matter who wins the White House, workers around the world will show up for work the next day with a singular focus to do the very best that they can for their companies and shareholders.

For the week, the DJIA finished higher by 0.09% while the broader-based S&P500 gained 0.41%. International markets were stronger as the EAFE Index advanced 0.49% for the week while emerging markets jumped 1.59%. Fixed income, represented by the Barclays Aggregate, finished the week slightly higher by 0.33%. As a result, the 10 YR US Treasury closed at a yield of 1.74% (down 6 bps from the previous week’s closing yield of 1.80%). Gold gained $12.80 to close at $1,265.90/oz. Oil prices were relatively flat (up $0.10) on the week to close at $50.85/bbl.

Expect a slew of earnings this week from S&P 500 companies. So far, earnings are beating expectations by 7% with just over 25% of companies reporting. Revenues are up by 1% … a nice uptick from recent negative sales trends. Perhaps this quarter will mark the end of the earnings recession … just maybe. Along with earnings, economic releases this week include new home sales, durable goods, jobless claims and GDP.

As always, we plan to look through the day-to-day news and focus on longer-term objectives.

Enjoy the fall season

“If opportunity doesn’t knock, build a door.” – Milton Berle

Politics, Corporate Earnings and the Fed

October 17, 2016 

Stocks continued their October slide last week, with the Russell 2000 declining 1.94% and the S&P 500 slipping 0.95%. The strong dollar acted as an additional headwind for overseas markets, with EAFE down 1.39% and EM declining 1.93%. The 10 year Treasury yield increased from 1.73% to 1.80% last week as a hawkish tone in September’s FOMC meeting minutes pushed rates higher.

The markets were weighed down by a strengthening dollar and increasing long term interest rates. A stronger dollar and rising rates negatively affects corporate earnings which are already expected to be languid as they are reported over the next few weeks. J. P. Morgan Chase, Citigroup and Wells Fargo reported and modestly beat earnings expectations, however, year-over-year net income declined and a possible slowdown in commercial lending activity surfaced. Wells Fargo’s profit fell 2.6% amid the fallout of the sales –tactics scandal.

With less than one month away from the U S Presidential election, the polarized political views are, and will continue to be, a drag on the financial markets. In addition, there is concern that government bond yields will continue to rise across developed markets reflecting better economic data and less accommodative monetary policy. With enough positive economic data being reported, the Fed will more than likely raise rates by 0.25% in December.

This week’s calendar will be very active, with another presidential debate set for Wednesday. A slew of corporate earnings announcements and the consumer price index, housing indices, and jobless claims will also be reported.

“I’m not an old, experienced hand at politics. But I am now seasoned enough to have learned that the hardest thing about any political campaign is how to win without proving that you are unworthy of winning.” – Adlai E. Stevenson

Employment Data Keeps the FED on Track

October 10, 2016 

Most equity indices traded lower last week continuing a narrow trading range it has navigated for the last couple of months. Economic data for the week included the following: ISM Manufacturing index came in at 51.4 showing an improvement from August’s reading of 49.4; U.S. Department of Commerce reported that construction spending dipped 0.7% for the month of August … missing consensus of 0.2% increase; Labor Department reported that US economy added 156,000 jobs in September (missing of estimates of 170,000) with unemployment ticking up to 5.0% … misleading as more people have reentered the labor market and are now looking for jobs.

For the week, the DJIA closed the week at 18240 for a weekly decline of 0.31%. The broader-based S&P 500 finished at 2154 for a weekly loss of 0.60%. Smaller US companies representing the Russell 2000 finished the week lower by 1.18% while international markets were mixed with the MSCI EAFE and MSCI EM finishing (0.77%) and 1.29% respectively. Rates moved higher last week with the 10yr US Treasury closing at a yield of 1.73% … up from 1.56% the week prior.

Recent economic data would indicate a December rate hike from the FOMC is probably the base case for the markets at this point. Minutes from the last Fed meeting will be released on Wednesday and should shed some light on the Fed’s next move. Fed funds futures are pricing in roughly a 72% chance of hiking rates in December.

Be on the lookout for 3rd quarter earnings announcements which begin on Tuesday with the report from Alcoa. Many big banks are due to report on Friday with earnings releases from Citigroup, JPMorgan and Wells Fargo.

“You can never cross the ocean until you have the courage to lose sight of the shore.” – Christopher Columbus

The Market is Currently Dodging the Shoals

October 3, 2016 

The markets finished the quarter on an up-note, with domestic equities advancing 20bps for the week and ~3% for the quarter. Deutsche Bank concerns [a proposed $14B fine threatened its balance sheet] produced a 6.7% decline on Thursday, but CEO assurances combined with a reduction of the fine to ~$5.5B produced a substantial Friday relief rally.

OPEC also made news last week by announcing a reduction in its output, which boosted crude prices by an additional 8% over three days [prices are up 30% YTD after briefly falling below $30 in February {a 13-yr low}]. However, remember that ~0.5M bbl/day is not that big, OPEC often fails to comply with its promised production cuts, and that OPEC is no longer the marginal producer [and its MS is down to 42%].

Finally, although it gives us no pleasure to throw cold water on a popular, bipartisan campaign promise, Phil Gramm’s warning about “The Subprime Superhighway” is a needed dose of reality. He points out that most developed economies are fully leveraged [debt at 85% to 100% of GDP] and that the rate of return on public infrastructure spending is much lower than previously promised. In the past, politicians have raided private savings [recall the Community Reinvestment Act] to fulfill their grandiose promises.  The EU is starting to repeat this wrong-headed funding approach, and the US seems to be not far behind. Let’s hope that cooler heads prevail.

“No really great man ever thought himself so”William Hazlitt