Archive for ND&S Updates
Are We There Yet?
November 21, 2016
Last week, the S&P500 was up 0.89% and is approaching the new threshold of 2200, while the NASDAQ set an all-time high. Wow!
Talk about a switch hitter, the speculative bets made before the election on the Hillary trade have quickly changed to the “Trump rotation”. Trump’s win has greatly increased expectations for US economic growth and potential inflation. As a result, the Russell 2000 last week jumped 2.62% while the MSCI EAFE, the international developed market equity index, declined 1.52%. The emerging equity market index, MSCI EM, was down 0.52% for the week.
US Federal Reserve chair, Janet Yellen, stated that an improving economy suggests that there will be a rate hike “relatively soon”. We expect a 25 basis point hike in the federal funds rate at the next FOMC meeting in December, roughly one year from their previous rate hike. The US Aggregate Bond Index lost 1.02% last week while non-US developed international bonds sank 3.2%. With the expectation of increased interest rates, the US dollar index hit a 14-year high, which continues to pressure fixed income assets, along with foreign currencies and bonds.
With a short holiday week, there will be a report on existing home sales tomorrow and on new home sales, durable goods orders and weekly jobless claims on Wednesday. All reports are expected to show a slight improvement adding to the Fed’s likelihood of raising rates.
Happy Thanksgiving!
“Be thankful for what you have; you’ll end up having more. If you concentrate on what you don’t have, you will never, ever have enough.” – Oprah Winfrey
Results Are in …
November 14, 2016
Equity markets rallied higher last week, breaking a 9 day downtrend (longest since 1980). The week kicked off on a positive note on Monday with investors banking on a Clinton victory after FBI was unable to find additional evidence to bring charges against her. The consensus from market pundits leading into election would be to sell U.S. and Global equities and buy treasuries and other safe haven assets in the event of a Trump win. The markets had other ideas … funny how that works. What resulted was roughly 5.2% overnight drop in S&P futures (see chart below) which quickly reversed with the market eventually opening 8pts below its Tuesday close. Beleaguered sectors such as industrials, financials, materials, and health care suddenly became in vogue while this year’s winners big tech, utilities, real estate, and staples were hit. With a Trump victory, expectations for the new administration are to bring increased spending on infrastructure (helping cyclicals) and defense, and less onerous regulations thus buoying beaten down companies in health care, financials, and segments of energy.
Source: Bloomberg, CME, Standard & Poor’s, J.P. Morgan Asset Management, Market Recap 11/14/16.
For the week, the DJIA closed at a record high of 18848 and a weekly gain of 5.52%. The broader-based S&P 500 closed the week higher by 3.87%. One area investors rushed into post-election was smaller US companies, which on the surface would be somewhat insulated from the President-elect’s more protectionist campaign rhetoric. International markets were mixed as the MSCI EAFE closed slightly higher and MSCI EM closing down by 3.51%. Bonds had a difficult week with the Barclays Aggregate down 1.48% as yields shot up on inflation fears and FOMC policy moving forward. The 10yr US Treasury closed at a yield of 2.15%, up significantly from 1.79% the week prior.
As we look ahead, uncertainty still largely remains. Civil unrest aside, question marks surrounding the President-elect’s Cabinet selections, protectionist views on trade, increasing inflation (who would have predicted that a few months ago? …), stronger dollar ($), and potential FOMC rate hikes remain in the back ground. Positives are corporate tax reform along with companies’ ability to repatriate cash held overseas (which both have bipartisan support), infrastructure spending (barring we don’t build bridges to nowhere), and less burdensome regulations which some economists predict are a 1%-2% drag on GDP. As long-term investors, we recommend staying globally diversified as it will take a long time for some policies to take shape.
No matter where one stands regarding the outcome of the election, let us all come together as one nation. As President Obama stated at the White House during the transition meeting with President-elect Trump, ”I believe that it is important for all of us, regardless of party and regardless of political preferences, to now come together, work together, to deal with the many challenges that we face,”
“With malice toward none, with charity for all” – Abraham Lincoln
Pre-Election Volatility
November 7, 2016
The stock market fell for the second consecutive week, with the S&P 500 down 1.9% and the tech-heavy NASDAQ lower by 2.8%. Markets dislike uncertainty, so the decline in Clinton’s once-comfortable lead over Trump is no doubt the proximate cause [better the devil you know than the one you don’t?]. The latest weekend comment by FBI Director James Comey reaffirms Mrs. Clinton’s July exoneration, which has produced notable Monday morning strength.
These political fireworks overshadowed the last heavy batch of third-quarter earnings, which was mostly greeted with caution. Facebook, for example, reported stellar results but its stock fell because of lower growth prospects [the law of large numbers makes this inevitable]. Note that S&P earnings will show growth for the first quarter since December 2014, and that the global economy is also picking up steam.
Finally, no matter who is our next president, they should address our sub-par economic growth [GDP is growing at only half of its postwar rate]. John Cochrane summarizes our counterproductive tax [we need lower marginal rates], regulatory [restore the rule of law], and social programs [remove disincentives to climb the economic ladder]. Health care, finance, labor and trade are among the other hot-button issues that Cochrane discusses. He doesn’t pretend that this will be easy … there are powerful entrenched interests in favor of the status quo. That’s probably why so many voters have been attracted to outsiders during this political season.
“No man should see how laws or sausages are made” – Bismarck
Post Thanksgiving Left Overs
November 28, 2016
Global equities rose for the week as investors continue to bet on better growth and the new administration. The weekly economic reports all pointed towards continued growth. Economic data included: October existing home sales of 5.6M units, a 2% increase from September; Initial jobless claims for the week ending Nov. 19 were 251,000; Durable goods orders were up a healthy 4.8% in October. All of this data continues to point towards a fed funds rate increase at the December FOMC meeting.
All four major U.S. indices set records on the same day with the DJIA, S&P 500, NASDAQ, and Russell 2000 all setting record highs on Tuesday, surpassing the December 31, 1999 record. The S&P 500 finished higher by 1.45% while the DJIA closed up 1.51%. The Russell 2000 finished the week up 2.41%. International is finally catching the “post trump” fever as both MSCI EAFE and the MSCI EM closed in the green, up 1.29% and 1.34% respectively. Bonds, represented by the Barclays Aggregate closed lower by 0.20% and the 10yr US Treasury closing at a yield of 2.36%, which is dramatically higher than the 1.37% close on July 8th.
We hope everyone was able to enjoy a great Thanksgiving with family and friends!
“The purpose of our lives is to be happy.” – Dalai Lama