Archive for ND&S Updates
Fed Hikes Rate 25BPs
December 19, 2016
Equities took a breather last week. The Federal Reserve increased its short-term benchmark interest rate by 25BPs, marking the first rate hike they have made since roughly one year ago. As we have mentioned in previous weekly comments, markets had priced in a rate hike for their December meeting. Commentary from Janet Yellen following the committee’s decision referred to the economy as “remarkably resilient” and noted progress towards their dual mandate of 2% inflation and full employment. The fed now anticipates raising rates in 2017 slightly faster than previous projections, and is forecasting 3 hikes in 2017.
For the week, the S&P 500 closed the week slightly in red down 0.3% while the DJIA finished higher by .45%. The Russell 2000 gave some back last week as it closed down 1.68% for the week. International markets also closed lower with the MSCI EAFE down 0.55% and EM down 2.43%. The dollar index touched a 14 year high while gold and oil struggled for the week. Yields continued higher last week with the 10yr Treasury closing at a yield of 2.60%.
The post-election stock market revival is forecasting an improved the outlook for GDP growth [from under 2% to 2.5%+?], and this includes the manufacturing sector. Manufacturing output is almost back to its prerecession level, although ongoing productivity improvements mean that factory jobs are still ~20% below previous levels.
In fact, the number of open manufacturing jobs is at a 15 year high, but most of these positions require skills that many laid-off blue-collar workers do not [yet?] possess.
Economic reports scheduled this week include GDP, existing and new home sales, and personal income & outlays. Enjoy the Holiday Season!
“Time is something that cannot be bought, it cannot be wagered with God, and it is not in endless supply. Time is simply how you live your life.” – Craig Sager
The Post-Election Stock Market Rally continues
December 13, 2016
The stock market powered higher again last week, as the prospect of lower marginal tax rates, less regulation, restoration of the rule-of-law and a smaller public sector offset the [hopefully remote] possibility of a trade war and mercantilist economic micromanagement. The S&P advanced 3.1% while the Russell 2000 was up 5.6%. Trump tweets on drug pricing and Air Force One’s “$4B price” proved to be only temporary detours for the “Trump train”.
This week’s Fed meeting will likely produce a 25BP interest rate increase, the first since last December [at one time the markets were digesting the possibility of four 2016 rate increases]. The market will be looking for any change in the Fed’s 2017 intentions for ~2 rate hikes, which is unlikely.
The energy sector has proven to be the surprise winner in 2016. Low and declining January crude oil prices [$20 oil was bandied about] have been replaced by recent agreement by OPEC and non-OPEC producers to reduce oil production in 2017.
It should be noted that this oil price exuberance may be short-lived, since OPEC has historically had difficulty staying within its production limits. This chart from Monday’s Wall Street Journal says it all:
“There is many a slip between the cup and the lip” – ancient Asian proverb
Equities Take A Breather
December 5, 2016
The post election equity rally faltered a little last week as the S&P 500 fell 0.91%, small cap stocks as measured by the Russell 2000 were off 2.4%, the NASDAQ was down 2.62% and international equities were also down with the MSCI EAFE index declining 0.22%. For the week, the best performing sector in the S&P 500 was the energy sector which rose 2.6% on news that OPEC had reached an agreement to limit production for 6 months. U.S. crude prices spiked as a result of the news with oil closing the week up 12%.
In economic news, the U.S. jobs report added 178,000 jobs for the month of November with the unemployment rate falling to 4.6%. This marks the lowest reading since August 2007. Although the number is encouraging, the percentage drop also benefited from 400,000 people dropping out of the workforce. Also, GDP revised upward to 3.2% annualized from a prior estimate of 2.9%. This news combined with the employment report is enough to ensure that the FOMC will raise interest rates next week as anticipated.
In Italy on Sunday, voters rejected the referendum on constitutional reform which will add to volatility in EU markets. Political uncertainty in Italy could put further pressure on Italian banks which are already down 50% this year while rate spreads on Italian bonds have widened versus their Spanish and German counterparts.
“I always wanted to be somebody, but now I realize I should have been more specific.” – Lily Tomlin
The Stockings Were Hung
December 27, 2016
It was a sluggish and short holiday week for US stocks, finishing with slight weekly gains with light trading volume. The S&P 500 gained 0.3%, the DJIA rose 0.46%, and NASDAQ was up 0.48% for the week. The bubbly was close to popping as the DJIA nearly hit the historical (meaningless in the long run) threshold of 20,000. Developed international markets rebounded this week with the MSCI EAFE up 0.38% while emerging markets again slipped 1.67%. Hurting international stocks has been the strength in the US dollar which has extended its rise post-election. The dollar recently hit its 14 year high with increasing demand for the currency, making US assets more attractive. Buyers beware … a strengthening dollar is a headwind for the earnings of large US companies with significant international exposure. Bond funds continue to see outflows; however, the US Aggregate Index rebounded slightly last week closing higher by 0.45%. Treasury yields moved lower across the board as the 10 YR Treasury closed at 2.55%.
The US economy is showing strength as 3rd quarter GDP was revised upwards to 3.55% from the 3.2% estimate last month. Consumer sentiment also came in at the highest level since January 2004 reading a sharp uptick from November.
Investors have to be questioning the valuations of US stocks especially those that have benefited the most since the election: small/mid caps, financials, energy and industrials. The S&P 500 is trading at 22.3x the preceding four quarter earnings, which is higher than 92% of readings since 1929. The yield on the S&P 500 is at 2.08%, compared to the 10yr Treasury at 2.55%. Just last July, the S&P 500 yielded 2.21% to the 10yr Treasury at 1.37%.
Though we are optimistic about US economic growth prospects and enticing valuations of foreign stocks and bonds, the heat will be back on companies to show revenue and earnings growth to justify the increased valuations. Enjoy the holiday shortened week!
“Hope smiles from the threshold of the year to come, whispering it will be happier.” – Alfred Tennyson