Archive for ND&S Updates
To Russia with Love
July 24, 2017
Last week, financial markets shrugged off the ongoing D.C. circus, geopolitical risks and monetary policy shifts. The S&P 500 index rose 0.56% while the NASDAQ added 1.20%, both extending gains for the third straight week. Second quarter earnings have been slightly better-than-expected with 20% of companies reporting and tracking at an estimated 7.2% growth rate. However, several reports caused concern, like past historical market barometers IBM and General Electric, which issued cautious revenue and earnings guidance. In addition to higher growth expectations, the US dollar weakness continues to benefit the international equity markets, with EAFE up 1.35% and EM adding 1.35% for a YTD gain of 25% – not too bad!
Inflation continues to remain subdued relative to the Federal Reserve’s stated target. This has put a lid on long-term rates which have actually gravitated lower so far this year. The trend continued last week with the 10 year US Treasury yield down 9 basis points to 2.24%.
This week all eyes are on corporate earnings reporting, including GOOG, AMZN and FB. On Wednesday, the Fed meeting will be uneventful and is expected not to increase short-term interest rates. The second quarter GDP will be reported on Friday.
Assuming we have a solid earnings season the rest of the way, and supportative commentary from the Federal Reserve, this bull market in stocks should keep going. Nevertheless, there are geopolitical and monetary policy headwinds which add to an already uncertain economic environment and outlook. Investors should remain diversified and avoid any emotional overreactions.
“The power of accurate observation is commonly called cynicism by those who have not got it.” -George Bernard Shaw
The Fed’s Latest Inflation Pronouncements Lead the Market Higher
July 17, 2017
Markets moved higher last week, with the DJIA and S&P 500 ending Friday at record highs. Things really picked up on Wednesday when FOMC Chairperson Janet Yellen testified before Congress. During her testimony, Yellen appeared to speak with a more cautious tone regarding further tightening in policy. Her biggest concern is inflation which has consistently run below their target of 2% during the current expansion. On Friday, the Department of Labor reported CPI was unchanged for the month of June, missing expectations of month over month rise of 0.2%. Over the past year, consumer prices have increased 1.6% while Core CPI (excludes food and energy) rose 1.7% well below its stated goal.
For the week, the DJIA finished up by 1.04% while the broader-based S&P 500 closed higher by 1.42%. International markets were also strong with both the MSCI EAFE and MSCI EM jumping up 2.38% and 4.60% respectively. Treasury yields moved lower as expectations of monetary tightening were reduced due to inflation concerns. The 10yr Treasury closed at a yield of 2.33% which was down from 2.39% the week prior. Gold and Oil both closed higher on the week.
In the week ahead, look for economic reports on Manufacturing and June housing starts. 26 companies in the S&P 500 will report this week which includes GE, JNJ, BAC, MSFT, and V just to name a few.
“When you arrive at a fork in the road, take it.” – Yogi Berra
Good News
July 10, 2017
U.S. equity markets finished on the plus side for the week as the monthly jobs report surprised to the upside with 220,000 new jobs vs expectations of about 180,000. In addition to the healthy June estimate, the figures for the prior 2 months were revised upwards. The S&P 500, DJIA and NASDAQ all were up fractionally for the week led by the financial sector. Financials have been strong since all major U.S. banks easily passed their stress tests and announced dividend increases. Growth outperformed value for the week in spite of continued volatility in the technology sector. International equities gave some back last week with both developed (-0.47%) and emerging (-0.58%) markets finishing in the red.
Bond prices were again under pressure as the strong jobs report increased the odds that the FOMC will raise short-term rates one more time this year. Yields increased across the board with the rate for the 10YR Treasury closing at a yield of 2.39%, an increase from 2.31% the week prior. In addition to potential rate hikes, the Fed continues to indicate that they will begin reducing their balance sheet (well in excess of $4T – see chart below) starting in September of this year.
Source: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
This week, look for economic reports on inflation, retail sales and industrial production. 2nd quarter earnings season shifts into gear with reports from PEP, C, JPM, and WFC to name a few.
“Less is only more where more is no good.” – Frank Lloyd Wright
Opportunities [as well as Challenges] Ahead
July 3, 2017
The stock market ended the quarter on a profit-taking note, with the S&P falling 0.6% while the Nasdaq declined 2.0%. Economic data was fine, with 1Q GDP expanding 1.4% and consumer confidence increasing to 118.9. The lower inflation reports [core PCI only 1.2% v. the Fed’s stated target of 2%] is pushing markets to forecast a pause in the fed fends increase activity until the 4Q [FF are currently 1.0%+ after two successive quarters of ¼ point increases].
The equity markets have performed admirably YTD [to the point where some are worried about excess enthusiasm]. The S&P is up 8.2% [9.3% including income], bonds are up 2.6% [High Yield up 4.9%]. International markets, with their lower valuations, are up even more, with EM up 18.6% YTD. Markets rarely advance in a straight line, but any upcoming corrections should be viewed as opportunities.
The “fight for $15”, as the concerted push for higher minimum wages is now known, has made significant headway in some locales, and objective data is starting to come in. Seattle has boosted its minimum wage from $9.47 in 2014 to $13 in 2016 [on its way to $15]. Now, the University of Washington has published a detailed study showing that the workers who were supposed to benefit from the higher minimum wage have actually experienced a decline of $125/month in their income because of fewer available hours. Other “unintended consequences” include fewer [none?] openings in fast food for unskilled entry-level workers. Let the buyer beware.
“Liberty without learning is always in peril; learning without liberty is always in vain.” – JFK
No Summertime Blues…
July 31, 2017
For the week, the DJIA rose 1.17% while the S&P 500 finished unchanged. Developed international markets finished the week slightly ahead by 0.23% while their year-to-date performance remains stellar as the MSCI EAFE index is up a healthy 17%. Emerging markets continued their strong advance as the MSCI EM index finished higher by 0.29% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week down 0.21% as bonds yields moved higher off last week’s overpriced level. As a result, the 10 YR US Treasury closed at a yield of 2.30% (up 6 bp from the previous week’s closing yield of 2.24%). Gold rose $13.50 to close at $1,268.40/oz. Oil prices moved higher (up $3.94) on the week to close at $49.71/bbl as Saudi Arabia urged OPEC members to stick to recent production cuts. Cheap oil prices are a boon to businesses and consumers. Cheaper oil prices and tame inflation contributed to the Fed’s decision last week to leave rates unchanged for July.
In economic news released last week, existing and new homes sales were mixed as existing home sales fell a bit while new home sales were steady at 610,000. July PMIs came in at 54.2 … providing further evidence of an economy gaining growth momentum. Durable goods orders, always an important harbinger of future growth, rose 6.5% marking the largest one month advance since July 2014. Lastly, the first reading of 2nd quarter GDP came in at 2.6% (in-line with expectations).
The week ahead looks to be pretty quiet. 2nd quarter earnings releases continue, and we expect most companies to report in-line or better-than-expected numbers. Along with more earnings reports, expect to see the following economics releases this week – ISM manufacturing, jobless claims, ADP employment report, BLS employment update and personal income and outlays.
Investors have not experienced any summertime blues, at least not yet. As always, we plan to look through the day-to-day news and focus on longer-term objectives. Investors should stay the course and stick close to their long-term asset allocation targets.
Let’s make it a good week and enjoy the summer!
“The best way to cheer yourself up is to try to cheer somebody else up.” – Mark Twain