Archive for ND&S Updates
Enough is Enough
August 21, 2017
Markets were volatile last week as investor focus shifted from geopolitics to aftershocks from the tragic events in Charlottesville, VA and Europe. The markets jumped higher to start the week as North Korea pulled back on threats against Guam easing tensions from the previous week. Disapproval to President Trump’s response prompted a number of CEOs to resign from advisory councils which he ultimately disbanded as the week wore on. Another ISIS inspired terrorist attack, this time in Barcelona, Spain added to the market’s uneasiness on Thursday. Additionally a knife attack in Turku, Finland occurred on Friday killing 2 and injuring several others. Enough is Enough
For the week, the DJIA closed down 0.77% while the broader-based S&P 500 was off 0.58%. Smaller US companies represented by the Russell 2000 shed 1.17%. Despite the terrorist events in Spain and Finland, international equities finished the week in the green with both Developing and Emerging Markets closing higher by 0.07% and 1.64% respectively. Yields were generally flat for the week as investors weighed the latest comments from FOMC and ECB. In minutes from recent policy discussions, both central banks had concerns with tepid inflation while Fed officials remain split over the next course of action.
Economic news for the week was a mixed bag: retail sales rose 0.6% in July ahead of expectations; housing starts fell to 1.115 million (seasonally adjusted annual rate) missing expectations of 1.122m; industrial production increased 0.2% month over month which was slightly below estimates of 0.3%; the labor market remained strong as initial jobless claims came in at 232k beating estimates.
Global equities should remain volatile given recent events around the world. Investors should continue to adhere to their long-term plan amongst all the noise!
“A single sunbeam is enough to drive away many shadows.” – Francis of Assisi
Fire and Fury
August 14, 2017
Complacency evaporated last week, as geopolitical uncertainty along with earnings disappointments [retail, upstart social media] and the fraying of the OPEC “production limitation” deal. A useful way to quantify investors’ mood is the CBOE Volatility Index (VIX). This year we have experienced a long-lived period of slowly advancing stock prices, which made the “short-volatility” trade one of the most popular [hence dangerous] trades. The VIX jumped 44% this week to 16.04, far above the previous ~10 complacency level. Since the VIX is a trading vehicle as well as well as an indicator, it can easily be part of a vicious circle. The following chart speaks volumes:
For the week, the DJIA closed down 0.91% while the broader-based S&P 500 was off 1.37%. International equities were even worse with developed international equites and emerging market equities lower by 1.48% and 2.24% respectively. As expected, money flowed into US Treasuries (along with gold) pushing yields lower across the board. The 10yr Treasury closed the week at a yield of 2.19% which was down from 2.27% the week prior.
In the week ahead, look for economic readings on retail sales, industrial production, consumer sentiment and the release of the FOMC minutes from July’s meeting. Volatility should remain heightened due to geopolitics, but any serious decline will likely be buffered by an improving US economy and earnings backdrop.
“Act as if what you do makes a difference. It does.” – William James
Moderate Growth to Continue
August 7, 2017
Last week, equity markets continued their advance driven by strong corporate earnings and better-than-expected job numbers. In the U.S., the S&P 500 was up 0.23% and the DJIA 1.22% while the NASDAQ declined -0.34%. Internationally MSCI EAFE and MSCI EM were up 0.88% and 0.45% respectively. For the week, value outperformed slightly but YTD growth continues to be a strong outperformer.
The July employment report was a better-than-expected 209,000 and the unemployment rate fell to 4.3%, the lowest level in 16 years. Employment numbers as well as corporate earnings and other economic numbers should provide support for moderate economic growth in the second half of 2017. This week, CPI and PPI inflation reports should show that inflation continues to be in check. We believe this will allow the Fed room to start reducing their balance sheet in the 4th quarter and raise short term rates for a third time in December.
This steady stock-market advance has taken it into fully-valued territory, which perforce raises bull market durability questions. Geopolitical disaster is currently the most likely bear-market catalyst, and the UN’s North Korean sanctions bring Pyongyang’s ongoing nuclear ambitions into sharp focus. Diplomacy will not be enough to prevent that rogue regime from acquiring deliverable [ICBM mounted] nuclear weapons, and the possibility of physical intervention [kinetic warfare?] is increasing. Please stay tuned.
“Without labor nothing prospers.” – Sophocles
The Week That Was
August 28, 2017
First and foremost our hearts and prayers go out to all of the victims of hurricane Harvey.
Amid a devastating hurricane hitting Texas, a solar eclipse that hasn’t happened in 99 ½ years and the potential shutdown of our government as early as October 2nd, the markets last week were very tame: the number of shares traded on Wednesday fell to their lowest level so far this year.
The resiliency of the US stock market is impressive. Last week the DJIA increased 0.71%, the S&P 500 rose 0.75% and the Nasdaq composite gained 0.80%. The insatiable appetite of companies’ repurchasing their own shares, fed by easy monetary policy, has decreased the capitalization of the US stock market by 17.5% over the past six years. Companies are beginning to pair back purchases, buying $100 billion less in the past 12 months than in the prior year.
On the positive side, GDP growth has been improving and our labor market is expanding which will undoubtedly create stronger wage growth. Second-quarter earnings rose by 10.2% y/y, the second consecutive quarter of double-digit growth.
We are concerned, however, with pockets of equity overvaluation, such as some Large Cap Tech and Utility stocks. The Federal Reserve kept interest rates the same at their Jackson Hole meeting but reminded that they will be paring back their $4.5 trillion bond portfolio. The US budget showdown is now at the forefront of investors minds.
International equities continue to benefit from a weaker dollar with EAFE gaining 0.61% and EM surging 2.46% for the week.
The bond market barely budged after Fed Chair Janet Yellen and ECB President Mario Draghi made rather defensive and dovish comments.
With summer winding down we caution investors not to be too complacent and to keep in mind their long-term investment goals.
“Even if you’re on the right track, you’ll get run over if you just sit there.”-Will Rogers