Archive for ND&S Updates
ND&S Weekly Commentary 2.22.22 – The Wall of Worry is Alive and Well
February 22, 2022
Equity markets finished broadly lower last week as investors worried about higher interest rates, inflation and increasing Russia-Ukraine tensions.
For the week, the DJIA lost 1.77% while the S&P 500 dropped 1.52%. The tech-heavy Nasdaq finished 1.73% lower. International markets were also lower with the MSCI EAFE Index down 1.86% while emerging market equities (MSCI EM) gave back 0.67%. Small company stocks, represented by the Russell 2000, fell 1.0%. Fixed income, represented by the Bloomberg/Barclays Aggregate finished lower by 0.24% for the week. The 10 YR US Treasury closed at a yield of 1.92% to finish flat on the week. Gold prices rallied as a flight-to-safety trade to close at $1,894/oz. – up 3.14%. Oil prices moved lower to close at $91.07 per barrel – down 2.18% on the week.
The Federal Reserve released their minutes from the January FOMC meeting. Interest rates have reached an inflection point, and the Fed will begin raising interest rates for the first time in several years to combat inflation. Market expectations are that the Fed will raise rates 4-5 times during the coming year. The Fed is also expected to begin unwinding some of its nearly $9 trillion balance sheet in 2022. Separately, St. Louis Federal Reserve President James Bullard reiterated that he thinks the central bank needs to increase its benchmark short-term rate to 1.00% as early as July.
In economic reports released last week, the U.S. Department of Labor reported that wholesale prices increased 1% in January, twice the expected level. Over the past 12 months, the gauge has risen 9.7%, close to a record level. Retail sales rose a surprising 3.8% m/m in January, beating 1.9% consensus estimates. The retail sales report was well received by the market as it points to continued strength and confidence from the consumer.
Markets are still in correction mode and are moving towards an oversold condition. As we have seen in recent weeks, concerns over increasing Russia-Ukraine tensions have overshadowed what has been a solid earnings season. Historically, conflicts like this have had minimal impact on markets overall. Diversification, patience and a bias towards quality will help investors manage through this temporary set-back. As such, we continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias.
Stay well!
“Observe good faith and justice toward all nations. Cultivate peace and harmony with all.” – George Washington
Weekly Commentary (2/14/22) – Markets in Flux
February 14, 2022
Equity markets were mixed last week with domestic large-cap equities finishing in the red while domestic small-cap equities along with international equities (developed and emerging) finished in the green. Investors were rightfully concerned about hotter-than-expected inflation reports and rising geopolitical issues.
For the week, the DJIA lost 0.96% while the S&P 500 dropped 1.79%. The tech-heavy Nasdaq finished lower by 2.17%. On a more positive note, the MSCI EAFE Index closed up by 1.61% while emerging market equities (MSCI EM) gained 1.43%. Small company stocks, represented by the Russell 2000, recovered by 1.42%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 0.41% for the week as yields jumped higher on inflation worries. As a result, the 10 YR US Treasury closed at a yield of 1.92%. Gold prices closed at $1,840.80/oz – up 1.89%. Oil prices moved higher on tensions around the world to close at $93.10 per barrel, up 0.86% on the week.
Encouraging news earlier in the week on the waning of Covid cases around the world and the lifting of restrictions was offset by disappointing inflation news. The Labor Department released data on Thursday morning that showed U.S. inflation accelerated at a 7.5% annual rate in January – a four decade high. Despite rising input costs, U.S. businesses have been able to hold operating margins steady (at least for now). Fourth quarter operating margins are coming in around 13.2% (with over 82% of companies having reported) … only 0.4% below the 2Q21 peak of 13.6%. The week ahead will include reports on January Producer Price Index, Retail Sales and Industrial Production.
Expect ongoing volatility until markets finally discount the Fed’s upcoming rate hikes. Remember, at the beginning of the year markets were anticipating three-to-four rates hikes for all of 2022. Today the consensus is five or more rate hikes this year. History points to equity markets moving higher 3-4 months after the first rate hike and often making news highs within 6-12 months. Diversification, patience and a bias towards quality will help investors manage through this temporary set-back. As such, we continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias.
Stay safe.
“Perfection is not attainable, but if we chase perfection we can catch excellence.” – Vince Lombardi
ND&S Weekly Commentary 2.7.22 – Choppy Waters
February 7, 2022
It was another bumpy ride on Wall Street last week, with conflicting earnings reports from big-tech companies.
The S&P 500 gained 1.6% this past week, while the Nasdaq rose 2.4% and the Dow Jones Industrial Average advanced 1.1%. Investors were frightened on Thursday after Meta Platforms’ (FB) disastrous earnings report. FB fell 26% triggering a 3.7% drop in the Nasdaq. Solid earnings reports, however; from Apple, Alphabet, Microsoft and Amazon buffered investors’ fears. International equities also finished higher with developed markets (MSCI-EAFE) and emerging markets (MSCI-EM) up 2.1% and 2.5%, respectively.
Despite a few major disappointments, corporate earnings continued to improve. Roughly, 56% of companies within the S&P 500 index reported an increase of 29% in fourth-quarter profits from the 2020 fourth-quarter according to FactSet.
On Friday, the Labor Department reported that there were 467,000 new jobs created in January, blowing away economists’ expectations. The strong jobs report weighed heavily on the bond market, sending the yield of the 10-year U.S. Treasury to 1.93%, which is the highest level since December 2019.
The price of oil surged with U.S. crude climbing to $92 per barrel, the highest level in eight years. Oil prices are up 23% year-to-date and 55% last year.
The strong jobs report and soaring energy prices reinforced the expectation that the Federal Reserve will be more aggressive in lifting interest rates. The so called “punch bowl” of monetary stimulus may be taken away sooner than expected.
With higher inflation, interest rates, and geopolitical tensions expected, market volatility will continue. We recommend revisiting investment objectives and risk tolerance. A globally diversified portfolio should be fine-tuned accordingly, keeping bond durations short while maintaining asset quality. Please avoid the temptation to chase high risk, momentum investments as they sell off.
All eyes will be on inflation numbers to be reported later this week. The consumer price index (CPI) will be reported on Thursday and expectations are as high as 7.2%.
“Things don’t correct themselves. You’ve got to go out there and work hard to correct them.” – Tom Brady
ND&S Weekly Commentary 2.28.22 – “Russian Roulette”
February 28, 2022
To say the least, it was a turbulent week for the stock market, as Russia followed through with their threats and invaded Ukraine. Investors feared that Russia’s invasion will push up inflation, especially energy prices, and that the Federal Reserve will begin increasing interest rates at the wrong time. Although Russia and Ukraine together account for only 2% of global market-based GDP, Russia produces 11% of the world’s oil and 17% of its natural gas. Ukraine and Russia account for roughly 25% global wheat exports.
Despite the geopolitical headwinds, the S&P 500 index was up 0.8% for the week, and Nasdaq gained 1.1%. The Dow Jones Industrial Average (DJIA) fell 0.1%. As expected, foreign markets were under pressure, with Developed (MSCI-EAFE) sliding -2.5% and emerging markets (MSCI-EM) down -4.8%.
Corporate earnings for the fourth quarter of 2021 have been solid. With 470 (94%) of the S&P 500 companies reporting an overall increase in Q4 earnings of 30.2% year over year and 16% revenue growth.
According to the ADP Employment Change Report, there were 467,000 jobs added to payrolls in January, well above consensus, and 400,000 new jobs are expected in February. The core personal consumption expenditures (PCE) price index rose 5.2% over the year ended in January, in line with estimates. With historically low inventory and rising mortgage rates, pending home sales slid to a nine-month low.
The bond market was also volatile with investors at first rushing into safe assets and then back into stocks on Friday. The U.S. 10 year Treasury note rose above 2.00% only to fall to 1.98% for the week. Gold prices declined 0.7% to $1,886/oz. Oil prices rose above $100 per barrel on Thursday for the first time since 2014. The price of oil settled back to $91.59 on Friday, up 1.9% for the week.
On Wednesday, Federal Reserve Chair Jerome Powell will give his semi-annual monetary policy update to the U.S. House Financial Services Committee. He will appear before the Senate Banking Committee on Thursday. Investors are hoping for clarifications on the Federal Reserves position on tapering and raising interest rates. President Biden will deliver his first State of the Union Address on Tuesday. He is expected to discuss the U.S. response to Russia’s invasion of Ukraine. Economic data this week will include reports on construction, factory orders, and employment.
We anticipate volatility will continue until the Ukranian war ends and there is more clarity about the direction of interest rates. Again, we recommend re-visiting investment objectives, risk tolerance and asset allocation goals. Our thoughts and prayers go out to the Ukranian people.
“Older men declare war. But its youth that must fight and die.”–Herbert Hoover