Archive for ND&S Updates
ND&S Weekly Commentary (3.21.22) – March Madness
March 21, 2022
Equities rebounded hard last week, as the Fed unveiled its monetary policy plans for the balance of 2022. The rally in risk assets came even amid Covid-19 lock-downs in China, data pointing to inflationary pressures, and a worsening situation in Ukraine.
For the week, the DJIA gained 5.53% while the S&P 500 recovered 6.19%. The tech-heavy Nasdaq jumped higher by 8.20%. Small company stocks, represented by the Russell 2000, returned 5.43%. International markets also had a strong week with developed markets (MSCI EAFE) and emerging markets (MSCI EM) up 5.63% and 3.51%, respectively. Fixed income, represented by the Bloomberg/Barclays Aggregate, was down 0.39% during a volatile trading week for bonds. Treasury yields increased across the board with the yield curve narrowing considerable after the Fed’s press release. As a result, the 10 YR US Treasury closed at a yield of 2.14% (up 14 bps from the previous week’s closing yield of ~2.00%). Gold prices closed at $1,936/oz. – down by 2.78% on the week. Oil prices fell last week amid concerns over the impact of widespread lock-downs in China. Oil closed at $104.70 per barrel, down 4.22%.
Last week, the Federal Open Market Committee (FOMC) delivered on a very well communicated 25 bps hike in its Federal Funds rate. The Fed made it clear that it plans to hike rates more quickly than it did in previous cycles to combat the inflation pressures. Accordingly, its members are now signaling a hawkish path ahead with 6 additional hikes expected during the remainder of 2022.
In economic data released last week, the Bureau of Labor Statistics reported that the Producer Price Index (PPI) rose 0.8% in February and 10.0% y/y. Retail sales rose 0.3% in February, below the 0.4% estimate as inflation seemed to impact consumer spending. Online spending pulled back sharply as sales for gasoline soared as prices jumped higher. Other categories of strength were food services, building materials and garden. This week’s economic calendar will include reports on consumer sentiment, durable goods orders, and the Markit manufacturing/services PMIs (Flash).
As we prepare for higher interest rates, we continue to utilize a flexible approach to fixed income with below market-weight duration. In terms of equities, we continue to focus on valuations and quality stocks with durable profits. The path ahead will continue to be filled with uncertainty with regards to geopolitical risks, elevated inflation, and supply chain disruptions. As such, we continue to stick close to asset allocation targets with a slight defensive bias.
Congratulations to the Providence College Friars, who have reached the Sweet Sixteen for the first time in 25 years. They will try to keep a dream season alive as they take on the Kansas Jayhawks on Friday night.
“… Providence is in the damn building.” – Ed Cooley
Weekly Commentary (3/14/22) – Markets Finish Lower as the War in Ukraine Intensifies
March 14, 2022
Equity markets were negative last week as a cornucopia of headwinds weighed on investor sentiment. The war in Ukraine, rising inflation, negative real wage growth, declining consumer confidence and decelerating GDP growth are all weighing heavily on investors’ minds. We suspect most of these concerns are reflected in current market levels.
For the week, the DJIA lost 1.99% while the S&P 500 dropped 2.88%. The tech-heavy Nasdaq finished lower by 3.53%. On a slightly more positive note, the MSCI EAFE Index closed up by 0.57% while emerging market equities (MSCI EM) sunk 5.17%. Small company stocks, represented by the Russell 2000, dropped 1.06%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 1.76% for the week as yields jumped higher on continued inflation worries. As a result, the 10 YR US Treasury closed at a yield of 2.00%. Gold prices closed at $1,982.70/oz – up 0.90%. Oil prices moved lower from last week’s high and closed at $109.33 per barrel, down 5.49% on the week. Despite the drop in oil prices, the national gas price average rocketed higher by almost 13% week-over-week to $4.33 per gallon … another tax on consumers and businesses.
The big economic focus of last week was on the release of the February Consumer Price Index – both headline and core figures matched expectations of 7.9% and 6.4%, respectively. Consumer inflation is now running at the fastest pace in 40 years and calls into question future consumer spending power. The University of Michigan Consumer Sentiment Index fell to 59.7 for the early weeks of March, its lowest level since 2011. On a more positive note, the Department of Labor reported last week that non-farm payroll employment rose by 678,000 in February (ahead of consensus). The unemployment rate fell to 3.8% even with more people entering the labor force and looking for employment. Normally such a strong employment figure would be well received by Wall Street, but investors are rightfully concerned about the war in Ukraine and rising inflation.
All eyes will be on the Fed this week as it wraps up its two-day meeting on Wednesday. It is widely expected that the Fed will raise the fed funds rate by 0.25% as it embarks on what is expected to be a series of seven rate hikes over the next 12 months. Other economic news this week includes Retail Sales, Import Prices and the Producer Price Index.
Expect ongoing volatility until a resolution in Ukraine is achieved. 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.
Happy Pi Day!
“Ask five economists and you’ll get five different answers – six if one went to Harvard.” – Edgar Fiedler
ND&S Weekly Commentary 3/7/22 – The Markets Loathe Uncertainty
March 7, 2022
Investors are processing the reality of a sovereign nation being invaded by its neighbor in style reminiscent of 1939. Many people had believed that such war mongering by a global power was a relic of the past. Putin’s provocations had planted doubts and worries in the minds of market participants, around the world, over recent months. So, Russia’s invasion of Ukraine on February 24th triggered a decline in stock prices and a rally in less volatile investments.
The Russian invasion has increased the probabilities of a set of dire possibilities. Asset prices gyrating, signals the lack of conviction about how this conflict will affect business around the globe and whether Putin’s ambitions will expand beyond Ukraine.
The human tragedy in Ukraine defies description. We join the billions of others who share sincere care and concern for the sufferings of the Ukrainian people, and we are hoping for a sharp decline in Russia’s unprovoked hostilities with Ukraine’s sovereignty intact.
All Major US and World equity indices were down for the week. The S&P 500 moved 1.24% lower but did avoid revisiting the “technical correction” level of 10% off its January 3 high, that it had reached in the previous week. The DJIA was off 1.23% while the Nasdaq slid even further and was down 2.76%. MSCI EM was off 2.29% and the MSCI EAFE had a significant retreat as it moved 6.5% lower. The small company stocks of the Russell 2000 dropped 1.92%.
As investors traded out of equities, bonds had a small rally. The US Aggregate Bond Index gained 0.95% and the 10 YR US Treasury yield dropped to 1.74% at the end of stock trading on Friday, signifying a rise in its price, for the week. Commodity prices in general were higher as Oil surged higher to $115.68 per barrel, up over 26%(!!) and Gold was higher at $1,945 per oz., up another 3.2%.
During his testimony on Capitol Hill this past week, US Federal Reserve Chairman, Jerome Powell, shared his inclination to propose that the FOMC raise the federal funds target rate by 0.25% at its March 15-16 meetings. This is in line with most investors’ expectations and typical of the Fed’s efforts to not surprise the markets with changes in its Monetary Policy. The Fed is working to combat the highest levels of inflation in 40 years. However, Powell also added that the FOMC was prepared to move more aggressively at future 2022 meetings, if inflation remains high.
The US Consumer Confidence numbers are down from recent peaks in mid-2021 but are still strong through February. Consumer Spending remains solid and job growth is still strong. A slow-down in growth is the Fed’s objective. The delicate balance is not provoking a recession. Despite the heightened level of uncertainty, markets are not discounting a recession and the prospects for a “soft landing” from the COVID stimulus growth rates are still good.
Over longer periods, investors’ asset allocation strategies have proved to be the major determinant in their investment results. Volatility is a function of how often prices are observed. Modern investors constantly face the temptation to constantly observe prices. Short term volatility is a distraction for investors with long-term objectives.
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” — Warren Buffett
ND&S Weekly Commentary 3.28.22 – Spring Is Here and Interest Rates Take It Literally
March 28, 2022
Russia’s invasion of Ukraine continues to dominate the world’s attention. The endgame remains unclear and Ukraine’s resilience and resolve in the defense of their country has surprised and impressed us all. Ukraine and other issues contribute to the heightened uncertainty that continues to weigh on the financial markets. We are in a period where numerous rogue factors are bearing on investors and markets simultaneously:
• the effect of the war in Ukraine on supply chains for manufacturing, energy and food
• the possibility of COVID variants surging and disrupting the recovery from the pandemic
• huge increases in oil prices
• the concerns that China may see this period as its best opportunity to invade Taiwan
• substantial, if not rampant, inflation rates in the global economies
• the central banks’ natural response of tightening money supplies to fight the inflation.
Fortunately, economic fundamentals in the US and European economies are strong. GDP growth is good, unemployment rates are low, and consumer balance sheets are strong. While everyone is on the alert for signs of recession, most indicators are not pointing in that direction. However, the equity markets do show a lack of conviction, and we continue to see intraday and intraweek volatility without any clear trends established.
Nearly all Major US and World equity indices were higher over last week. The S&P 500 moved 1.81% higher and the DIJA moved ahead 0.31%. The Nasdaq rallied 1.99%, but the small-cap Russell 2000 dropped 0.38%. MSCI EM added 0.23% and the MSCI EAFE was also up for the week by 0.20%.
Comments from some FOMC members indicate the Fed may move more aggressively and more quickly than previously indicated in its already forecasted plans to raise the discount rate to ~2% over its next six meetings. It raised the rate by 0.25% to the current 0.50% in mid-March. The Fed avoids actions that surprise markets, and such comments are a means of preparing the markets for what seems to be a more hawkish plan for fighting inflation. Bond investors responded by signaling their needs for higher rates of return as they forced bond prices lower, thus increasing the effective yield on bonds’ fixed streams of future payments. The 10-year US Treasury bond saw its yield spring to over 2.5% before ending the week at 2.48%. This is the highest yield for the 10-year since April 2019.
Bond prices were lower across the maturity spectrum. The US 2yr added 13 bps, the 10yr added 34 bps, and the 30yr added 18 bps to their effective yields to close the week at 2.3%, 2.48% and 2.6%, respectively. This steepens the front of the yield curve, and, for the time being at least, indicates a sanguine attitude from the bond market regarding the Fed’s ability to bring inflation under control without undue harm to GDP growth. For the week, the US Aggregate Bond Index dropped 1.82%. Oil moved ~$9 higher to finish at $113.90 per barrel and Gold added ~1% during the week to close at $1,954 per oz.
Patience and conviction bring successful investors through the storms of uncertainty to reach their goals. Investors with a long-term investment thesis are undeterred by momentary setbacks and avoid the temptations to “do something clever” that is in direct conflict with their overarching plan.
” The key to everything is patience. You get the chicken by hatching the egg, not by smashing it.” – Arnold H. Glasow