Archive for ND&S Updates
ND&S Weekly 4.18.22 – Inflationary Pressures Persist
April 18, 2022
Markets experienced another challenging week as they were hit with several key economic reports confirming the ongoing inflation problem.
For the week, the DJIA declined 0.78% while the S&P 500 dropped 2.11%. The tech-heavy Nasdaq finished 2.62% lower. International markets were also lower with the MSCI EAFE Index down 1.03% while emerging market equities (MSCI EM) gave back 1.23%. On a slightly more positive note, small company stocks, represented by the Russell 2000, increased 0.57%. Fixed income, represented by the Bloomberg/Barclays Aggregate finished lower by 0.70% for the week. The 10 YR US Treasury closed at a yield of 2.83%, an increase of 13bps last week. Gold prices rallied as a flight-to-safety trade to close at $1970/oz. – up 1.51%. Oil prices jumped higher to close at $106.95 per barrel – up 8.84% on the week. It was reported by Baker Hughes that active rig counts climbed by 253 last week so we are starting to see the influence of high oil prices. Let’s hope that we start to see some moderation in oil prices.
There were three key March economic reports released during the holiday-shortened week. The March Consumer Price Index (CPI) and Producer Price Index (PPI) both showed annual increases. The March CPI reading came in at 8.5% (year-over-year), ahead of estimates of 8.4% and the highest since December 1981. Following that report, the March PPI jumped 11.2% (year-over-year) which suggests continued inflation pressures in the months ahead even as oil prices level off. Retail sales in March rose 0.5% as consumers spent more on essentials like gasoline and food. Looking through the report, Gasoline Stations sales soared 37% (Y-o-Y) while sales at grocery stores increased 9.5% (Y-o-Y). There were declines in online shopping and auto sales that held back spending totals.
In the week ahead, there will be a modest number of economic reports as most investor eyes will be on the first full week of Q1’22 earnings announcements. In 2021, companies benefited from easy year-over-year comparisons with Covid-ravaged 2020 results. Expectations for this reporting season are expected to have earnings for the S&P 500 overall grow at less than 5%. As is normally the case, it is expected that companies will at a minimum meet their expectations, but forward guidance will be extremely important in the face of inflation pressures and the moderating economic outlook.
Equity markets seem a bit oversold again after the jump off the mid-March lows while bond yields have soared higher in the face of a more hawkish Fed. It is our hope that we are at or close to peak inflation which should offer some relief for both stocks and bonds. Patience is still warranted as investors should continue to stick close to long-term allocation targets with a slight defensive bias.
“The hardest thing to understand in the world is the income tax.” – Albert Einstein
ND&S Weekly Commentary 4.11.22 – Markets Finish Lower as Uncertainty Continues
April 11, 2022
Equity and bond markets were negative last week as investors fretted about uncertainty surrounding Federal Reserve policy and the continuing war in Ukraine. Despite last week’s setback, the S&P 500 has rebounded 7.6% from its March 8th low.
For the week, the DJIA lost 0.28% while the S&P 500 dropped 1.27%. The tech-heavy Nasdaq finished lower by 3.86%. International markets provided no shelter as the MSCI EAFE Index closed down 1.36% while emerging market equities (MSCI EM) gave back 1.53%. Small company stocks, represented by the Russell 2000, dropped 4.62%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 1.82% for the week as yields jumped higher on continued inflation worries. As a result, the 10 YR US Treasury closed at a yield of 2.70%. Gold prices closed at $1,941.60/oz – up 1.17%. Oil prices moved lower from last week’s high and closed at $98.26 per barrel, down 1.02% on the week. A further drop in oil prices will ease the strain on consumers’ pocketbooks.
Last week’s release of the latest FOMC minutes essentially confirmed a 50-basis point move at its May meeting. Fed governors were unanimous in their intent to limit the damage from inflation. As a result, bond yields moved materially higher last week (explaining the hit to tech stocks last week). Last week also saw the release of the Markit ISM Services Purchasing Managers Index (PMI). March’s index registered 58.0, up from 56.5 in February as output quickened amid stronger demand conditions (a reading above 50 indicates that the services sector is expanding). Interestingly, client demand strengthened despite a sharp increase in cost burdens. Backlogs expanded at the fastest rate since 2009 reflecting not only strong demand, but capacity pressures as well.
Economic news this week includes CPI, PPI, retail sales and import prices. Tuesday’s CPI will likely be a bit hot given pricing comments from last week’s PMI reports. Wednesday’s PPI should continue to reflect rising input costs. Thursday’s retail sales report should be decent given last week’s release of Mastercard’s Spending Pulse Report for March that showed total retail sales excluding autos rose 8.4% year-over-year. Markets close this Friday for Good Friday. Next week will be the beginning of earnings season.
Expect ongoing volatility until inflation concerns abate and 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.
Best wishes for a Happy Passover and Happy Easter.
“With the new day comes new strength and new thoughts.” – Eleanor Roosevelt
ND&S Weekly Commentary 4.4.22 – Recession Signals
April 4, 2022
Stocks ended the week mixed, as investors struggled with the war in Ukraine, an inverted yield curve and higher inflationary expectations. For the week, the DJIA was down 0.12%, while the S&P 500 ticked up 0.08% and the tech-heavy Nasdaq rose 0.66%. Foreign equities fared well with developed markets (MSCI-EAFE) up 0.83% while emerging markets (MSCI-EM) gained 1.92%. The stock markets have been amazingly resilient, given the convincing evidence that inflation is elevating, which will undoubtedly force the Federal Reserve to act more aggressively to taper bond purchases and hike interest rates.
The Federal Reserve’s preferred inflation metric, the core personal consumption index, rose 5.4% in February, which is well above its target of 2%. Other inflationary data included wages increasing 5.6% year over year in March, the unemployment rate falling 3.6%, and the labor force participation rate climbing to 62.4%. During March, there were 431,000 jobs created in the U.S., the eleventh consecutive month that job gains exceeded 400,000.
The Institute for Supply Management Purchasing Manager Index (PMI), slowed down in March to 57.1% from February’s 58.6% and below expectations of 59.0%. The price of oil dropped below the $100 level for a weekly decline of nearly 13%, largely a result of the Biden Administration announcing a plan to release up to 180 million barrels from strategic reserves over the next several months.
The 2-year and 10-year yields inverted for the first time since 2019. This part of the yield curve is closely watched as a warning signal that a recession could be on the horizon. Last week, the yield on the 2-year U.S. Treasury rose 14 basis points (bps) to 2.44%, the yield on the 10-year note dropped 10 bps to 2.38%, while the 30-year bond rate declined 16 bps to 2.44%. While the yield curve has been a reliable predictor of pending recessions, there has often been a long lag time between the inversion and actual recession.
Important economic data released this week will include the Institute for Supply Management’s non-manufacturing index, the release of the March 15-16 Federal Reserve meeting minutes, and wholesale inventories. We suggest that investors maintain their longer-term focus, well-diversified portfolios, and manage fixed income investment risks by keeping duration short and credit quality strong.
“Avoiding inflation is not an absolute imperative but rather is one of a number of conflicting goals that we must pursue and that we may often have to compromise.”-Paul Samuelson
ND&S Weekly 4.18.22 – Should I Stay or Should I Go?
April 26, 2022
The US and other major economies face the multiple challenges of global supply chain disruptions, massive increases in oil prices, dramatic increases in inflation rates, central banks pushing interest rates higher, and the potential that COVID could still have significant impacts – as it has in China throughout most of April. While these issues are plenty, the war in Ukraine adds more uncertainty, as it continues to have negative impacts on energy prices, supply chains, food supply and general concerns about geopolitical stability and what Russia might do, if they cannot achieve their objectives by “conventional means”.
For the week, the DJIA declined 2.86% and the S&P 500 dropped 2.75%. The tech-heavy Nasdaq finished even lower, down 3.83%. International markets were also lower with the MSCI EAFE Index down 1.53% and emerging market equities (MSCI EM) gave back 3.35%. Small company stocks, represented by the Russell 2000, decreased 3.21%. Fixed income, represented by the Bloomberg/Barclays Aggregate finished lower by 1.04% for the week. The 10 YR US Treasury closed at a yield of 2.90%, an increase of 7bps last week. Even Gold prices were lower, closing at $1931/oz. – down 0.98%. Oil prices slumped to close at $103.07 per barrel – off 3.76% on the week.
Markets continue to wrestle with this difficult environment and, over the past three weeks, equity and bond investors have shown more eagerness to sell their positions than the new buyers have in taking on those positions. This brings assets prices down and that accelerated during this most recent week.
At the same time, the micro rallies within a generally down trend that began in 2022 across virtually all asset classes reveals the underlying optimism embedded in investors’ psyches in the ability of the US and other economies to fight back and overcome these recent and “temporary” challenges. The amount of time in “temporary” is the major unknown. The lack of conviction in the markets about this is unmistakable. It is clearly the clash of “should I stay, or should I go?”!
Ultimately, equity investors care about earnings and sustainable growth. Q1 22 earnings report have begun. With close to 25% of the S&P 500 companies reported by the end of last week, EPS results were mildly exciting with 76% beating expectation by ~7.2%. Earnings growth estimates also brought positive news: 6.4% overall and 15.4% Ex-Financials. Close to 50% of the S&P 500 will report this week. The Federal Reserve’s upcoming meeting and subsequent members’ comments will have major implications on how long “temporary” might be.
In the week ahead, as noted, the bulk of earnings announcements will be reported. The Consumer Confidence Index will be reported on Tuesday. Friday is a big day for more inflation numbers with the PCE index and Chicago PMI levels released.
While it is tempting to try to outsmart the market by deciding “when to go and when to come back”, nobody has proved that can be done consistently. The successful long-term investor “stays”. The difference is investors can pull back, without leaving. We are doing that – we are on the low side of allocation targets for both stock and bonds, and we are more cautious/defensive in how we are invested in those asset classes.
“”This is an important fact: people prefer to dance than to fight wars.”.” – Mick Jones, The Clash