Newman Dignan & Sheerar, Inc.

Registered Investment Advisors

ND&S Weekly 5.31.22 – “A Bit of Reprieve”

May 31, 2022 

Wall Street ended its 7th straight week of market declines as investors were calmed by signs of peaking inflation and consumer resiliency.
The S&P 500 gained 6.6% this past week, while the Nasdaq rose 6.9% and the Dow Jones Industrial Average advanced 6.3%. International equities also finished higher with developed markets (MSCI-EAFE) and emerging markets (MSCI-EM) up 3.5% and 0.9%, respectively. The yield on the 10-year U.S. Treasury moved 4bps lower last week to close at 2.74%.

On Wednesday, the Federal Reserve released minutes from their latest meeting that showed its members felt that raising interest rates by half a percentage point at their next two meetings could be enough to slow economic growth to tame inflation. Investors had feared a more aggressive rate hike policy might be needed. The Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index (PCE) rose at an annual rate of 6.3%, still elevated but down from 6.6% in March. The annualized GDP figure released on Thursday showed that the economy contracted by 1.5%, higher than the 1.4% estimated.

The price of oil surged with U.S. crude climbing 4.4% to $115 per barrel. That is still down from the high of $123 at the beginning of the war in Ukraine. Housing showed signs of slowing as home sales fell for the sixth straight month due to high prices and higher mortgage rates. There will be economic reports this week on the labor market and the release of the S&P Case-Shiller Home Price Index.

With the uncertainty of inflation, interest rates, and geopolitical tensions, market volatility will continue. We recommend revisiting investment objectives and risk tolerance and fine-tuning accordingly.

“Our debt to the heroic men and valiant women in the service of our country can never be repaid. They have earned our undying gratitude. America will never forget their sacrifices.”– Harry S. Truman

ND&S Weekly Commentary 5.23.22 – The Bears Have Come out of Hibernation

May 23, 2022 

A rough week for equities ended with all US indices down for the week. The S&P 500, a broad measure of the market, traded intra-day below a 20% decline from its 52-week high, signaling a possible “bear market.”

The equity markets’ wide swings are expressions of its varied views and lack of true conviction. There are as many pundits who believe we are at the bottom of this decline as there are who believe this is only stage one of a historic decline in equity values. If current levels are the bottom of this decline, we still have not seen the “capitulation” that typically comes before the true bottom. Capitulation is the market’s version of the last stage of grief – the denial, the anger, the bargaining, and the depression are over, and the market’s “acceptance” is usually a broad sell-off that goes well below fair valuations. The challenges include that there is no guarantee that these past behaviors will be repeated.

We see many reasons to be positive that even if we have a recession, it will be shallow and short-lived. We see reasons to be concerned, too. More important is our confidence in the longer-term outcomes from our investment decisions. Our clients are interested in the long-term values of their investments. Short-term price changes that are overly influenced by near term noise, greed, fear and other emotions are the enemy of sound investment decisions.

For the week, the DJIA declined 2.78%, while the S&P 500 dropped 3.05%. The tech-heavy Nasdaq finished 3.82% lower. International markets gained, with the MSCI EAFE Index up 1.53% while emerging market equities (MSCI EM) popped 3.13%. Small company stocks, represented by the Russell 2000, declined 1.05%. Fixed income, represented by the Bloomberg/Barclays Aggregate recovered 0.59% for the week. The 10 YR US Treasury rallied, dropping its yield to ~2.8%. Gold USD prices ($1,841/oz.) moved 1.9% higher as the USD traded slightly lower over the week. As we move into the high demand summer driving season, Oil prices were up about 2.5% last week to close at $113.23 per barrel.

Bonds, as measured by the benchmark US Treasury yield curve, rallied for the week. This was a positive sign of a typical market reaction of investors moving away from the struggling equity market to the higher quality of predictable cash flows from US Treasury obligations. In previous weeks, we saw stock and bond prices both declining. This is some indication that, for the time being, that investors are comfortable with the yield curve in place now. However, at the same time, yields on corporate obligations, relative to US Treasuries, increased. Corporate yields are measured by their “spread” (difference) over UST obligations with the same maturity. This increase in spreads is, perhaps, an early sign of investors’ credit concerns. As the risk of difficult conditions for corporations increases and their ability to service debts (potentially) declines, spreads increase, because investors demand higher compensation for taking on this risk. Such indicators bear watching as the bond market has a reputation of “getting things right” and is generally less emotional than the equity markets.

In the week ahead there are more earnings reports will be trickling in, with NVIDIA, a bellwether for semiconductor chips, being one to watch. Durable goods orders and GDP numbers come out Wednesday and Thursday and Personal Spending and Income numbers on Friday. The Bond Market – which gets this right too! – closes at 2PM on Friday. So, tell your employer that you follow the bonds and see if you can get out early for a nice long weekend!

“You make most of your money in a bear market, you just don’t realize it at the time.”
– Shelby Cullom Davis

Weekly Commentary (5/9/22) – Markets Finish Lower as Uncertainty Continues

May 9, 2022 

Equity and bond markets were negative last week as investors fretted about uncertainty surrounding Federal Reserve policy, rising inflation, the ongoing war in Ukraine and continued China lock-downs. The Dow Jones Industrial Average is riding a six-week losing streak while the 10-year Treasury yield hit its highest level since late 2018.

For the week, the DJIA lost 0.24% while the S&P 500 dropped 0.21%. The tech-heavy Nasdaq finished lower by 1.54%. International markets provided no shelter as the MSCI EAFE Index closed lower by 2.78% while emerging market equities (MSCI EM) gave back 4.13%. Small company stocks, represented by the Russell 2000, dropped 1.32%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 1.11% for the week as yields jumped higher on continued inflation worries. As a result, the 10 YR US Treasury closed at a yield of 3.12%. Gold prices closed at $1,881.20/oz – down 1.47% on continued dollar strength. Oil prices moved higher from last week’s levels and closed at $109.77 per barrel, up 4.85% on the week. High oil and gas prices continue to strain consumers’ pocketbooks.

As widely anticipated on Wednesday, the FOMC raised the Fed funds target range by 50 basis points (bps). It was the biggest increase in the Fed funds rate since May 2000. The Fed also confirmed that it will begin to reduce its bloated balance sheet beginning in June. Fed Chair Powell squelched the idea of a potential 75 bps and reaffirmed the Fed’s bias to increase rates by another 50 bps at its June meeting. Friday’s stronger-than-expected jobs report for April fueled investors’ concerns about rising wage inflation. The report also showed the unemployment rate was unchanged at 3.6% while the labor force participation rate slipped to 62.2% – its lowest reading in the last three months. Many economists believe that the Fed is too late in its efforts to raise rates and slow down the economy and inflation.

Economic news this week will focus on the release of April’s Consumer Price Index on Wednesday and the Producer Price Index on Thursday. April’s CPI is expected to come in around 8% (March’s reading was 8.5% year-over-year). We expect April’s CPI to be close to peak inflation as higher rates and rising inflation will ultimately slowdown consumer spending and inflation’s rise. One encouraging sign regarding inflation showed up in April’s Manheim Used Vehicle Index as the index fell 1%, its third consecutive decline. The reading suggests that one of the main contributors to last year’s run-up in core CPI (CPI for used cars and trucks) should also be moderating in the months ahead.

Expect ongoing volatility until inflation concerns abate and a resolution in Ukraine is achieved. Markets are exhibiting signs that traditionally point to a bottoming process (maximum pessimism and low sentiment, hedge fund liquidations, lack of reaction to positive news, etc…). 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.

“If the world were perfect, it wouldn’t be.” – Yogi Berra

NDS Weekly Commentary 5.2.22 – Weak Week

May 2, 2022 

The stock market suffered another volatile week with a hard sell-off on Friday. Investors struggled with China’s economic slow-down, the ongoing war in Ukraine, surging inflation, and a hawkish Federal Reserve.

For the week, the Dow Jones Industrial Average (DJIA) slid 2.47%, the S&P 500 lost 3.26%, and the Nasdaq fell 3.92%. Foreign markets were mixed with developed equities (MSCI EAFE) down 2.17%, while emerging markets (MSCI EM) returned 0.09%, Small company stocks, represented by the Russell 2000, finished the week in the red by 3.94%. April was a cruel month for investors as the S & P 500 index lost 8.8%, the worst month since Covid 19 began, and the Nasdaq plunged 13.3%, the most since October 2008. Oil prices (WTI) closed at $104.35 per barrel, up 2.2%, gold declined 1.2%, and the Dollar Index advanced 0.5% to 103.43.

Corporate earnings for the first quarter were stronger than expected with 279 of the S&P 500 companies reporting. Roughly 66% have exceeded sales expectations and about 81% have beat profit projections. Overall, sales growth is tracking to increase 12.8% and earnings should grow 2.6% year over year.

Bond yields, which rise as bond prices fall, continue to increase as inflation has remained stubbornly high. The yield on the U.S. 10 year note closed at 2.89%, roughly the same as the previous week, however, up from 2.32% at the end of March. The Federal Reserve is expected to aggressively lift interest rates to stave off inflation and reduce its bond holdings. Investors and economists are concerned that the Fed’s tightening may come at a difficult time and could dampen economic growth.

On the economic front, the US economy’s overall health gauge, the gross domestic product (GDP), shrank by a 1.4% annual rate in the first quarter. The Fed’s preferred measure of inflation, the personal consumption expenditures index (PCE), gained 6.6% year over year in March, spelling more trouble for the economy.

The highlight of this coming week’s calendar is Wednesday’s Federal Reserve meeting and their policy decisions and commentary. The monthly jobs report is scheduled to be released on Friday.

We look for markets to continue to be volatile and focused on inflationary pressures, the Fed’s response, and the war in Ukraine.

“Spring is the time of year when it is summer in the sun and winter in the shade” – Charles Dickens