Archive for ND&S Updates

ND&S Weekly 9.26.22 – What It Takes

September 26, 2022 

It was another tumultuous week for investors as the markets continued to process new information from the Fed. One thing became clear, the equity markets are finally realizing the Fed will indeed “go bigger, for longer” on inflation. The Federal Open Markets Committee (FOMC) met and announced a rate hike of 75 basis points. Additionally, the FOMC laid out a hawkish path for rates, one that could take the policy rate to mid-4% range in 2023. In the wake of the meeting, US yields have risen sharply with 2yr US Treasury note reaching 4.2%, the highest since 2007.

For the week, the DJIA fell 4.00% and the S&P 500 dropped 4.63%. The tech-heavy Nasdaq slid 5.06%. International markets were also down. For the week, the MSCI EAFE Index (developed international) finished lower by 5.59% and emerging market equities (MSCI EM) dropped 4.02%. Small company stocks, represented by the Russell 2000, were down sharply (-6.58%) for the week. The 10 YR US Treasury closed at a yield of 3.69% (up 24 bps over the week) and as a result, fixed income, represented by the Bloomberg/Barclays Aggregate, fell 1.56% as yields moved sharply higher. Gold prices finished at $1,644/oz. – down 1.58% on the week. Oil prices retreated to $78.74 per barrel, down 7.4% on the week.

Looking ahead, concerns regarding a slowing economy and rising costs have increased. 2023 earnings expectations have remained high, still pointing to 8% year-over-year growth next year. A more realistic view suggests analysts will begin to cut expectations for future earnings if the continued tight monetary environment tips the economy into a recession. 3q22 earnings season will begin in a couple of weeks and we should see companies begin to reduce guidance. The bearish story is well known, and we are certainly in the mix of the chaos. In times of panic, we are reminded of the quote from investor Byron Wein, “disaster has a way of not happening”. Investor sentiment is at extreme levels and technical indicators are indicating oversold conditions. Markets have already begun discounting the slowdown and we wouldn’t be at all surprised if equity markets were to have a relief rally in the short-term.

“The science of today is the technology of tomorrow.” – Edward Teller

ND&S Weekly Commentary 9.19.22 – Fall, Leaves, Fall

September 19, 2022 

Halloween came early as investors were spooked by higher-than-expected inflation, signs of slowing economic growth and the likelihood of the Federal Reserve hiking interest rates more than expected.

On Tuesday, the Consumer Price Index (CPI) release showed that the key drivers of inflation are not slowing down. The market reacted by sending U.S. stocks to their steepest one-day decline since the beginning of the pandemic.

For the week, the S&P500 slid 4.7%, the DJIA fell 4.1%, and the tech-heavy NASDAQ took back 5.5%. International equities were also weak with developed and emerging markets down 2.7% and 2.6%, respectively. The price of gold dropped to $1,683/oz. – down 2.6% for the week.

Interest rates advanced with the yield on the 10yr U.S. Treasury climbing for the seventh straight week to close at 3.45% … up from 3.32% the previous week. The yield curve remains inverted with the 2yr Treasury Note rising to 3.87% which is its highest level since 2007.

The August CPI report released last week came in at 8.2% y/y, a slight decline from July (8.5%) but higher than expected. When food and gasoline prices are excluded, core inflation rose 6.3%, much higher than the expected 5.9%. There was good news about U.S. Retail Sales rising in August by 0.3% following July’s 0.4% decline.

We expect the Federal Reserve to stick to their guns and increase the Federal Funds rate by 0.75% at this week’s meeting. The CEO of the shipping giant FedEx warned of a gloomy outlook for the global economy and expects that there will be a global recession. FedEx announced that it was pulling its full-year earnings guidance due to the “continued volatile operating environment.”

Despite more compelling stock valuations and a resilient consumer, we recommend that investors reassess their investment objectives, risk tolerance and fine-tune a diversified portfolio accordingly.

“There is a harmony in autumn, and a luster in its sky, which through the summer is not heard nor seen, as if it could not be, as if it had not been!” – Percy Bysshe Shelley

Weekly Commentary (9/12/22) – Markets Bounce Higher on Hopes of a Soft Landing

September 12, 2022 

US Markets were sharply higher last week as investors’ fears of a recession slowing the economy, in the near term, abated. Reversing course from its reaction to the Fed’s reaffirmation of its resolve to fight inflation, investors were willing to pay higher prices for stocks in virtually all asset classes. This was despite bond yields still rising slightly.

For the week, the DJIA returned 2.72% and the S&P 500 was up 3.68%. The tech-heavy Nasdaq bounced back and climbed 4.15%. International markets were mixed and more muted. For the week, the MSCI EAFE Index (developed countries) added 0.89% while emerging market equities (MSCI EM) were off 0.13%. Small company stocks, represented by the Russell 2000, were strong and finished the week up 4.07%. Fixed income, represented by the Bloomberg Aggregate, declined 0.70% for the week as yields moved slightly higher. The 10 YR US Treasury closed at a yield of 3.33% (up ~ 13 bps from the previous week’s closing yield of ~3.20%). Gold prices closed at $1,713/oz. – up just slightly from $1,710 on the week. Oil prices were stable and closed only down $0.08 at $86.79 per barrel.

Last week’s economic data included the ISM Services PMI which unexpectedly edged higher to 56.9 in August of 2022 from 56.7 in July, beating market forecasts of 55.1, and pointing to the strongest growth in services activity in four months. There is evidence of some supply chain, logistics and cost improvements; however, material shortages remain a challenge. Consumer Credit Consumer credit in the United States increased by USD 23.81 billion in July of 2022, down from a downwardly revised USD 39.1 billion gain in the previous month and well below market expectations of a USD 33 billion rise. This may be an indicator of cautious consumers.

This week some key inflation metrics will be released: Monday – Consumer Inflation Expectations, Tuesday- CPI and Core Inflation numbers for August, Wednesday – Producer Price Index (PPI) data for August, Thursday- Retail Sales data. With so much attention focused on inflation rates and the consumers’ spending rates and how the Fed will/might execute its mandate to curb inflation, this data could move markets as investors typically have a dramatic initial reaction to any surprises. Even if there are no surprises, bullish investors will often take this as a very positive cue, in this environment.

The market tested a significant “technical level” of about 3,900 on the S&P 500 Index the week before last and bounced off it to make gains for the past week. If stock prices break down through this level, technical analysts would generally predict that the market could move even lower to test the June 14 lows. Regardless of whether this near-term movement takes place, we are sanguine on the long-term prospects for stocks and remind investors to avoid being distracted by near-term gyrations as we all juggle the data deluge and an unprecedented economic environment – of course, it always feels that way.

“You may not control all the events that happen to you, but you can decide not to be reduced by them.” – Maya Angelou

Weekly Commentary (9/6/22) – Markets Lower on Fed Resolve

September 6, 2022 

Markets were lower across the board last week as investors reacted to hawkish comments from Fed Chair Powell at the Jackson Hole conference. The Fed reiterated their intention to tame inflation while being willing to sacrifice some softness in the economy to do so.

For the week, the DJIA lost 2.85% while the S&P 500 gave back 3.23%. The tech-heavy Nasdaq had a rough week as it declined 4.18%. International markets finished lower as well. For the week, the MSCI EAFE Index (developed countries) finished lower by 3.00% while emerging market equities (MSCI EM) dropped 3.41%. Small company stocks, represented by the Russell 2000, were weak and finished the week down 4.70%. Fixed income, represented by the Bloomberg Aggregate, declined 1.02% for the week as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 3.20% (up ~ 16 bps from the previous week’s closing yield of ~3.04%). Gold prices closed at $1,709.80/oz – down 1.51% as the U.S. dollar rose 0.81% on the week. Oil prices retreated to close at $86.87 per barrel, down 6.65% on the week.

Last week saw several important economic releases. The US Manufacturing PMI came in at 51.5 … down 0.7 points from July. Unemployment nudged up to 3.7% while the August Employment Report showed 315k jobs added for the month – slightly better than the expected 295k. Average hourly earnings for August rose 5.2% (unchanged versus July) while the report also showed downward revisions in the number of jobs created in June and July to 107k. The big news of the week, highlighted above, was from the Fed’s Jackson Hole conference. The Fed remained resolute in attacking inflation. The next Fed meeting is scheduled for September 20 – 21 when they are expected to raise rates 75 bp (up from pervious estimates of 50 bp) followed by two 25 bp hikes before year-end for a terminal fed funds rate of 3.50% – 4.0%. Markets were hoping for more dovish comments from the Fed.

The week ahead holds a few events that will provide investors a snapshot of how the economy and sentiment are holding up in early September. Releases include: August Services PMI, ISM Non-Manufacturing Index, Consumer Credit and an OPEC+ and ECB meeting.

We are likely not out of the woods yet and we look for markets to remain range-bound. September has not been overly kind to investors over the years with the median market return of -0.1%. When the S&P 500 is down YTD (like 2022) September has averaged a loss of 3.4%. But we all know that 2022 so far has been anything but normal. We urge investors to stick close to long-term asset allocation targets with a slight defensive bias.

“Opportunity is missed by most people because it is dressed in overalls and looks like work.” – Thomas A. Edison