Archive for ND&S Updates
ND&S Weekly Commentary (12.19.22) – Fed Talks Tough
December 19, 2022
Equity markets were lower across the board last week after hawkish rhetoric from the U.S. Federal Reserve Bank dispelled the notion of a dovish monetary policy pivot any time soon. For the week, the S&P 500 declined 2.05%, the DJIA lost 1.65%, and the tech-heavy Nasdaq dropped 2.70%. The Russell 2000 small-cap index slid 1.81%. International equity markets also finished in the red as developed (MSCI-EAFE) and emerging (MSCI-EM) markets gave back 2.13% and 2.09%, respectively. The price of oil (WTI) increased to $76.11 a barrel. The price of gold declined modestly on the week to $1,793 per ounce. Fixed income was the only asset class to provide a positive return last week as the Bloomberg/Barclays U.S. Aggregate returned 0.80% on the week. Interest rates were surprisingly lower across the yield curve as the 10yr yield settled on Friday at 3.48%.
The U.S. Federal Reserve Bank delivered the 50 basis-point increase that was widely expected at the conclusion of their December meeting. The markets were caught offsides when the committee delivered their forecast for the terminal federal funds rate and expectations for inflation. The median forecast for the federal funds rate was increased to 5.1% from 4.6% at their September meeting. Their outlook for core PCE inflation was adjusted to 3.5% from 3.1%, despite softer inflation readings in recent months. Futures markets remain skeptical that the Fed will hold true to their forecasts.
In other economic reports released last week, the Consumer Price Index (CPI) reading showed only a 0.1% month-over-month increase which was a better-than-expected deceleration for inflation. The year-over-year CPI number fell to 7.1%, down from 7.7% in October. Retail sales declined 0.6% last month spooking the markets, this after a much better-than-expected 1.6% increase in October.
There is no question that valuations for both equities and even fixed income are more appealing than they have been in recent years … and over a decade when it comes to most fixed income. Most institutional investors, CNBC talking heads and market forecasters are extremely pessimistic – normally a positive sign. Markets will remain volatile, as there is a lot of tax-loss harvesting and re-balancing affecting markets from now until early next year. We are continuing to remain patient by slowly investing in high-quality assets when attractive within a well-diversified portfolio.
“Investing is laying out money now to get more back in the future.” – Warren Buffet
ND&S Weekly Commentary 12.12.22 – Will Fed Chair be the Grinch who stole Christmas?
December 12, 2022
The stock market retreated last week as investors grew anxious over the economic outlook and the Federal Reserve’s response to tame inflation. The ongoing strength of the job market and consumer spending are ironically causes of concern and may trigger the Fed to continue raising interest rates higher and longer than expected.
For the week, the S&P 500 dropped 3.35%, the DJIA lost 2.74%, and the tech-heavy Nasdaq slid 3.98%. The Russell 2000 small-cap index tumbled 5.06%. The decline in the U.S. dollar and China’s lifting of Covid restrictions helped international equities. Developed markets (MSCI-EAFE) declined only 0.19% while emerging (MSCI-EM) rose 0.48%. Since mid-October, EAFE and EM have risen roughly 19% and 15%, respectively. The price of U.S. crude oil fell 11% to $71.58 a barrel and is down almost 23% from its high in early November. The price of gold declined slightly to $1,796 per ounce.
Last Friday, the Producer Price Index (PPI) rose modestly on a year-over-year basis 7.4%, higher than the consensus estimate of 7.2%. Investors were hoping for a slightly lower number to show that the Fed’s policies were making progress. The spread between the 2-year U.S. Treasury note and the 10-year note is now the widest since the early 1980s. The yield on the 2-year note rose 5 bps to 4.34% and the 10- year note increased 6 bps to 3.57%.
All eyes will be on the Consumer Price Index (CPI) to be reported on Tuesday, and the Fed meeting concluding on Wednesday. We hope to see that inflation is continuing to moderate and that the Fed will only increase the Federal Funds Rate by 0.50%. Chairperson Jerome Powell’s remarks on the economy, inflation, and the Fed’s strategy going forward will be closely examined.
“Maybe Christmas doesn’t come from a store. Maybe Christmas, perhaps, means a little bit more.” -The Grinch
ND&S Weekly Commentary 12.05.22 – Markets Hearing What They Want to Hear
December 5, 2022
Global equities had a sharp positive response to Fed Chairman Jerome Powell’s mid-week comments, but then began backsliding as data that supports a continuation of a strong US labor market and that showed wage inflation above expectations was released. Powell had a mostly hawkish tilt to his message, but equity investors seized on hints that the Fed is likely slowing its pace of interest rate increases – information that was supposedly already discounted in stock prices.
For the week, the DJIA managed a gain of 0.41% while the S&P 500 added 1.19%. The tech-heavy Nasdaq advanced 2.12%. International markets were higher with the MSCI EAFE Index (developed countries) gaining 1.06% and emerging market equities (MSCI EM) jumping 3.51%. Small company stocks, represented by the Russell 2000, grew 1.33% last week. Fixed income, represented by the Bloomberg Aggregate, gained 1.54% for the week as yields generally moved lower, with the front of the curve being more stubborn and the ending result being more yield inversion from 1yr to 10yr. The 10 YR US Treasury was down 17 basis points on the week closing at a yield of 3.51%. Gold prices closed at $1,785/oz. – up 1.83%. Oil prices reversed a five-week trend and closed up ~4.9% at $79.98 on the week.
In last week’s data, housing showed some improvement over October but was still generally negative: the S&P Case-Schiller US Home Price Index was -8.7% vs -10.4% in October, the FHFA US home Price Index was 0.9% vs -7.5% in October, and the Pending Home Sales Index was -4.6% vs -8.7% in October. Real GDP was revised to 2.9% vs 2.6% and Consumer Confidence was unchanged at 100.2, and Consumer Spending was up 0.5% vs 0.3%.
This week’s economic data releases include Trade Deficit, Productivity revision, and PPI. It is a relatively quiet week. The following week is a very important one as the Consumer Price Index (CPI) data will be released, followed by the Fed Funds target rate announcement and then a press conference with Fed Chairman Powell.
There is more chatter about a “soft landing” but most money is betting against it. If you are looking for a reason why not a soft landing – look no further than it has never been done before… especially coming from where we were. We had a HUGE spike in the money supply and the CPI rocketed to near 10%. The Fed was slow to respond and now it is in a battle to land the economy in the goldilocks zone of ~2% inflation and ~4% unemployment. Imagine the space shuttle crew trying to land while blindfolded and the feedback from the ground is delayed 30 seconds. The chances they find the runway are slim. It will land, and there will be damage, but it will be temporary, and the shuttle/economy will fly again.
We hope that all of you and your families are continuing to stay healthy and safe this holiday season. There are only 13 days until Hanukkah and 20 days to Christmas and just 26 days left in 2022!
“Anyone who sits on top of the largest hydrogen-oxygen fueled system in the world, knowing they’re going to light the bottom, and doesn’t get a little worried, does not fully understand the situation.”
– John Young, Space Shuttle Astronaut
ND&S Weekly Commentary 12.27.22 – Markets Finish Mixed
December 27, 2022
Equity markets were mixed last week as investors continued to worry about nagging inflation and a possible recession. The S&P 500, Russell 2000 and NASDAQ are all in bear market territory (down 20% or more from peak).
For the week, the DJIA gained 0.86% while the S&P 500 dropped 0.20%. The tech-heavy Nasdaq finished 1.94% lower as tech stocks struggled to move higher. For the week, the MSCI EAFE Index closed up by 0.38% while emerging market equities (MSCI EM) gave back 0.24%. Small company stocks, represented by the Russell 2000, advanced 0.53%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 1.47% for the week as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 3.75% (up 27bps from the previous week’s closing yield of ~3.48%). Gold prices closed at $1,795.90/oz – up 0.33%. Oil prices moved higher to close at $79.56 per barrel, up 7.09% on the week.
Economic news was fairly light last week. Housing starts fell 0.5% m/m. New home sales decreased to 600k (no surprise given higher mortgage rates and talk of a possible recession). Initial unemployment claims climbed to 216k. Surprisingly, consumer confidence increased to 108.3, its first increase in three months and above consensus of 101. Economic releases in the week ahead include: S&P Case-Shiller Home Price Index, December Consumer Confidence, November Pending Home Sales, Weekly Jobless Claims, and the Chicago PMI for December.
Markets will attempt to move higher this week as the Santa Claus rally kicks into high gear. Let’s hope the old saying is proven wrong this year – “If Santa should fail to call, bears may come to Broad and Wall’. Tax loss selling is mostly over and should take away some of the downside pressure that we saw over the past few weeks. We hope to be picking up bargains over weeks and months ahead. Diversification, patience and a bias towards quality will help investors manage through this challenging environment. As such, we continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias.
We hope that you have been enjoying the holidays. Stay safe.
“Let us be grateful to the people who make us happy, they are the charming gardeners who make our souls blossom.” – Marcel Proust