Archive for ND&S Updates
Weekly Commentary (1/23/23) – Markets Mostly Lower on the Week
January 23, 2023
Equity markets finished mostly lower last week as investors digested fourth quarter earnings reports and recent economic releases.
For the week, the DJIA lost 2.7% while the S&P 500 dropped 0.7%. The tech-heavy Nasdaq finished up 0.6%. For the week, the MSCI EAFE Index inched higher by 0.01% while emerging market equities (MSCI EM) gained 0.6%. Small company stocks, represented by the Russell 2000, lost 1.0%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished higher by 0.2% for the week as yields moved slightly lower. As a result, the 10 YR US Treasury closed at a yield of 3.48% (down 1bps from the previous week’s closing yield of ~3.49%) as investors were drawn to decent yields and the perceived safety of treasuries. Gold prices closed at $1,926.40/oz – up 0.42%. Oil prices moved up 1.8% to $81.31 as China’s reopening added to demand pressures.
Economic news released last week confirmed a weakening in the economy. December retail sales fell sharply while manufacturing PMIs, industrial production and regional Fed surveys all confirmed a slowdown in the US economy. The Fed’s pursuit of higher interest rates is, naturally, having a negative effect on consumers and businesses. The consumer represents roughly 70% of GDP so any slowdown in consumer spending will necessarily impact our overall economy. The Federal Reserve meets next Tuesday and Wednesday, and investors are anticipating a 25 or 50 basis point rate increase. The good news is that the Fed is almost done with their tightening.
Markets are off to a decent start this year as investors have been looking through the noise to find bargains after last year’s ugly market. We expect continued volatility until we see more clarity from the Fed and the impact of their aggressive tightening. Diversification, patience, and a bias towards quality will help investors manage through this period of uncertainty.
Stay safe!
“If you fell down yesterday, stand up today.” – H.G. Wells
ND&S Weekly Commentary 1.17.23 – Inflation Moderates in December
January 17, 2023
Hopes for a soft economic landing intensified last week as the U.S. inflation eased again in December. The Consumer Price Index (CPI) declined 0.1% from November and moderated to 6.5% from a year earlier … inflation peaked in June 2022 at an annual rate of 9.1%. Looking further out, with the inflation surge ebbing and barring any geopolitical unforeseen setback, the cooling inflation environment should lead to a more measured approach to monetary policy at future fed meetings in 2023.
For the week, the DJIA increased 2.01% while the S&P 500 gained 2.71%. The tech-heavy Nasdaq jumped 4.83% after many growth stocks hurt in 2022, recovered nicely on the week. International markets were also very strong with the MSCI EAFE Index (developed countries) finishing higher by 4.25% while emerging market equities (MSCI EM) added 4.18%. Small company stocks, represented by the Russell 2000, were strong as they tacked on 5.27% for the week. Fixed income, represented by the Bloomberg Aggregate, advanced 0.88% for the week as yields moved lower across the curve. As a result, the 10 YR US Treasury closed at a yield of 3.49% (down ~ 6 bps from the previous week’s closing yield of ~3.55%). Gold prices closed at $1,907/oz. – up 2.96%. Oil prices moved higher to close at $78.39 per barrel, up 6.4% on the week.
Earnings season got underway last week. Analysts expect a 4.1% year-over-year decline in Q4 S&P 500 earnings, the first contraction since Q3 2020 (Covid). Earnings reports from the financial sector will dominate the early part of the week, while the end of the week will have reports from several large consumer companies.
Markets will remain volatile as we head into earnings season. As mentioned, analysts are expecting earnings to decline overall for the first time in several years. Equity investors are hoping the momentum continues as stocks have started out of the gate strong in 2023 … Let’s make it another good week!
“Faith is taking the first step even when you don’t see the whole staircase.” – Dr. Martin Luther King Jr.
ND&S Weekly Commentary 1.09.23 – Markets Ring in 2023
January 9, 2023
2023 kicked off on a positive note as all major equity markets and fixed income markets finished in positive territory for the first trading week of the year. For the week, the DJIA increased 1.50% while the S&P 500 gained 1.47%. The tech-heavy Nasdaq advanced 1.01%. International markets were strong with the MSCI EAFE Index (developed countries) finishing higher by 2.68% while emerging market equities (MSCI EM) jumped 3.39%. Small company stocks, represented by the Russell 2000, added 1.81% for the week. Fixed income, represented by the Bloomberg Aggregate, advanced 1.85% for the week as yields moved considerably lower across all areas of the yield curve. As a result, the 10 YR US Treasury closed at a yield of 3.55% (down ~ 33 bps from the previous week’s closing yield of ~3.88%). Gold prices closed at $1,852/oz – up 2.09%. Oil prices moved lower to close at $73.67 per barrel, down 8.0% on the week.
December’s employment report released on Friday was a mixed bag but markets responded positively. The jobless rate fell unexpectedly from 3.7% to 3.5%, the lowest it has been since Joe Namath was leading the Jets as Super Bowl Champions. Average hourly earnings showed an increase of 4.6% which is still stubbornly high and will do little to change the Fed’s hawkish outlook. In other economic news, the Institute for Supply Management’s (ISM) index for manufacturing decreased into a mild contraction in December with a reading of 49.6. The S&P US Services PMI came in a better-than-expected reading of 44. 7 but still in contraction territory. Both leading indicators are flashing yellow, but it remains to be seen if it carries over to revenue and earnings for companies.
The Federal Open Market Committee (FOMC) released minutes from their December meeting. From the minutes, it would appear the Fed is not contemplating halting it rate hikes yet with its focus on slowing inflation. No committee member sees a cut in rates in 2023. The Fed is likely to have concerns that the robust labor market will continue to push inflation higher.
Current valuations would suggest that markets are discounting a challenging earnings environment in early 2023. Let’s make it another good week!
“I never think of the future – it comes soon enough.” – Albert Einstein
Weekly Commentary (01/03/2023) – Markets Mixed Again in Choppy Last Week of 2022
January 3, 2023
Equity markets had mixed results last week in another choppy week of trading. Since mid-June of 2022, equity investors have clearly shown their desire that a new bullish environment takes hold while fighting the reality of the underlying fundamentals. Central banks across the globe are increasing interest rates to combat global inflation that shows some signs of being more stubborn. The Fed is signaling its resolve to “do what it takes” to move inflation to its target zone (~2-2.5%). As a result, equity prices have been volatile as the true conviction that a new period of growth in earnings is upon us has not formed.
For the week, the DJIA slipped 0.17% to finish down 6.86% for the year. The S&P 500 trimmed another 0.11% and finished 18.11% lower for the year. The tech-heavy Nasdaq dropped 0.28% and is down 32.54% as tech stocks have struggled against higher interest rates all year. For the week, the MSCI EAFE Index closed up by 0.07% while emerging market equities (MSCI EM) gained 0.34%. For the past year, these two international indices were down 14.01% and 19.74%, respectively. Small company stocks, represented by the Russell 2000, gained 0.08% to finish the year down 20.44%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 0.65% for the week as yields moved higher. For the year, “the Agg” was down 13.01%. The 10 YR US Treasury closed at a yield of 3.88% (up 13bps from the previous week’s closing yield of ~3.75%). For the year, the 10-year yield rose an amazing 236 bps from 1.52%. Gold prices closed at $1814/oz – up ~1% and basically unchanged over the $1,806 closing price in 2021. Oil prices moved lower to close at $78.40 per barrel, down 1.46% on the week and, remarkably, only ~4% higher than the $75.33 close on 12/31/21.
Economic news was very light last week. The S&P Case-Shiller Home Price Index declined another 3.1% and November Pending Home Sales fell 4%. The CSHPI fell far less than the 9% decline in October but the Pending Sales decline was over twice the expected amount. The coming week includes the Fed FOMC minutes on Wednesday and some inflation indicators in the ISM manufacturing data and Trade Deficit numbers. The following week will be of greater significance when the CPI numbers are released.
Equity investors are desperate for good news and have been willing to create bear market rallies in the face of some pressing realities. The Fed is on a mission to reduce inflation, and with the peculiar US domestic employment environment (at least the data makes it peculiar), the Fed is more emboldened to be tougher than most investors would like. This increases the likelihood of a difficult earnings environment and that keeps putting the brakes on equity prices rising. The fact the Fed and many economists allude to a longer period of persistent inflation (i.e, interest rates higher for longer) does not help the investment math arrive at higher prices, either.
We expect the shift to a positive environment is likely gradual and staying patient will be rewarded.
“The underlying driving force behind market timing decisions seems to be emotional — fear, greed, chasing performance — buying something after it has gone up, disappointment, and sales after something has declined.” – David Swensen
Weekly Commentary (1/30/23) – Markets Move Higher on the Week to Extend 2023 Rally
January 30, 2023
Equity markets finished higher over the week as investors seem unimpressed by a general trend of contracting earnings and seem more influenced by signals that the economy is slowing in an orderly manner. In other words, equity prices appear to be discounting a “soft landing” for the US economy as the Fed’s rate cuts slow the engines. It is also likely that the more bearish investors are hedging their bets and rotating some capital to equities, in case their macro-economic and near-term market forecasts are wrong.
For the week, the DJIA added 1.81% while the S&P 500 lifted 2.48%. The tech-heavy Nasdaq popped 4.32%. The MSCI EAFE Index moved higher by 1.40% and emerging market equities (MSCI EM) added 1.44%. Small company stocks, represented by the Russell 2000, gained 2.37%. Fixed income, represented by the Bloomberg/Barclays Aggregate, inched higher by 0.02% for the week as yields were generally unchanged. As a result, the 10 YR US Treasury closed at a yield of 3.52% (up 4 bps from the previous week’s closing yield of ~3.48%) as investors continue to be drawn to decent yields and the perceived safety of treasuries. Gold prices closed at $1,923/oz – down 0.15%. Oil prices moved slightly lower by 0.37% to $81.01.
Last week the index of leading economic indicators was down 1.0% versus the consensus of down 0.7%, the Purchasing Mangers Index (PMI) was 46.8, and anything less than 50 is generally a signal of a contracting economy. The Personal Consumption Expenditures Index (PCE) for December was 5.0% which is down from 5.5% and 6.1% for November and October, respectively. The PCE is the Fed’s preferred measure of inflation. Housing had a lift over consensus projections as pending home sales were up 2.5% versus -1.0% and new home sales were 616k versus 615k forecast.
Though some of the signals are mixed. For now, investors appear more interested in how the end game of the Fed’s efforts to fight inflation plays out than they are interested in the fact that the economy is showing clear signs of slowing and perhaps contracting. The US economy did grow 2.9% in Q4 ’22, down from 3.3% in Q3 and eternally optimistic equity investors extended the 2023 New Year rally. With 28% of S&P 500 companies having reported for Q4, the “blended EPS” (combines reported with reaming estimates) indicates the earnings have declined ~5.1%. Multiples are rising while earnings are shrinking. Meanwhile a wave of Tech layoffs was announced, yet labor remains tight, so far, with jobless claims coming in at 186,000 versus a 205,000 estimate.
The first Federal Open Markets Committee (FOMC) meeting of 2023 will be held this week. The market is signaling it expects a 25-bps increase of the Discount Rate. More important will be the Fed’s language in announcing this rate and the inferences the market takes from its messaging. We expect the Fed will emphasize the “higher for longer” messaging, but we do not expect the market to believe that, immediately.
Patience and focus on the long-term results will be rewarded.
“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” – Charlie Munger