Archive for ND&S Updates

Weekly Commentary (3/27/23) – Markets Push Higher Despite Fed Hike and Banking Fears   

March 27, 2023 

Both equity and fixed income markets continue to show persistent volatility, but both sides of the market still rose last week.  Rates and stock price levels gyrated throughout the week in anticipation of, and then in reaction to, the FOMC’s interest rate decision and its commentary thereon.  The verdict: confusion.  The market loathes uncertainty, and it is very blurry view for those who try to model and predict the economic environment we are moving towards.  Will the Fed cut? When? Will they hold? For how long? Have we hit a rut in the move towards lower inflation? Will we have a sharp rise in unemployment and a “hard landing” or can we “slow grow” our way out of high inflation?  There is also the growing threat of global geo-political tensions intensifying and the event risks that portends.

For the week, the DJIA gained 1.18% and the S&P 500 added 1.41%.  The tech-heavy Nasdaq finished up 1.67% as lower (market) rates continued to draw investors to tech stocks.  For the week, the MSCI EAFE Index rose 1.59% as fears of a spreading bank crisis subsided and European investors bid prices higher.   Emerging market equities (MSCI EM) had the largest advance among the major indices by jumping 2.23% over the week.  Small company stocks, represented by the Russell 2000, struggled but still added 0.53% – its relatively higher exposure regional banks has been a headwind since SVB imploded. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished higher by 0.5% for the week as investors are still pushing yields lower despite the backdrop of the Fed hiking rates and suggesting its Fed Funds target rate is not going to be adjusted down for quite some time.  As a result, the 10 YR US Treasury closed at a yield of 3.38% (down 5bps from the previous week’s closing yield of ~3.43%). Gold inched higher by 1.06% to close at $1,994/oz.  Oil prices recovered $3.22 to close at $69.96/bbl.

During the past week, fears of banking issues lingered over the financial markets.  There is the fear of real fundamental issues, and there is also the fear of others overreacting and panicking – “the fear of the fear”.  In general, investors are absorbing the SVB/Signature/Credit Suisse developments reasonably well and it seems there is higher probability that there is no contagion spreading and investors can resume having confidence in the banking system.

The coming week’s economic data releases includes the Personal Consumption Expenditures price index (PCE) on Friday.  This is the Fed’s “preferred measure of inflation” and forecasts predict this will show signs of cooling inflation – January’s number was 5.4% YoY and was hotter than December.  Housing data (S&P Case-Shiller home price index, FHFA home price index, and Pending U.S. home sales) is released this week, as well, and is expected to show further contraction in housing activity.  Michael Barr is testifying before Congress on banking on Tuesday and Wednesday and given the recent focus on banking regulation and enforcement, his testimony will get some attention, but no major reveals are expected.

Spring is here notwithstanding what the groundhog predicted – another pundit making predictions without fear of reprisal despite frequent fails!  We predict more choppy sailing as the economy is weaned off easy money and fiscal stimulus.  Stay patient.

 “People often say there’s lots of uncertainty, but when was there ever certainty in the markets, the economy, or the future? I’m just trying to understand the present.”  – Bill Miller

ND&S Weekly Commentary 3.23.23 – Markets Finished Mixed Amidst Banking Stress

March 20, 2023 

Equity markets finished mixed last week as markets digested yet another crisis within the global banking system.  The collapse of Silicon Valley Bank and Signature Bank on Monday sent markets lower as investors feared a contagion in global banks.  Efforts by the Federal Reserve (responsible for a good part of this mess …) and other central banks helped to shore-up banking reserves and investor confidence.

For the week, the DJIA lost 0.11% while the S&P 500 gained 1.47%.  The tech-heavy Nasdaq finished up 4.44% as lower rates and a more predictable stream of earnings emboldened investors to add to beaten down tech stocks.  For the week, the MSCI EAFE Index fell 3.11% as news of a potential failure of Credit Suisse rattled European investors.   Emerging market equities (MSCI EM) lost 0.26%.  Small company stocks, represented by the Russell 2000, lost 2.58% due to its higher concentration of regional banks. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished higher by 1.4% for the week as yields moved lower on a flight-to-safety move.  As a result, the 10 YR US Treasury closed at a yield of 3.43% (down 27bps from the previous week’s closing yield of ~3.70%). Gold was the big winner on the week as it rallied 5.69% to close at $1,973.50/oz.  Oil prices dropped $9.94 to close at $66.74/bbl as recession fears and global oversupply weighed on prices.

Economic news released last week centered mostly around the global banking system and persistent inflation.  Monday brought news about Silicon Valley Bank and Signature Bank.  On Tuesday, the BLS reported that inflation grew at an annual rate of 6.0% in February – down from 6.4% in January and in-line with expectations. Wednesday’s news centered on the potential collapse of Credit Suisse (something that has been brewing for several years …).  On Thursday, the European Central Bank hiked interest rates 50 bps (as expected) while Swiss regulators provided stabilization funds to Credit Suisse.  Friday’s news centered on a $30Bn rescue package from 11 large banks in the U.S. to help shore up smaller domestic banks. Yes, parts of the U.S. banking system are stressed, but we do not see the makings of systemic banking crisis in the U.S..  Most U.S. banks are very well capitalized and are able to manage through this interest rate hiking cycle and potential economic slowdown.

The Federal Reserve meets this Tuesday and Wednesday, and investors are anticipating a 25 basis point rate increase.  Some investment houses, like Goldman Sachs, are calling for the Fed to pause.  Whether or not the Fed hikes 25 bps or pauses, the good news is that the Fed is likely done with their tightening.

We expect continued volatility until this banking stress calms down and until we see more clarity from the Fed and the impact of their tightening.  A word of caution regarding social media – several hedge funds (and individual investors) posted false or misleading information that dozens of individual banks would collapse and go out of business last week … only to find out later that many of these hedge funds were short the banks they were mentioning.  Charles Schwab was even mentioned as a bank that was under enormous stress.  Schwab publicly reiterated their solid financial situation and, as a show of confidence, a number of Schwab executives bought stock at the open on Tuesday morning.

Stay safe and let’s hope for a calm week!

“If you don’t have time to do it right, when will you have time to do it over?” John Wooden

ND & S Weekly Commentary 3.13.23 – Weekly Update

March 13, 2023 

An over-arching theme for the last several quarters was whether the current fed policy would eventually break something. The Fed has made it clear it was willing to cause a shallow recession if that was the small price it took to bring long-term inflation down to more sustainable levels. For the last several months, the employment markets have been extremely resilient (last week’s February employment report showed a 311k m/m increase, much higher-than-expected), and inflation moderated from extreme levels. A crack began to form last week, when crypto-focused bank Silvergate announced it would wind down operations (due to the FTX fallout) and the FDIC taking control of Silicon Valley Bank’s deposits on Friday, after the bank had to recognize losses in its fixed income portfolio, a direct result of Fed rate hikes. The concern is whether there is contagion risk in the financial market or is this mostly an isolated issue within a niche area?

On the week, the S&P 500 weakened 4.51% and the DJIA declined 4.35%. The Russell 2000, which represents small/midsized US companies, dropped 8.03%. International markets were not nearly as bad, but they also gave back ground with developed international (MSCI EAFE) and emerging markets (MSCI EM) down 0.75% and 3.29%, respectively. Bonds had a strong week rallying 1.15% amidst the chaos as there was a flight to safety. The 10 yr Treasury ended last week at a yield of 3.70% versus 3.97% the week prior.

On Friday, Silicon Valley Bank (SIVB) was shut down by regulators who cited inadequate liquidity and insolvency. According to the FDIC, insured depositors will have access to their funds no later than this morning. While capital, wholesale funding, and loan to deposit ratios have vastly improved since the financial crisis, there are a few exceptions and SIVB was in a league of its own in relation to other financial institutions. SIVB has a high level of loans plus securities as a percentage of deposits, and very low sticky retail deposits, unlike most financial institutions. Bottom line, SIVB carved out a distinct and much riskier capital profile and had an unusually high reliance on corporate and venture capital funding (only 7% was private banking clients…).

Historically, banks have failed due to credit risk. In this case, the primary issue was a duration mismatch between high quality assets (“hold-to-maturity” securities) and deposit liabilities. Additionally, SIVB is not a systemically important financial institution that will bring down the financial system. With that said, we are monitoring the situation closely and will continue to provide our thoughts as more details become available. Markets will likely be volatile in the near-term.

“You only find out who is swimming naked when the tide goes out”. – Warren Buffett


ND & S Weekly Commentary 3.6.23 – Spring Fever

March 6, 2023 

Wall Street’s mood greatly improved at the end of last week as a result of stronger economic data and a more hawkish tone expressed by the Federal Reserve.

The S&P 500 gained 1.96% this past week, while the Nasdaq rose 2.61% and the Dow Jones Industrial average advanced 1.85%. International equities also finished higher with developed markets (EAFE) and emerging markets (EM) up 1.81% and 1.68%, respectively.

Over 95% of companies within the S&P 500 index reported an overall decline of 4.6% in fourth-quarter earnings from the 2021 fourth quarter according to FactSet. The ISM Services PMI index declined slightly to 55.1 in February from 55.2 in January, however, beating the consensus forecast of 54.3.

Pending home sales jumped by 8.1% from December to January, according to the National Association of Realtors. However, housing will undoubtedly be affected by 30-year mortgage rates hitting 6.65%, the highest in three months.  Atlanta Federal Reserve President Raphael Bostic stated that the “Fed could be in a position to pause by mid to late summer.” The yield on the 10-year U.S. Treasury closed above 4% on Thursday and ended the week at 3.97%, relatively unchanged.

The price of U.S. crude climbed 4% to nearly $80 per barrel, mostly as a result of China’s reopening its economy after years of Covid lockdowns. Oil prices are basically flat year-to-date and down 28% last year.

With mixed economic data, higher interest rates, and continued geopolitical tensions, market volatility will continue. We recommend revisiting investment objectives, cash flow needs and risk tolerance.

All eyes will be on Fed Chair Jerome Powell’s testimony before Congress and employment numbers to be reported later this week.

If winter comes, can spring be far behind.”- Percy Bysshe Shelley