Archive for ND&S Updates
Weekly Commentary (5/15/23) – Most Markets Down Last Week
May 15, 2023
Equity markets were mostly lower last week as investors processed elevated but lessening inflation levels, political squabbling about the debt ceiling, expectations of recession / slowing growth, and lingering concerns about banks’ safety and stability.
For the week, the DJIA retreated 1.04% and the S&P 500 was down 0.24%. The tech-heavy Nasdaq added 0.44%. The MSCI EAFE Index gave up 0.63% while emerging market equities (MSCI EM) dropped 0.85%. Small company stocks, represented by the Russell 2000, were also down 1.04%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 0.23% for the week as yields moved a tiny bit higher. As a result, the 10 YR US Treasury closed at a yield of 3.46% (up 2bps from the previous week’s closing yield of ~3.44%) as investors seemed unmoved by CPI, PPI and unemployment data that met forecasts and expectations. Gold prices closed at $2,020/oz. – up 0.13%. Oil prices reversed course and moved higher by 3.37% to $70.87.
Last week’s major economic news was the Consumer Price Index data for April which came in on target for the month. Both the CPI and the Core CPI were up 0.4%. The year-over-year CPI came in at 4.9% versus the 5.0% forecast. Core CPI y/y was on target at 5.5%. Ultimately, investors did not react to this news with much energy as markets were generally tame last week. The VIX, which is a real-time measure of equity volatility, fell back to 16.5. In general, when the VIX is below 20 it is a signal of stable and lower stress conditions and levels at 30 or above is a sign of high volatility, uncertainty, and fear. The VIX has not closed above 30 since October and its peak close in 2023 was 26.52 in mid-March when SVB was rescued.
Nearly all S&P 500 Q1 earnings are reported, though a few notables report this week including Walmart, Home Depot, Target, and TJX. These are some of the retail bellwethers and their outlooks on the rest of the calendar year/consumer spending may be interesting. There have really been no big surprises this earnings cycle, though most companies continue to guide future earnings forecast lower or flat.
Markets continue to find more reasons to be sanguine than not. It’s as if the financial markets are tired of the recession hypothesis and are just looking past it, like real investors instead of the impetuous trader they most often are. Perhaps this is what a soft landing looks like – since nobody has ever really described it, or given an example of one from history, how should we know if we are landing softly? To say this environment is often confusing and incongruous is a major understatement. The pundits are at opposite poles – from a major repricing of equities being imminent, to jump on the bull and ride because the bottom of this cycle was made in October.
Since we are still wary of some near-term pressure on equity price levels, we remind clients to be mindful of their coming cash distributions needs. Avoid mixing funds that are earmarked for withdrawal over the next 24 months into the more volatile asset classes. Please keep us informed of your plans to access cash so we can adjust allocations appropriately.
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria” – Sir John Templeton
Stocks Rally to End Volatile Week – 5.8.23
May 8, 2023
Equities jumped higher on Friday, partially offsetting four days of declines earlier in the week. On the week, the S&P 500 weakened 0.78% and the DJIA declined 1.23%. The tech-heavy Nasdaq eked out 0.09%, helped by Apple’s results posted on Thursday. International equities had modest gains of 0.20% for developed markets and 0.52% for emerging markets. Fixed income was extremely volatile as the Fed delivered what was expected to be their last rate hike of this cycle, increasing the federal funds rate by another 0.25% to a range of 5.00-5.25%. The benchmark Bloomberg U.S. Aggregate finished the week down 0.05%. The yield curve became less inverted with the 2yr U.S. Treasury dropping to 3.92% and the 10yr U.S. Treasury finishing flat to close at 3.44%. Gold was a positive contributor last week, finishing up 1.37%. Oil (WTI) continued to move lower closing at $68.56/barrel.
It is certainly up for debate, within the analyst community, whether a recession is on the horizon. Economic data in recent months has pointed to a slowing economy in the face of higher interest rates. Yet, despite expectations of a slowdown, last week’s monthly payroll reports painted a completely different picture. April saw an increase of 253,000 jobs (much higher than estimates), with unemployment of 3.4% matching a low from 1969. The low jobless number has kept upward pressure on wages, which are up 4.4% from a year earlier.
Equity markets have been clinging to gains so far in 2023. Entering the quarter, it was expected that earnings would decline 6.3%, but results so far show a contraction of 3.7%, much better than feared. In fact, S&P 500 is posting their best performance relative to analysts’ expectations since Q4 2021. We are continuing to have a bias towards quality for stock and bond selection to help us navigate this period of increased uncertainty.
“Our satisfactory results have been the products of about a dozen truly good decisions. That would be about one every five years.” – Warren Buffett
ND & S Weekly Commentary 5.1.23
May 1, 2023
Markets Results Mostly Higher on the Week
Equity markets were generally higher last week with investors favoring larger companies, tech and developed economies.
For the week, the DJIA added 0.86% and the S&P 500 moved 0.89% higher. The tech-heavy Nasdaq had was even higher adding by 1.28%. The MSCI EAFE Index also continued moving higher adding 0.17% while emerging market equities (MSCI EM) dropped 0.27%. Small company stocks, represented by the Russell 2000, retreated 1.24%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished higher by 0.83% for the week as yields moved slightly lower. As a result, the 10 YR US Treasury closed at a yield of 3.44% (down 13bps from the previous week’s closing yield of ~3.57%) as investors reacted to lower-than-expected GDP results and perhaps some bias towards the Fed being less hawkish. Gold prices closed at $1,983/oz – up 0.18%. Oil prices continued to move lower by 3.99% to $74.76.
The major macro-economic news last week was GDP being revised down from 2.6% to a 1.1% growth rate in Q1 and inflation numbers showing more stubbornness. US Core PCE increased 4.6% year-over-year and the Department of Labor’s employment cost index increased 1.2% quarter-over-quarter. Both were higher than the expectations of 4.5% and 1.0%, respectively. The PCE numbers are of greater importance to the Fed’s thinking than are the CPI and other inflation measures or indicators.
Despite the evidence that the economy is slowing, and inflation is declining at decreasing rates, investors seem more focused on recent earnings results. While earnings are not spectacular, they are not horrible either and that seems to be good enough for the optimists who seem tired of the dark ideas of interest rates being higher for longer and an inevitable recession.
Earnings results, outlooks and forecasts will continue over the next few weeks. So far, about 50% of the S&P earnings are reported and about 79% have beat their earnings estimates, although most companies had tempered their outlooks in the previous quarters. So, good news on the beats, but few were working off a high bar.
The big, planned event this week is the Fed’s interest rate statement and Chair Powell’s press conference on Wednesday. Expect a 25bp hike despite a big, unplanned event of the third major bank failure over the weekend. (The FDIC seized First Republic over the weekend and JP Morgan bought it from the FDIC – ho, hum, that’s what we do.). The Fed’s statements, while always important, will be parsed and analyzed as to whether this is the end of the rate increase cycle and how long will the Fed pause before taking any further action. The consensus is its next action will be a cut, but opinions on when that happens are so diverse, there really is no consensus.
The financial markets do not always make sense in the near term. We are in a period where that appears to be the case. To reduce inflation, the Fed is working to slow the economy. Indications are the economy is slowing, but inflation is now being stubborn after an initial drop from relatively high levels. All this points to the need to squeeze growth for longer. Despite this, stock indices have moved and are moving higher. We are not excited about chasing equity prices at this juncture. Sticking to long term strategic allocations to equities will always beat trying to time it.
“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” – Shelby M.C. Davis
Deal The Cards Already!
May 30, 2023
Stocks ended the week mixed, as investors struggled with the debt ceiling squabbling and slightly higher than expected inflation numbers.
For the week, the DJIA was down 1.0%, while the S&P 500 gained 0.4%. The tech-heavy Nasdaq continued its run for the fifth consecutive week of relative out-performance to the DJIA and S&P 500, up 2.5% and 24.4% year-to-date. Tech continues to drive the markets with artificial intelligence plays lifting the spirits of aggressive growth investors. Foreign equities lost ground with developed markets (MSCI-EAFE) down 2.3% and emerging markets (MSCI-EM) fell 0.4%. The U.S. stock market has been amazingly resilient, with optimism that the debt ceiling will be raised before entering into the default zone.
The Federal Reserve’s preferred inflation metric, the core personal consumption index (PCE) rose to an annual rate of 4.7% in April, slightly higher than expected and still well above its target of 2%. In April, consumer spending increased 0.8% from March, well above expectations of 0.4%. Consumers continue spending despite higher inflation and interest rates, and are dipping into savings. The personal savings rate of 4.1% for April was 0.4% lower than March. Overall, the U.S. economy grew faster in the 1st Q than previous estimates with GDP growing 1.3% annualized compared to the estimated 1.1%. The hope is that the Fed will pause its run of 10 consecutive monthly rate increases at its June 14th meeting. The yield on the 10-year U.S. Treasury rose 10 basis points (bps) to 3.80%, its highest level in two and a half months.
Important economic data released this holiday-shortened week will include consumer confidence, employment reports, and the Institute for Supply Management’s manufacturing index.
We suggest that investors maintain their longer-term focus with a well-diversified portfolio, and extend fixed income duration. The weak breath of the market and huge rally in AI tech stocks require prudent restraint.
“Those who have long enjoyed such privileges as we enjoy forget in time that men have died to win them.” – Franklin D. Roosevelt