Archive for ND&S Updates
ND&S Weekly Commentary (6.21.23) – Fed Leaves Rates Unchanged … for now
June 21, 2023
Equity markets have continued to search for direction since the conclusion of last week’s Federal Reserve meeting. As expected, the FOMC left the federal funds rate unchanged but hawkish messaging left the door open for further tightening in the coming months. Certainly, inflation has moderated but the year-over-year change in PCE (the Fed’s favorite measure of inflation), is still roughly 2.5% above the official target. It would seem likely that the fed could raise rates another 50bps this year, putting pressure on equities at least in the short-term.
For the last week, the S&P 500 has added 0.49% while the small cap U.S. companies Russell 2000 has given back 1.51%. International companies are modestly higher with the MSCI EAFE Index and MSCI EM up 0.22% and 0.14%, respectively. Fixed income, represented by the Bloomberg/Barclays Aggregate, has surprisingly moved higher by 0.68% as yields moved lower further down the yield curve.
We are entering the dog days of summer, with that comes lower trading activity and usually slightly higher volatility. Diversification, patience, and a bias towards quality will continue to help investors navigate through this period of uncertainty. Enjoy the Week!
“He who knows that enough is enough will always have enough.” – Lao Tzu
Weekly Commentary (6/12/23) – Markets Finish Modestly Higher on the Week
June 13, 2023
Equity markets finished higher last week as investors continued to bid up stocks.
For the week, the DJIA gained 0.36% while the S&P 500 added 0.41%. The tech-heavy Nasdaq finished ahead by 0.15%. For the week, the MSCI EAFE Index tacked-on 0.65% while emerging market equities (MSCI EM) finished up 1.90%. Small company stocks, represented by the Russell 2000, advanced 1.92%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 0.15% for the week as yields moved slightly higher. As a result, the 10 YR US Treasury closed at a yield of 3.75% (up 6bps from the previous week’s closing yield of ~3.69%) as investors await the Fed’s decision on interest rates. Gold prices closed at $1,962.20/oz – up 0.5%. Oil prices moved lower by 2.19% to close at $70.17 per barrel (helping consumers and businesses).
Economic news released last week confirmed a slowing economic backdrop. The May Services ISM Index fell from 51.9 to 50.3 (still in expansion territory). Initial jobless claims for the week ending June 3 spiked to 261k – the highest level since October 2021. Core durable goods fell 0.3% m/m.
The big news in the week ahead centers on the Fed’s upcoming FOMC meeting on Tuesday and Wednesday. Chairman Powell and the Fed will most likely keep rates steady (pause) with a caveat that they will remain data dependent. Markets seem to think (wish) that the Fed is done raising rates, but the Fed will likely keep investors and markets on edge with the usual say nothing Fed-speak. We expect the Fed to pause (as the full effect of their previous rate hikes are not fully reflected in the economy yet) and cut rates sometime in early 2024. Other important economic news in the week ahead includes the release of the CPI, PPI, Retail Sales, Consumer Sentiment, and Industrial Production.
Market activity is broadening out (not just big tech) … a good sign. Diversification, patience and a bias towards quality will help investors manage through the usually slow summer period.
Enjoy the week.
“The hardest arithmetic to master is that which enables us to count our blessings.” – Eric Hoffer
ND&S Weekly Commentary 6.5.23 – Debt Ceiling Overhang Moves to the Rear-view
June 5, 2023
Equity markets experienced a bit of a relief rally last week as the debt ceiling overhang moved into the rear-view.
On the week, the S&P 500 gained 1.88% and the DJIA increased 2.17%. The tech-heavy Nasdaq moved higher by 2.07%. International equities also closed higher with developed markets (MSCI EAFE) and emerging markets (MSCI EM) up 0.90% and 1.26%, respectively. Fixed income, represented by the benchmark Bloomberg U.S. Aggregate, jumped 0.96% last week as the longer end of the yield curve shifted lower. The benchmark 10yr Treasury yield closed at 3.69%, down from 3.80% the week prior. Gold was a positive contributor last week, closing at $1,963/oz. Oil (WTI) continued to move lower closing at $70.10 a barrel.
Last week, we received many economic data points related to the jobs market. The May employment report showed a net creation of 339,000 jobs, well ahead of expectations and an increase from April’s release. The unemployment rate increased 0.3% but that was mostly attributed to more people entering the workforce. The April JOLTS report was a bit of a mixed bag; job openings had a slight uptick to 10.1m after several months of decline. On the other hand, the quits rate fell to 2.4% which might signal fewer people would be interested in leaving their jobs or the quality of jobs available isn’t there. Overall, the labor market showed some signs of stabilizing, which should be seen as a positive for the economy.
Congress finally agreed on a bi-partisan package to increase the debt ceiling with a slight decline in spending. This removed one big overhang on the market, but Friday’s rally was likely the brief tail wind that would be expected from the agreement. The S&P 500’s 11% return year-to-date has been incredibly narrow and concentrated. Just seven companies account for that return while the other 493 would have delivered a slightly negative return over the same period. Those mega-cap tech-related winners have seen their combined fwd. earnings multiple increase over 30% while their earnings remain virtually unchanged. For the market to take another leg higher, the equity market will need to broaden out. As result, we continue to remain patient and a bit defensive within allocations while waiting for better opportunities to present themselves.
“The greater our knowledge increases, the more our ignorance unfolds.” – John F. Kennedy
ND&S Weekly Commentary 6.26.23 – Stocks Slide
June 26, 2023
During the holiday-shortened week, investors worried about the likelihood of a global recession as they waded through worsening economic data and hawkish Federal Reserve commentary.
For the week, both the S&P 500 and Nasdaq fell 1.4% and the Dow Jones Industrials lost 1.7%. International markets sold off with developed (MSCI EAFE) and emerging markets (MSCI EM) sliding 3.3% and 3.6%, respectively.
The U.S. Manufacturing Purchasing Manager’s Index (PMI) for June came in at 46.3%, its lowest level in the six months and missing expectations. The Federal Reserve decided against raising rates at their June meeting. However, Chairman Jerome Powell stated in comments last week that there is more work to do in it’s fight against inflation, meaning more rate increases could be expected.
This year’s stock market rally and economic resilience have been in defiance of a steepening inverted yield curve. When shorter-term interest rates remain higher than longer-term rates, historically, recessionary conditions follow. Last week, the 10yr Treasury yield remained relatively the same, closing at 3.74%. With heightened fear of a global recession, oil prices fell 4% from the previous week to close at $69.51 per barrel, a far cry from $80 at the start of the year.
The biggest losers were regional banks that had been expected to improve since the banking crisis. The FDIC is proposing higher capital requirements and, as a result, the SPDR S&P Regional Bank ETF (KRE) slid 8.3% for the week. A reduction in lending activity is expected as banks retrench from the outflow of deposits.
On Friday, the Federal Reserve’s preferred gauge for inflation, the Personal Consumption Expenditures Price Index (PCE) will be reported. The PCE for April rose to a 4.4% annual rate, up from 4.2% in March. Another increase would place pressure on the Fed to increase rates next month.
We anticipate a broadening of the highly concentrated performance of the U.S. stock market. There will be a peak in interest rates at some point, providing an opportunity to extend bond duration.
“There are two seasons when the leaves are in their glory, their green and perfect youth in June and their ripe old age.” – Henry David Thoreau