Archive for ND&S Updates

ND&S Weekly Commentary 7.31.23 – Soft Landing In Sight

July 31, 2023 

Economic data released last week painted a positive picture of the US economy as many economists and the equity markets have continued to price in a “soft landing” for the economy.

For the week, the DJIA gained 0.66% while the S&P 500 added 1.03%. The tech-heavy Nasdaq finished 2.03% higher as results came in better than expected from both Alphabet and Meta. For the week, the MSCI EAFE Index closed up by 0.93% while emerging market equities (MSCI EM) increased 2.86%. Small company stocks, represented by the Russell 2000, advanced 1.09%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 0.40% in a volatile week for bonds. As a result, the 10 YR US Treasury closed at a yield of 3.96% (up 12bps from the previous week’s closing yield of ~3.84%). Gold prices closed at $1,954/oz – down 0.32%. Oil prices moved higher to close at $80.09 per barrel, up 4.55% on the week.

At the FOMC’s July meeting, the fed hiked rates by another 25bps, as widely expected. Statement language from Federal Reserve Chairman Jerome Powell was dovish, but he kept the door open for further rate hikes if data warranted. Last week’s economic data painted a fairly rosy picture for the economy. The first estimate for 2Q23 GDP showed the economy grew at a much better-than-expected 2.4% annualized rate. PCE (the Fed’s preferred measure of inflation) monthly reading of 0.2%, confirmed further progress on disinflation. Weekly unemployment claims have continued to come in low showing little softness on the labor front.

Going forward, the Fed will be continuing to take pulse on inflation, but their next meeting is not until September, so we have a lot of data between now and then. The week ahead will have another jam-packed calendar of corporate earnings announcements with results expected from Apple, Microsoft, Amazon, among others. Enjoy The Week!

“This is the precept by which I have lived: Prepare for the worst; expect the best; and take what comes.” – Hannah Arendt

ND&S Weekly Market Update (7/24/23) – Happy Summer!

July 24, 2023 

Last week stocks extended their winning streak, with the major indexes boosted by rebounding banks, energy and healthcare companies.

For the week the S&P 500 rose 0.7%, while the Dow Jones Industrial Average added 2.1% and the Nasdaq slipped 0.6%. The Nasdaq is 34% higher so far in 2023 and the S&P 500 is within 6% of its all-time high recovering much of 2022’s painful decline. Overseas markets fell with developing markets (MSCI-EAFE) down 0.6% while emerging markets (MSCI-EM) slipped 1.3%.

Corporate earnings, though ratcheted downward, have steadily met or exceeded analysts’ expectations so far. The S&P 500 is now trading at 19.5 times forward earnings, which exceeds its five-year average of 18.9 times, according to FactSet.

US monthly retail sales climbed 0.2% in June, much lower than the 0.5% expected. On a year-over-year trend, retail sales rose 1.6%, the weakest gain since July 2020. Housing starts slid by 8% in June and building permits fell 3.7%, more signs that the economy is slowing due higher rates as U.S. homebuilders sharply slowed down on starting new single family construction . The bond market wavered as short-term yields ticked lower, with the yield on the US 10-year holding steady at 3.8%. We expect a quarter point interest rate increase at the Federal Reserve’s meeting this week.

The markets are certainly fully valued, and narratives appear to matter more than fundamentals. Nevertheless, investors still favor stocks as a result of above expected earnings, cooling inflation and a resilient economy. There are certainly fundamental risks such as concentrated high valuations and dis-inflationary pressures on corporate revenues.

The major event this week will be the Federal Reserve’s reactions and comments on Wednesday at the conclusion of their July meeting. We hope that they will be satisfied with the cooling of inflation to express a more dovish attitude towards tightening. Volatility will undoubtedly rise from non-economic issues; however, long term investors should remain undaunted and vigilant.

“Smell the sea and feel the sky. Let your soul and spirit fly.” – Van Morrison

Weekly Commentary (7/17/23) – Markets on The Rise Across the Board

July 17, 2023 

During yet another period where all news is good news, stocks and bonds surged on some truly good inflation numbers.

For the week, the DJIA added 2.29% and the S&P 500 rose 2.44%. The tech-heavy Nasdaq increased 3.32%. International markets were even stronger. For the week, the MSCI EAFE jumped 4.87% and emerging market equities (MSCI EM) were even higher, adding 4.96%. Small company stocks, represented by the Russell 2000, finished 3.58% higher. Fixed income, represented by the Bloomberg Aggregate, was up 1.51% for the week as yields moved lower. As a result, the 10 YR US Treasury closed at a yield of 3.83% (down ~ 23 bps over the week and reversing the previous week’s action). Gold prices closed at $1,954 /oz. – up ~1.7%. Oil prices closed at $76.89 $71.80 per barrel, up 7% on the week.

Recently, markets seem determined to go higher as they accentuate the positive data and discount the negative data. Last week the inflation numbers showed a little more cooling than was expected and that inspired buying in equities and fixed income. All the inflation data last week was better than expected: Both CPI and Core CPI were up 0.2% for June versus 0.3% forecast. Year over year CPI was 3% versus 3.1% forecast and 4% in May, and Core CPI (YoY) was 4.8% versus 5% forecast and 5.3% previous period. Producer Price Index (PPI) numbers had parallel results.

These positive signs of inflation seemingly coming under control, after showing signs of stubbornness in previous periods, were a boon to bullish investors. Most Fed watchers are still leaning heavily towards another rate hike at next week’s Fed meeting, but the consensus is building that after that move, the Fed will be done raising its overnight borrowing rate until data supports further action. Most see the next action being a cut in the Discount Rate (overnight rate). In the meantime, the Fed will continue to shrink its balance sheet by selling the trillions of dollars of securities it bought during its major market interventions (2008- 2009 & Covid).

Of greater immediate interest are the Q2 earnings releases. S&P 500 earnings results and company outlooks will ramp up over the next few weeks. Whether these numbers can support current equity valuations is always the question. Good or great news will push stocks higher, and disappointments typically do the opposite. With the mood of this market, any reversals may not be in proportion to the disappointments, and upside action will probably be out proportion to any positives.

Lost in the sauce of last week’s inflation prints was the huge drop in the growth of consumer credit. Consumers borrowed “only” ~$7.2 billion in May compared to a $21.5B forecast and $20.3B in April. If this is a sign of consumer spending falling off cliff, revenues and earnings will be under pressure. The consumer is ~70% of the spending in the U.S. economy…

We are maintaining asset allocations according to objectives and being patient. We believe we are in a period where many investors have lost patience and are becoming more speculative. Like a person initially cautious about thin ice, this market may have moved farther from the shore in testing the surface than it realizes or intended.

Enjoy July and stay cool!

“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”Warren Buffett

Weekly Commentary (7/10/23) – Markets Start Second Half of ’23 on Losing Note

July 10, 2023 

Markets pulled back during last week’s holiday-shortened week.

For the week, the DJIA lost 1.9% while the S&P 500 gave back 1.1%. The tech-heavy Nasdaq declined 0.9%. International markets also finished in the red. For the week, the MSCI EAFE Index finished lower by 2.0% while emerging market equities (MSCI EM) pulled back 0.6%. Small company stocks, represented by the Russell 2000, finished lower by 1.3%. Fixed income, represented by the Bloomberg Aggregate, declined 1.30% for the week as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 4.06% (up ~ 25 bps from the previous week’s closing yield of ~3.86%). Gold prices closed at $1922/oz. – up 0.3%. Oil prices closed at $71.80 per barrel, up 4.5% on the week.

Last week saw a number of economic releases. The ISM Non-Manufacturing Index rose to 53.9% in June vs. 50.3% in May, the results were much better than the consensus estimate of 51.3%. The U.S. economy added 209,000 jobs in June, missing estimates for a gain of 225,000. The unemployment rate declined slightly to 3.6%, in line with estimates. The resiliency of the U.S. labor market will help to soften the blow from any potential recession.

The week ahead holds a few important events that investors will be watching closely – June CPI comes out on Wednesday while PPI gets released on Thursday followed by the University of Michigan Consumer Sentiment Index on Friday. The inflation reports will be watched closely as they may give a clue to future Fed action. This week also is the start of 2nd quarter earnings season with Pepsi, Delta Airlines, JP Morgan, Wells Fargo, Citigroup and others reporting. We expect companies to talk about the challenges of inflation, softening consumer demand and higher interest rates/cost of capital.

We hope you had a great 4th! Enjoy the summer!

ND&S Weekly Commentary 7.3.23 – Stocks Still Higher as First Half of 2023 is in The Books

July 3, 2023 

For the most part, stocks gained again last week, and bonds saw prices decline as investors demanded more yield.

On the week, the S&P 500 gained 2.36% and the DJIA added 2.02%. The tech-heavy Nasdaq moved higher by 2.20%. International equities were mixed with developed markets (MSCI EAFE) up 1.67% and emerging markets (MSCI EM) flat at 0% return. Fixed income, represented by the benchmark Bloomberg U.S. Aggregate, was off 0.26% last week as yields shifted higher across most of the curve. The benchmark 10yr U.S. Treasury yield closed at 3.81%, up from 3.74% the week prior. Gold and Oil (WTI) were both up just slightly last week, closing at $1,912/oz. versus $1,931 for Gold and $69.86 versus $69.51a barrel for Oil.

The big numbers for the week include a revised GDP number coming in at 2.0% against a forecast of 1.6% and a previous period of 1.3%. Bonds reacted to this since this relatively hot GDP number was not expected and supports a hawkish tone towards interest rates. A rise in consumer confidence, initial jobless claims below estimates and some housing data that indicated less cooling than anticipated all support the notion that the economy is showing resilience towards efforts to slow things down.

At the end of the week, the PCE numbers (the Fed’s preferred measure of inflation) were on target, but the targets support the view that inflation is resisting efforts to curb it (PCE was up 4.6% over the past year). These “sticky” levels of inflation correlate with the Fed’s comments that we should expect rates to be higher for longer.

The bond market seemed to react to this data…the stock market, not so much. Stocks are plodding higher, raising price multiples, against the backdrop of an interest rate structure that challenges those multiples and the clear indications from the Fed that it will do what it must to curb inflation – which is to slow the economy. When the economy slows, it has a direct impact on corporate revenues. When revenues stop growing or decline, the only way to avoid an impact to earnings per share is to improve margins (% of revenue that becomes earnings) or reduce the number of shares. Margins are at historically high levels and a new 1% federal excise tax may curb the buyback appetite. So, a bit puzzling is this equity market.

Economic data coming in this holiday-shortened 4th of July week includes trade deficit, ISM manufacturing and construction spending data, jobs and unemployment data, and the release of the FOMC Minutes from the Fed’s June meeting.

The Fed’s next meeting (July 26-27) and the signals it sends ahead of it could be interesting. The consensus view is that markets are pricing two more 25bps hikes this year, but not necessarily any action at the next meeting. The Fed does not seek to surprise investors, so expect to hear messages that do not contradict this approach unless the attitude to be more aggressive in July or September is growing; listen for those indications in the commentary.

With July getting underway, summer is finally here! We hope you have some great fun and enjoy some of the best weather of the year this summer.

“The waiting is the hardest part.”Tom Petty