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

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

ND&S Weekly Commentary 12.27.22 – Markets Finish Mixed

December 27, 2022

Equity markets were mixed last week as investors continued to worry about nagging inflation and a possible recession. The S&P 500, Russell 2000 and NASDAQ are all in bear market territory (down 20% or more from peak).

For the week, the DJIA gained 0.86% while the S&P 500 dropped 0.20%. The tech-heavy Nasdaq finished 1.94% lower as tech stocks struggled to move higher. For the week, the MSCI EAFE Index closed up by 0.38% while emerging market equities (MSCI EM) gave back 0.24%. Small company stocks, represented by the Russell 2000, advanced 0.53%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 1.47% for the week as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 3.75% (up 27bps from the previous week’s closing yield of ~3.48%). Gold prices closed at $1,795.90/oz – up 0.33%. Oil prices moved higher to close at $79.56 per barrel, up 7.09% on the week.

Economic news was fairly light last week. Housing starts fell 0.5% m/m. New home sales decreased to 600k (no surprise given higher mortgage rates and talk of a possible recession). Initial unemployment claims climbed to 216k. Surprisingly, consumer confidence increased to 108.3, its first increase in three months and above consensus of 101. Economic releases in the week ahead include: S&P Case-Shiller Home Price Index, December Consumer Confidence, November Pending Home Sales, Weekly Jobless Claims, and the Chicago PMI for December.

Markets will attempt to move higher this week as the Santa Claus rally kicks into high gear. Let’s hope the old saying is proven wrong this year – “If Santa should fail to call, bears may come to Broad and Wall’. Tax loss selling is mostly over and should take away some of the downside pressure that we saw over the past few weeks. We hope to be picking up bargains over weeks and months ahead. Diversification, patience and a bias towards quality will help investors manage through this challenging environment. As such, we continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias.

We hope that you have been enjoying the holidays. Stay safe.

“Let us be grateful to the people who make us happy, they are the charming gardeners who make our souls blossom.” – Marcel Proust

ND&S Weekly Commentary (12.19.22) – Fed Talks Tough

December 19, 2022

Equity markets were lower across the board last week after hawkish rhetoric from the U.S. Federal Reserve Bank dispelled the notion of a dovish monetary policy pivot any time soon. For the week, the S&P 500 declined 2.05%, the DJIA lost 1.65%, and the tech-heavy Nasdaq dropped 2.70%. The Russell 2000 small-cap index slid 1.81%. International equity markets also finished in the red as developed (MSCI-EAFE) and emerging (MSCI-EM) markets gave back 2.13% and 2.09%, respectively. The price of oil (WTI) increased to $76.11 a barrel. The price of gold declined modestly on the week to $1,793 per ounce. Fixed income was the only asset class to provide a positive return last week as the Bloomberg/Barclays U.S. Aggregate returned 0.80% on the week. Interest rates were surprisingly lower across the yield curve as the 10yr yield settled on Friday at 3.48%.

The U.S. Federal Reserve Bank delivered the 50 basis-point increase that was widely expected at the conclusion of their December meeting. The markets were caught offsides when the committee delivered their forecast for the terminal federal funds rate and expectations for inflation. The median forecast for the federal funds rate was increased to 5.1% from 4.6% at their September meeting. Their outlook for core PCE inflation was adjusted to 3.5% from 3.1%, despite softer inflation readings in recent months. Futures markets remain skeptical that the Fed will hold true to their forecasts.

In other economic reports released last week, the Consumer Price Index (CPI) reading showed only a 0.1% month-over-month increase which was a better-than-expected deceleration for inflation. The year-over-year CPI number fell to 7.1%, down from 7.7% in October. Retail sales declined 0.6% last month spooking the markets, this after a much better-than-expected 1.6% increase in October.

There is no question that valuations for both equities and even fixed income are more appealing than they have been in recent years … and over a decade when it comes to most fixed income. Most institutional investors, CNBC talking heads and market forecasters are extremely pessimistic – normally a positive sign. Markets will remain volatile, as there is a lot of tax-loss harvesting and re-balancing affecting markets from now until early next year. We are continuing to remain patient by slowly investing in high-quality assets when attractive within a well-diversified portfolio.

“Investing is laying out money now to get more back in the future.” – Warren Buffet

ND&S Weekly Commentary 12.12.22 – Will Fed Chair be the Grinch who stole Christmas?

December 12, 2022

The stock market retreated last week as investors grew anxious over the economic outlook and the Federal Reserve’s response to tame inflation. The ongoing strength of the job market and consumer spending are ironically causes of concern and may trigger the Fed to continue raising interest rates higher and longer than expected.

For the week, the S&P 500 dropped 3.35%, the DJIA lost 2.74%, and the tech-heavy Nasdaq slid 3.98%. The Russell 2000 small-cap index tumbled 5.06%. The decline in the U.S. dollar and China’s lifting of Covid restrictions helped international equities. Developed markets (MSCI-EAFE) declined only 0.19% while emerging (MSCI-EM) rose 0.48%. Since mid-October, EAFE and EM have risen roughly 19% and 15%, respectively. The price of U.S. crude oil fell 11% to $71.58 a barrel and is down almost 23% from its high in early November. The price of gold declined slightly to $1,796 per ounce.

Last Friday, the Producer Price Index (PPI) rose modestly on a year-over-year basis 7.4%, higher than the consensus estimate of 7.2%. Investors were hoping for a slightly lower number to show that the Fed’s policies were making progress. The spread between the 2-year U.S. Treasury note and the 10-year note is now the widest since the early 1980s. The yield on the 2-year note rose 5 bps to 4.34% and the 10- year note increased 6 bps to 3.57%.

All eyes will be on the Consumer Price Index (CPI) to be reported on Tuesday, and the Fed meeting concluding on Wednesday. We hope to see that inflation is continuing to moderate and that the Fed will only increase the Federal Funds Rate by 0.50%. Chairperson Jerome Powell’s remarks on the economy, inflation, and the Fed’s strategy going forward will be closely examined.

“Maybe Christmas doesn’t come from a store. Maybe Christmas, perhaps, means a little bit more.” -The Grinch

ND&S Weekly Commentary 12.05.22 – Markets Hearing What They Want to Hear

December 5, 2022

Global equities had a sharp positive response to Fed Chairman Jerome Powell’s mid-week comments, but then began backsliding as data that supports a continuation of a strong US labor market and that showed wage inflation above expectations was released. Powell had a mostly hawkish tilt to his message, but equity investors seized on hints that the Fed is likely slowing its pace of interest rate increases – information that was supposedly already discounted in stock prices.

For the week, the DJIA managed a gain of 0.41% while the S&P 500 added 1.19%. The tech-heavy Nasdaq advanced 2.12%. International markets were higher with the MSCI EAFE Index (developed countries) gaining 1.06% and emerging market equities (MSCI EM) jumping 3.51%. Small company stocks, represented by the Russell 2000, grew 1.33% last week. Fixed income, represented by the Bloomberg Aggregate, gained 1.54% for the week as yields generally moved lower, with the front of the curve being more stubborn and the ending result being more yield inversion from 1yr to 10yr. The 10 YR US Treasury was down 17 basis points on the week closing at a yield of 3.51%. Gold prices closed at $1,785/oz. – up 1.83%. Oil prices reversed a five-week trend and closed up ~4.9% at $79.98 on the week.

In last week’s data, housing showed some improvement over October but was still generally negative: the S&P Case-Schiller US Home Price Index was -8.7% vs -10.4% in October, the FHFA US home Price Index was 0.9% vs -7.5% in October, and the Pending Home Sales Index was -4.6% vs -8.7% in October. Real GDP was revised to 2.9% vs 2.6% and Consumer Confidence was unchanged at 100.2, and Consumer Spending was up 0.5% vs 0.3%.

This week’s economic data releases include Trade Deficit, Productivity revision, and PPI. It is a relatively quiet week. The following week is a very important one as the Consumer Price Index (CPI) data will be released, followed by the Fed Funds target rate announcement and then a press conference with Fed Chairman Powell.

There is more chatter about a “soft landing” but most money is betting against it. If you are looking for a reason why not a soft landing – look no further than it has never been done before… especially coming from where we were. We had a HUGE spike in the money supply and the CPI rocketed to near 10%. The Fed was slow to respond and now it is in a battle to land the economy in the goldilocks zone of ~2% inflation and ~4% unemployment. Imagine the space shuttle crew trying to land while blindfolded and the feedback from the ground is delayed 30 seconds. The chances they find the runway are slim. It will land, and there will be damage, but it will be temporary, and the shuttle/economy will fly again.

We hope that all of you and your families are continuing to stay healthy and safe this holiday season. There are only 13 days until Hanukkah and 20 days to Christmas and just 26 days left in 2022!

“Anyone who sits on top of the largest hydrogen-oxygen fueled system in the world, knowing they’re going to light the bottom, and doesn’t get a little worried, does not fully understand the situation.”
– John Young, Space Shuttle Astronaut

ND&S Weekly Commentary 11.21.22 – Little Changed

November 21, 2022

Global equities were little changed, and range bound last week as economic data reconfirmed that inflation is moderating.

For the week, the DJIA ticked higher by 0.11% while the S&P 500 shaved off 0.61%. The tech-heavy Nasdaq was taken down by 1.51%. International markets were higher with the MSCI EAFE Index (developed countries) adding 0.26% and emerging market equities (MSCI EM) gaining 0.80%. Small company stocks, represented by the Russell 2000, fell 1.70% last week. Fixed income, represented by the Bloomberg Aggregate, gained 0.48% for the week as the long end of the yield curve moved lower. The 10 YR US Treasury was unchanged on the week closing at a yield of 3.82%. Gold prices closed at $1,752/oz. – down 0.39%. Oil prices moved lower, for a fourth week in a row, to close at $80.08 per barrel, down 9% on the week.

Headline PPI (Producer Price Index) in October was up 0.2% m/o/m, half the estimate expected. The softer than expected report, much like the October CPI, remains far from where it needs to be but is showing improvement. In other economic news, retail sales for October increased a stronger-than-expected 1.3%, the largest jump in 8 months. Housing starts declined further in October and is showing softness in the face of higher interest rates. This holiday shortened week will have reports on durable goods orders, new home sales, and consumer sentiment.

We hope that all of you and your families are continuing to stay healthy and safe this holiday season. We wish to extend to all a very Happy Thanksgiving!

This week also, brings the return of the most watched sporting event in the world. US returns to the World Cup against Wales after 8-year wait. When the U.S. takes the field on Monday, it will have been 3,066 days since its last World Cup match … that seems like a lifetime ago…

“The World Cup is a very important way to measure the good players and the great ones. It is a test of a great player.” – Pele