Weekly Commentary (11/20/23) – US Inflation Shows Decline – Markets Rally
November 20, 2023
All Markets rallied as investors welcomed some positive inflation news. US Treasury rates moved sharply lower to reverse trend and equity markets advanced across the board.
For the week, the DJIA gained 2.06% while the S&P 500 added 2.31%. The tech-heavy Nasdaq was up 2.42%. International markets also finished higher. For the week, the MSCI EAFE Index (developed countries) rose 4.51% and emerging market equities (MSCI EM) gained 2.99%. Small company stocks, represented by the Russell 2000, had a major advance and added 5.49% for the week. Fixed income, represented by the Bloomberg Aggregate, rose 1.37% for the week as yields continued a swift retreat from recent highs. As a result, the 10 YR US Treasury closed at a yield of 4.44% (down ~ 17 bps from the previous week’s closing yield of ~4.61%). Gold prices also rose to $1,981.60/oz – up 2.54%. Oil prices continued their trend lower and closed at $72.92 per barrel.
Last week’s major economic news was consumer prices were unchanged over the previous month and though they rose 3.4% over the previous 12 months, this was meaningfully less than the 3.7% pace from October. This was a positive surprise, and the bond market showed an immediate reaction with the UST 10-yr yields dropping about 20 bps on the news. Equities took that cue and extended recent gains. Investors have virtually abandoned the bets the Fed will hike again in this cycle and are more interested in when and how much the Fed may begin to loosen rates.
The budget fiasco was put on hold as lawmakers agreed to a continuing resolution to keep the doors open into February. In the meantime, Moody’s changed its outlook on US government debt to “Negative” from “Stable” and referenced the deficit spending levels and political polarization as major factors in that decision.
The shortened Thanksgiving week is relatively light on economic data but will include leading economic indicators, home sales, some employment data, and PMI data. The Fed’s FOMC minutes will also be released.
Based on the recent data and investor sentiment, we would not be surprised to see market interest rates cycle higher again. The reality is that the Fed cannot substantially cut its overnight lending rate with inflation above their 2% target and otherwise strong economic data. This is the soft-landing scenario. With huge supply of US debt coming to the market and the reality of “term premium”, investors are not going to acquire that debt at these levels unless they believe the front end of the interest rate curve will move substantially lower. Without a true economic downturn, the Fed cannot cut rates enough to have the current yield levels of mid and longer term debt “make sense”.
We are implementing asset allocation strategies that are geared toward long-term investment results but have a near-term defensive bias. We favor higher cash levels, low duration fixed income, and defensive equity exposure. We hope you all have a pleasant Thanksgiving!
“Enjoy the little things, for one day you may look back and realize they were the big things.”
– Robert Brault
Weekly Commentary (11/13/23) – Inflation Data Looms
November 13, 2023
The major stock market indexes were mixed last week with the S&P 500 notching its second weekly gain. The S&P 500 advanced 1.3% and the Dow Jones Industrial Average (DJIA) added 0.7%. The tech-heavy Nasdaq was the stellar performer, gaining 2.4%. Small Caps, as measured by the Russell 2000 Index, were down 3.1%. International developed (MSCI EAFE) fell 0.9% while Emerging Markets (MSCI EM) were basically flat. Emerging Markets have been struggling with higher U.S. interest rates and slower growth in China.
So far 81% of the S&P 500 companies have beaten analysts’ third quarter estimates. The price of oil continues to slide with U.S. Crude trading around $77 per barrel, down from about $89 three weeks ago.
On Thursday, Federal Reserve Chair, Jerome Powell, commented that additional rate hikes may be needed to defeat inflation. “We know that ongoing progress toward our 2% goal is not assured: Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so.” The 10-year U.S. Treasury rose to 4.76% from 4.57%, the previous week.
U.S. Consumer Sentiment sagged to a six-month low over higher interest rates and the concerns over the ongoing wars in the Middle East and Ukraine. The University of Michigan’s consumer sentiment index fell for the fourth straight month.
All eyes will be on next week’s inflation reports. The Consumer Price Index (CPI) will be released on Tuesday and the Producer Price Index (PPI) is due out on Wednesday.
“It is foolish and wrong to mourn the men who died. Rather, we should thank God that such men lived.” – George S. Patton, Jr.
Weekly Commentary (10/30/23) – Markets in Correction Mode
October 30, 2023
Markets were lower across the board last week as the S&P 500 officially entered correction territory – down 10% from its recent high. The Nasdaq was already in correction territory. Major averages are now on track for 3 straight months of declines. Rising interest rates and mixed earnings reports have taken a toll on investor confidence.
For the week, the DJIA lost 2.14% while the S&P 500 gave back 2.52%. The tech-heavy Nasdaq dropped 2.62%. International markets finished lower as well, but not by as much as U.S. markets. For the week, the MSCI EAFE Index (developed countries) finished lower by 0.76% while emerging market equities (MSCI EM) dropped 0.61%. Small company stocks, represented by the Russell 2000, experienced a loss of 2.60% for the week. Fixed income, represented by the Bloomberg Aggregate, advanced 0.68% for the week as yields moved lower. As a result, the 10 YR US Treasury closed at a yield of 4.86% (down ~ 7 bps from the previous week’s closing yield of ~4.93%). Gold prices closed at $1,988.60/oz – up 0.31% as the U.S. dollar index rose by a similar amount. Oil prices retreated from their recent highs to close at $85.54 per barrel, down 2.88% on the week.
Last week witnessed the release of 3rd quarter 2023 GDP, and the number was better-than-expected. GDP in the 3rd quarter grew an estimated 4.9% versus expectations for a gain of 4.7%. The GDP figure likely overstates the strength of the economy as higher interest rates and borrowing costs are just now beginning to show up in weaker consumer spending. September PCE came in at 0.3%, in-line with expectations.
The week ahead holds a few important events. The FOMC meeting is Tuesday and Wednesday, and it is widely expected that the Fed will hold rates steady. Comments from Chairman Jay Powell should give investors a clue about Fed thinking and future Fed moves. Friday brings the nonfarm payrolls report while earnings from the likes of Apple, McDonalds and many other bellwether companies should give investors some insight on how companies are adapting to this higher rate environment.
Ongoing tragedies and tensions in the Middle East will continue to weigh heavily on investors’ minds. Let’s not forget that corrections are normal market events (although they are certainly unsettling). We suspect that markets are oversold and will bounce a bit higher from here. Fortunately, the fourth quarter has historically been kind to investors even when it is off to a slow start. We urge investors to stick close to long-term asset allocation targets with a slight defensive bias.
“In the business world, the rearview mirror is always clearer than the windshield.” – Warren Buffett
ND&S Weekly Commentary 10.23.23 – Challenges on All Fronts
October 23, 2023
The last several weeks have brought challenges on all fronts … literally and figuratively. The Fed shows no sign of letting up on their fight against inflation. The conflict remains ongoing in Ukraine while it seems things could potentially escalate further in the Middle East. The cost of capital for businesses and consumers remains high. Washington remains a mess … the list goes on.
For the week, the DJIA fell 1.57%% and the S&P 500 dropped 2.38%. The tech-heavy Nasdaq slid 3.16%. International markets were also down. For the week, the MSCI EAFE Index (developed international) finished lower by 2.59% and emerging market equities (MSCI EM) dropped 2.69%. Small company stocks, represented by the Russell 2000, were also down 2.25% for the week. The 10 YR US Treasury closed at a yield of 4.93% (up 30 bps over the week) and as a result, fixed income, represented by the Bloomberg/Barclays Aggregate, fell 1.73% as yields moved sharply higher. Gold prices finished at $1,989/oz. – up 2.8% on the week, providing some support in an otherwise down week. Oil prices settled at $89.38 per barrel, up 2.5% on the week.
Through all the negative headline noise last week, consumer strength continues to be a bright spot in 2023. Last week, it was reported that retail sales grew 0.7% m/m in September. Industrial production also saw an uptick last month (0.3%). Additionally, 3rd quarter GDP will be reported this week, estimates are suggesting the economy expanded over 4% marking the fastest quarterly expansion since the reopening of the economy in 20-21 Covid years. The economy has remained quite resilient, although a temporary slowdown should be expected in the economy in the next 6-12mths.
This week will provide equity markets with plenty to think about. There are a number of companies scheduled to report results this week, which includes the likes of Amazon, Microsoft, Alphabet, Mastercard, among others. On the technical side, the S&P 500 is currently bouncing along its 200-day moving average which is providing support, but could also sound the alarms if that support is breached. We are in the midst of a correction that started during the summer, however, the market is transitioning to a seasonal period that is usually bullish.
Through it all, there are plenty of negatives that investors and prognosticators can point at to “talk their book”. We are continuing to remain patient and defensive, although there are opportunities that have begun to present themselves. As famous investor Robert Arnott has said, “In Investing, what is comfortable is rarely profitable”. Fixed income is now offering investors yields that haven’t been seen in decades while a number of companies followed by our team are trading at attractive valuations that could merit investment.
Let’s make it a great week!
ND&S Weekly Commentary 10.16.23 – Higher for Longer
October 16, 2023
Last week’s atrocities of Hamas against Israel and the inevitable horrific response, drove investors to safe-haven assets like gold, U.S. Treasuries, and utility stocks.
For the week, the S&P 500 added 0.47%, the Dow Jones Industrial Average rose 0.79%, and the tech-heavy Nasdaq declined 0.18%. The international markets showed resilience with developed (MSCI EAFE Index) and developing (MSCI EM Index) gaining 0.97% and 1.52%, respectively.
A voting member of the Federal Reserve’s Open Market Committee stated that he does not see the need for raising the federal funds rate further. The Wednesday release of the Federal Reserve’s September meeting indicated that higher market yields may help curb inflation. U.S. government bond yields retreated, ending five consecutive weekly gains. The 10-year Treasury yield fell modestly to 4.63%, still near its highest level since 2007. Will interest rates stay higher for longer or has the Federal Reserve done their job?
Corporate earnings season began with J.P. Morgan, Citibank, and Wells Fargo reporting over $22 billion in profits during the third quarter. The banks exceeded analysts’ expectations for net income and revenues. According to FactSet, earnings of the S&P 500 companies in the third quarter will increase by 0.4% overall, breaking three consecutive declining quarters.
If Iran responds to the Israel-Hamas war or is implicated in any way, oil sanctions may result pressuring oil prices. For the week, the price of oil soared 5.9% to $87.69 bbl. Gold also rose 5.3% to its highest level since the bank failures last March.
On the economic front, September’s Consumer Price Index (CPI) came in at 3.7% annualized and was the same as the previous month. The Producer Price Index (PPI) was little changed at 2.2% annualized as investors worried that inflation had stopped slowing down. With oil and commodity prices elevated, concerns on inflation will remain. The University of Michigan’s consumer-sentiment for October was also lower than consensus.
Despite the horrors of the Israel-Hamas war, financial markets have been surprisingly resilient. Next week’s corporate earnings announcements will take center stage. Important economic news next week will include September retail sales and housing data. We encourage investors to broaden diversification and seek opportunities in high-quality assets.
“War is only a cowardly escape from the problems of peace.”—Thomas Mann
Weekly Commentary (10/9/23) – US Treasury Yields Continue to Climb
October 9, 2023
Equity markets were mixed but mostly lower last week. US Large Cap and Tech were positive, but all other segments and groups were lower. Bonds continue to struggle.
For the week, the DJIA lost 0.24% while the S&P 500 advanced 0.52%. The tech-heavy Nasdaq managed a 1.62% gain. International markets finished lower again. For the week, the MSCI EAFE Index (developed countries) declined 1.85% and emerging market equities (MSCI EM) was off 1.61%. Small company stocks, represented by the Russell 2000, were hit harder, and fell 2.19% for the week. Fixed income, represented by the Bloomberg Aggregate, declined 1.17% for the week as yields continued to move higher. As a result, the 10 YR US Treasury closed at a yield of 4.78% (up ~ 19 bps from the previous week’s closing yield of ~4.59%). Gold prices closed slightly lower at $1,830.20/oz – down 0.1%. Oil prices moved sharply lower and closed at $82.31 per barrel, down 9.3% on the week.
Last week’s economic data made it apparent that the US labor market is not cooling at a pace that suits the Fed’s mission to reestablish price stability. The US economy continues to add jobs at rates above estimates. The JOLTS labor data pegs 700k in job openings in August. Weekly jobless claims are at persistently low levels and the unemployment rate held at 3.8%. After the data release, US 10-year Treasury yields rose to 4.88%, the highest level since 2007, and odds of a rate hike before year-end rose to ~ 50%. Equities continue to wrestle with the conundrum of the positive aspects of a warm and growing economy and the competing valuation mathematics of higher current interest rates and the possibility that rates will continue to rise. Naturally, bonds suffered price declines as investors demanded higher yields. When the interest payments are fixed, the only way to produce a higher yield from a bond is to lower its price.
Over the weekend, Hamas carried out an unprecedented terrorist attack on Israel that directly targeted innocent civilians, including the elderly, women, and children. The attack not only included the indiscriminate destruction of bombs and rockets but also countless face-to-face murders and kidnappings of non-military targets using guns and knives. These heinous acts have shocked all rational observers. The ensuing retribution, which most believe is justified, will unleash more death and destruction. The wider-reaching geopolitical implications are concerning and warrant careful monitoring. No doubt this new conflict will affect financial markets. More immediate is the concern we all have for all the innocent people in that region who have already experienced unthinkable trauma and for those who will be suffering in the coming weeks and months. Prayers are needed.
The coming week will bring us some key inflation data. Producer price index (PPI) data is released Wednesday and consumer price index data (CPI) is released on Thursday.
We are implementing asset allocation strategies that are geared toward long-term investment results but have a near-term defensive bias. We favor higher cash levels, low duration fixed income, and defensive equity exposure.
“In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” – Peter Lynch
ND&S Weekly Commentary 10.2.23 – Markets Mostly Lower, Again
October 2, 2023
Markets were mostly lower last week, locking in the worst month so far this year as investors and companies continue to struggle with higher interest rates. The S&P 500 fell 4.9% in September, the worst month since December 2022.
For the week, the DJIA lost 1.34% while the S&P 500 gave back 0.71%. The tech-heavy Nasdaq eked out a 0.07% gain. International markets finished lower as well. For the week, the MSCI EAFE Index (developed countries) finished lower by 1.40% while emerging market equities (MSCI EM) dropped 1.13%. Small company stocks, represented by the Russell 2000, were a bit better as they managed to gain 0.55% for the week. Fixed income, represented by the Bloomberg Aggregate, declined 0.96% for the week as yields moved considerably higher. As a result, the 10 YR US Treasury closed at a yield of 4.59% (up ~ 15 bps from the previous week’s closing yield of ~4.44%). Gold prices closed at $1,848.10/oz – down 4.1% as the U.S. dollar index rose. Oil prices continued their march higher to close at $90.79 per barrel, up 0.84% on the week.
Last week saw several important economic releases. Core PCE (the Fed’s favorite inflation indicator) came in below 4% to 3.9% for the first time in two years. Core PCE strips out both food and energy. Given that gasoline prices have risen nearly 30% in the past few months, the average consumer is probably less inclined to cheer the latest Core PCE report. August’s Headline Durable Goods Orders came in at 0.2% m/m. Headline beat consensus of -0.5% as the increase was led by defense orders, with aircraft jumping 19.2%. Year-over-year momentum, however, eased as durable goods orders rose 5.1% versus 5.8% in the prior month – this suggests further weakness in manufacturing output over the near-term. Lastly, mortgage applications and refi’s declined from the prior week (no surprise) as high rates and low inventory continue to constrain demand.
The week ahead holds a few events that will provide investors with a snapshot of how the economy and sentiment are holding up in early September. Releases include: August Services PMI, ISM Non-Manufacturing Index, JOLTS, and Consumer Credit.
We are likely not out of the woods yet, and we look for markets to remain rangebound until there is more clarity on interest rates and inflation. Third quarter earnings should be reasonable, but consumers and businesses are beginning to feel the effects of higher interest rates. Fortunately, the fourth quarter has historically been kind to investors. We urge investors to stick close to long-term asset allocation targets with a slight defensive bias.
“Just because something doesn’t do what you planned it to do doesn’t mean it’s useless.” – Thomas A. Edison
ND&S Weekly Commentary (9.25.23) – One More Rate Increase Expected
September 25, 2023
The Fed meeting last week unraveled pretty much as expected. The Federal Reserve kept the federal funds rate unchanged, however, it gave plenty of ammo for the press and investors to continue speculating on what policy will look like at future meetings. In the Fed’s statement, the committee noted strong economic growth across the country. Their biggest concern (and the market’s, which reacted negatively post meeting), at this point, is whether the strong economic growth will bring with it more inflation pressures.
For the week, the S&P 500, the DJIA and NASDAQ were all negative at -2.91%, -1.89% and -3.61%, respectively. Small Cap stocks, as measured by the Russell 2000, also closed lower by 3.81%. International equities were also negative last week with developed markets declining 2.03% and emerging markets down 2.08%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 0.50% for the week as yields moved meaningfully higher in response to FOMC commentary. As a result, the 10 YR US Treasury closed at a yield of 4.44% (up 11bps from the previous week’s closing yield of ~4.33%). Gold prices closed at $1,927/oz. – up a modest 0.9%. Oil (WTI) remains elevated closing last week at $89.63 per barrel which is likely a headwind to growth at these levels.
As we enter the last trading week of the 3rd Quarter, equity markets remain well in positive territory year-to-date even with a difficult September. The equity markets seem stuck in this, bad economic news is good news & good economic news is bad news environment. We believe the economy is slowing despite what will likely be a 4%+ reading for 3rd Quarter GDP. As result, we continue to remain patient and a bit defensive within allocations while waiting for better opportunities to present themselves.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett
ND&S Weekly 9.18.23 – Fall Is Upon Us
September 18, 2023
The major stock market indexes finished mixed last week, as investors struggled with inflation data and rising oil prices.
The S&P 500 fell 0.12%, the Dow Jones Industrial Average eked out a gain of 0.14%, while the tech-heavy Nasdaq slid 0.37%. International equities fared better with developed markets (MSCI EAFE) up 1.6% and emerging markets (MSCI EM) gaining 1.27%.
The consumer price index (CPI) rose a hefty 0.6% in August, and was up 3.7% from a year ago. The acceleration was caused by higher energy prices. Core CPI, which excludes energy and food, rose 0.3% versus 0.2% forecasted. U.S. benchmark West Texas Intermediate oil prices rose above $90 per barrel for the first time since November 2022.
The bond market bounced around a bit with U.S. Treasury yields modestly increasing over most maturities. The 10-year Treasury closed at a yield of 4.29%, up slightly over last week’s 4.26%.
In other economic news, China reported that its economy picked up steam last month, easing concerns about the world’s second-largest economy. U.S. retail sales and wholesale price inflation were higher than expected. All of this bodes well for a soft economic landing and signs of a resilient consumer. There could be trouble on the horizon; however, as the United Auto workers officially launched their strike against the Big 3 automaker plants.
All eyes and ears will be on next week’s Federal Reserve meeting when central bankers will share their latest thinking on interest rate policy. Important housing data and the leading economic indicators for August will also be reported.
“And all at once, summer collapsed into fall.” – Oscar Wilde
Weekly Commentary (11/27/23) – Major Averages Move Higher for the Fourth Straight Week
November 27, 2023
Markets were higher across the board during last week’s holiday-shortened trading. It was the fourth straight week of gains for the major averages. Another positive sign – breadth has been expanding lately as roughly 55% of S&P 500 stocks closed above their 200-day moving average. Lower oil prices gave investors another reason to cheer.
For the week, the DJIA gained 1.27% while the S&P 500 moved higher by 1.00%. The tech-heavy Nasdaq jumped 0.89%. International markets finished up as well. For the week, the MSCI EAFE Index (developed countries) finished ahead by 1.06% while emerging market equities (MSCI EM) inched higher by 0.47%. Small company stocks, represented by the Russell 2000, gained 0.54% for the week. Fixed income, represented by the Bloomberg Aggregate, declined 0.09% for the week as yields moved slightly higher. As a result, the 10 YR US Treasury closed at a yield of 4.47% (up ~ 3 bps from the previous week’s closing yield of ~4.44%). Gold prices closed at $2,002.20/oz – up 1.04% as the U.S. dollar index dropped by 0.48%. Oil prices retreated to close at $75.54 per barrel, down 0.66% on the week.
Last week witnessed strong Black Friday sales as U.S. consumers continue to spend past their means. Credit card balances are now @$1.08 trillion … an all-time high. Consumer Sentiment rose to 61.3 from the estimate of 60.4. Durable goods orders fell 5.4%
The most pertinent news item in the week ahead will be the release on Thursday of the Personal Consumption Expenditures (PCE) index – the Fed’s preferred inflation gauge. Expectations for the PCE report are for a 3.5% annual inflation rate in October and for a 0.2% increase over the prior month. The PCE will give investors a clue as to the Fed’s next rate move – as of now, markets are pricing in just a 12% chance that the Fed raises rates again in this cycle. Other economic releases this week include new home sales, consumer confidence, GDP and ISM Manufacturing. Additionally, quarterly earnings reports are expected from Salesforce, Snowflake, Okta, Costco, Dollar Tree, Kroger and others.
After such a strong run for the markets over the past few weeks (too far, too fast?), we would not be surprised to see a short-term pause. That said, seasonality is still favorable into year-end. We urge investors to stick close to long-term asset allocation targets.
“The secret of getting ahead is getting started.” – Mark Twain