NDS Weekly Commentary 9.16.19 – Markets Advance as Rates Move Higher

September 16, 2019

Equities advanced last week as money rotated out of bonds and high flying tech names into value stocks and sectors that had been previously out of favor. What otherwise was a quiet week for stocks, a huge discrepancy occurred beneath the surface between the Russell 1000 Value (2.47%) and the Russell 1000 Growth (-0.45%). Improving trade relations with China and a jump in interest rates provided fuel for last week’s move. We caution looking too much into one week’s performance, but a wide gap in performance between the two indexes has been present for years.

valuegrowth

On the week, the S&P 500 increased 1.02% while the DJIA finished up 1.65%. Smaller US companies represented by the Russell 2000 jumped 4.90%. International equities were also strong with developed (MSCI EAFE) and emerging (MSCI EM) closing higher by 1.99% and 1.91%, respectively. Bonds really struggled with the benchmark Barclay’s US Aggregate Index shedding 1.66% on the week. Bonds prices move inversely to the direction in yields. Treasury yields jumped higher across the board with the 10yr US Treasury closing at 1.90%, which is up from 1.55% just last week (see image below).

Rates

Economic data last week was relatively positive. On Wednesday, the Producer Price Index (PPI) for final demand ticked up 0.1% which exceeded expectations of unchanged. On Thursday, the Consumer Price Index (CPI) increased 0.1% which was in-line with estimates. Over the last 12 months, CPI is up 1.7%. On Friday, retail and food-services sales rose 0.5% in August, doubling expectations of a 0.2% monthly advance. The U.S. consumer continues to be healthy. There will be reports this week on housing, industrial production and manufacturing.
The FOMC gears up for their two-day meeting this week. The Fed is expected to cut its policy rate by another 25bps … this despite political pressure to reduce rates farther. Views are divided on what the Fed’s monetary path will look like for the rest of the year. Rising core-inflation, solid economic activity, and thawing trade relations with China support a wait and see approach for further shifts after the conclusion of this meeting. There will likely be dissent on both sides among members of the FOMC.

“If you can dream it, you can do it.” – Walt Disney

ND&S Weekly Commentary 9.9.19 – The Endless Summer

September 9, 2019

Despite data clearly showing global manufacturing slowing, and below expected job numbers, investors showed a sigh of relief when news on trade talks were back on the table. For the holiday shortened week, the DJIA rose 1.53%, the S&P 500 gained 1.83% and the NASDAQ was up 1.78%. International equities were especially strong with developed markets (MSCI EAFE) rising 2.23% and emerging markets (MSCI EM) advancing 2.44%.

The department of labor was busy announcing jobs data for August which showed mixed results. The US economy added 130 thousand jobs, which missed consensus estimates of 163 thousand. The unemployment rate remained historically low at 3.7%. The total number of Americans employed increased by 590,000, setting a record of 157.9 million workers.

Federal Reserve Chairman Jerome Powell also soothed investor worries stating that fundamentals of the US economy remain strong and there’s no chance of an immediate recession. The market expects another Fed Funds Rate reduction of 25bps at their next meeting.

Further whetting the appetite for equity investing, is the rising S&P 500 dividend yield. It is nearing 2% and soundly beats the 10yr US Treasury yield of 1.55%. When taking into account the expected inflation rate and the after tax yield, dividend paying equities are a relative bargain.

We are not out of the woods yet. The economies of China and the Euro-zone could continue to slow more sharply and we never know what the President’s next move will be. Consumers are spending while inventories have been declining. A sudden surge in hiring workers and increasing wages could spark inflation above the Federal Reserve’s 2% target.

Nevertheless, we strongly feel that a well-diversified portfolio with slightly higher money market balances and a bias for dividend growth will continue to provide happy returns.

There will be a slew of economic data reported this week including the producer, consumer, and import price indices. August retail sales will also be of significant interest as consumer spending is expected to continue to increase.

“Genius is 1% inspiration and 99% perspiration”Thomas Edison

ND&S Weekly Commentary 9.3.19 – Equities Rally Into September

September 3, 2019

Global equities snapped a four week losing streak to end the month on a high note. Cooling trade tensions and better-than-expected economic data were the catalysts last week, but much of the core concerns regarding trade still remain. According to comments from the Chinese commerce ministry, the talks between the US and China will continue in Washington in September. The rhetoric has been toned down with China vowing not to retaliate on the latest tariff hike.

The Dow Jones Industrial Average (DJIA) jumped 3.1%, while the S&P 500 climbed 2.8% and the NASDAQ rose 2.7% on the week. International equities were also positive with the MSCI EAFE and MSCI EM finishing up 0.9% and 1.2%, respectively. The 10Yr and 2Yr US Treasuries inverted again last week, and both closed the week at yields of 1.50%. Oil continues to trade in the mid-$50 per barrel range as lower supply due to geopolitics has so far offset economic concerns and weaker demand.

Economic data on the week was generally positive versus expectations. On Monday, manufactured durable goods advanced 2.1% in July which beat expectations. On Thursday, real GDP, which adjusts for inflation, increased 2.0% in the second quarter. This follows a 3.1% advance in the first quarter of the year. On Friday, it was reported that personal consumption expenditures increased 0.6% in July, which was an increase from the previous two months. It is important to remember, consumption makes up roughly 70% of the US economy.

Earnings reports for the second quarter are mostly complete. Many analysts and forecasters were calling for an earnings decline as recently as 2 months ago. However, earnings growth for the quarter slowed to 4.9% (well ahead of estimates) from a robust 20% pace seen in 2018. On the surface it is concerning, but last year’s jump was mostly attributed to the Tax Cuts and Jobs Act which lowered the corporate tax rate from 35% to 21%. For the quarter, roughly 75% of companies reported a positive earnings surprise. On the top line, revenue has increased 3.6% versus expectations of a 3.16% increase.

We expect markets to remain volatile until more certainty regarding trade is established. We suggest investors stay close to their long-term target asset allocations with a slight defensive bias.

“The world of ours … must avoid becoming a community of dreadful fear and hate, and be, instead, a proud confederation of mutual trust and respect.”Dwight D. Eisenhower

Weekly Commentary (08/26/19) –Trade Tensions Weigh on Markets

August 26, 2019

Markets were fairly calm for most of last week until China announced on Friday that they would impose tariffs of 5% to 10% on $75 billion worth of U.S. goods to be implemented in two stages – September 1st and December 15th. Not to be outdone, President Trump responded in-kind by saying he would raise the tariff rate by 5% on existing and planned tariffs. He also directed U.S. companies to immediately look for alternatives to China while tweeting “We Don’t Need China.” Wasting no time, the media used the chaos and uncertainty to reiterate their battle cry that a recession is looming. While the probability of a recession has increased lately, it is unlikely that we will see one in the near term. We will likely see a recession within the next 18 months or so, but recessions are quite normal and happen, on average, about once every five years.

Economic data released last week was mostly positive. Existing home sales jumped 2.5% in July (better than expected) while existing home pricing increased 4.3% year-over-year. Initial jobless claims for the week ending August 17 were better than consensus as claims remained below 300,000 (level considered for a healthy jobs market) for 233 consecutive weeks. New homes sales were reported on Friday as levels were slightly less than expected; however, June’s level was revised sharply higher which makes up for July’s slight miss. Trade tensions and headline news about a looming recession certainly have investors on edge, but the U.S. consumer (2/3rds of GDP) remains mostly upbeat.

For the week, the DJIA fell 0.98% while the S&P 500 dropped 1.42%. The volatile NASDAQ declined 1.81%. Developed international markets fared better. For the week, the MSCI EAFE index advanced by 0.86% while emerging market equities (MSCI EM) inched higher by 0.38%. Small company stocks, represented by the Russell 2000, finished lower by 2.27% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week slightly higher as investors continued to flee to the perceived safety of bonds. As a result, the 10 YR US Treasury closed at a yield of 1.52% (down ~3 bps from the previous week’s closing yield of 1.55%). Not surprisingly, Gold prices closed at $1,526.60/oz – up 0.93% on the week. Oil prices dropped $0.64 last week as signs of slowing global growth lowered future demand expectations.

We wish the markets were calmer and less frenetic, but that is not the case. We expect the markets to continue to overreact to headline news regarding trade with China. We suggest investors stay close to their long-term target asset allocations with a slight defensive bias.

“All you need is the plan, the road map, and the courage to press on to your destination.”Earl Nightingale

NDS Weekly Commentary 8.19.19 – Volatility Continues

August 19, 2019

Stock markets worldwide were lower last week as weak economic data out of China and Germany rattled investors. Chinese industrial production slowed to 4.8% year-over-year, the weakest since 2002, while German GDP contracted -0.1% for the 2nd quarter of 2019. Trade worries continued to hang over the markets as China and US exchanged threats. However, hidden behind all of the negative global headlines were July retail sales that rose a healthy 0.7% month-over-month and new home permits were up 8.4% month-over-month and now up 1.5% year-over-year. It’s important to remember consumption is two-thirds of U.S. GDP and retail sales are 43% of consumption.

Despite an 800 point selloff in the DJIA on Wednesday, markets bounced back and finished the week modestly lower. For the week, the DJIA, the S&P 500, and the NASDAQ were down -1.4%, -0.9% and –0.9%, respectively. Developed international and emerging markets declined -1.5% and -1.0%. The best performing sectors for the week were the more defensive (albeit overvalued) consumer staples, utilities, and real estate.

The increased volatility has benefited fixed income markets as investors sought shelter in U.S. Treasury securities. Interest rates continued to fall for the week. During the week, the 30 year U.S. Treasury bond briefly dipped below 2.0%. At one point during the week, the yield on the 2 year and 10 year U.S. Treasury briefly inverted raising recessionary concerns. However, by the end of the week the 10 year ended at 1.55% down from 1.74% and the 2year was at 1.48%. While recessionary fears are rising we do not anticipate a recession in the near-term.

This week is a slow week for economic news with only reports on existing home sales, new home sales and preliminary mfg. PMI.

We would remind investors to maintain a well-diversified portfolio to help weather periods of market volatility.

“Failure will never overtake me if my determination to succeed is strong enough.”Og Mandino

ND&S Weekly Commentary (8.12.19) – Confucius Say …

August 12, 2019

The ongoing US-China trade war escalated last week and wreaked havoc in the financial markets. China retaliated to President Trump’s 10% tariff threat on over $300 billion of imports by devaluing its currency to its lowest level in eleven years. As a result, there was a major flight to safety that drove down bond yields globally and caused renewed volatility in the equity markets. The prices of historical safety nets of government bonds and gold were bid higher. The yield on the 10-year Treasury slid to 1.6%, its lowest level since October 2016. The price of gold surged past $1,500 an ounce for the first time since 2013.

The volatility of the stock market was clearly evident on Wednesday as the Dow Jones Industrials went from down 589 to end nearly flat in the sharpest turnaround in seven months. For the week, the DJIA and the S&P 500 finished down 0.61% and 0.40%, respectively, while the NASDAQ declined 0.51%. Trade tariff threats weighed heavily on international markets as developed equities (EAFE) slipped 1.14% and emerging market stocks (EEM) were off by 2.22%.

Fixed income markets were quite volatile due largely to the currency devaluation of China, slowing global growth and, yes, fear. The yield on the 10-year US Treasury dropped from 1.86% last week to 1.74%.

It is difficult to explain the indirect causes and effects of negative interest rates. The global supply of negative-yielding bonds has grown to over $15 trillion. Bond prices are expected to remain high as a result of increasing demand for income yields, slowing economic activity and monetary easing by global central banks.

Several research analysts and economists claim that central banks around the world are reducing rates to weaken their currencies which would make their exports less expensive and support economic growth. Investors are expecting further rate cuts by the Federal Reserve in order to prevent the US dollar from strengthening and keeping our exports competitive.

The price of Brent crude fell 4.6% to $56.75 a barrel. Rising inventories of oil have kept prices down about 25% in the past 12 months which is great for consumers but difficult for energy companies.

This week’s reports: Monday—China vehicle sales—Tuesday, US and Germany’s inflation rates— Wednesday, China retail sales, Germany and Europe GDP, Thursday—US retail sales and Friday—US housing starts and building permits.

“He who thinks too much about every step he takes will always stay on one leg.”
-Chinese Proverb

Weekly Commentary (08/05 /19) –Fed Cuts Rates and Trade Tensions

August 5, 2019

Markets were decidedly lower last week as President Trump announced he would impose a 10% tariff on $300 billion on additional Chinese imports beginning September 1. President Trump’s decision on Thursday (against the advice of his chief advisers) completely overshadowed action by the Fed the day before. On Wednesday, the Fed lowered rates by 0.25%, as widely expected.

For the week, the DJIA fell 2.59% while the S&P 500 dropped 3.07%. The volatile Nasdaq declined 3.90%. Developed international markets also sold off. For the week, the MSCI EAFE index gave up 2.64% while emerging market equities (MSCI EM) sunk 4.29%. Small company stocks, represented by the Russell 2000, finished lower by 2.85% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week higher as investors reacted to actions by the Fed and President Trump. As a result, the 10 YR US Treasury closed at a yield of 1.845% (down ~22 bps from the previous week’s closing yield of 2.07%). Not surprisingly, Gold prices closed at $1,445.60/oz – up 1.85% on the week. Oil prices dropped $0.54 last week as signs of slowing global growth lowered future demand expectations.

We expect China to retaliate against President Trump’s recent actions. As a result, markets will most likely be volatile for the next week or so. Buckle-up and stay close to your long-term target asset allocations with a slight defensive bias.

As everyone knows by now, two mass shootings took place in the United States over the weekend. We are greatly saddened by these events, and we extend our sincere condolences to the families who lost love ones. This madness must end.

“We don’t develop courage by being happy every day. We develop it by surviving difficult times and challenging adversity.”Barbara De Angelis

ND&S Weekly Commentary (7/29/19) – All Eyes on the Fed

July 29, 2019

Strong earnings pushed stocks higher last week as investor eyes turned to this week’s Fed meeting, where it is anticipated they will reduce the federal funds rate by 0.25%. On the week, the DJIA inched higher by 0.14% while the broader based S&P 500 closed up 1.66%. Small companies had a strong week with the Russell 2000 jumping 2.02%. However, international stocks closed lower on the week with the MSCI EAFE and MSCI EM down 0.20% and 0.75%, respectively. Treasury yields remained steady on the week with the 10 yr. US Treasury closing at 2.08%, up slightly from 2.05% the week prior. Gold closed the week at $1420 oz. while oil remained in the mid-$50s per barrel.

The big economic news last week was the release of 2Q19 real GDP, which came in at a better-than-expected 2.1%. This result follows a 3.1% advance in the 1st quarter of the year. The growth was supported by strong consumer spending (+4.2%) which offset a small decline (0.6%) in business investment. Other economic releases last week included durable goods, which rebounded 2.0% in June, beating estimates and new home sales that came in at a 646k annual rate which missed expectations. .

Earnings season is upon us and has thus far been positive versus expectations. With approximately 43% of S&P 500 companies having reported, blended earnings are currently -2.3% year-over-year, while revenues are expected to grow 3.9%, according to FactSet Research. This week, roughly half of the S&P 500 companies will report earnings. Apple, Mastercard, Procter & Gamble, Pfizer are just some of the companies scheduled to report.

US-China trade talks are expected to resume this week in Shanghai. US has signaled that it would like to get back to the same level of dialogue reached in May. Most eyes will be on the fed as they wrap up their July meeting on Wednesday.

“The will to win, the desire to succeed, the urge to reach your full potential … these are the keys that will unlock the door to personal excellence.”Confucius

ND&S Weekly Commentary (7/22/19) – Earnings Season Kicks into Gear

July 22, 2019

Equity prices weakened last week as investors digested mixed earnings news and shifting expectations on Federal Reserve rate moves. For the week, the S&P 500 and DJIA were off 1.2% and 0.6%, respectively, while the NASDAQ declined 1.2%. International markets were mixed with developed markets down 0.1% and emerging markets up 0.8%. Communication services, energy and real estate were the weakest sectors last week.

In fixed income, the rate on 10 year U.S. Treasury fell to 2.05% from 2.12% last week. It’s widely believed that the Fed will reduce rates by 1/4% at its July meeting and that the chances for 1 or 2 more rate cuts before the end of the year are high. Globally other central banks are also in an easing mode.

Earnings reports accelerated last week with companies showing mixed results but many exceeding beaten down expectations. Microsoft reported earnings that beat expectations and the stock rose slightly on Friday. According to FactSet, earnings for companies in the S&P 500 will be down 1.9% from a year earlier. Actual results may be somewhat better given companies tendency to reduce expectations in advance.

In the week ahead, look for economic reports on existing home sales, durable goods orders and a first estimate for 2nd quarter GDP. Growth for the 2nd quarter is estimated at 1.8% vs 3.1% for the 1st quarter. Growth has moderated as a result of slowing global growth and trade uncertainty but still appears solid due to low inflation, solid job numbers and the prospect for lower rates. Chances of a recession in the near term appear to be low.

“Less is only more where more is no good” – Frank Lloyd Wright

ND&S Weekly Commentary (7.15.19) – Stock Market Milestones

July 15, 2019

US stocks achieved record highs last week buoyed by investors’ expectations that the Fed will lower interest rates at the end of the month. The Dow Jones Industrial Average (DJIA) was up 1.54%, while the S&P 500 climbed 0.82% and the NASDAQ rose 1.01%. International equities continue to be weighed down by trade tariffs and delayed negotiations. Developed international stocks (EAFE) slipped 0.54% and the emerging market equity index (EEM) declined 0.75%.

Fed chairman Jerome Powell hinted at a possible reduction in the Federal Funds Rate during the FMOC meeting on July 30-31. Powell said that below baseline inflation target of 2% could stifle economic growth and the central bank will “act as appropriate” to maintain the US expansion.

The Trump administration abandoned a proposal for rebates from governmental drug plans and a federal judge blocked the proposed rule requiring drug makers to list drug prices on television. Healthcare stocks rallied and then settled back down declining 1.64%.

Citigroup (C), JP Morgan (JPM), Goldman Sachs (GS) and Wells Fargo (WFC) report second quarter earnings on Monday and Tuesday. The low interest rate environment and weak trading volume have tempered earnings expectations. Bank revenues, earnings and guidance are key drivers of the stock market. However, they are cheap with the bank index trading at about 10.2 times estimates for the next 12 months compared to an average multiple of 12.4 for the last 10 years.

Oil prices continue to rally with the WTI now above $60 gaining 5% for the week. Tropical storm Barry shut down 53% of the oil production in the Gulf of Mexico. US inventories were already on the downswing over the last four weeks as a result of the instability in the Middle East.

Investors fear that Congress will fail to raise the US borrowing limit, which could be required in September, a month earlier than expected. Also, stronger than expected consumer prices were reported for June. As a result, the 10 year US Treasury yield rose to 2.12% up from last week’s 2.04%.

In addition to the kickoff of earnings season, this week the economic calendar is very active with reports on housing starts, manufacturing, industrial production, retail sales and consumer sentiment.

“Remember to celebrate milestones as you prepare for the road ahead.”Nelson Mandela