ND&S Weekly Commentary (5.24.21) – Cryptocurrency vs. Kryptonite
May 24, 2021
It was a volatile week on Wall Street as investors struggled with rising inflation concerns and the Federal Reserve’s accommodating monetary policy.
For the week, the Dow Jones Industrial Average (DJIA) slid 0.5%, the S&P 500 lost 0.4%, and the Nasdaq rebounded 0.3% from four straight down weeks. Foreign markets were the bright spot with developed equities (MSCI EAFE) up 1.08% and emerging markets (MSCI EM) climbing 1.75%. Oil (WTI) prices took a breather down 2.3% for the week and are still up 32% year-to-date.
The corporate profit recovery has been strong with earnings rising 49% in the first quarter of the year. Earnings are expected to grow roughly 30% in 2021. The concern is that stock prices, as measured by the S&P 500, have risen 75% in the last 12 months of the pandemic recovery. The market is now selling at 22x forward price to earnings while the historical average is 16x.
On Wednesday, the Federal Reserve’s Open Market Committee (FOMC) disclosed that some members are preparing to talk about tapering asset purchases as a result of our rapid economic recovery. Lessening their purchases would place pressures on interest rates which could lower bond prices and raise concerns over slowing economic growth. Treasury yields initially rose after the FOMC meeting minutes were released but later subsided. Rates were virtually unchanged last week.
There was mixed economic data during the week. Jobless claims reached another pandemic low of 444,000; though small businesses are finding it difficult to find workers. The April housing market was weaker than expected with housing starts at 1,569k vs. 1,740k estimate. Existing home sales were 5.85m vs. the estimate of 6.07m. The Markit Manufacturing and Services indexes exceeded consensus.
The topic of the week was the 29% decline in the price of Bitcoin, the primary cryptocurrency and most speculative of assets. The People’s Bank of China banned financial and payment institutions from accepting digital currencies. Bitcoin’s price reached $64,829 on April 16th and hit $30,202 on Wednesday, sending jitters throughout the speculative areas of financial markets.
For now, we remain cautiously optimistic about equity markets, we would refrain from speculative investing and keep bond duration short.
“Bitcoin is really a fascinating example of how human beings create value, and is not always rational …” – Alan Greenspan
ND&S Weekly Commentary (5.17.21) – Inflation Concerns Spark Investor Angst
May 17, 2021
The markets pulled back during a volatile week as inflation concerns sparked a sell-off in high-growth and technology stocks.
For the week, the S&P 500 and DJIA returned -1.35% and -1.08%, respectively. The tech-heavy NASDAQ closed down 2.32%. International markets didn’t fare any better with the MSCI EAFE declining 1.28% and MSCI EM off 2.99%. Fixed income was also under pressure as the Bloomberg Barclays U.S. Aggregate bond index finished down 0.37%. As a result, the 10yr U.S. Treasury yield rose 3bps to close at 1.63%. Gold inched higher by 0.37% to close at $1,838/oz. Oil (WTI) closed at $65.51/bbl – up 0.72% last week.
The catalyst for the pullback was a much hotter than expected April Consumer Price Index (CPI) reading that heightened inflation concerns last week. On Wednesday, the Dept. of Labor Statistics reported that the CPI increased 0.8% in April, well ahead of expectations of 0.2%. Year-over-year, the CPI has increased 4.2% which is the largest 12 month reading since September 2008. Looking at inflation from the producer side, the Producer Price Index (PPI) for April also doubled expectations with a reading of 0.6%. There are widespread supply shortages of materials including semi-conductor chips which are driving up production costs.
In other economic news, the JOLT’s report showed that 266,000 jobs were added last month and job openings hit a record 8.1 million at the end of March. Retail sales were virtually unchanged in April missing an estimate of 0.9% increase. Retail sales are still up 17.9% from February 2020, which marks the onset of the pandemic.
We are closely monitoring economic data around inflation. Inflation usually increases above trend at the beginning of an economic recovery. The Federal Reserve has indicated that this spike in inflation is transitory and will let it run above its 2% target for now before changing it’s accommodating policies. The concern is that the Federal Reserve will be forced to tighten monetary policy faster than markets are currently discounting. Rising prices and costs could also limit consumer demand and corporate profitability. Investors should continue to maintain risk exposure in-line with one’s long-term investment objectives and goals.
“If inflation were to move up in ways that are unwelcome, we have the tools for that, and we will use them. No one should doubt that. When the time comes to raise interest rates, we’ll certainly do that, and that time, by the way, is no time soon” – Jerome Powell (March 20, 2021)
ND&S Weekly Commentary 5.10.21 – Markets Inch Higher
May 10, 2021
Equity markets mostly advanced last week which reflected a continued shift out of large cap growth companies who benefited from the Covid-19 response into economically sensitive areas that are more leveraged to an economic reopening. The best performing sectors last week and a year-to-date basis are energy, materials, financials and industrials.
For the week, the S&P 500 increased 1.26% while the DJIA jumped 2.72%. The tech-heavy NASDAQ declined 1.48%. International developed had a strong week with the MSCI EAFE up 2.63%. Emerging markets inched higher by 0.10%. Fixed Income, represented by the Bloomberg/Barclays Aggregate, finished higher last week as the index gained 0.28%. As a result, yields drifted lower last week with the 10yr U.S. Treasury closing at a yield 1.60% (down from 1.63% the week prior). Oil (WTI) prices jumped 2.03% last week to close at $64.82 per barrel. Gold prices closed at $1837/oz. – up 3.61% last week.
Earnings releases will continue this week, and we continue to expect companies to report mostly better-than-expected numbers. So far, 87.0% of companies have reported EPS ahead of consensus. Earnings are up 52.4% year over year vs. expectations for an overall 51.1% advance. S&P 500 revenues are up 14.3% vs. expectations of a 13.0% advance.
Economic data last week was mostly below Wall Street estimates. ISM manufacturing and services PMIs for April came in at 60.7% and 62.7%, respectively. Both releases were below expectations but still represent strong expansion in each sector. On Friday, it was reported that the U.S. economy gained 266,000 jobs in April, a significant miss against expectations of 1,000,000. Some businesses are cautious about ramping up hiring given the pandemic and uncertainty. Other industries are reporting they can’t find enough workers due to expanded unemployment benefits, workers fear of contracting the virus, and child-care constraints due to school closures.
Equity markets have been strong in 2021 and have correctly discounted the jump in corporate earnings. Many companies have issued strong guidance for the rest of the year but have seen a tepid market response. It would seem markets have discounted much of the good news and we wouldn’t be surprised if they take a breather here. Investors should maintain discipline in-line with their long-term goals.
“What would life be if we had no courage to attempt anything.” – Vincent Van Gogh
Weekly Commentary (5/03/21) – Markets Flat to Down Despite Strong Earnings
May 3, 2021
Markets were flat to slightly down last week despite strong earnings reports from Microsoft, Apple, Amazon, Alphabet (Google) and others.
For the week, the DJIA declined 0.50% while the S&P 500 was basically flat at +0.02%. The tech-heavy Nasdaq dropped 0.39%. International markets also moved slightly lower. For the week, the All Country World Index ex-USA declined 0.53% while emerging market equities (MSCI EM) finished lower by 0.40%. Small company stocks, represented by the Russell 2000, finished in the red by 0.24%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week lower as the index lost 0.18%. As a result, the 10 YR US Treasury closed at a yield of 1.63% (up ~6.6 bps from the previous week’s closing yield of ~1.57%). Gold prices closed at $1,767.30/oz – down 0.56% on the week. Oil prices jumped 2.3% on the week to close at $63.58 per barrel.
Earnings releases will continue in full swing this week, and we expect companies to report mostly better-than-expected earnings as covid cases recede around the world (with the exception of India and a few other countries). Massive amounts of economic stimulus along with accommodative central banks should support strong economic growth. According to S&P Capital IQ, Q1 S&P 500 earnings per share should rise 15.4% year-over-year.
Tepid market reaction to outstanding earnings reports from several bell weather companies tells investors that perhaps the markets have already discounted a lot of good news. Don’t be surprised if the markets take a bit of a breather here. We continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias. Stay safe and enjoy the improving weather.
“Attitude is a little thing that makes a big difference” – Winston Churchill
ND&S Weekly Commentary 4.26.21 – A Volatile Week for Stocks
April 26, 2021
Equity markets ended a volatile week with a Friday rally on strong economic news. For the week, however, major markets all finished slightly lower with the S&P 500, DJIA, and the NASDAQ down respectively -0.1%, -0.4%, and -0.25%. On Thursday, the Labor Department reported that weekly jobless claims were the lowest since the pandemic began at 547,000. That good news was overshadowed by news reports that President Biden is expected to propose a capital gains tax rate of 39.6% on taxpayers earning more than $1 million a year which hit markets hard. On Friday, however, markets rallied strongly as reports on the IHS Markit Flash U.S. Services index jumped to 63.1 in April, the fastest expansion since 2009. Also, the IHS Markit Manufacturing index showed a steep rise in output and at the same time the Commerce Department reported that new single-family home sales in March rose more than 20% compared with February. For the week, the strongest sectors were real estate and healthcare while the weakest was energy. International equities were mixed with the MSCI EAFE index down -0.38% and emerging markets (MSCI EM) rising 0.35%. Fixed income markets were relatively quiet last week with the yield on the 10 year U.S. Treasury declining slightly to 1.58% from 1.59% the prior week.
This week will be busy with a third of the S&P 500 companies reporting earnings, a Federal Reserve meeting, and Presidential address to Congress on Wednesday. Among companies reporting this week will be Apple, Microsoft, Alphabet, and Amazon. So far, earnings news has been positive, with 86% of companies reporting earnings better than Wall Street’s expectations. Corporate profits for the quarter are expected to be up about 33.9%. The markets trading near all-time highs and big expectations for earnings will likely keep the upside reactions relatively muted. There will also be economic reports released on consumer confidence, first quarter real GDP and pending home sales. Economic news should continue be positive as the economy rebounds but rebalance as necessary if asset allocations are out-of-line.
“It is better to know some of the questions than all of the answers.” – James Thurber
ND&S Weekly Commentary 4.19.21 – Higher and Higher
April 19, 2021
The US stock market hit all-time highs last week as blue-chip companies reported solid earnings and fresh economic data showed strong improvement in consumer spending and the labor market. Investors’ expectations for a return to normalcy and economic growth are being fueled by cyclical companies and banks reporting healthier revenues, earnings and guidance.
For the week, the Dow Jones Industrials Average (DJIA) rose 1.18%, the S&P 500 gained 1.39% both advancing for four straight weeks. The tech-heavy Nasdaq gained for the third consecutive week, up 1.10%. Foreign stocks also appreciated with developed (MSCI EAFE) and emerging (MSCI EM) markets gaining 1.67% and 1.41%, respectively. The price of oil ($/bbl) soared 6.5% to $63.13 and gold finished the week down 1.91% to $1,774/oz. The yield on the 10 year U.S. Treasury saw its largest one week decline since June, falling from 1.67% the previous week to 1.59%. The Federal Reserve has convinced investors that it will not increase rates and will accommodate slightly higher inflation. That said, inflationary fears remain a major headwind to the highly valued equity and credit markets.
As stimulus checks arrive, consumers have begun to splurge and retail sales soared 9.8% last month compared to February. There is hope that the pandemic has created a lot of pent up demand and it could be fueled further by banks relaxing their credit standards and increasing lending at these historically low interest rates. Unemployment has steadily improved with weekly jobless claims coming in at 567,000, much better than consensus estimates and a new low since the pandemic began.
As mentioned, creeping inflation is being tolerated for now. Consumer prices rose 0.6% in March. Headlining the uptick in sales were motor vehicles and building materials soaring 27% and 32%, respectively, from their pre-pandemic peak according to FactSet. In addition to the splurge in consumer spending, the global supply disruptions to production caused by the pandemic is pressuring input costs and highly skilled labor is in short supply.
The transition from recovery to expansion, created by the re-opening of the economy due to accelerated vaccine momentum, substantial fiscal stimulus and an accommodative monetary policy, have served the financial markets well. The first quarter earnings of the S&P 500 are expected to grow at a whopping 25%. We must keep a watchful eye on valuations (are bit stretched…) and interest rates which drive the markets over time. Please remain diversified and stay in-line with your long term goals.
“Your love, liftin’ me higher
Than I’ve been lifted before
So keep it up, quench my desire
And I’ll be at your side forevermore”
Song by Carl Smith and Raynard Miner as performed by Jackie Wilson and by the Knickerbocker All Stars.
ND&S Weekly Commentary 4.12.21 – S&P 500 and DJIA Reach New Highs
April 12, 2021
The S&P 500 and DJIA closed at record levels last week supported by the improving economic recovery and an increasingly successful rollout of the coronavirus vaccines.
Economic data released last week confirmed the improving economic picture. The Institute for Supply Management (ISM) reported their March manufacturing and services index last week with both reports coming in better-than-expected. The services index surged 8.4 percentage points in March to mark an all-time high of 63.7%. The manufacturing index was equally as strong posting 64.7%. Durable goods orders fell 0.8% in February to $505.7 billion missing estimates for a 0.5% decrease. The Producer Price Index (PPI) showed final demand for goods and services increased 1.0% in March. The PPI measures price changes from the producer’s perspective which offers a different vantage-point on inflation pressures.
For the week, the S&P 500 and DJIA were up 2.76% and 1.99%, respectively. The Nasdaq rebounded on the strength of the technology sector to close higher by 3.13%. Small company stocks, represented by the Russell 2000, cooled off to close 0.46% lower. International markets were mixed last week with the developed markets (MSCI EAFE) increasing 2.01% and emerging markets (MSCI EM) lower by 0.34%. The rise in treasury yields moderated last week as the 10yr U.S. Treasury yield had a slight decline of 2bps to close at 1.67%. Gold prices closed at $1,741/oz. – up 0.97% on the week. Oil prices closed at $59.32/bbl – down 3.47% last week.
First-quarter earnings season begins this week with a number of major banks scheduled to report results Wednesday before the bell. With earnings season, we will return to market fundamentals and also gain deeper insight into how individual companies are navigating the reopening. Equity markets posted a strong first quarter and are at least partially discounting strong economic conditions ahead. We continue to suggest investors stay close to long-term asset allocation targets.
Congratulations to Lee Elder and Hideki Matsuyama. Elder, was the first African-American to play the Masters Tournament in 1975. He was joined by Jack Nicklaus and Gary Player as honorary starters for the 85th edition of the Masters Tournament. Hideki Matsuyama, made history on Sunday as the first male golfer from Japan to win one of golf’s major championships.
“I always said that if they have a course like this in heaven, I want to be the head pro.” – Gary Player
Weekly Commentary (04/05/21) – Markets Advance on Massive Infrastructure Plan
April 5, 2021
Equity markets closed near all-time highs last week as investors cheered President Biden’s $2 trillion (yes, trillion) infrastructure plan along with another round of stimulus money.
For the week, the DJIA advanced 0.24% while the S&P 500 gained 1.14%. The tech-heavy Nasdaq jumped 2.60%. International markets were strong as the MSCI EAFE index (developed markets) closed higher by 0.53% while emerging market equities (MSCI EM) jumped higher by 2.40%. Small company stocks, represented by the Russell 2000, finished ahead by 1.46% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week lower as the yield curve continued to steepen. As a result, the 10 YR US Treasury closed at a yield of 1.69% (up ~6 bps from the previous week’s closing yield of ~1.63%). Gold prices closed at $1,726.50/oz – down 0.33% on the week. Oil prices closed at $61.45/bbl (up 0.79% on the week).
Economic news released last week was mixed, but the big news came on Friday when the Labor Department reported that 916,000 jobs were added in March – far surpassing estimates for a gain of 647,000 jobs. The strong jobs report will likely boost equity markets in the short-term. Economic releases in the week ahead include Durable Goods, JOLTS job openings and Producer Price Index (PPI).
Economic and market fundamentals remain quite reasonable, and the news on the vaccine front continues to be encouraging. Markets will likely turn their attention to the details of the massive infrastructure plan and how the Biden administration plans to pay for the plan. Of course, the burden will fall to taxpayers, and the first proposed major tax increase announced by the Biden team pushes corporate taxes up 33% – from 21% to 28%.
We suggest investors stay close to their long-term target asset allocations (stay underweight fixed income and be market weighted to slightly higher-than market weight in equities). Let’s make it a good week!
“Success is never final, failure is never fatal. It’s courage that counts.” – John Wooden
ND&S Weekly Commentary (3.29.21) – Volatility Continues – Mixed Bag
March 29, 2021
Stocks ended a volatile week with a late day rally that pushed the S&P 500 and the DJIA to new highs while all other equity markets finished the week lower. Stocks swung during the week as investors weighed signals that the U.S. economy is primed for recovery versus concerns over higher interest rates and higher inflation. The S&P 500 and the DJIA were up 1.7% and 1.4% respectively on Friday and for the week the S&P 500 and DJIA finished up 1.6% and 1.4%. The NASDAQ declined -0.6% last week as tech stocks continued to struggle with higher interest rates. Small U.S. stocks, represented by the Russell 2000, declined -2.88%. The best performing sectors last week were real estate and consumer staples and the worst performing was communications services. International markets were weak as European countries struggle with the vaccine roll out, a stronger U.S. dollar and global supply chain issues caused by the blockage of the Suez Canal. The MSCI EAFE index and the MSCI Emerging Markets index declined -0.5% and -2.1%, respectively. Fixed income markets rose last week as the yield on the 10 year U.S. Treasury declined from 1.74% to 1.67%.
Economic data reported last week came in mostly below analyst estimates. On Monday, the National Association of Realtors reported existing home sales declined 6.6% in February. The results missed expectations but are up a whopping 9.1% from the same time last year. The Commerce Department reported manufactured durable goods fell 1.1% in February, missing expectations of a 0.5% advance. The “second” reading of real Gross Domestic Product (GDP) was increased to 4.3% in the fourth quarter of 2020, outpacing estimates of 4.3%. Jobless claims for the week ended March 20 were 684,000, beating estimates of 735,000. This week in economic news look for reports on consumer confidence, the ISM Mfg. index and the March jobs report.
As the stimulus funds get distributed and the vaccine roll out accelerates, the U.S. economy should continue to improve.
“Here comes the sun, and I say it’s all right.” – The Beatles
ND&S Weekly Commentary 6.1.21 – Markets Continue Rally
June 1, 2021
Stocks finished higher last week despite concerns about higher inflation.
For the week, the S&P 500, DJIA and NASDAQ were up 1.2%, 1.0% and 2.1%, respectively. The best performing sectors were communication services and consumer discretionary which benefited from a number of good earnings announcements from the retail sector. International equity markets also advanced with MSCI EAFE up 1.2% and MSCI EM up 2.4%. Covid-19 trends in Europe have shown continued improvement. Fixed income markets were also positive for the week with the rate on the 10 year U.S. Treasury Note declining from 1.63% to 1.58%. Gold closed at $1900/oz. – up 1.3% and oil (WTI) jumped 4.3% to close at $66.32/bbl.
First quarter earnings are on pace to rise by 50% from a year ago, marking the fastest growth rate since the Global Financial Crisis. Of companies who have reported, over 85% have had a positive earnings surprise (earnings-per-share above Wall Street consensus). In terms of revenues, over 75% have reported revenues above estimates. The forward 12-month P/E has adjusted lower due to the improved earnings outlook and is now at 21x.
Core Personal Consumption Expenditures (PCE), the Fed’s preferred measure for inflation, came in at 3.1% year-over-year reflecting a surge in demand after Covid-19 restrictions were lifted in a number of states. The Fed aims to maintain core PCE at around 2% but it has remained below that level for years. Most economists are expecting that higher inflation numbers will only be transitory. Personal income fell 13.7% in April after surging the previous month due largely to stimulus payments. This week look for economic reports on mortgage applications and the May jobs report. Estimates are for 700,000 jobs to be added but they may come in lower as companies have said they can’t find enough workers to fill open positions.
Let us never forget the real meaning of Memorial Day – to honor those who have gone before us and paid the ultimate price to ensure our freedom and to secure the blessings of liberty.
“Their sacrifice was great, but not in vain. All Americans and every free nation on earth can trace their liberty to the white markers of places like Arlington National Cemetery. And may God keep us ever grateful.”
– George W. Bush