ND&S Weekly Commentary 6.15.20 – Volatility

June 15, 2020

Last week US stocks suffered their worst week since March. Investors were rattled over fears of rising COVID-19 infections and very dovish comments by the Federal Reserve, “the Fed,” forecasting a weaker than expected economy. On Thursday, the Dow Jones Industrials (DJIA) fell more than 1,800 points representing a 6.9% drop. Stocks were unable to sustain their bullish pace for the last 11 weeks during which they gained over 44%.

For the week, the DJIA slid 5.6%, the S&P 500 declined 4.8% and the tech heavy Nasdaq was down 2.3%. Foreign markets also weakened with Developed (MSCI EAFE) and Developing International (MSCI EM) equities down 4.2% and 1.5% respectively. The Cboe Volatility Index (VIX) commonly referred to as Wall Street’s” fear gauge,” gained 44% for the week. Bankrupt companies like Hertz Holdings went wild, rocketing 115% on Monday, dropping 24% on Tuesday and 18% on Thursday. Traders and speculators are making a spectacle of themselves and stirring up tremendous volatility.

On Wednesday, Federal Reserve Chairman, Jerome Powell, stated that the economic recovery is going to be slower and more painful than many had hoped. Powell said the Fed has no plans to raise short-term rates through 2022 and would continue adding liquidity to the credit markets. The 10 year US Treasury yield ended the week at 0.71%, a 0.2% weekly decline. The Fed has been buying bonds for 10 straight weeks including high yield corporates and municipals which stabilized credit markets and enriched risky bond holders. In fact, high yield bonds have gained more than 21% since bottoming in late March. There’s an expression that you should never fight the Fed.

In May, the US surprisingly added 2.5 million jobs, far exceeding the consensus expectations of a 7.5 million job loss – though the added jobs only represented 11% of the 22 million job lost in the preceding two months. The manufacturing and services activity declined but showed improvement over April’s reports. The price of oil once again revealed its volatility on rising inventories declining 7.8% to $ 36.45 price per barrel.

With all of this uncertainty, let us not forget what boosted the market the last several weeks. The Fed’s massive liquidity stimulus, improving economic data, our adjusting to life and business in the new coronavirus world and investor’s fear of missing out have all contributed to the boost. Moreover, there was encouraging news by Eli Lilly and Regeneron Pharmaceuticals on their coronavirus treatments. Moderna also announced it will begin a Phase 3 study of its virus vaccine next month.

This week retail sales will be released on Tuesday, housing starts and building permits on Wednesday and the leading indicator on Thursday. Markets will continue to be quite volatile and we recommend investors try and remain patient and stay close to their long-term asset allocation targets.

Please stay safe!

“You pay a very high price for a cheery consensus. It won’t be the economy that will do in investors; it will be themselves. Uncertainty is actually the friend of the buyer of long-term values.” —-Warren Buffet

Weekly Commentary: Optimism Rules the Week

June 8, 2020

Global stocks surged last week as investors focused on improving, albeit still dismal, economic news. Investors seemed to shrug off concerns related to the coronavirus, trade tensions with China and widespread protests.

On the week, the S&P 500 gained 4.9% while the DJIA surged 6.8%. The Russell 2000 which represents small/midsized US companies also jumped higher as it added 8.1% for the week. International markets joined the party as developed international markets (MSCI EAFE) jumped 7.1% while emerging markets (MSCI EM) tacked-on 7.9%. Bonds sold off as the Bloomberg Barclays Aggregate finished lower by 0.49% on the week. The 10 yr Treasury ended last week at a yield of 0.895%, up 24.3 basis points on the week as bond yields reached their highest levels since March. Gold prices retreated last week and closed at $1,676.20 for a 3.5% drop for the week while oil prices continued their march higher and finished up 11.4% to $39.55 per barrel. Even after last week’s surge, oil prices are down 35.2% year-to-date.

Economic news continues to be dismal although many reports were better than feared. Investors are certainly betting that the worst is behind us. On Monday, the Institute of Supply Management reported that the purchasing mangers’ index (PMI) moved up 1.6% to 43.1% … consensus was for 43.7%. On Wednesday, the ADP National Employment Report (NER) indicated a loss of 2.76 million jobs in the private sector, better than an expected loss of 9 million jobs. May’s non-manufacturing index (NMI) grew 3.6% to 45.4%, ahead of expectations of 44.4%. Also on Wednesday, the U.S. Commerce Department reported that new orders for manufactured goods sank 13%, slightly better than expectations for a 13.4% decline. On Friday, the Labor Department reported that the country added 2.5 million jobs in May, a huge surprise given that consensus was for losses of 8.3 million jobs. The unemployment rate fell to 13.3% from April’s 14.7% level (a post-World War II high). Despite May’s gains, unemployment remains historically high – nearly four times the rate in February.

We mentioned last week that markets will need to broaden out beyond just technology stocks in order to meaningfully advance from here. The positive employment last week prompted just that … value/cyclical stocks moved nicely higher last week as investors bet that the economy might be able to recover from its downturn faster than originally thought. It is impossible to know whether or not this rotation persists, but a broadly diversified portfolio will benefit investors in such an environment.

Markets will be watching as more and more states begin their re-opening process. Stay safe.

“If you cannot do great things, do small things in a great way” – Oliver Napoleon Hill

ND&S Weekly Commentary 6.1.20 – Green Shoots?

June 1, 2020

Global stocks advanced last week for the second week in a row as investors pinned their hopes on a successful reopening of the economy.

On the week, the S&P 500 gained 3.0% while the DJIA advanced 3.8%. The Russell 2000 which represents small/midsized US companies also moved higher as it added 2.8% for the week. International markets joined the party as developed international markets (MSCI EAFE) jumped 5.1% while emerging markets (MSCI EM) tacked-on 2.9%. Bonds were a bit higher as the Bloomberg Barclays Aggregate finished ahead by 0.2% on the week. The 10yr Treasury ended last week at a yield of 0.65%. Gold prices closed at $1,736.90 for a 0.1% advance for the week while oil prices leapt 6.7% to $35.49 per barrel. Even after last week’s surge, oil prices are down 41.9% year-to-date.

Economic news continues to be dismal although many reports were better than feared. Perhaps some green shoots are beginning to appear. On Tuesday, the U.S. Census Bureau reported that April new home sales inched higher by 0.6% month-over-month and down 6.2% year-over-year. The news was much better than the consensus expectation of a 20% decline. On Thursday, the Commerce Department released its reading of new orders for manufactured durable goods; orders fell 17.2% versus expectations for a 19.1% drop. Also on Thursday, the Bureau of Economic Analysis reported a revised first quarter real GDP of -5.0% (driven by weaker than expected business investment spending), below expectations of a 4.8% decline. Pending Home Sales declined 21.8% in April while expectations were for a 17% drop. U.S. initial jobless claims for the week ending May 23 declined from 2.4 to 2.1 million. Of note, 41 million people have filed initial claims for unemployment insurance over the past 11 weeks.

We certainly recognize that markets have advanced handsomely off of the March 23rd bottom and that market valuations are no longer favorable. It is reasonable to expect that the market advance during the past two months or so is unlikely to persist. The five largest stocks in the S&P 500 represent 20% of the index, exceeding the previous 18% peak during the internet bubble in March 2000. The market will need to broaden out for the index to climb meaningfully higher from here … fortunately, we have seen such a broadening out over the past two weeks. We will keep a close eye on the persistency of this rotation.

Investors will be watching the results of the reopening in most states along with escalating trade tensions with China. After a strong May, we would not be surprised if the markets took a breather in June. Of course, the tragic and senseless killing of George Floyd and the resulting protests will cast a pall over the country until a healing process takes hold.

George Floyd – Rest in Peace.

ND&S Weekly Commentary 5.26.20 – Markets Cheer Vaccine News

May 26, 2020

Equity markets rose across the board last week as investors focused on state “reopening plans” and positive initial results for Moderna’s Coronavirus vaccine. For the week, the S&P 500, DJIA and NASDAQ were up 3.27%, 3.43% and 3.48%, respectively. International equity markets also advanced with developed markets, as measured by EAFE up 3.03% and emerging markets up 0.5%. Cyclical stocks were strong last week in spite of continuing negative economic news. The best performing sectors in the S&P 500 were industrials, energy and real estate. Fixed income markets also rallied as corporate bonds and municipals rose 1.5% and 1.1% respectively for the week. The yield on the 10yr U.S. Treasury settled at 0.66%.

Economic news continued to reflect the impact from Covid-19 shutdowns. Initial jobless claims for the week of May 16 came in at 2.438 million slightly higher than consensus. Existing home sales declined 17.8% in April to a seasonally adjusted annual rate of 4.33 million, its lowest reading in a decade. On the positive side, the flash PMI for manufacturing increased to 39.8 in May from 36.1 in April and the flash PMI for services rose to 36.9 in May from 26.7 in April.

This week look for economic reports on consumer confidence, new/existing home sales and personal consumption. Investors will be hoping for signs that the reopening will have a positive social and economic impact without triggering a spike in virus cases.

“And if words cannot repay the debt we owe these men, surely with our actions we must strive to keep faith with them and with the vision that led them to battle and to final sacrifice.” – Ronald Reagan

ND&S Weekly Commentary 5.18.20 – Reopening

May 18, 2020

Last week US Stocks sold-off on dour retail sales, escalating tensions between the US and China and historic rising unemployment.
The decline in consumer spending was an unprecedented 16.4% in April while economists were expecting a 12% decline. On Friday, the Trump administration moved to halt shipments of semiconductors to Huawei Technologies in China. The Chinese countered by threatening to restrict investments in US companies if shipments were blocked. The weekly jobless claims reached 3 million creating 36 million unemployed Americans in roughly 2 months.

Major news headlines surround the Covid-19 pandemic and states reopening. There is tremendous pressure by business owners against health guidelines and restrictions. Also, employees who have received stimulus checks and unemployment benefits may be taking a pay cut by going back to work. A political battle continues with the House pushing their HEROES stimulus package and Republicans fighting to lessen the liability and burden around worker and customer safety now squarely on employers.

US stocks ended the week lower with the DJIA declining 2.6%, the S&P 500 down 2.2% and the NASDAQ slipping 1.2%. Oil stocks lost 7.0% and banks declined 5.6% for the week. Though oil increased 20.0% to close at $29.65 a barrel, oil demand remains suspect. Bank stocks received a momentary boost with rumors that Goldman Sachs may be looking to acquire. They lost ground, however, as consumer demand indicators weakened. Foreign stocks also were weak with developed (MSCI EAFE) and emerging markets (MSCI EM) down 3.2% and 1.1%, respectively. The US stock market has rebounded over 30% from its March 23rd lows. We are hopeful that the developing vaccines will be available sooner than expected.

Interest rates are anemic and there are concerns that US rates could turn negative. However, Jerome Powell, Fed Chairman, stated that “negative interest rates is probably not an appropriate or useful policy for us here in the United States.” The Fed has and will continue their monetary easing and various other liquidity facilities to support the flow of credit in several markets. As a result, the Fed’s balance sheet could grow to $10 Trillion by year-end. The 10yr Treasury yield ended the week down fractionally at 0.64%.

Our cautious posture towards the financial markets accounts for having slightly higher cash balances, safe and quality holdings and diversification in client’s portfolios. With earnings season winding down, this week will feature important housing market data, manufacturing and service PMIs, jobless claims and Fed Commentary.

We wish everyone to be healthy and safe. Our hearts go out to those affected and the medical personnel helping us get through this horrific pandemic.

“More compassionate mind, more sense of concern for other’s well-being, is source of happiness.”– Dalai Lama

NDS Weekly Commentary 5.11.20 – Markets Continue Higher

May 11, 2020

Markets rallied again last week as investors continue to take historically bad economic data in stride. Market optimism around the economic reopening and successes on the therapeutic front has provided the recent boost.

For the week, the DJIA advanced 2.67% while the S&P 500 gained 3.57%. The tech-heavy NASDAQ jumped ahead by 6.05%. The MSCI EAFE index (developed markets) increased 0.90% while emerging market equities (MSCI EM) gave back 0.52%. Small company stocks, represented by the Russell 2000, jumped by 5.52% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week lower by 0.33% as interest rates increased on the week. As a result, the 10 YR US Treasury yield closed the week at a yield of 0.69% (up from the previous week’s closing yield of 0.64%). Gold prices closed at $1,704/oz. Oil continued higher as traders anticipate the demand picking up slightly due to the soft reopening of the economy. Oil is likely to remain low for an extended time period with low oil prices serving as a tax cut to consumers and businesses.

The scope of the coronavirus economic impact became clearer last week as non-farm payrolls fell 20.5 million in April. This represents the first full month of the lock-down in response to the pandemic. As expected, the unemployment rate rose to a post-World War II record of 14.7%. While the data was horrific, it did eclipse analyst’s estimates. Over 18.1 million workers have reported that they are on temporary layoff, and therefore a portion should be rehired as the country gradually reopens. This will likely be a slow recovery in jobs as beefed up unemployment benefits (at least through July …) have discouraged some employees from going back to work right away.

With 86% of the constituents of the S&P 500 having reported, year over year earnings are showing a decline of 13.8% according to FactSet Research. Revenues have held up slightly better so far as they are down less than 1% from a year earlier. Technology, healthcare and consumer staples are the sectors which have held up the best.

We would not be at all surprised for the market to give a little back in the short-term as the range of plausible outcomes moving forward remains wide right now. Key variables, usually used to forecast markets, have given way to how quickly the economy reopens, the number of new virus cases, and how quickly therapies and vaccines to fight the disease are developed. We plan to take advantage of sizable price dislocations that present themselves as we remain optimistic for markets and the economy long-term.

“Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.” – Helen Keller

ND&S Weekly Market Commentary 5.4.20 – A Ray of Hope …

May 4, 2020

We hope that all of you and your families are well. The country is edging ever-so-slowly towards a cautious reopening of the economy, and we hope that people act prudently and continue to follow the Covid-19 protocols in their communities. Promising results from Gilead’s Remdesivir trial gave investors a ray of hope as the National Institute of Allergy and Infectious Diseases (NIAID) announced that “hospitalized patients with advanced COVID-19 and lung involvement who received remdesivir recovered faster than similar patients who received placebo, according to a preliminary data analysis from a randomized, controlled trial involving 1063 patients, which began on February 21.” Of course, an effective vaccine is still the ultimate goal, and dozens of trials for potential vaccines and therapeutics are underway.

In contrast to recent weeks, large-cap U.S. stocks under-performed last week as investors bid-up lagging U.S. small company stocks and foreign stocks. On the week, the S&P 500 and the DJIA gave back 0.2%. The Russell 2000 which represents small/midsized US companies bucked the trend and gained 2.22%. International markets gained ground as developed international markets (MSCI EAFE) advanced 3.1% while emerging markets (MSCI EM) jumped 4.3%. Bonds were off slightly as the Bloomberg Barclays Aggregate finished lower 0.12% on the week. The 10yr Treasury ended last week at a yield of 0.64%. Gold prices declined 3.1% on the week while oil prices leapt 23.3% to $19.78 per barrel. Even after last week’s surge, oil prices are down 68% year-to-date.

The first quarter earnings season is underway with nearly 67% of S&P 500 companies reporting better-than-expected earnings (albeit from lowered expectations due to the economic shutdown). So far, earnings growth is down 16.75% year-over-year while revenues are up 1.49%. Most large-cap technology companies reported in-line to slightly-better top and bottom line results last week. As one would expect, over 160 companies in the S&P 500 have either withdrawn or suspended forward guidance as the outlook for the economy remains cloudy.

The S&P 500 finished last week 27% higher than the lows experienced in March. After such a powerful set of relief rallies, we suspect that markets are ahead of themselves. Worldwide economies will not return to anything close to normal for quite some time, and we would not be surprised if markets pulled back a bit until the path forward becomes clearer.

This time is not different … we will get through this crisis just like we have gotten through every other crisis. Warren Buffett, at his virtual annual meeting this past weekend, summed it up well – “We’ve faced tougher problems, and the American miracle, the American magic, has always prevailed.”

ND&S Weekly Commentary – “Negative” Oil Grabbed Headlines

April 27, 2020

Markets started last week on the decline, driven by volatility in the oil markets, before recovering some ground and ending the week slightly negative. Due to lack of storage space in Cushing, Oklahoma where physical settlements take place, the price for May contracts for WTI oil fell below zero for the first time in history. On Friday, President Trump signed a $484 billion fourth relief package that replenishes the Payroll Protection Plan bringing total relief funds to nearly $3 trillion with more anticipated.

For the week, the S&P 500, the DJIA and NASDAQ were all negative at -1.3%, -1.9% and -0.2%, respectively. One small positive was that small caps, as measured by the Russell 2000, finished up 0.3%. Small caps have been among the worst performers year-to-date as they are impacted by the slow growth environment. International equities were also negative last week with developed markets declining 2.0% and emerging markets down 2.4%. In fixed income, U.S. Treasuries continued to provide some stability as the yield on the 10 year declined from 0.7% to 0.65%. Municipals backed down somewhat as most states now face large deficits and long-term pension liabilities grow.

This week, economic reports are expected on 1st quarter GDP, ISM mfg., and consumer confidence … all are expected to show declines. On a positive note some states, including Alaska, Georgia, South Carolina, Tennessee and Texas are expected to start announcing easing of lockdowns. New York State has also stated they will start to reopen in phases.

Earnings season is in full swing and so far S&P 500 earnings growth is down roughly 20.7% year over year while revenues are up 2.0%. Most companies have stopped issuing forward guidance due to the uncertainty of Covid-19 containment efforts. This will be a big week of company reports as Facebook (FB), Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), and Microsoft (MFST) are scheduled to report. Look for markets to continue to be volatile and focused on progress or improvements on treating the Coronavirus.

“The trick to forgetting the big picture is to look at everything close-up” – Chuck Palahniuk

ND&S Weekly Commentary – RESILIENCE

April 20, 2020

Stocks rallied for the second straight week as there were tentative signs that the coronavirus outbreak was slowing, new treatments were showing encouraging results, and the Federal Reserve approach of advanced “whatever it takes” have eased the interim credit crisis.

As a result, the DJIA rose 2.2%, the S&P 500 gained 3.1% and the tech-heavy NASDAQ soared 6.1%. The S&P 500 broad index is now up 28% from its March 23rd low. International equities also finished higher on the week with developed markets up 1.0% and emerging markets gaining 1.6%. Despite the Fed’s unprecedented support of foreign monetary authorities, the US dollar has appreciated especially against the Euro and Yen. We feel that the US will likely be more resilient through this horrific crisis than other developed economies. The US has more impactful and accommodating monetary and fiscal policies at its disposal, a much higher level of health-care spending and has a smaller share of manufacturing in its GDP.

Our hearts and prayers go out to the victims, their families, and healthcare workers affected by the coronavirus. There have been over 2 million confirmed cases worldwide and 690,000 reported cases in the US. The good news is that the social containment efforts are working and the infection and mortality rates are slowing. Last week, President Trump and his staff worked together with governors to begin planning for a return to normalcy and re-opening of the US economy.

The economic data and corporate earnings demonstrate the level of damage the coronavirus and containment efforts have inflicted. Recessionary conditions now exist with another 5.5 million workers applying for unemployment benefits last week bringing the total of furloughed and laid off workers to 22 million (roughly 14% of US workforce). US retail sales declined 8.7% month over month and China’s GDP sank 6.8% in the first quarter. Industrial production slid 5.4% in March, its largest single month decline since 1946. The largest U.S. banks, JP Morgan, Citigroup, and Bank of America started earnings season last week. As a result of the economic shutdown, their revenues and earnings slowed in the first quarter and they warned of increasing their loan loss reserves.

The yield on the 10yr Treasury closed the week at 0.65% which is down from 0.73% the week prior. One year ago the yield was 2.59%. Despite OPEC+ supply cut backs, oil prices hit an 18yr low last week.

This week, existing home sales, the Purchasing Manager Index (PMI) and consumer sentiment will be reported. Almost 20% of S&P 500 companies are scheduled to release results this week. This will give investors a look at the Covid-19 pandemic impact on sectors from airlines to technology companies.

We expect volatility to continue and there likely will be a retest of market lows. As we stated in past weekly commentaries and our recent quarterly newsletter, this too shall pass. Our team is working diligently to monitor markets and researching investments for risks and opportunities.

“Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.” – Thomas Edison

ND&S Weekly Commentary 4/13/20 – Markets Roar Back…

April 13, 2020

We hope that all of you and your families are well. It appears that some of the social distancing measures being taken are showing results in the hardest hit areas around the world. Please continue to follow the Covid-19 protocols in your communities.

Markets roared back last week hopefully providing investors some relief over the long weekend. U.S. equities recorded one of the best weeks in modern history. On the week, the S&P 500 jumped 12.1% and the DJIA gained back 12.7%. The Russell 2000 which represents small/midsized US companies (and has been more impacted by slower growth expectations) catapulted 18.5%. International markets were also strong as developed international markets gained 8.1% while emerging markets increased by 6.8%. The 10yr U.S. Treasury yield increased 11bps to close at a yield of 0.73%. With volatility high and government yields near zero around the world, gold continues to provide investors some protection and closed at $1736 oz. Oil prices will remain volatile as oil producing nations agreed to a production cut over the weekend to reduce oil output by almost 10 million barrels a day. This should alleviate some of the supply imbalance in oil that a global shutdown has created.

We are currently seeing a deterioration in the U.S. labor market of unprecedented speed and magnitude. The March employment report released last week showed a decline of 701K and an unemployment rate that rose to 4.4%. An additional 16.8 million have filed claims for unemployment insurance implying that the unemployment rate is nearly 15%. Markets are hoping that the expanded unemployment benefits and business loans from the $2.3 trillion fiscal package can keep workers and businesses afloat long enough to see a sharp employment recovery when social distancing measures ease.

This week, we will get our first glimpse of first quarter 2020 earnings announcements with 15 S&P 500 companies set to report. We expect earnings for Q1 and Q2 to be quite challenged and somewhat meaningless, but we plan to key-in on management commentary and balance sheet strength. After last week’s rally, it would appear the markets are bit ahead of themselves, and we urge investors to proceed with some caution. We plan to take advantage of pricing dislocations, and it continues to be our intention to begin putting higher-than-normal cash levels back to work in the markets as opportunities present themselves. We will likely see a number of additional relief rallies. Remember, bottoms are a process. Rest assured, we are monitoring investments and markets, and we remain available should you have any questions.

“The glow of one warm thought is to me worth more than money.” – Thomas Jefferson