New Fed Chair Likely

October 30, 2017

Large Cap US equities continued their advance last week on the heels of better-than-expected company earnings and a positive GDP reading. With a little less than half of the S&P500 constituents having reported, the blended estimate of aggregate y/y earnings growth is 5.3%. The revenue projection for the quarter is 4.8%. The US economy grew at a faster-than-forecast pace of 3.0% in the third quarter, easily beating economists’ estimates of 2.5%. Hurricanes Harvey and Irma were expected to have a negative impact of growth.

For the week, the DJIA increased 0.45% while the broader-based S&P 500 climbed 0.23%. Growth oriented equities provided the boost as a number of mega-cap technology stocks reported strong earnings including AMZN, GOOG, and MFST. Small Cap US companies representing the Russel 2000 finished the week slightly down. International equities also finished the week in the red with the MSCI EAFE 0.34% lower and emerging markets down 0.84%. Yields again pushed higher with the 10YR Treasury closing at a yield of 2.42% … which is up from 2.38% the week prior. Yields should remain volatile as the nomination of the next Fed chair is expected any day.

As mentioned above, the nomination of the next Fed chair (and possibly vice chair as well) is expected any day. The nomination appears to be down to four candidates (there are some reports than current chair Janet Yellen is no longer in the running). Stanford University economist John Taylor and Former Governor and Hoover Institute Fellow Kevin Warsh are perceived to be on the more hawkish end of the spectrum and their nomination could pressure rates in the short-term; while Fed Governor Jerome Powell and current chair Janet Yellen are seen as more dovish and a continuation of current policy. None of the candidates to this point are likely to make a knee-jerk direction change to current policy but their perceived biases could increase market volatility in the short-term.

“Out of difficulties grow miracles.”Jean de la Bruyere

ND&S Weekly Commentary (10/23/2017) – Chaos, Calm & The Markets …

October 23, 2017

It is said that markets climb a wall of worry. Hurricanes, floods, fires, mass shootings and threat of nuclear war haven’t deterred investors from pushing market averages higher. As Alfred E. Neuman would say, “What, me worry?

For the week, the DJIA rose 2.04% while the S&P 500 finished higher by 0.88%. Developed international markets finished the week a bit lower as the MSCI EAFE index closed down 0.31%. Emerging markets lost ground as well with the MSCI EM index finishing lower by 0.54% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week in the negative territory (down 0.45%). As a result, the 10 YR US Treasury closed at a yield of 2.39% (up 11 bp from the previous week’s closing yield of 2.28%). Gold declined $24.10 to close at $1,277/oz. Oil prices were essentially flat as they closed the week at $51.47/bbl. Cheap oil prices continue to be a boon to businesses and consumers.

Markets got a boost last week as the Senate passed a $4 trillion budget resolution that increased the odds of tax reform (eventually …). In economic news released last week, the US Empire State Manufacturing Survey jumped to 30.2 – easily beating consensus of 20.4 and finishing at its highest level since 2014. US initial jobless claims were also better-than-expected.

The week ahead will see more earnings reports with Alphabet, Microsoft, Amazon, Exxon and others reporting. Third quarter earnings have been largely ahead of expectations so far. Several economic reports are due out this week – flash PMI composite, durable goods orders, new home sales, international trade and the first estimate of 3rd quarter GDP. Meanwhile, saber rattling out of North Korea has been fairly quiet lately … let’s hope it stays that way!

As always, we plan to look through the day-to-day news and focus on longer-term objectives. Investors should stay the course and stick close to their long-term asset allocation targets.

Let’s make it a good week!

“There is nothing permanent except change.” – Heraclitus


Markets Continue to Advance

October 16, 2017

Last week, equity markets advanced against a backdrop of improving global growth and expectations for improving corporate earnings. The S&P 500, DJIA and the NASDAQ were up 0.17%, 0.43% and 0.24% respectively. International equities advanced the most for the week with the MSCI EAFE up 1.63% while emerging markets up 2.08%. Financial stocks declined last week 0.9% despite of earnings reports that mostly exceeded expectations but are still being pressured by lower interest rates. Health care stocks also declined 0.6% for the week as the Trump administration ended payments to insurers under the Affordable Care Act.

On the fixed income front, U.S. bond prices rose and the yield on the 10 year U.S. Treasury Note dropped from 2.37% to 2.28% for the week largely because of a lower-than-expected core CPI reading … it was unchanged at 1.7% y/y. Still, most economists expect the FOMC to increase short term-rates at the December meeting. Futures markets are pricing an 85% probability for an increase in December.

This week look for a continuing flood of corporate earnings with 59 companies in the S&P500 reporting. In addition, there will be reports on industrial production, housing starts and existing home sales.

“Greatness is a road leading towards the unknown.”Charles de Gaulle


ND&S Weekly Market Commentary 10.09.17

October 9, 2017

Markets extended their gains last week notching a series of new records for the headline indices before retreating on Friday. Solid economic data along with hopes of a tax reform package provided equities a boost and pressured bonds further.

For the week, the DJIA moved higher by 1.70% while the broader-based S&P 500 finished up 1.25%. Smaller US companies representing the Russell 2000 were also positive for the week as it gained 1.32%. International equities were mixed with the MSCI EAFE down .06% and MSCI EM up 2.00% for the week. Bond prices were again under pressure as yields moved higher last week. The 10yr US Treasury closed the week at 2.37% which is up from 2.06% one month ago. WTI slipped last week to $49.50/barrel.

Economic data for the week was generally positive. On Monday, the ISM reported the manufacturing index continued to expand with a reading of 60.8 handily beating expectations. This marks the fastest rate of growth for American manufacturers since 2004. The nonmanufacturing reading came in at a healthy 59.8, a reading not seen since 2005. On Wednesday, we saw a better-than-expected payrolls number showing an increase in 135,000 jobs beating expectations. On Thursday, the Commerce Department reported a 1.2% m/m increase in August factory orders which was ahead of estimates (durable and non-durable goods). Finally on Friday, the Labor Department reported the economy lost 33,000 jobs in September, missing expectations of an 80k increase. The negative report was largely shrugged off by the markets as most economists viewed it as a bad reading due to the devastation caused by hurricanes Harvey and Irma. We believe the reading is not a reflection of the overall long-term trend in employment.

Earnings season will kick into gear this week with most reports coming from the financial sector. In total, 10 S&P 500 companies will be reporting which include BAC, WFC, and JPM. In addition to earnings, we will have the release of FOMC minutes and reports on inflation, consumer sentiment, and retail sales.

“Following the light of the sun, we left the Old World.” – Christopher Columbus

The Long Awaited Tax Plan

October 2, 2017

Last week, Wall Street celebrated the Trump administration’s tax plan with the prospects for lower corporate taxes and less tax on repatriating profits back to the US. Major indices closed the week at new all time highs: the DJIA gained 0.2%, the S&P 500 was up 0.7% and the NASDAQ advanced 1.1% for the week. The recent increase in the dollar sent the MSCI EAFE index down 0.3%. However, small US stocks cheered the dollar rally, with the Russell 2000 index gaining 2.8% for the week — a record high.

The month of September historically has been the worst month of the year for the stock market, yet the DJIA was up 2.1%, the S&P 1.9% and the NASDAQ 1%. For the third quarter, the NASDAQ rose 5.8%, with its fifth straight positive quarter, the DJIA surged 4.8% while the S&P gained 4%.

The Feds hawkish comments and better-than-expected GDP numbers caused Treasury yields to continue to rise with the 10yr US Treasury settling at 2.34%.

US crude oil prices rose 2% to $51.67 a barrel which is a five month high as oil stocks responded nicely to the news. New home sales fell to an eight month low in August and pending home sales came in at close to its two year low. Without question, the devastation of the hurricanes is affecting our economic outlook.

This week the Institute for Supply Management index (PMI) will be reported on Monday, vehicle sales will come Tuesday and on Friday, the labor Department will announce its September employment report.

We are pleased and yet concerned about the second longest “Bull Market” in history. The forward price to earnings (P/E) ratio for the S&P 500 is 19 times with earning estimates of $131.38, while historically the long-term average P/E ratio is closer to 15 times. In addition, a marginal decline of non-financial companies buying back their own stock could raise some alarm. These larger US companies are in pretty solid financial shape with $2.3 trillion in liquidity. We hope more will begin to spend on infrastructure expansion and accretive mergers and acquisitions.

“Love is the most important thing in the world, but baseball is pretty good, too.” –Yogi Berra


The Great Unwind

September 25, 2017

Equity markets finished modestly higher last week, as the FOMC reaffirmed it will begin the process of reducing its oversized $4.5 trillion balance sheet (see chart below). For the week, the DJIA closed higher by 0.36% while the broader-based S&P 500 increased 0.09%. The market’s advance broadened out a bit as evidenced by the Nasdaq finishing the week down 0.33%, while smaller US companies represented by the Russell 2000 increased 1.35%. Developed international equities closed the week higher by 0.70% while emerging market equities were flat. Treasury yields moved higher across the board with the 10yr Treasury closing the week at a yield of 2.26%. Oil (WTI) closed above $50.00/barrel.

The Federal Reserve’s decision following last week’s two-day meeting was widely anticipated. It will begin by rolling off $10 billion every month and will increase the cap by $10 billion a quarter until the total reaches $50b a month. The committee continues to expect more rate hikes with one later this year (Dec?) and three more in 2018. The Fed also shaved 20bps off its long-run rate projection of 3.0%. The committee cited continuing strength in the labor markets and moderate growth as deciding factors to embark on its “balance sheet normalization program”.

Fed bal

“Quick decisions are unsafe decisions” – Sophocles

Onward and Upward

September 19, 2017

The stock market registered another solid advance last week, with the S&P up 1.6% [+11.7% YTD] and the Nasdaq up 1.4% [+19.8% YTD]. This was in response to Irma’s less-than-expected damage estimates and in spite of Friday’s latest North Korea missile launch [the chances of a “kinetic response” are increasing!]. After hitting a 10-month low last week, the 10 year treasury yield rose to 2.2%.

Total August CPI increased 0.4% [consensus 0.3%], while core CPI rose 0.2% as expected.

Inflation 9.19.17

This raised the market’s expectations of a Dec FF rate increase to 58%, up from a previous 31%. The Fed will consider inflation and its outsized balance sheet [the Great Unwinding] during this week’s Tuesday-Wednesday FOMC meeting.

Finally, the Equifax hack [announced 9/7/17] has potentially exposed 143 million people to financial information theft over the summer. The federal investigation is still underway, but exposed individuals should take immediate action. Freeze your credit at each of the three credit bureaus. Begin monitoring your credit reports [experts suggest setting up a staggered report-request pattern so that every four months one of the three bureaus would provide a {free} credit report]. Consumer Reports offers additional suggestions for even better protection.

“A stitch in time saves nine”Francis Baily

ND&S Weekly Commentary (9/11/17)

September 12, 2017

Last week, U.S. equity markets declined driven by concerns over severe weather and continuing tensions with North Korea. For the week, the S&P 500, the DJIA and the Nasdaq declined -0.58, -0.82 and -1.16% respectively. Shares of financial companies had their worst week in months as banks and insurance stocks were hit over concerns for lower interest rates and hurricanes damage. The financial sector declined 2.8% for the week. The best performing sectors were health care and energy.

International stocks and fixed income provided positive returns for the week as the EAFE index was up 0.83% boosted by the ECB’s upgrade to its forecast for Eurozone growth and emerging markets advanced .04%.

The rush into safe haven U.S. government bonds drove the yield on the 10 year U.S. Treasury Note down to 2.06% (it was 2.45% at the start of the year) and the U.S. Aggregate index was up 0.46% for the week. This week look for economic reports on retail sales, industrial production and inflation (with reports on CPI and PPI).

“One cannot and must not try to erase the past merely because it does not fit the present.” – Golda Meir


Weekly Commentary (09/05/17) – No Summer of Discontent

September 5, 2017

Summer is over and the markets forgot to sell off. Positive economic news and market momentum have trumped investors’ concerns about geopolitical risks … at least for the moment.

For the week, the DJIA rose 0.88% while the S&P 500 finished higher by 1.43%. Developed international markets finished the week ahead by 0.57% while their year-to-date performance remains stellar as the MSCI EAFE index is up a healthy 18%. Emerging markets continued their advance as the MSCI EM index finished higher by 0.65% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week barely up by 0.07% as bonds yields were relatively flat for the week. As a result, the 10 YR US Treasury closed at a yield of 2.16% (down 1 bp from the previous week’s closing yield of 2.17%). Gold rose $33.88 to close at $1,325/oz on increased fears due to more North Korea missile testing . Oil prices were essentially flat as they closed the week at $47.29/bbl. Cheap oil prices continue to be a boon to businesses and consumers.

In economic news released last week, nonfarm payrolls disappointed (as they normally do in August) as they rose 156,000 … missing estimates of 180,000; US second quarter GDP was revised higher to 3% from an earlier estimate of 2.6%; and ISM manufacturing rose to 58.8% from 56.3%. Despite a somewhat-expected soft nonfarm payrolls report, most economic news was encouraging and continues to point to a gradually improving economic backdrop.

The week ahead looks to be pretty quiet on the economic front as jobless claims, international trade balance numbers and non-manufacturing PMIs are set to be released.

The week ahead on the geopolitical front remains another story. North Korea will, no doubt, dominate headline news as their missile testing and firing continues. Markets will most likely experience increased volatility this week as a result of North Korea’s saber rattling. The S&P 500 has gone 10 months without a correction of at least 3% (the third longest streak since WWII), and we would not be surprised if the markets pullback. Nonetheless, the positive economic backdrop will likely limit any market pullbacks.

As always, we plan to look through the day-to-day news and focus on longer-term objectives. Investors should stay the course and stick close to their long-term asset allocation targets.

Let’s make it a good week!

“Opportunity is missed by most people because it is dressed in overalls and looks like work.”Thomas A. Edison


The Week That Was

August 28, 2017

First and foremost our hearts and prayers go out to all of the victims of hurricane Harvey.

Amid a devastating hurricane hitting Texas, a solar eclipse that hasn’t happened in 99 ½ years and the potential shutdown of our government as early as October 2nd, the markets last week were very tame: the number of shares traded on Wednesday fell to their lowest level so far this year.

The resiliency of the US stock market is impressive. Last week the DJIA increased 0.71%, the S&P 500 rose 0.75% and the Nasdaq composite gained 0.80%. The insatiable appetite of companies’ repurchasing their own shares, fed by easy monetary policy, has decreased the capitalization of the US stock market by 17.5% over the past six years. Companies are beginning to pair back purchases, buying $100 billion less in the past 12 months than in the prior year.

On the positive side, GDP growth has been improving and our labor market is expanding which will undoubtedly create stronger wage growth. Second-quarter earnings rose by 10.2% y/y, the second consecutive quarter of double-digit growth.

We are concerned, however, with pockets of equity overvaluation, such as some Large Cap Tech and Utility stocks. The Federal Reserve kept interest rates the same at their Jackson Hole meeting but reminded that they will be paring back their $4.5 trillion bond portfolio. The US budget showdown is now at the forefront of investors minds.

International equities continue to benefit from a weaker dollar with EAFE gaining 0.61% and EM surging 2.46% for the week.

The bond market barely budged after Fed Chair Janet Yellen and ECB President Mario Draghi made rather defensive and dovish comments.

With summer winding down we caution investors not to be too complacent and to keep in mind their long-term investment goals.

“Even if you’re on the right track, you’ll get run over if you just sit there.”-Will Rogers