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

ND&S Weekly Commentary (4.6.20) – Coronavirus Uncertainty Continues

April 6, 2020

We hope that all of you and your families are well. It appears that we are headed into a pivotal week for the virus so please continue to follow the Covid-19 protocols in your communities. This crisis will end, and we can all do our part to slow the spread of this pervasive virus.

Last week was another volatile week as investors sold stocks due to heightened uncertainty surrounding the spread of Covid-19. With coronavirus cases topping one million globally the impact on economies around the world will be massive. In the United States alone, a record 6.6 million Americans applied for unemployment benefits last week.

On the week, the S&P 500 weakened 2.1% and the DJIA declined 2.7%. The Russell 2000 which represents small/midsized US companies (and is more impacted by slower growth) dropped 7.1%. International markets were not immune from the pullback as developed international markets (MSCI EAFE) gave back 3.7% while emerging markets (MSCI EM) were lower by 1.2%. Bonds were a bit of a safe-haven as the Barclays Aggregate finished higher by 0.73% on the week. The 10yr Treasury ended last week at a yield of 0.62% versus 0.72% the week prior.

Markets have already priced in a global recession (which most likely began in early March). The depth and breadth of the global recession will depend on the course of the virus and the human response (individuals and governments) to those impacted by the virus. The economic backdrop will get worse before it gets better; however, markets almost always bottom before manifestations of a crisis begin to meaningfully improve.

The vast majority of large companies around the world are not permanently impaired, yet markets are pricing securities as if that is the case. 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 relief rallies, but we remain cautious (a bit less so as each week passes) and don’t plan on jumping at the first sign of a bounce … a bottom will take time to form. Rest assured, we are monitoring investments and markets, and we remain available should you have any questions.

A Happy Passover and Easter to all.

“We should take comfort that while we may have more still to endure, better days will return: we will be with our friends again; we will be with our families again; we will meet again.”Queen Elizabeth II

ND&S Market Commentary 3.30.20 – Markets Jump on Stimulus Hopes

March 30, 2020

Equity markets closed lower on Friday but still recorded large gains for the week as the coronavirus (Covid-19) continued to spread across the globe. Expectations are for further acceleration of confirmed cases as testing becomes more widespread … increased testing will provide a better reading on the virus’s prevalence and severity. To offset the financial pressures of the nationwide shutdown, the Federal Reserve announced massive policy measures to support credit and lending, while Congress passed a bipartisan bill which included a $2 trillion rescue package for businesses and households on Friday. The bill includes direct payments to individuals and aid to large corporations and small businesses.

For the week, the S&P 500 climbed 10.3% notching its biggest gain since March 2009. The DJIA rose 12.8% marking the biggest weekly gain for the index since 1938. International markets also rallied with developed markets (MSCI EAFE) up 11.2% and emerging markets (MSCI EM) advancing 5%. Bonds posted a strong week as normalcy returned to fixed income markets. The 10yr Treasury closed at a yield of 0.72% which is down from 0.92% the week prior.

We are going to see incredibly steep contractions in economic data over the next several weeks and months; however, these reports will have minimal impact on the markets as focus will be 6-9 months out. As an example, unemployment claims skyrocketed to 3.3 million for the week ending March 21, which is more than 3x the previous record high. Most of claims were from the service industries -specifically accommodation and food services. This week look for economic reports on consumer confidence and monthly employment which should start to reflect job losses from the virus.

Monday and Friday saw market declines, but Tuesday through Thursday saw the biggest 3-day rally since 1931. We expect markets to remain volatile until there are signs of the virus slowing and success at “flattening the curve”. No doubt, we see quite a few bargains in the market today. We will likely see a number of relief rallies, as a bottom will take time to form. It is our intention to begin to redeploy higher-than-normal cash levels as opportunities present themselves. Long-term investors should remember that since 1928, through 14 recessions and 21 bear markets, equity markets have never failed to regain a prior peak. This time will be no different.

“The investor who says, this time is different, when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.” – John Templeton

ND&S Weekly Commentary 3.24.20 – Coronavirus Uncertainty

March 24, 2020

First and foremost, we hope that all of you and your families are well. Please follow the Covid-19 protocols in your communities. This crisis will end, and we can all do our part to slow the spread of this pervasive virus.

Last week was another volatile and nerve-wracking week as investors sold stocks due to heightened uncertainty surrounding the spread of Covid-19 and the massive impact on economies around the world. The Dow has now erased three years of gains in a month while historically it took the market on average 18 months to move from peak to trough.

On the week, the S&P 500 weakened 14.95% and the DJIA declined 17.29%. The Russell 2000 which represents small/midsized US companies (and is more impacted by slower growth) dropped 16.14%. International markets were not as bad, but they also gave back ground with developed international (MSCI EAFE) -5.76% and emerging markets (MSCI EM) -9.79%. Bonds were not immune to the chaos with the Barclays Aggregate down 2.29% on the week. The 10yr Treasury ended last week at a yield of 0.92% versus 0.94% the week prior.

There are some difficult days and weeks ahead as quarantines and lock-downs grow. Yes, markets have already priced in a global recession, but the uncertainty from day to day will likely keep investors on edge. The Federal Reserve has been very aggressive in their monetary response, and we sincerely hope and expect that Congress will put aside its pettiness and pass an impactful stimulus bill … our workers and our country deserve no less.

Markets are most certainly displaying the tell-tale signs of panic and capitulation. The vast majority of large companies around the world are not permanently impaired, yet markets are pricing securities as if that is the case. The economic backdrop will get worse before it gets better; however, markets almost always bottom before manifestations of a crisis begin to meaningfully improve.

It is our intention to begin putting higher-than-normal cash levels back to work in the markets as opportunities present themselves. No doubt, we see quite a few bargains in the market today. We will likely see a number of relief rallies, but we remain cautious and don’t plan on jumping at the first sign of a bounce … a bottom will take time to form. Rest assured, we are monitoring investments and markets, and we remain available should you have any questions.

“No problem of human destiny is beyond human beings.” – John F. Kennedy

ND&S Weekly Commentary 3.16.20 – Markets React Wildly to Pandemic Uncertainty

March 16, 2020

We hope that all of you and your families stay healthy and safe and please follow the Covid-19 protocols in your communities. This is certainly an unnerving time and the steps being taken both here in the U.S. and abroad to combat the spread (and to flatten the curve) of the virus are unprecedented. Our belief is the faster we can shut down the spread of the virus (even if that means extreme measures), the faster we can return to a normal operating environment.

Last week was most certainly the wildest week since the financial crisis. The World Health Organization on Wednesday declared the coronavirus a pandemic. On Friday, President Trump declared a national emergency. Markets around the world fluctuated wildly all week as investors attempted to gauge the economic and social impact of the virus.

On the week, the S&P 500 weakened 8.73% and the DJIA declined 10.24%. The Russell 2000 which represents small/midsized US companies (and is more impacted by slower growth) dropped 16.44%. International markets also gave back value with developed international (MSCI EAFE) -18.36% and emerging markets (MSCI EM) -11.92%. Bonds were not immune to the chaos with the Bloomberg/Barclays Aggregate down 3.17% on the week. The 10yr Treasury ended a wild week as it closed at a yield of 0.91% versus 0.74% the week prior.

The outlook for the economy and markets will depend on the world’s success at flattening the curve. Simply put, the harsher the actions to tackle this now, the quicker we can slow this virus and get people back to work. Markets always discount the future, and they have already discounted a significant slow- down and most likely a recession. No doubt, the market action last week was indicative of a panic/capitulation phase, and we suspect that the bulk of the market correction is behind us. Having said that, it is quite likely that markets could reach lower levels as more virus cases are reported. Markets will stabilize as we begin to see the virus’ peak and containment.

Our hope is that the coordinated response between government and our private sector will illustrate the power of collaboration in working for the common good. We are already seeing massive monetary and fiscal stimulus packages that will serve to support the economy through this very difficult, but temporary, time. We have been net sellers of equities over the past few months, and we continue to maintain cash levels at the higher end of our policy range. We would caution against making a wholesale change to your long-term plan or investments. As we mentioned above, it feels like we are in the fear/panic stage of the cycle where stock prices disassociate greatly from their true value. Rest assured, we are monitoring investments and markets, and we remain available should you have any questions.

“Ask five economists and you’ll get five different answers – six if one went to Harvard.” – Edgar Fiedler

Weekly Commentary (03/09/20) – Markets Stabilize Last Week … More Uncertainty Ahead

March 9, 2020

Markets stabilized last week after suffering their worst weekly drop in over 10 years the previous week.

For the week, the DJIA advanced 1.79% while the S&P 500 gained 0.61%. The tech-heavy Nasdaq inched ahead by 0.10%. International markets were also positive as investors put money to work after the previous week’s sell-off. For the week, the MSCI EAFE index (developed markets) jumped 0.35% while emerging market equities (MSCI EM) tacked-on 0.69%. Small company stocks, represented by the Russell 2000, finished lower by 1.81% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week higher by 1.88% as investors fled to the perceived safety of bonds. As a result, the 10 YR US Treasury yield collapsed to its lowest yield in history as it closed the week at a yield of 0.74% (down sharply from the previous week’s closing yield of ~1.13%). Gold prices jumped as gold closed at $1,670.80/oz – up 6.82% on the week. Oil prices dropped 7.77% to $41.28 on global growth concerns, plentiful supply and OPEC disarray. Fortunately, low oil prices serve as a tax cut to consumers and businesses.

Market uncertainty remains high as the coronavirus continues to spread around the world. Adding fuel to the fire, Russia and OPEC failed to come to an agreement over the weekend on production cuts to oil. As a result, oil prices are plummeting this morning as Saudi Arabia and Russia attempt to put pressure on U.S. shale producers (lower oil prices may force many shale producers to shut-in production and/or go bankrupt). This current bout of volatility is certainly unnerving, particularly after investors have been treated with relative calm over the past few years. We don’t know when markets will bottom. We do know, however, that they will bottom. Every correction that we have ever had has been temporary, and this one will be no different.

Could more pain be ahead for investors? Of course. The uncertainty of the global growth impact from the coronavirus along with plunging oil prices will put downward pressure on stock markets around the world. We suspect that central banks and governments around the world will come to the rescue to help stabilize markets.

Patient, long-term focused investors will be well served in the end, and investors that sell based on panic rarely win over time. This recent bout of volatility reinforces the benefits of diversification as well balanced portfolios have been able to weather the storm relatively well. Investors should stay close to their long-term target asset allocations with a slight defensive bias as markets work through this period of volatility.

“Everyone goes through adversity in life, but what matters is how you learn from it.”Lou Holtz

Weekly Commentary (03/02/20) – Coronavirus Fears Push Markets Into Correction Territory

March 2, 2020

Markets moved into correction territory last week amid fears of the economic impact of the coronavirus on global growth. Markets suffered their worst weekly drop in over 10 years (and the world didn’t come to an end …).

For the week, the DJIA fell 12.26% while the S&P 500 lost 11.44%. The tech-heavy Nasdaq dropped 10.52%. International markets fared a bit better, but they also lost ground. For the week, the MSCI EAFE index (developed markets) gave back 9.55% while emerging market equities (MSCI EM) declined 7.23%. Small company stocks, represented by the Russell 2000, finished lower by 12.01% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week higher by 1.26% as investors fled to the perceived safety of bonds. As a result, the 10 YR US Treasury yield collapsed to its lowest yield in history as it closed the week at a yield of 1.13% (down from the previous week’s closing yield of ~1.46%). Gold prices were surprisingly weak as gold closed at $1,564.10/oz – down 4.92% on the week. Oil prices dropped 16.15% to $44.76 on global growth concerns and plentiful supply. Fortunately, low oil prices serve as a tax cut to consumers and businesses.

After a long period of relative calm in the markets, it is not surprising to see volatility surge as fears of the unknown grip investors’ psyches. We don’t know when the spread of COVID-19 will subside. We do know, however, that it will ultimately subside. In the meantime, markets are correctly adjusting to slower (or perhaps zero) economic growth. As we have highlighted many times in the past, the average intra-year decline in the S&P 500 has been roughly 14%. Since 1950, and before the current setback, markets have experienced 23 corrections (10%-plus pullback in prices) with an average decline of 13.7%. So far in 2020, the peak-to-trough correction has been 15.8% in the S&P 500 and 13.6% for the DJIA. Markets have recovered, on average, four months after each correction.

Could more pain be ahead for investors? Of course. The uncertainty of the global growth impact from the coronavirus is likely to remain high; however, markets have already discounted quite a bit of bad news. We suspect that central banks around the world will come to the rescue to help stabilize markets. We question whether or not central bank easing will work, but we agree that the main impact of such easing will be psychological.

We suggest that investors turn off CNBC. Patient, long-term focused investors will be well served in the end, and investors that sell based on panic rarely win over time. This recent bout of volatility reinforces the benefits of diversification as well balanced portfolios have been able to weather the storm relatively well. Investors should stay close to their long-term target asset allocations with a slight defensive bias as markets work through this period of volatility. Stay calm and carry on.

“Life is 10% what happens to you and 90% how you react to it.” – Charles R. Swindoll

ND&S Weekly Commentary 02.24.20 – Coronavirus Scare

February 24, 2020

Throughout the holiday-shortened week, reports of the COVID-19 coronavirus spreading to other countries created fears of a global economic slowdown. Investors and traders reversed course and went from risk-on to risk-off investments. As a result the Dow Jones fell 1.36%, the S&P 500 was down 1.22% and the tech-heavy NASDAQ slid 1.55%. International equities also suffered with Developed (EAFE) and Developing (EM) down 1.23% and 1.96%, respectively.

On Friday the World Health Organization reported that there were 76,767 confirmed cases of COVID-19 and 2,247 deaths. China’s shutdown of business activity has affected supply chains throughout the world. The second largest economy reported that during the first two weeks of February car sales declined 92% year over year.

In the U.S., the composite economic PMI (Purchasing Managers’ Index), which includes service and manufacturing indexes, came in below 50 for the first time since 2013. U.S. existing home sales were also weak falling 1.3% in January to a 5.46 million annual rate. Housing starts were down 3.6%. The price of a barrel of West Texas Intermediate Crude for March delivery fell over 2% on Friday. Gold was boosted again as a safe haven asset up 1.8% for the week at $1,648.80 an ounce, reaching a seven year high.

The U.S. 10-year Treasury Note slipped to 1.47% the lowest level since early September. The 30-year T-Bond yield dropped to 1.89% reaching an historic all-time low. Recession worries are indicative of an inverted yield curve with the three month T-Bill yielding 1.55% while the two-year notes are 1.34%.

Despite a 3.1% fourth quarter profit growth for the S&P 500 companies and excluding the energy sector the growth rate was 6%, the coronavirus dominated the financial markets. The FAANG’s – Facebook, Apple, Amazon, Netflix and Google are up 10% year to date. Their average price to earnings ratio is up to 35 times estimated earnings from 21 times last year. Another huge holding is Microsoft at $1.4 trillion in market cap. Microsoft is up 14% year to date and trades at 31 times estimated earnings. The stock hasn’t traded at that level since the dot-com crisis.

We anticipate volatility to increase while, hopefully, the coronavirus can be contained and cured. The concentration and size of FAANG and Microsoft within major indices and their exposure to a slowing global economy is worrisome. We strongly feel that raising cash balances for foreseeable needs, assessing the risk of owning sizable positions and diversification will pave the way to stable returns.

This week consumer confidence will be reported on Tuesday, new home sales on Wednesday and personal income and spending on Friday.

 
“Although the world is full of suffering, it is full also of the overcoming of it.” – Helen Keller

ND&S Weekly Commentary 02.18.20 – Markets Continue to Shrug Off Coronavirus Fears

February 18, 2020

Markets pushed higher last week despite ongoing uncertainty surrounding the coronavirus. Helping the markets move higher were encouraging comments from Fed Chair Jerome Powell and mostly better-than-expected economic news.

For the week, the DJIA advanced 1.17% while the S&P 500 gained 1.65%. The tech-heavy Nasdaq jumped 2.23% as investors flooded into cloud-related stocks. International markets were mixed. For the week, the MSCI EAFE index (developed markets) inched lower by 0.02% while emerging market equities (MSCI EM) jumped 1.37%. International markets remained under pressure due to uncertainty regarding the impact of the coronavirus on global growth. Small company stocks, represented by the Russell 2000, finished higher by 1.90% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week essentially unchanged as bond investors remained on the sidelines for the week. As a result, the 10 YR US Treasury closed at a yield of 1.59% (unchanged from the previous week’s closing yield of ~1.59%). Gold prices closed at $1,582.70/oz – up 0.81% on the week. Oil prices rose 3.38% to $52.05 despite adequate supply and weakening demand. Low oil prices serve as a tax cut to consumers and businesses and are a contributing factor (along with low unemployment) to robust consumer sentiment and retail sales.

Economic news released last week confirmed a resilient jobs market, still moderate inflation, and elevated consumer sentiment. On Thursday, The U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI)  advanced 0.1% in January, below expectations of a 0.2% gain. Over the past 12 months core CPI has risen 2.3%, ahead of the 2.2% consensus and in-line with annual gains seen in October, November and December. Also on Thursday, the Department of Labor reported that initial jobless claims for the week ending February 8 were 205,000, below expectations of 210,000 … another sign of a strengthening labor market. Jobless claims have remained under 300,000 for 257 consecutive weeks – the longest streak on record. On Friday, the U.S. Commerce Department reported that January retail sales advanced 0.3%, matching expectations. The Federal Reserve announced on Friday that January industrial production fell 0.3%, more than the expected 0.2% decline (likely due to fears around global growth as a result of the coronavirus outbreak). Finally, on Friday the University of Michigan Consumer Sentiment Index rose to 100.9 in February – the highest level since March 2018.

Most economic and market fundamentals remain reasonable although traditional market valuations are a bit stretched. We suggest investors stay close to their long-term target asset allocations with a slight defensive bias as markets are due for a pause.

“There are many ways of going forward, but only one way of standing still.” – Franklin D. Roosevelt