Rate Hike Likely at Next Fed Meeting
September 17, 2018
Global equity markets were positive across the board last week. In the U.S., the S&P 500, DJIA and NASDAQ were up 1.2%, .9% and 1.4%, respectively. International markets also advanced with the MSCI EAFE up 1.8% and even emerging markets, which have been under pressure, rose 0.6%. Growth stocks continued to outperform value stocks. The leading sectors for the week were telecom and energy, while the worst performing sector was financials. Fixed income markets declined as yields increased across the whole length of the yield curve. The rate on the 10-year U.S. Treasury note rose from 2.94% to 2.99% during the week.
In economic news last week, the pace of inflation slowed slightly from the prior month as August headline CPI was up 2.7% y/y versus 2.9% y/y in July. Core inflation remained the same at 2.2% y/y. The Fed’s preferred measure of inflation, PCE, rose 2.3%. With a tight labor market and a strong U.S. economy, this should be enough to support another 0.25% short-term rate increase by the FOMC at their meeting next week.
In the week ahead, there will be reports on housing and the release of the Flash PMI Composite. Additionally, high-level talks are expected to resume this week between the US and China ahead of an additional round of tariffs on $200 billion of Chinese imports.
“Your positive action combined with positive thinking results in success.” – Shiv Khera
ND&S Weekly 9.10.18 – Tariff Envy
September 10, 2018
The equity markets last week were weighed down by trade tensions and Washington shenanigans during the Labor Day shortened week.
US economic reports were impressive with the ISM manufacturing index increasing to a 14yr high. The big story for the week was a robust jobs report that showed nonfarm payrolls and wages increased more-than-expected while the unemployment rate remained at 3.9%, close to an 18yr low. Total Wages, which factors in average hourly wages as well as total hours worked, are up a robust 5.1% in the past year.
Despite the good economic news, investors were concerned about comments from the White House economic advisor, Larry Kudlow, who said that President Trump would be making a decision regarding another round of tariffs. This one threatens to impose $267bn of new tariffs on Chinese goods. As a result, the S&P 500 declined 1% and the tech-heavy NASDAQ was down 2.5% for the week. Foreign markets continued their slide with developed international declining 2.8% and emerging markets over 3%.
After a fabulous 2017, emerging markets entered bear-market territory. The recovery from the financial crisis has been slow, as the MSCI Emerging Markets ETF (EEM) has not yet eclipsed its closing high of $55.73 it set all the way back on 10/31/07 (not including dividends). Emerging market investments have been stuck in a tug of war between solid fundamentals/corporate earnings growth and sentiment that has recently turned negative. Emerging market equities have been undermined by the combination of rising trade tensions, a strengthening US dollar and rising US Treasury yields which has exposed structural weakness in several EM economies and punished their currencies.
The Price of WTI crude oil declined nearly 4% last week to close at 67.76/bbl. Domestic oil production continued to hit record levels while concerns arose over global demand due to escalating trade issues between China and the US.
Treasury yields moved higher last week as last week’s job report seemed to indicate a higher likelihood of two additional rate hikes from the Fed in 2018. The 10yr Treasury closed at a yield of 2.94%, up from 2.86% the week before.
There will be a flood of inflation reports this week: the Producer Price Index (PPI), Consumer Price Index (CPI) and the Import Price Index. The consumer pulse will also be tested with economic releases on retail sales and consumer confidence.
With the political jostling, trade tensions, potential for slower economic growth, we strongly recommend a balance between a risk-on and risk-off outlook. Maintaining quality diversified assets and fine-tuning portfolios based on market conditions, and more importantly, client’s needs, will produce happy returns.
“Dare to be honest and fear no labor.” – Robert Burns
ND&S Weekly Commentary 9.4.18 – Trade Tensions Ease
September 4, 2018
US equity markets moved higher last week as trade tensions eased with an agreement announced between US and Mexico. Talks between US and Canada remain ongoing and will continue this week as officials look to conclude a revised NAFTA agreement before year-end. On the other hand, trade relations remain frosty between US and China as President Trump was in support of another round of tariffs on an additional $200 billion in Chinese imports set to take effect this week.
Equity investors were rewarded for the week, the DJIA closed higher by 0.79% while the broader-based S&P 500 closed up 0.98%. Technology stocks were again the leading contributor for performance as the tech-heavy NASDAQ closed the week up 2.07%. International stocks also finished the week in the green with the MSCI EAFE and MSCI EM indexes up 0.28% and 0.60%, respectively. Treasury yields finished the week slightly higher with the 10yr US Treasury closing at a yield of 2.86%.
Economic data for the week was generally positive. On Wednesday, real GDP was revised higher to 4.2% in the 2nd quarter of 2018 with consumer spending serving as a catalyst for the positive adjustment. The core personal consumption expenditures (PCE) index, which measures personal spending and accounts for over 2/3 of US economic activity, increased to 2.0% year-over-year. On Friday, consumer confidence came in at 133.4, marking its highest reading since October 2000. The holiday-shortened week ahead will have economic releases on manufacturing and employment.
Second quarter earnings are nearly complete and have been very positive versus expectations. Earnings per share for the S&P 500 increased 25% when compared to a year ago. Revenues were also strong for the index, as revenues expanded 10.1%. Earnings growth has likely peaked in this expansion, but we continue to see reasonable earning growth in the quarters ahead.
“In life, as in football, you won’t go far unless you know where the goalposts are.” – Arnold H. Glasgow
Weekly Commentary (8/27/18) – A Bull Run and an American Hero
August 27, 2018
Stocks ended last week higher as the U.S. stock market, on Wednesday, became the longest-ever bull market on record (9 years, 5 months and 13 days). Despite a tumult of negative political news out of Washington, the strength of the U.S. economy has simply been too strong to ignore. Second quarter earnings reports are nearly complete, and earnings for the quarter point to continued strong execution by U.S. companies. Adding to the economic backdrop (and offsetting political headwinds) was Fed Chairman Powell’s speech in Jackson Hole on Friday where he sounded a more dovish tone and hinted at a more gradual pace of rate hikes (perhaps one more hike this year rather than two).
For the week, the DJIA gained 0.51% while the S&P 500 finished higher by 0.88%. The volatile Nasdaq jumped 1.67%. Developed international markets finished in the black as the MSCI EAFE index moved up 1.56% for the week. Emerging markets recovered a much-needed 2.71% last week as the U.S. dollar weakened nearly 1% and talks of trade deals lifted the badly bruised asset class. Small company stocks, represented by the Russell 2000, pushed higher by 1.94%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week slightly higher by 0.26%. As a result, the 10 YR US Treasury closed at a yield of 2.82% (down 5 bps from the previous week’s closing yield of 2.87%). Gold prices surged higher by $29.80 to close at $1,206.30/oz. Oil prices advanced $3.51 last week as oil closed at $68.72/bbl.
Lastly, an American Hero passed away last week. Senator John Sidney McCain III died on Saturday at age 81. Senator McCain was a distinguished naval officer who was shot down over Vietnam and held as a prisoner of war suffering through immense torture. He later served honorably in the U.S. senate for 31 years. We salute Senator McCain. May he rest in peace.
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. The bull market may be aging, but we see more gains ahead.
“In prison, I fell in love with my country. I had loved her before then, but like most young people, my affection was little more than a simple appreciation for the comforts and privileges most Americans enjoyed and took for granted. It wasn’t until I had lost America for a time that I realized how much I loved her.” – John McCain
ND&S Weekly Recap: Earnings Reports Continue to be Good
August 20, 2018
U.S. equity markets struggled early last week as concerns over contagion from Turkey’s currency crisis worried investors. However, a positive report on retail sales and news that negotiators from the U.S. and China would meet to try to end the trade standoff, helped to end the week on a strong note. Retail sales for July rose 0.5% suggesting that consumers remain healthy and should provide support for continued economic growth. For the week, the DJIA and the S&P 500 increased 1.5% and 0.6% respectively, while the NASDAQ declined 0.2% held back by weakness in technology stocks. The broader market pushed higher by strength in consumer staples, which rose 3.2% for the week. Value stocks outperformed growth stocks, as perhaps investors sought shelter from market volatility. The struggle continued for international stocks last week with the EAFE and emerging markets down 1.1% and 3.7%, respectively.
Fixed income markets were relatively stable as the rate on the 10-year U.S. Treasury note held steady at 2.87%. This week, investors will be watching the numbers for existing and new home sales for July. In June, existing home sales fell for the fifth time in six months and new home sales fell to their worst reading in eight months. Rate increases by the Fed may be starting to have an effect on an important part of the economy.
With 96% of S&P 500 companies reporting 2nd quarter earnings, 79% have beat on earnings and 61% have beat on revenue. Margins continue to be a major driver of earnings growth this quarter and are set to expand to 11.7%, their highest level on record.
“Music does a lot of things for a lot of people. It’s transporting, for sure. It can take you right back, it’s uplifting, it’s encouraging, it’s strengthening.” – Aretha Franklin
ND&S Weekly Commentary 8.13.18 – Victory in Japan Day
August 13, 2018
Last Friday was Turkey Day as the Turkish Lira declined 20% spreading fears throughout the global markets. As a result, equities for the week fell with the S&P 500 and DJIA declining .18% and .44%, respectively. The tech-heavy NASDAQ held its own returning 0.3% as large technology stocks regained momentum. International markets reacted to Turkey’s currency turmoil along with continued tariff announcements between the US and China. The MSCI EAFE fell 1.46% while emerging markets lost 0.98%. The 10yr US Treasury yield remained steady at 2.87%, moving down 0.08% for the week despite favorable economic news.
The US equity markets rose over 5% last month because of encouraging economic data and solid corporate profit results. With the majority of S&P 500 companies already reporting, their quarterly earnings rose an impressive 26% and even more encouraging revenue growth was 10%, twice as much as from a year ago.
This week’s economic reports include retail sales on Wednesday, housing starts on Thursday and the leading economic index on Friday.
We expect investors’ attention will remain on tariff tensions and other geopolitical headwinds, which should bring back more market volatility. We recommend staying diversified and looking for opportunities in US dividend paying companies as well as foreign equities offering attractive valuations.
“VJ Day, or Victory in Japan Day, marks the date of the Japanese surrender that ended fighting in the Pacific.” – Doc Hastings
ND&S Weekly Commentary (8.6.18) – $1,000,000,000,000
August 6, 2018
US equities finished modestly higher last week in what was a busy week from political, economic, and company specific perspectives. For the week, the DJIA increased 0.05% while the broader-based S&P 500 climbed 0.80% for the week. International equities closed the week in the red with the MSCI EAFE off 1.45% and emerging markets closed lower by 1.66%. Treasury yields stayed relatively flat for the week, despite the FOMC characterizing the US economy as “strong” which would likely hint they will continue to raise rates at the current pace. The 10yr US Treasury briefly crossed 3% before closing the week at 2.97%. Gold and oil closed the week slightly lower.
Trade tensions escalated with China as the Trump administration announced they are looking into raising the tariff rate to 25% on $200 billion worth of Chinese goods … an increase from the 10% rate initially announced. China in-turn announced they would retaliate with tariffs on roughly $60 billion worth of US goods ranging from 5% – 25%.
Economic news for the week included – Personal consumption expenditures (PCE) came in at 1.9%, slightly below estimates of 2.0%; Markit/ISM mfg. PMI at 58.1, surpassing expectations and reaffirming continued expansion of US manufacturing; Nonfarm payrolls rose 157,000 in July which missed estimates for the month. However, there were upward revisions to both May and June that resulted in the unemployment rate dropping to 3.9%. Hourly earnings rose 0.3% in June having risen 2.7% from a year ago.
Tuesday, after the closing bell, Apple (AAPL) reported both revenues and earnings per share (EPS) that beat analyst expectations with its fiscal third quarter earnings report. In addition to the strong numbers, their forward revenue guidance came in ahead of market expectations which was enough to ultimately push the company’s market cap over $1,000,000,000,000 (that’s a lot of zeros), making it the first company to reach this historic valuation.
With 80% of S&P 500 constituents having reported, 2nd quarter earnings growth is estimated to be 24%. Those earnings figures are running very close to the 24.8% EPS growth rate in the first quarter. There will be 85 companies scheduled to report this week along with economic releases on Inflation, consumer credit and jobless claims. Have a great week!
“Great things in business are never done by one person. They’re done by a team of people.” – Steve Jobs
Weekly Commentary (7/30/18) – Markets Move Higher on Strong Earnings & GDP
July 30, 2018
Stocks ended last week mostly higher on continued positive earnings reports and a strong second quarter GDP report. Second quarter earnings reports have been quite strong with most companies reporting in-line to better-than-expected earnings. On the economic front, Real U.S. GDP (GDP adjusted for inflation) grew at a 4.1% annual rate in the second quarter … the highest growth rate since 2014. New and existing home sales for June were a bit shy of expectations … we’ll keep an eye on housing to see if the recent weakness is just temporary. Also reported last week, the Flash U.S. Composite Purchasing Managers Output Index for July pulled back slightly. The good news out of the report was that the Flash Manufacturing PMI moved to a two-month high to help offset some weakness in the Flash U.S. Services Business Activity.
For the week, the DJIA gained 1.6% while the S&P 500 finished higher by 0.6%. The volatile Nasdaq lost 1.1% for the week as some high-flying technology stocks reported earnings a bit shy of heightened expectations (namely, Facebook and Netflix). Developed international markets finished in the black as the MSCI EAFE index moved up 1.4% for the week. Emerging markets recovered 2.2% last week as the U.S. dollar weakened. Small company stocks, represented by the Russell 2000, gave back 2.0% on profit taking. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week lower by 0.17%. As a result, the 10 YR US Treasury closed at a yield of 2.95% (up 6.1 bps from the previous week’s closing yield of 2.89%). Gold prices ticked lower by $2.70 to close at $1,222.60/oz. Oil prices dropped $0.92 last week as oil closed at $68.69/bbl.
The week ahead has a few important economic releases – PCE (headline and core), ADP/BLS employment reports, ISM Manufacturing and Non-Manufacturing along with an update on the International Trade balance. In addition to economic releases, we expect to see the continuation of 2nd quarter earnings releases. Trading should be somewhat light this week as many investors will be on vacation.
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. The weather is beautiful … make an effort to get outside and smell the roses as summer is in full swing!
“Just living is not enough … one must have sunshine, freedom, and a little flower.” – Hans Christian Anderson
NDS Market Update (7/23/18) – Markets Struggle for Direction
July 24, 2018
Last week, stock prices ended little changed as major indexes struggled to move higher. In spite of upbeat earnings reports, uncertainty around trade and monetary policy rose, as white house criticism of the Fed for raising interest rates, weighed on stock and bond markets. The S&P 500, and the DJIA were up 0.04% and 0.2%, respectively, and the NASDAQ declined .07%. U.S. bonds were off 0.27% for the week, as the yield on the 10 U.S. Treasury note rose to 2.90%. Foreign stocks were mixed as the MSCI EAFE index closed higher by 0.63% while emerging markets declined 0.44%.
Investor attention will turn to earnings this week as one third of S&P 500 companies are due to report. Major companies such as Alphabet, Boeing, Coca Cola, Facebook, Amazon and Exxon Mobil are scheduled to announce results. The quarter should mark another strong showing for corporate earnings growth because of tax reform and a strong underlying economy. In economic news, reports are due on existing-home sales, durable goods orders, and the advance estimate for 2nd quarter GDP. Analyst estimates are calling for durable goods to be up 3.1% and a reading of 4.2% for GDP.
“We live in a rainbow of chaos.” – Paul Cezanne
ND&S Weekly Commentary (9/24/18) – Resilient
September 24, 2018
This market is resilient! U.S. stocks pushed to record highs last week despite ongoing trade tensions with China. President Trump announced a 10% tariff on $200 billion of Chinese goods while China retaliated with a 5% to 10% tariff on $60 billion of U.S. goods (will they all just grow up?). Investors focused, yet again, on the strength of the U.S. economy. Evidence of our robust economy can be found in second quarter earnings. With earnings reports now complete, second quarter earnings increased over 24.4% year-over-year with 81.4% of companies reporting positive earnings surprises. Revenues for the second quarter were up 9.4%.
For the week, the DJIA gained 2.25% while the S&P 500 finished higher by 0.86%. The volatile Nasdaq lost 0.28% after some profit-taking in technology stocks. Developed international markets finished in the black as the MSCI EAFE index moved up 2.91% for the week. Emerging markets recovered a much-needed 2.28% last week even as the U.S. dollar gained 0.3%. Small company stocks, represented by the Russell 2000, gave back some gains as it dropped 0.53% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week slightly lower by 0.26%. As a result, the 10 YR US Treasury closed at a yield of 3.07% (up 8 bps from the previous week’s closing yield of 2.99%). Gold prices dropped by $10 to close at $1,196.20/oz. Oil prices advanced $0.46 last week as oil closed at $70.78/bbl … certainly not a hindrance to further economic growth
The most newsworthy economic event this week is the meeting of the Fed on Tuesday and Wednesday. It is widely anticipated that the Fed will raise interest rates 25bps to 2.25%. Commentary from the Fed will be closely watched for any hints about a possible December rate hike.
Markets are typically volatile heading into mid-term elections, and we expect this year to be no different. 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.
“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” – William Feather