Opportunities [as well as Challenges] Ahead

July 3, 2017

The stock market ended the quarter on a profit-taking note, with the S&P falling 0.6% while the Nasdaq declined 2.0%. Economic data was fine, with 1Q GDP expanding 1.4% and consumer confidence increasing to 118.9. The lower inflation reports [core PCI only 1.2% v. the Fed’s stated target of 2%] is pushing markets to forecast a pause in the fed fends increase activity until the 4Q [FF are currently 1.0%+ after two successive quarters of ¼ point increases].

The equity markets have performed admirably YTD [to the point where some are worried about excess enthusiasm]. The S&P is up 8.2% [9.3% including income], bonds are up 2.6% [High Yield up 4.9%]. International markets, with their lower valuations, are up even more, with EM up 18.6% YTD. Markets rarely advance in a straight line, but any upcoming corrections should be viewed as opportunities.

The “fight for $15”, as the concerted push for higher minimum wages is now known, has made significant headway in some locales, and objective data is starting to come in. Seattle has boosted its minimum wage from $9.47 in 2014 to $13 in 2016 [on its way to $15]. Now, the University of Washington has published a detailed study showing that the workers who were supposed to benefit from the higher minimum wage have actually experienced a decline of $125/month in their income because of fewer available hours. Other “unintended consequences” include fewer [none?] openings in fast food for unskilled entry-level workers. Let the buyer beware.

“Liberty without learning is always in peril; learning without liberty is always in vain.” – JFK

Stay the Course

June 26, 2017

For the week, both the DJIA and the S&P 500 finished slightly higher – the DJIA inched higher by 0.05% while the S&P 500 advanced 0.22%. Developed international markets finished down by just 0.17%. Emerging markets continued their strong advance as the MSCI EM index finished higher by 0.99% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week ahead by 0.17% as bonds yields moved lower amid muted inflation expectations. As a result, the 10 YR US Treasury closed at a yield of 2.15% (down 1 bp from the previous week’s closing yield of 2.16%). Gold rose $2.20 to close at $1,256.20/oz. Oil prices dropped (down up $1.96) on the week to close at $43.01/bbl on increased supply and tepid demand. Oil prices are officially in bear market territory as prices have fallen greater than 25% from this year’s $58.30 high reached on the first trading day of the year. Cheap oil prices are a boon to businesses and consumers. Cheaper oil prices and tame inflation could temper the Fed’s enthusiasm for raising rates later this year … we’ll see.

In economic news released last week, existing and new homes sales both exceeded expectations. The current low unemployment rate along with low interest rates is supportive of a healthy housing market. Supply continues to be somewhat constrained with just 4.2 months of inventory at today’s sales pace.

The week ahead looks to be pretty quiet. Economic news this week includes durable goods orders, June consumer confidence, personal income data, and the final tally of first quarter GDP.

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 and enjoy the summer!

“The individual investor should act consistently as an investor and not as a speculator”Ben Graham

Whole Foods

June 19, 2017

The S&P 500 rose 0.1% last week, as markets struggled with the latest Fed interest rate increase. The NASDAQ fell 0.9% as large tech stocks resumed their slide with the exception of Amazon, which spiked on news that they are pursuing a takeover of Whole Foods Market. International equity markets were also sluggish as the MSCI EAFE index was virtually flat while the Emerging Market Index declined 1.4%. Treasury yields trended lower in spite of the Fed Hike with the 10 Year Treasury closing at a yield of 2.16%. Oil closed the week below $45 a barrel as the price fell for the fourth straight week.

In economic news, US retail sales in May experienced their largest decline in sixteen months. New home construction weakened for a third straight month and consumer confidence also was down the most since October. The big news item was the Fed’s decision to increase the federal funds rate by a quarter of one percent. In addition, they announced their intentions of a “taper-up” strategy to reduce their holdings of treasuries and mortgage backed securities, which was not unexpected. We are concerned, however, about the growth of the US economy. For instance, the nation’s gross domestic product grew a meager 1.2% annual rate in the first quarter. Job growth, the last three months, averaged only 121,000 jobs a month, much less than economists’ benchmark of 150,000 new jobs each month.

Grocery store shares, including Walmart, were hurt last week after Amazon announced on Friday it will acquire Whole Foods for $13.7 billion. It’s amazing that Amazon began as an on-line bookstore. The brick and mortar retail store cliff continues!

With the Fed decision behind us, summertime should settle the markets down and, hopefully, Washington’s turmoil as well.

“If you want to cook dinner, at least they ought to let you shop for the groceries.”
-Bill Parcells

ND&S Weekly Recap: Not Your Average Thursday

June 12, 2017

With financial journalists doing their best to hype whatever news they can, “Super Thursday” came and went with markets taking it in stride. The day started with ECB President Mario Draghi’s press conference, and as expected, no changes were made from current policy as he foresees interest rates “remaining at present levels for an extended time”. He did drop a reference to future rate cuts for the region. At 10am, an estimated 19.5 million viewers (not including viewing parties at bars, restaurants, and coffee shops or through online streaming) from around the US tuned into the highly anticipated testimony from former FBI Director James Comey. Comey spent 3 hours on the stand fielding questions before the Senate Intelligent Committee on the FBI investigation into former National Security Advisor Michael Flynn, as well as details into his relationship with President Trump and former Presidents. Rounding out Thursday, the big surprise came from the British election as the Conservative Party lead by Prime Minister Theresa May, failed in their attempt to obtain a majority in the House of Commons. The lack of a majority could complicate a BREXIT negotiation.

For the week, the S&P 500 closed down 0.27% while the DJIA increased by 0.33%. The Russell 2000 had a nice week as financials, which encompass a big percentage of the index, finished the week up 1.18%. International markets were volatile last week with all of the geopolitical news. The MSCI EAFE closed down by 1.16% while emerging markets closed the week higher by 0.36%. Rates moved higher across the board in anticipation of a rate hike from this week’s FOMC Meeting. The 10yr Treasury closed at a yield of 2.21%.

There is plenty on the economic calendar this week. There will be reports on Producer Price Index (PPI), Consumer Price Index (CPI), retail sales, and housing starts. The biggest news for the week will likely come from the Fed, as the FOMC gathers for their June meeting. Investors are pricing in a 98% probability of a rate hike, which will be their 4th hike since beginning in December 2016. Following the meeting which concludes Wednesday, much of the focus will be on their economic outlook moving forward and clues to monetary policy for the remainder of the year.

“A man should always consider how much he has more than he wants.” – Joseph Addison

Unemployment Rate Hits 16-Year Low

June 5, 2017

Global Equities continued their advance last week …. The DJIA increased 0.69% while the broader-based S&P 500 increased by 1.01%. Smaller US companies representing the Russel 2000 had a good week closing higher by 1.71% as the advance in US Equities broadened out. International equities were mixed as the MSCI EAFE closed higher by 1.74% while the MSCI EM finished down 0.12%. Yields moved lower across the board on a weaker-than-expected employment report. The 10Yr Treasury closed at a yield of 2.15% which is down from 2.25% the prior week. Oil was under pressure again as WTI Crude closed at $47.35 a barrel (down from $48.95 a week ago). Volatility, as measured by the VIX, remained low closing the week at 9.9.

The May Jobs report saw the economy add 138,000 new jobs, missing estimates of 184,000. In addition to the weak report for May, March and April data were revised lower. The unemployment rate dipped again to 4.3% and is now at its lowest level since March 2001. Although the employment data came in weaker than expected, the numbers should be strong enough for the Fed to raise rates at their upcoming June meeting. Additional economic reports last week included: personal income up 0.4% m/m, beating expectations; PCE Index increased 0.2% in April and is up 1.5%, slightly below the Fed’s target of 2.0% where it has generally run during the current expansion; ISM Manufacturing PMI rose to 54.9 beating estimates which called for a decline.

Geopolitics returns to the forefront this week as we anticipate some volatility around the UK terrorist attack and the upcoming election which will be held Thursday. Opinion polls have been all over the place showing Conservatives with a slight lead over the Labour Party. Also Thursday, the European Central Bank will discuss their monetary policy with rates likely to stay the same. Let’s Make It A Good Week!

“Success is getting what you want. Happiness is wanting what you get.”Dale Carnegie

Will the Fed Raise Rates?

May 30, 2017

Equities advanced across the board last week, with the S&P 500, the DJIA and the NASDAQ up 1.5%, 1.4% and 2.1% respectively. Developed international stocks were up by a modest 0.22%, with emerging market equities producing the best results having advanced 2.2%. Growth stocks continued to outperform value stocks last week with the Russell 1000 Growth up 1.9% vs. only 0.9% for value. The best performing industry group was utilities up 2.6% as inflation expectations moderated. The worst performing sector was energy, as oil prices declined 1.7% for the week. Investors were disappointed that OPEC did not take more aggressive measures to cut production.

In economic news the second revision to U.S. 1st quarter GDP growth was reported as 1.2% vs an initial reading of 0.7%. Most economists expect growth to improve in the second and third quarters. This Friday’s employment report is estimated to show 185,000 new jobs. The report could have an influence on whether or not the FOMC raises rates at their meeting in June … the Fed has indicated two additional hikes in 2017 so June seems likely at this point baring an unforeseen jobs report.

Despite stronger than anticipated Q1 reported earnings, investors are concerned with US equity valuations. At the end of 2011, the S&P 500 traded at 13x trailing 12 month earnings. The S&P 500 is currently trading at 24x trailing 12 month earnings. We remain cautiously optimistic and suggest investors stay globally diversified with interest rate sensitivity in mind.

“The patriot’s blood is the seed of Freedom’s tree.” – Thomas Campbell

Volatility Returns – Weekly Commentary 5.22.17

May 22, 2017

Stocks lost ground last week following the appointment of a special counsel to probe potential Russian interference with the presidential campaign and the Trump administration (among other things). News released on Tuesday evening that President Trump allegedly asked former FBI Director James Comey to drop the investigation of former national security advisor Michael Flynn led to a market sell-off on Wednesday. Markets rebounded at the end of the week as investors focused on an economy that is generally improving and in decent shape.

For the week, both the DJIA and the S&P 500 finished lower by 0.32%. Developed international markets bucked the trend and finished higher by 1.02% for the week. Emerging markets gave back 0.63% for the week on increased nervousness surrounding government corruption charges in Brazil. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week ahead by 0.48% following a flight-to-safety into U.S. treasuries. As a result, the 10 YR US Treasury closed at a yield of 2.23% (down 10 bps from the previous week’s closing yield of 2.33%). Gold jumped $26.50 to close at $1,252.70/oz. Oil prices ticked higher (up $2.49) on the week to close at $50.33/bbl on increased speculation that recent OPEC production cuts would be extended.

In economic news released last week, April housing starts were a bit soft while industrial production was better than expected. Initial jobless claims reported last week were slightly higher than expected, but unemployment remained at a low 4.4%. The Conference Board US Leading Index rose 0.3%, slightly below consensus.

S&P 500 earnings look to have grown by 13.9% in the first quarter as 73.3% of companies reporting beat expectations. Revenue growth in the first quarter appears to be up 7.4%, ahead of expectations for a 7.13% increase. So far, so good …

As always, we plan to look through the day-to-day news and focus on longer-term objectives.

Let’s make it a good week! 

“Give light and people will find the way.”   –   Ella Baker

The Resilient Investor

May 15, 2017

Last week, the CBOE Volatility Index (VIX), Wall Street’s fear gauge reached a 24 year low, indicating little investor concern for market volatility in near-term. Money flows into equities have continued as complacency has seemed to set in. The S&P 500 closed the week  -0.3%, the DJIA -0.5% and the NASDAQ up 0.3%. International developed equities rose 0.3% while emerging market equities continues to outperform, up 2.5% and now 16.8% year-to-date.

Confidence in Trump’s economic policies continues for deregulation, tax reform, repatriation of corporate profits held overseas and infrastructure spending. The market digested the hyped political news of Trump’s firing of FBI Director James Comey.  The election of Emmanuel Macron as France’s President, a strong supporter of the EU, removed some geopolitical uncertainty.

First quarter’s strong corporate earnings and revenue growth have been much better than expected. S&P 500 companies are estimated to increase earnings 14.7% and revenues 8% versus last year’s first quarter according to TheStreet.com. The US economy has its ups and downs … capital spending is on the rise, banks are preparing to lend and employment is very strong … on the other hand, auto sales are weakening, 1st quarter GDP was dismal and legislation changes are in a ping pong match.

We expect continued economic growth especially in Europe and feel that the corporate earnings recession is over.

“When you can’t make them see the light, make them feel the heat.” – Ronald Reagan

ND&S Weekly Commentary – 5/8/17

May 8, 2017

Global equities continued their upward trend last week surviving another week of earnings, slumping commodity prices, and geopolitical concerns. For the week, the DJIA closed higher by 0.33% while the broader-based S&P500 finished up 0.66% notching a new closing high. International equities closed the week higher despite the French Election overhang with both the MSCI EAFE and MSCI EM up 1.86% and 0.08% respectively. Yields moved higher across the board as the Fed’s current policy of “gradual rate hikes” remains in place at the conclusion of last week’s FOMC meeting. The yield on the 10yr Treasury closed the week at 2.36% … up from 2.29% the week prior. Oil was under pressure last week dipping to new lows for the year on oversupply concerns. This may prove worrisome down the road with West Texas Intermediate crude closing the week at $45.50/barrel.

First quarter earnings are in full swing and have been relatively positive compared to estimates. With roughly 70% of S&P 500 constituents having reported earnings, earnings are expected to increase by 14.2% y/y while revenues are expected to increase 7.2%. Forty-one companies in the S&P 500 will report this week with health care and consumer discretionary stocks coming under the lens.

Geopolitical risk should take a breather as French voters have spoken with the election of Emmanuel Macron in Sunday’s runoff. The election was seen as a vote for France’s future as a European Union member.

Economic reports this week include retail sales, import prices, CPI, PPI, and consumer sentiment. Enjoy The Week

“Hope is independent of the apparatus of logic.” – Norman Cousins


France Reduces Euro Uncertainty

May 1, 2017

Equity markets responded euphorically last week to the Sunday French election, which chose Emmanuel Macron as the leading, EU-defending candidate. The May 7th run-off will feature Macron against Marine Le Pen, the EU-skeptical populist.  Positive earnings reports from the likes of DD, CAT and MCD added to the euphoria on Tuesday, enabling the S&P to end the week with a 1.5% advance. This occurred in spite of midweek emergence of possible DC tax-cut gridlock and international tension from North Korea. The Nasdaq registered an even better 1.9% increase.

Rising equity markets [up 11.6% since 11/08] has resulted in higher valuations. The S&P’s forward PE ratio has risen from 16.4x to 18.1x over the same time period. This is very close to a 13 year high. Robert Shiller’s CAPE ratio suggests that the market “hasn’t been this overvalued except for a couple times in history—around 1929, around 2000″:

Cape 5.1

However, Jeremy Siegel is still bullish, citing low interest rates, the anomalous lack of any profits during the second half of 2008 thru March of 2009, and the increasingly conservative GAAP earnings. Moreover, he points out that returns available elsewhere in the asset markets should also be taken into consideration.

These Bull and Bear debates rarely have a clear-cut “winner”. However both agree that although valuation is a poor tool for trying to determine market turning points, it may offer rebalancing opportunities.

“Any man who is bearish on the United States will go broke” – J P Morgan