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 As one would expect, over 160 companies in the S&P 500 have either withdrawn or suspended forward guidance as the outlook for the economy remains cloudy.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

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