To Russia with Love
July 24, 2017
Last week, financial markets shrugged off the ongoing D.C. circus, geopolitical risks and monetary policy shifts. The S&P 500 index rose 0.56% while the NASDAQ added 1.20%, both extending gains for the third straight week. Second quarter earnings have been slightly better-than-expected with 20% of companies reporting and tracking at an estimated 7.2% growth rate. However, several reports caused concern, like past historical market barometers IBM and General Electric, which issued cautious revenue and earnings guidance. In addition to higher growth expectations, the US dollar weakness continues to benefit the international equity markets, with EAFE up 1.35% and EM adding 1.35% for a YTD gain of 25% – not too bad!
Inflation continues to remain subdued relative to the Federal Reserve’s stated target. This has put a lid on long-term rates which have actually gravitated lower so far this year. The trend continued last week with the 10 year US Treasury yield down 9 basis points to 2.24%.
This week all eyes are on corporate earnings reporting, including GOOG, AMZN and FB. On Wednesday, the Fed meeting will be uneventful and is expected not to increase short-term interest rates. The second quarter GDP will be reported on Friday.
Assuming we have a solid earnings season the rest of the way, and supportative commentary from the Federal Reserve, this bull market in stocks should keep going. Nevertheless, there are geopolitical and monetary policy headwinds which add to an already uncertain economic environment and outlook. Investors should remain diversified and avoid any emotional overreactions.
“The power of accurate observation is commonly called cynicism by those who have not got it.” -George Bernard Shaw
The Fed’s Latest Inflation Pronouncements Lead the Market Higher
July 17, 2017
Markets moved higher last week, with the DJIA and S&P 500 ending Friday at record highs. Things really picked up on Wednesday when FOMC Chairperson Janet Yellen testified before Congress. During her testimony, Yellen appeared to speak with a more cautious tone regarding further tightening in policy. Her biggest concern is inflation which has consistently run below their target of 2% during the current expansion. On Friday, the Department of Labor reported CPI was unchanged for the month of June, missing expectations of month over month rise of 0.2%. Over the past year, consumer prices have increased 1.6% while Core CPI (excludes food and energy) rose 1.7% well below its stated goal.
For the week, the DJIA finished up by 1.04% while the broader-based S&P 500 closed higher by 1.42%. International markets were also strong with both the MSCI EAFE and MSCI EM jumping up 2.38% and 4.60% respectively. Treasury yields moved lower as expectations of monetary tightening were reduced due to inflation concerns. The 10yr Treasury closed at a yield of 2.33% which was down from 2.39% the week prior. Gold and Oil both closed higher on the week.
In the week ahead, look for economic reports on Manufacturing and June housing starts. 26 companies in the S&P 500 will report this week which includes GE, JNJ, BAC, MSFT, and V just to name a few.
“When you arrive at a fork in the road, take it.” – Yogi Berra
Good News
July 10, 2017
U.S. equity markets finished on the plus side for the week as the monthly jobs report surprised to the upside with 220,000 new jobs vs expectations of about 180,000. In addition to the healthy June estimate, the figures for the prior 2 months were revised upwards. The S&P 500, DJIA and NASDAQ all were up fractionally for the week led by the financial sector. Financials have been strong since all major U.S. banks easily passed their stress tests and announced dividend increases. Growth outperformed value for the week in spite of continued volatility in the technology sector. International equities gave some back last week with both developed (-0.47%) and emerging (-0.58%) markets finishing in the red.
Bond prices were again under pressure as the strong jobs report increased the odds that the FOMC will raise short-term rates one more time this year. Yields increased across the board with the rate for the 10YR Treasury closing at a yield of 2.39%, an increase from 2.31% the week prior. In addition to potential rate hikes, the Fed continues to indicate that they will begin reducing their balance sheet (well in excess of $4T – see chart below) starting in September of this year.
Source: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
This week, look for economic reports on inflation, retail sales and industrial production. 2nd quarter earnings season shifts into gear with reports from PEP, C, JPM, and WFC to name a few.
“Less is only more where more is no good.” – Frank Lloyd Wright
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
No Summertime Blues…
July 31, 2017
For the week, the DJIA rose 1.17% while the S&P 500 finished unchanged. Developed international markets finished the week slightly ahead by 0.23% while their year-to-date performance remains stellar as the MSCI EAFE index is up a healthy 17%. Emerging markets continued their strong advance as the MSCI EM index finished higher by 0.29% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week down 0.21% as bonds yields moved higher off last week’s overpriced level. As a result, the 10 YR US Treasury closed at a yield of 2.30% (up 6 bp from the previous week’s closing yield of 2.24%). Gold rose $13.50 to close at $1,268.40/oz. Oil prices moved higher (up $3.94) on the week to close at $49.71/bbl as Saudi Arabia urged OPEC members to stick to recent production cuts. Cheap oil prices are a boon to businesses and consumers. Cheaper oil prices and tame inflation contributed to the Fed’s decision last week to leave rates unchanged for July.
In economic news released last week, existing and new homes sales were mixed as existing home sales fell a bit while new home sales were steady at 610,000. July PMIs came in at 54.2 … providing further evidence of an economy gaining growth momentum. Durable goods orders, always an important harbinger of future growth, rose 6.5% marking the largest one month advance since July 2014. Lastly, the first reading of 2nd quarter GDP came in at 2.6% (in-line with expectations).
The week ahead looks to be pretty quiet. 2nd quarter earnings releases continue, and we expect most companies to report in-line or better-than-expected numbers. Along with more earnings reports, expect to see the following economics releases this week – ISM manufacturing, jobless claims, ADP employment report, BLS employment update and personal income and outlays.
Investors have not experienced any summertime blues, at least not yet. 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 best way to cheer yourself up is to try to cheer somebody else up.” – Mark Twain