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

Earnings Reports Continue

April 24, 2017

Last week, equity markets rallied with the DJIA, S&P 500 and the NASDAQ advancing 0.51%, 0.87% and 1.82% respectively. Small caps were the best performers for the week as measured by the Russell 2000 index which was up 2.58%. The best performing stock sectors were industrials, consumer discretionary and technology. Growth stocks continue to outperform value stocks. International equities were also positive with the MSCI EAFE up 0.23% and the MSCI EM up 0.17%.

This week the flood of earnings reports continues but the big news over the weekend was the results of the voting in France. The centrist candidate Emmanuel Macron bested populist candidate Marine Le Pen in the 14 person initial round of voting. This is calming fears about the possibility of France leaving the EU. On Friday, we will get the 1st quarter advanced estimate for GDP which is expected to come in at around 1% which would be substantially below estimates for 2.1% at the beginning of the year.

French Election

Source: www.kantar.com

So far this year, “soft data” on the economy such as consumer and business confidence has been strong, but “hard data” like car sales, consumer spending and production have not matched expectations. Hopefully economic numbers will start to match expectations otherwise company earnings may be impacted.

“Success is where preparation and opportunity meet.” – Bobby Unser

Weekly Commentary (4/17/17) – Geopolitical Tensions are Back

April 17, 2017

Stocks lost ground last week as geopolitical tensions rattled investors’ nerves. Ongoing tensions between the United States and Russia along with escalating tensions between the United States and North Korea pushed stocks lower and bonds higher.

For the week, the DJIA finished lower by 0.98% while the S&P 500 fell by 1.11%. Developed international markets were also off, but by much less than U.S. markets as the DJ Global ex-US index gave back 0.12%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week ahead by 0.76%. As a result, the 10 YR US Treasury closed at a yield of 2.237% (down 11 bps from the previous week’s closing yield of 2.343%). Gold jumped $31.60 to close at $1,285.90/oz. Oil prices ticked higher (up $0.94) on the week to close at $53.18/bbl.

In economic news released last week, the Labor Department reported that import prices fell 0.2% in March … further reinforcing moderate inflation expectations and keeping bond yields lower. Earnings season kicked-off last week with JP Morgan and Citigroup reporting better-than-expected earnings.

Expect to see a slew of blue chip companies reporting earnings this week. Among the companies reporting are Johnson & Johnson, General Electric, Morgan Stanley and United Health Care. Economic releases this week include Empire Manufacturing, Industrial Production, Initial Jobless Claims and March Leading Index.

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!

“Always do your best. What you plant now, you will harvest later.” – Og Mandino


Shots Fired

April 10, 2017

Equity markets saw lots of volatility but ended mostly flat last week, with geopolitical developments being the prime driver. The week kicked off on Monday with President Trump saying he is ready to act alone on North Korea if China does not change the current situation … the comments came days before a scheduled meeting with Chinese President Xi Jinping. Wednesday produced a roundtrip by the markets, morning optimism prompted by the ADP employment report was offset by the afternoon release of the Fed minutes (“stocks are quite high”) combined with Paul Ryan’s comments that tax cuts would take even longer than health care insurance reform. On Friday, responding to a chemical attack in Syria on rebel forces and civilians, the US conducted an overnight strike against the Shayrat airbase and the Assad regime. Although the strike was condemned by Russian and Iran (allies of Syria President Bashar al-Assad), it garnered bi-partisan support domestically and around the globe.

For the week, the DJIA closed at 20656 for a slight gain of 0.02%. The broader-based S&P500 closed lower by 0.24. Smaller US companies measured by the Russell 2000 finished the week down by 1.52%. International equities were mixed with the MSCI EAFE closing lower by 0.65 and emerging markets closing higher by 0.38%. Yields were flat for the week as the 10yr US Treasury closed the week at 2.38. As expected, gold and commodities caught a bid and finished the week higher due to the uncertain geopolitics around the world.

If last week is any indication, any unexpected political event will not currently cause investor panic. This holiday shortened week is light on market moving news with only reports on retail sales and consumer price data set for Friday. It appears that investors have their eyes on the impending earnings season which a number of banks set to report this week.

“I never had a policy; I have just tried to do my very best each and every day.” Abraham Lincoln

Market Recap 4/3/2017

April 3, 2017

The DJIA closed the week higher by 0.32% while the broader-based S&P 500 finished up 0.82%. Representing smaller US companies, the Russell 2000 was the best performer last week as it closed higher by 2.37%. International markets finished flat to down as the MSCI EAFE finished up 0.06% and the MSCI EM finished the week down 1.05%. Yields across the board closed the week right about where they started as the 10 Yr. Treasury closed at a yield of 2.4%. Last week’s rebound closed a positive first quarter for risk assets with all major equity assets in the green … S&P 500 +6.07%, Russell 2000 +2.47%, MSCI EAFE +7.25%, MSCI EM +11.45%.

Economic data released last week were fairly positive – Consumer Confidence came in at 125.6 as it continued its upward trend since the election and marked the highest level since December 2000; Home prices increased 5.7% y/y beating estimates; The Commerce Department released their 3rd and final estimate of fourth-quarter GDP, which came in at 2.1%. On the geopolitical front, the United Kingdom formally began the process of withdrawing its European Union membership by triggering Article 50 of the Lisbon Treaty. The news was expected, and they will now enter into a two-year negotiation on a formal divorce from the European Union.

Economic data this week will include a report on Global manufacturing PMIs, minutes from the March FOMC meeting and the March employment report. Now that the calendar has flipped to April, investors will be looking to earnings season which begins to unfold over the next few weeks.

Enjoy the Spring!

“Here cometh April again, and as far as I can see the world hath more fools in it than ever.” – Charles Lamb

The “Belthway Swamp” Wins a Round

March 28, 2017

Concern over the Trump economic agenda pressured stocks last week, with the S&P 500 declining by 1.4%, the largest weekly decline since the election. The Russell 2000 also fell by -2.6%, thus turning negative for the year by -0.1% [note that the 500 is still up 4.7% YTD].

The prospects for the “Ryan health care” bill [to replace the ACA] dimmed as the week went on, finally getting cancelled [postponed?] Friday afternoon. The markets’ responses included weaker economic growth assumptions, lower interest rates and a flatter yield curve. Equity markets cut prices in every sector except utilities [+1.3%] and Real Estate [+0.8%], with the Financials dropping by -3.8% [see nearby bar chart].

Sector 3.28.17

Finally, it is important to note that asset allocation portfolios, in spite of their many benefits [reduced volatility, lower risk, often higher income] will under-perform the S&P 500 from time to time. This has been the case lately. According to JP Morgan, an asset-allocation portfolio has under-performed the 500 by an annualized 8.8% over the last 5 years [ending 2/28/17]. However, using history as our guide, such under-performance will be followed by out-performance [by ~4.4%] over subsequent 5-year periods.

AA 1AA 1
Source: Barclays, Bloomberg, MSCI, NAREIT, Russell, Standard and Poor’s, FactSet, J.P. Morgan Asset Mgt. (link)

“Good habits are the basic tools that will determine whether you are a tortoise or hare in life!”Lucas Remmerswaal

Fed Raises Rates

March 20, 2017

Both equity and fixed income markets advanced last week. International equity markets were the best performers with the EAFE index up 2.1% and emerging markets advancing 4.3%. In the U.S., the S&P 500, the DJIA and the NASDAQ were up 0.29%, .01% and 0.7%, respectively. Growth stocks continued to slightly outperform value for the week. Year-to-date large cap growth stocks are up 9.1% vs. value up only 4.3%. Fixed income markets also finished the week higher as the yield on the 10 year U.S. Treasury Note dropped from 2.58% to 2.50%.

As expected, the FOMC raised its target for short term interest rates by .25% last week. Indications from the Fed, however, were less enthusiastic regarding the economy than the financial markets have been. The Fed continues to expect “gradual” rate hike movement through the end of the year with two more rate hikes expected. Their median forecast for economic growth this year is 2.1% – unchanged from December. As a result, interest sensitive stocks were the best performers in the S&P 500 last week with real estate stocks up 1.9% and utilities and telecom up 1.3%.

This is a light week for economic news with reports on housing and durable goods expected. Welcome to Spring!

“Spring is nature’s way of saying: Let’s Party!” – Robin Williams