Economy Rebounding

July 18, 2016

Last week, equity markets continued their advance led by international stocks. For the week, the MSCI EAFE index was up 3.66% while the MSCI Emerging Market index increased 4.85%. In the U.S., the DJIA was up 2.04% while the S&P 500 increased 1.51%. Small caps as measured by the Russell 2000 finished up 2.39% for the week. Bonds declined as interest rates rose for the first time in several weeks. The 10 year U.S. Treasury rate went from 1.37% to 1.6% as the U.S. Bond Aggregate index declined 0.78% for the week.

Cyclical sectors still lag defensives YTD, but recent economic news suggests that investor optimism is improving.  Post Brexit, cyclical sector stocks in the U.S. are up 9.2% vs 5.9% for defensive stocks. Economic reports last week were generally positive as retail sales increased by 0.6% m/m, PPI improved 0.5% m/m, and CPI showed a 0.2% increase in June. Even though earnings expectations for the second quarter are expected to decline, headwinds from the stronger dollar and oil prices are starting to fade. Cyclical sectors may have some tailwinds moving forward.

Market sentiment this week should be dictated mostly by company earnings and guidance. This week, 88 companies in the S&P500 are set to report.

“Obstacles are those frightful things you see when you take your eyes off your goal.” – Henry Ford

Inching Towards New Highs …

July 11, 2016

Equity markets finished in the green last week as June’s job report was much better than expected at 287,000 new jobs.  This follows May’s dismal showing of only 11,000 new jobs.  U.S. markets are now closing in on all-time highs … just at a time when investors feel like there is no hope for markets to go higher.

For the week, the DJIA finished higher by 1.12% while the broader-based S&P500 gained 1.33%.  International markets continue to struggle as the EAFE Index lost 1.74% for the week.     Fixed income, represented by the Barclays Aggregate, finished the week higher by 0.60%.  As a result, the 10 YR US Treasury closed at a yield of 1.37% (down 9 bps from the previous week’s closing yield of 1.46%).

In addition to the jobs report, last week saw a number of economic releases.  New orders for U.S. factory goods fell 1.0% in May following a 1.8% gain in April … some experts are indicating that a bottom may be in place for manufacturing.  On the other hand, June’s U.S. non-manufacturing rose more than expected to 56.5 from 52.9 in May.

We expect volatility to remain high as investors digest conflicting economic and political news.  As always, we plan to look through the day-to-day news and focus on longer-term objectives.

Lastly, our hearts and prayers go out to the entire Dallas community after last week’s tragic events.  We wish everyone PEACE.

Enjoy the summer …

“Peace begins with a smile.”  – Mother Teresa

The British are Going! The British are Going!

July 5, 2016


The global markets rebounded last week, recovering from the “Brexit” induced sell-off that carried into Monday.  The S&P 500, NASDAQ, and Dow Industrials all gained over 3% for the week.  International equities also recovered nicely with the MSCI EAFE rising 3.48% and MSCI EM gaining 4.5%.  Brexit certainly shocked the global equity markets which experienced the highest one-day sell off in history ($2.08 trillion) the day after the UK vote.  Investors were able to breathe a sigh of relief with last week’s rally, which was supported by the Bank of England signaling further monetary easing and the price of oil rising during the equity market’s decline.  Oil has surged 26% during the last three months, its largest quarterly gain since 2009.

US economists are still concerned about the flattening yield curve with both the 10 year and 30 year Treasury yields touching record lows.  The current yield of the 30Yr Treasury is 2.19% while the 10 year is 1.38%.  These tightly narrowing spreads tend to indicate sluggish economic growth going forward.

Thirty-one out of thirty-three banks passed the 2nd round of the Fed’s annual stress tests, allowing the banks that passed to commence share buy-backs and to increase dividends.  Buyer beware, bank interest rate margins are being squeezed with rates at all time lows.  Lower margins will weigh heavily on earnings.

All eyes will be on second quarter earnings and guidance along with this week’s June employment report.

What the heck is going on out there?” – Vince Lombardi

Uncertainties Abound Post-Brexit

June 27, 2016

Despite a strong start to the week, the “Brexit” black swan became a reality Thursday evening.  Global equity markets were caught flat-footed following the U.K.’s decision to leave the European Union (EU).  For the week, the DJIA closed down 1.55% while the broader-based S&P 500 finished lower by 1.62%.   Smaller US companies reflecting the Russell 2000, closed 1.48% lower. Developed international markets finished the volatile week with the MSCI EAFE shedding 1.72% while MSCI EM closed up 0.14% for the week.  With an investor flight to quality, treasury yields moved lower, the dollar strengthened against the (€) Euro, and gold moved higher closing at a 2yr high.

The U.K. decision to leave the EU came as a surprise to the markets, especially the “smart money” that bet on the “Remain”.  In addition to the immediate market declines, we will most likely see continued volatility in equities and a number of currencies. S&P has downgraded the U.K. credit rating to AA and markets do not like uncertainty. There are many questions; will there be another U.K. referendum … Scottish referendum … who will succeed Cameron … who might be next … in addition to the uncertainty of how a country exits the EU which has never happened before. The fall out could result in an endless number of scenarios which is adding to the uncertainty.  Experience has taught us that macroeconomic or geopolitical shocks generally create opportunities in specific businesses or entire sectors. The market price shocks tend to be much more inflated than the actual change in value of a company.  Companies will continue to adapt to the political uncertainty around the globe and maximize profits/value for their shareholders, employees, and businesses.  We do not see this event being any different.

Although “Brexit” dominated the headlines, there was positive news last week.  Importantly, the U.S. banks all passed the stress tests of their capital requirements. This is a positive, with the banks finally being able to increase their dividends as well as commence share buy backs.   This, after years of banks boosting their capital reserves and paying enormous ex post facto fines and legal settlements following the 2008/09 financial crisis.

We encourage everyone to take the longer view and avoid the knee-jerk reactions that come in uncertain times.

“In investing, what is comfortable is rarely profitable.”  –  Robert Arnott

“Brexit” Dominates

June 20, 2016

The market broke out of a two-week sideways pattern on the downside last week, with the S&P 500 declining 1.2%. The Russell 2000 and the tech-heavy Nasdaq fell even further, as Fed fumbles and “Brexit” fears weighed on markets. Note that the Mail’s Brexit survey favoring “remain” circulated on Sunday, and investor sentiment improved dramatically on Monday morning.

This week offers several significant events. This includes Yellen’s monetary testimony on Tuesday, bank stress-test results on Thursday, and most significantly the British vote to leave the European Union. Finally, the annual rebalancing of the Russell 1000 and Russell 2000 will occur on Friday.

GDP growth of only ~2% has been characterized as the new normal, seemingly implying that slow growth is inevitable. This ignores several self-inflicted obstacles, including the dramatic increase in the corporate regulatory burden. One particularly egregious example is the FCC’s recently upheld decision to turn the 1996 Telecom Act on its head and to start regulating the internet as if it was a natural monopoly. This has already produced a noticeable slowing of investments by Internet Service Providers.

“…the government solution to a problem is usually as bad as the problem and very often makes the problem worse”Milton Friedman

ND&S Weekly Commentary

June 13, 2016

Last week, equity prices mostly declined as concerns rose about global growth and Britain’s June 23rd referendum on whether to remain in the European Union. For the week, the S&P 500 finished down 0.1%, the NASDAQ declined 0.95%, and the MSCI EAFE fell 1.72%. Federal Reserve Chairwomen Janet Yellen took a more dovish tone during Monday’s speech distancing the Fed from an expected rate hike at their June policy meeting.  As a result, interest rates moved lower across the board with the 10 year U.S. Treasury yield closing the week at 1.64%, the lowest since May 2013. Government bond yields hit record lows in Japan, Germany, and the U.K. with many issues now having negative yields.

This is a packed week of macroeconomic reports including CPI, retail sales and housing starts. In addition, the FOMC will conclude its June policy meeting on Wednesday.

Our hearts and prayers are with the victims and their families of the horrific terrorist attack in Orlando on Sunday morning…

Dismal Jobs Report … Fed Likely on Hold

June 6, 2016

Equity markets finished relatively flat during last week’s holiday-shortened trading despite the release of a number of important economic data.

For the week, the DJIA finished lower by 0.37% while the broader-based S&P500 was flat (0.00%).  International markets moved slightly higher as the Dow Jones Global ex U.S. index gained 0.55% for the week.   Fixed income, represented by the Barclays Aggregate, finished the week higher by 0.67%.  As a result, the 10 YR US Treasury closed at a yield of 1.71% (down 14 bps from the previous week).

A plethora of economic news provided added volatility to the markets last week.  On Tuesday, the Commerce Department reported that consumer spending jumped 1% in April … expectations had been for an increase of 0.7%.  On Wednesday, the May Markit manufacturing PMI came in at 50.7 … down from 50.8 in April.  Markit indicated that new business growth fell to its lowest level in 2016 (regulatory drag?).  Construction spending fell in April by 1.8% versus consensus of a 0.6% increase (this was the biggest drop since January 2011).  Lastly, on Friday the Department of Labor reported that the U.S. economy added only 38,000 jobs in May while expectations had been for a gain in jobs of 158,000.  The dismal jobs report, combined with the other disappointing economic news, will likely keep the Fed on hold during its June 14-15 meeting.  A July rate hike is still a possibility.

On the earnings front, the news is a bit better.  First quarter earnings, although sluggish, have been better than expected.  With earnings season just about over, 72.4% of companies have beaten expectations.

The week ahead holds the potential for a number of market-moving events.  Most notably, Janet Yellen will speak on Monday in Philadelphia as she reviews the current economic climate … we suspect that Friday’s sobering jobs report will temper her enthusiasm for the economy.

Enjoy the summer …

“It’s the repetition of affirmations that leads to belief. And once that belief becomes a deep conviction, things begin to happen.”  –  Muhammad Ali

Rate Hike 2.0

May 31, 2016

Global equities rallied last week as investors processed the possibility of a rate hike from the US Federal Reserve at either their June or July meeting.  Assuming that the economic data stay close to the FOMC forecasts, a 0.25bps hike should be expected in the coming months.  According to Bloomberg calculations, the probability of a June fed hike as of Friday was 34% but up significantly from earlier this month when it was in the low single digits.  The May employment number is slated to be released on Friday (June 3rd) and will provide economists with another measure of whether a rate hike is imminent.

US equities had their strongest week since early March and are now within 2.0% of all-time highs.  For the week, the S&P 500 closed up 2.32% while the DJIA finished the week higher by 2.15%.  International markets were also strong as the MSCI EAFE and MSCI EM closed the week higher by 2.67% and 2.42%, respectively.  Oil had its highest close of the year this past week as it closed over $50 for the first time since November.

Deja Vu? … Rate chatter will most likely dominate the headlines in the coming weeks. The market’s reaction last week seems to imply: if the Fed wants to raise rates … things must be good. We all know how volatility picked up around the last rate hike in December, but don’t forget that was the first hike in 9.5 years. We expect volatility to pick up again but not as much as earlier in the year.  As always we encourage everyone to Stay The Course.

“Ask not what your country can do for you; ask what you can do for your country.”  –  John F. Kennedy

The Hawkish Fed

May 23, 2016

The stock market modestly advanced last week with the S&P 500 rising .3%, the Nasdaq, with AAPL up 5%, increased 1.1% while the Dow slipped .2%. Investors were caught off guard by the Fed’s hawkish comments and suggestion of a possibility of raising rates at the upcoming June meeting. As a result, interest sensitive stocks lost ground.

The housing market is improving, job growth is steady, and wages are increasing. Consumer prices rose 3% in April, which is the largest monthly gain in three years, though core inflation is rather tame at 2.1%.

International markets are jittery as global economies remain sluggish. Developed markets were up .33% as evidenced by the EAFE index but still down -5.9% year to date. The EM, emerging markets index, was off -1.3%. There is evidence that investors are growing weary of no earnings growth for 10 years in Europe, especially with bank stocks, which have so far this year fallen -19%.

The fixed income markets reacted negatively to the possibility of a June interest rate hike by the Fed. The 10-year Treasury yield rose 14 basis points to 1.85%. Economists are worried about the flattening yield curve and its affect on economic growth. A flat yield curve implies a lack of growth while an inverted curve can imply an upcoming recession. All eyes and ears are on the Fed’s comments and decision.

~“The four most dangerous words in investing are: “this time is different.” –Sir John Templeton

Near-term Caution, Long-term Opportunities

May 16, 2016

The S&P 500 fell 0.5% last week, while the Dow and the small-cap Russell 2000 both registered a more significant -1.1% decline.  This marks the third consecutive weekly decline, the longest since the year-opening 10.3% air-pocket.  Commodities were mixed, with gold falling by 1.6% to $1,272/oz., while crude oil rose by 3.5% for the week.

The earnings reporting season was particularly depressing last week. Brick-and-mortar retailers like Macy’s, Kohl’s, and then Nordstrom all reported less-than-expected results, which resulted in double-digit stock declines.  Fortunately, total retail sales [much broader than just department stores] increased 1.3% for the month of April. Autos, gasoline and internet were important upside catalysts.

briefing 051616

We have now had a chance to review ~92% of the S&P 500 corporate results. So far, earnings have declined 7%, and further declines are expected in the second quarter. The good news is that this should reverse in the second half of the year.

“Plus ça change, plus c’est la même chose” – Jean-Baptiste Alphonse Karr