ND&S Weekly Commentary 2.22.22 – The Wall of Worry is Alive and Well

February 22, 2022

Equity markets finished broadly lower last week as investors worried about higher interest rates, inflation and increasing Russia-Ukraine tensions.

For the week, the DJIA lost 1.77% while the S&P 500 dropped 1.52%. The tech-heavy Nasdaq finished 1.73% lower. International markets were also lower with the MSCI EAFE Index down 1.86% while emerging market equities (MSCI EM) gave back 0.67%. Small company stocks, represented by the Russell 2000, fell 1.0%. Fixed income, represented by the Bloomberg/Barclays Aggregate finished lower by 0.24% for the week. The 10 YR US Treasury closed at a yield of 1.92% to finish flat on the week. Gold prices rallied as a flight-to-safety trade to close at $1,894/oz. – up 3.14%. Oil prices moved lower to close at $91.07 per barrel – down 2.18% on the week.

The Federal Reserve released their minutes from the January FOMC meeting. Interest rates have reached an inflection point, and the Fed will begin raising interest rates for the first time in several years to combat inflation. Market expectations are that the Fed will raise rates 4-5 times during the coming year. The Fed is also expected to begin unwinding some of its nearly $9 trillion balance sheet in 2022. Separately, St. Louis Federal Reserve President James Bullard reiterated that he thinks the central bank needs to increase its benchmark short-term rate to 1.00% as early as July.

In economic reports released last week, the U.S. Department of Labor reported that wholesale prices increased 1% in January, twice the expected level. Over the past 12 months, the gauge has risen 9.7%, close to a record level. Retail sales rose a surprising 3.8% m/m in January, beating 1.9% consensus estimates. The retail sales report was well received by the market as it points to continued strength and confidence from the consumer.

Markets are still in correction mode and are moving towards an oversold condition. As we have seen in recent weeks, concerns over increasing Russia-Ukraine tensions have overshadowed what has been a solid earnings season. Historically, conflicts like this have had minimal impact on markets overall. Diversification, patience and a bias towards quality will help investors manage through this temporary set-back. As such, we continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias.

Stay well!

“Observe good faith and justice toward all nations. Cultivate peace and harmony with all.”George Washington

Weekly Commentary (2/14/22) – Markets in Flux

February 14, 2022

Equity markets were mixed last week with domestic large-cap equities finishing in the red while domestic small-cap equities along with international equities (developed and emerging) finished in the green. Investors were rightfully concerned about hotter-than-expected inflation reports and rising geopolitical issues.

For the week, the DJIA lost 0.96% while the S&P 500 dropped 1.79%. The tech-heavy Nasdaq finished lower by 2.17%. On a more positive note, the MSCI EAFE Index closed up by 1.61% while emerging market equities (MSCI EM) gained 1.43%. Small company stocks, represented by the Russell 2000, recovered by 1.42%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 0.41% for the week as yields jumped higher on inflation worries. As a result, the 10 YR US Treasury closed at a yield of 1.92%. Gold prices closed at $1,840.80/oz – up 1.89%. Oil prices moved higher on tensions around the world to close at $93.10 per barrel, up 0.86% on the week.

Encouraging news earlier in the week on the waning of Covid cases around the world and the lifting of restrictions was offset by disappointing inflation news. The Labor Department released data on Thursday morning that showed U.S. inflation accelerated at a 7.5% annual rate in January – a four decade high. Despite rising input costs, U.S. businesses have been able to hold operating margins steady (at least for now). Fourth quarter operating margins are coming in around 13.2% (with over 82% of companies having reported) … only 0.4% below the 2Q21 peak of 13.6%. The week ahead will include reports on January Producer Price Index, Retail Sales and Industrial Production.

Expect ongoing volatility until markets finally discount the Fed’s upcoming rate hikes. Remember, at the beginning of the year markets were anticipating three-to-four rates hikes for all of 2022. Today the consensus is five or more rate hikes this year. History points to equity markets moving higher 3-4 months after the first rate hike and often making news highs within 6-12 months. Diversification, patience and a bias towards quality will help investors manage through this temporary set-back. As such, we continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias.

Stay safe.

“Perfection is not attainable, but if we chase perfection we can catch excellence.”Vince Lombardi

ND&S Weekly Commentary 2.7.22 – Choppy Waters

February 7, 2022

It was another bumpy ride on Wall Street last week, with conflicting earnings reports from big-tech companies.

The S&P 500 gained 1.6% this past week, while the Nasdaq rose 2.4% and the Dow Jones Industrial Average advanced 1.1%. Investors were frightened on Thursday after Meta Platforms’ (FB) disastrous earnings report. FB fell 26% triggering a 3.7% drop in the Nasdaq. Solid earnings reports, however; from Apple, Alphabet, Microsoft and Amazon buffered investors’ fears. International equities also finished higher with developed markets (MSCI-EAFE) and emerging markets (MSCI-EM) up 2.1% and 2.5%, respectively.

Despite a few major disappointments, corporate earnings continued to improve. Roughly, 56% of companies within the S&P 500 index reported an increase of 29% in fourth-quarter profits from the 2020 fourth-quarter according to FactSet.

On Friday, the Labor Department reported that there were 467,000 new jobs created in January, blowing away economists’ expectations. The strong jobs report weighed heavily on the bond market, sending the yield of the 10-year U.S. Treasury to 1.93%, which is the highest level since December 2019.

The price of oil surged with U.S. crude climbing to $92 per barrel, the highest level in eight years. Oil prices are up 23% year-to-date and 55% last year.

The strong jobs report and soaring energy prices reinforced the expectation that the Federal Reserve will be more aggressive in lifting interest rates. The so called “punch bowl” of monetary stimulus may be taken away sooner than expected.

With higher inflation, interest rates, and geopolitical tensions expected, market volatility will continue. We recommend revisiting investment objectives and risk tolerance. A globally diversified portfolio should be fine-tuned accordingly, keeping bond durations short while maintaining asset quality. Please avoid the temptation to chase high risk, momentum investments as they sell off.

All eyes will be on inflation numbers to be reported later this week. The consumer price index (CPI) will be reported on Thursday and expectations are as high as 7.2%.

“Things don’t correct themselves. You’ve got to go out there and work hard to correct them.” – Tom Brady

NDS Weekly Commentary 1.31.22 – The Fed is Ready to Raise Rates

January 31, 2022

Equity and bond markets were quite volatile last week in response to increasing geopolitics with Russia, numerous corporate earnings reports, and monetary policy shifting at the Federal Reserve. Equities rebounded Friday to salvage a positive week for US markets.

For the week, the S&P 500 closed up 0.79%, the Dow Jones Industrials Average gained 1.34% and the tech-heavy Nasdaq rose 0.02%. International equities were weak due to geopolitical tensions between Russia and Ukraine with developed markets (MSCI EAFE) down 3.61% and emerging markets (MSCI EM) declining 4.26%. U.S. Treasuries fell last week as concerns about inflation and shifting monetary policy pressured yields. The yield on the 10 year U.S. Treasury increased from 1.75% to 1.78%. Gold closed at $1,778/oz. to close down 2.9%. Oil (WTI) reached its highest level since September 2014 as it closed at $86.82/bbl.

The US Federal Reserve left rates unchanged at the January meeting of the Federal Open Market Committee (FOMC); however, Chairman Jerome Powell made it clear in his post-meeting press conference that they will end their open-market asset purchases and begin raising the federal funds rate at their next meeting in March. As of this morning, the futures market for federal funds was pricing in 5 rate hikes in 2022. In economic releases last week, it was reported that the US economy expanded at a 6.9% annual rate in the final quarter of 2021, beating estimates. Markit Research reported their U.S. manufacturing and services PMI readings at 55.0 and 50.9, respectively. The release showed a significant slowdown from the acceleration in December, but is still showing the economy is in an expansion environment.

Markets should remain volatile this week as the pace of earnings announcements accelerate further. Markets are still in correction mode, but the resiliency it showed last week has us believing there is a more reasonable margin of safety in prices today. We will continue to have a bias towards companies with strong earnings qualities which have weathered the recent storm better than lower quality stocks.

Stay Well!

“The price of greatness is responsibility.” – Winston Churchill

Weekly Commentary (1/24/22) – Markets in Correction Mode

January 24, 2022

Equity markets finished broadly lower last week as investors worried about higher interest rates, inflation and geopolitical uncertainties. The Nasdaq and S&P 500 suffered their steepest drops since March 2020.

For the week, the DJIA lost 4.58% while the S&P 500 dropped 5.68%. The tech-heavy Nasdaq finished 7.55% lower and is now in correction mode – down 12.0% year-to-date. For the week, the MSCI EAFE Index closed down by 2.44% while emerging market equities (MSCI EM) gave back 1.05%. Small company stocks, represented by the Russell 2000, sank 8.07%. Fixed income, represented by the Bloomberg/Barclays Aggregate, was essentially flat as it finished higher by 0.05% for the week as yields moved slightly lower. As a result, the 10 YR US Treasury closed at a yield of 1.76% (down 2bps from the previous week’s closing yield of ~1.78%) as investors moved to the perceived safety of treasuries. Gold prices closed at $1,831.80/oz – up 0.84%. Oil prices moved higher on tensions around the world to close at $85.14 per barrel, up 2.21% on the week.

The Federal Reserve meets on Tuesday and Wednesday, and investors will be waiting for further guidance on the Fed’s plan to hike rates and contain inflation. Earnings season is in full swing with roughly half of the Dow 30 companies having already reported. Earnings have been fairly robust, but 5 out of 6 companies providing guidance have lowered expectations given Covid-related supply chain issues and higher input costs. Economic reports due this week include 4Q’21 GDP, December PCE, December New Home Sales, Durable Goods Orders and Consumer Confidence.

Markets are in correction mode and are moving towards an oversold condition. We hope to be picking up bargains over the days and weeks ahead. Diversification, patience and a bias towards quality will help investors manage through this temporary set-back. As such, we continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias.

Stay safe.

“Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.” – John Quincy Adams

ND&S Weekly Commentary 1.18.22 – Stocks Decline Again

January 18, 2022

Stock markets suffered their second straight week of losses as inflation fears, higher interest rates and a disappointing start to earnings season worried investors.

For the week, Standard & Poor’s 500, the DJIA and the tech-heavy Nasdaq declined 0.3%, 0.9%, and 0.3%, respectively. Smaller companies represented by the Russell 2000 closed lower by 0.8%. International equities were the lone bright spot with the MSCI EAFE index up 0.2% and the MSCI EM increasing 2.6%.

On Friday, the quarterly profits of JP Morgan Chase and Citigroup fell by double-digits, which was worse-than-expected. The U.S. dollar gained ground while gold lost $4.60 to $1,816.80 per ounce. Oil prices (WTI) climbed to $83.82 from $78.90 the previous week and are up 55% from a year ago. Despite a spike in inflation, the U.S. 10-yr yield was relatively unchanged for the week at 1.78%. However, it has moved much higher since the Federal Reserve reiterated their hawkish stance earlier in the year.

There was a slew of economic data that disappointed, causing concerns that the economic recovery could be vulnerable. For December, consumer inflation matched headline figures of a staggering 7% year-over-year jump, the highest since 1982. There was an unexpected 1.9% decline in retail sales that missed expectations.

Using the consensus 2022 operating earnings estimate of $220, the stock market is now selling at 21.2 times earnings which is not overly expensive. We are, however, concerned about the concentration of the stock market. The five largest holdings of the S&P 500 have a 22.4% weighting and the top five stocks in the Nasdaq represents 40.2%. With the estimated earnings growth of the S&P 500 slowing to 9%, rising interest rates and inflation, not to mention our political and geopolitical issues and Covid, higher volatility is expected. We recommend a cautious approach to maintaining a well-diversified portfolio.

There will be one-third of the S&P 500 companies reporting this week. The hope is that companies will exceed expectations of 20% growth year-over-year. Economic reports will include the Fed’s Empire State manufacturing survey on Tuesday and the Philadelphia Fed manufacturing survey on Thursday. Existing home sales will also be reported on Thursday. Let’s make it a better week in remembrance of Martin Luther King Jr.

“Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate, only love can do that.” –Martin Luther King Jr.

ND&S Weekly Commentary 1.10.22 – Markets Start 2022 on Sour Note

January 10, 2022

Global equities declined in the first trading week of 2022 as the US Federal Reserve hinted at a more hawkish stance to combat inflation pressures.

For the week, the DJIA slipped 0.25% while the S&P 500 gave back 1.83%. The tech-heavy Nasdaq finished lower by 4.52%. International markets also finished in the red as developed market equities (MSCI EAFE) were down 0.29% while emerging markets (MSCI EM) retreated 0.47%. Small company stocks, represented by the Russell 2000, were also weak as they closed lower by 2.91%. Fixed income, represented by the Bloomberg/Barclays Aggregate, had a brutal week declining 1.53% as yields spiked higher in response to the Fed policy changes and comments. As a result, the 10 YR US Treasury closed at a yield of 1.76%, up substantially from the previous week’s closing yield of ~1.52%. Gold prices closed at $1,793/oz. to finish down 1.46%. Oil prices jumped 4.91% to close at $78.90/bbl.

The Federal Reserve released their December meeting minutes last week. At the meeting, they discussed plans to cut the amount of bonds they are holding on its balance sheet. While they did not determine when they would start rolling off the nearly $8.3 trillion in bonds it is holding, statements out of the meeting indicated the process could start in 2022, which is much earlier than expected. Additionally, officials see up to three quarter-percentage-point rate increases in 2022. Worsening the situation on Thursday was St. Louis Federal Reserve President James Bullard (a voting member of the Federal Reserve Open Market Committee) said he sees an initial rate increase happening as soon as March to “quell the hottest inflation in nearly four decades”.

In other economic news, non-farm payrolls increased 199,000 in December versus a consensus estimate of 450,000. The unemployment rate fell to 3.9% beating estimates of 4.1%. Workers quit their jobs in record numbers (4.5million) in November while total employment openings pulled back. According to the JOLTS report released last week, job openings decreased to 10.6 million.

With strong returns in risk-assets since the March 2020 Covid-19 lows, we are not at all surprised with increased volatility. January is always a good time to review asset allocation policy targets and re-balance as necessary. We continue to stick close to policy targets with a slight-defensive bias.

“Kindness and consideration of somebody besides yourself keeps you feeling young.” – Betty White

ND&S Weekly Commentary 1.3.22 – Markets Move Quietly Higher

January 3, 2022

Equity markets finished mostly higher during the last week of 2021. Trading volumes, as expected, were fairly light due to many investors and traders being on vacation.

For the week, the DJIA advanced 1.08% while the S&P 500 gained 0.87%. The tech-heavy Nasdaq nudged a bit lower as it finished -0.05%. The MSCI EAFE Index closed ahead by 0.96% while emerging market equities (MSCI EM) added 1.15%. Small company stocks, represented by the Russell 2000, finished in the green by 0.21%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished higher by 0.16% for the week. As a result, the 10 YR US Treasury closed at a yield of 1.52% (up 2bps from the previous week’s closing yield of ~1.50%). Gold prices closed at $1,827.50/oz. – up 0.91%. Oil prices moved higher to close at $75.21 per barrel.

Economic news released last week was pretty quiet. Initial jobless claims for the week ended December 25th declined to 198,000 compared to consensus of 206,000. Chicago PMI rose to 63.1 – more than expected.

The week ahead will feature reports on Manufacturing/Services PMIs, Unemployment and November final Durable Goods Orders.

The economy remains reasonably strong, and we remain sanguine on equites. Concerns over surging Covid cases may temper investors’ enthusiasm for equities in the short-term, but patient investors should be rewarded with mid-to-high single digit returns in 2022. As such, we continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias.

Stay safe and best wishes for a happy, healthy & peaceful New Year!

“I like dreams of the future better than the history of the past.” – Thomas Jefferson

ND&S Weekly Commentary 12.27.21 – Volatility Continues Amid Headwinds

December 27, 2021

After dropping sharply on Monday, global equities reversed course to finish the holiday-shortened week in the green. For the week, the Dow Jones Industrial Average (DJIA) increased 0.15%, the S&P 500 added 1.25% and the tech-heavy Nasdaq rose 3.13%. International markets were mixed with developed markets (EAFE) increasing 0.64% and emerging (MSCI-EM) equities sliding 0.30%. The Russell 2000 index, made up of U.S. small cap companies, jumped 4.15%. Treasury yields moved higher across the board, with the yield on the benchmark 10 year US Treasury note closing the week at 1.50%. As a result, the Bloomberg/Barclay’s Aggregate closed down 0.22%. Crude oil (WTI) rose 4.1% to $73.79 per barrel and gold was flat closing at $1,805/oz.

The economic calendar has been limited due to the holiday week. Consumer confidence remains high with a reading of 115.8 in December, up from 111.9 in November. According to the Mastercard Spending Pulse which tracks purchases across all formats, holiday spending jumped 8.5% this year compared to 2020. In the week ahead, there will be a report on housing from S&P/Case-Shiller.

Volatility should remain elevated due to year-end tax selling and uncertainty around the Omnicron variant. No doubt, there will continue to be event cancellations and postponements due to Covid-19 concerns. However, governments have avoided any significant lock-downs that have proven to be economically punishing and mostly ineffective in controlling the spread.

Without question, it has been an eventful and prosperous year for the markets. We continue to recommend staying diversified and re-balance where necessary.

We wish you and your families a Happy and Healthy New Year!

ND&S Weekly Commentary 12.20.21 – The Fed and Omicron Rattle Markets

December 20, 2021

Global equities declined last week as the Omicron variant concerns remained in the forefront. Adding to the fray, the U.S. Federal Reserve announced last week that its run of ultra-easy monetary policy will be ending soon in response to rising inflation.

For the week, the DJIA lost 1.67% while the S&P 500 gave back 1.91%. The tech-heavy Nasdaq finished the week lower by 2.94%. International markets also finished in the red as developed market equities (MSCI EAFE) were down 0.46% while emerging markets (MSCI EM) retreated 1.75%. Small company stocks, represented by the Russell 2000, were also weak as they closed lower by 1.68%. Fixed income, represented by the Bloomberg/Barclays Aggregate, grinded out a gain of 0.35% for the week as yields were quite volatile in response to the Fed policy changes. As a result, the 10 YR US Treasury closed at a yield of 1.41% (down 7 bps from the previous week’s closing yield of ~1.48%). Gold prices closed at $1,808/oz. – up 1.17% on the week. Oil prices slid 1.13% last week to close at $70.86/bbl.

The FOMC wrapped up their December policy meeting last Wednesday announcing that they will accelerate the reduction of its monthly bond purchases. At the current pace, the monthly purchases should conclude in March 2022. Additionally, Fed officials indicated that we could see as many as 3 rate hikes in 2022. The shift in policy was somewhat expected in response to persistent inflation that the Fed now sees at 5.3% for 2021.
In economic releases last week, the Producer Price Index (PPI) for November came in higher than expectations rising to a record 9.6% y/y. The Flash PMI from Markit Economics ticked lower to 57.8 missing consensus of 58.3. Both the manufacturing and services sectors remain in expansion territory. Retail sales for November increased 0.3% m/m missing consensus estimates of a 0.8% increase.

This will be a holiday-shortened week for the markets as volatility should remain elevated. Over the weekend, Senator Joe Manchin announced that he wouldn’t support the Build-Back-Better legislation as currently presented. This should have little impact on the markets overall as most of the focus will remain on the Omicron variant. Equity investors have been rewarded with strong returns in 2021 with very few setbacks in the S&P 500, DJIA and Nasdaq. Markets are long overdue for a breather after the big run-up. As such, we continue to suggest that investors remain diligent and stay close to long-term asset allocation targets.

Stay safe and enjoy the holiday season!

“The Grinch hated Christmas! The whole Christmas season!
Now, please don’t ask why. No one quite knows the reason.
It could be his head wasn’t screwed on just right.
It could be, perhaps, that his shoes were too tight.
But I think that the most likely reason of all
May have been that his heart was two sizes too small.”

How The Grinch Stole Christmas – Dr. Seuss