ND&S Weekly Commentary 8.1.22 – Markets Close Out Strong July
August 1, 2022
Amid a barrage of corporate earnings reports, the outcome of the Fed’s July monetary policy meeting and a key economic data report, equity markets closed out July on a strong note marking their first positive month since March.
For the week, the DJIA gained 2.97% while the S&P 500 closed up 4.28%. The tech-heavy Nasdaq jumped higher by 4.72% during a week where several bell-weather technology companies reported. Small company stocks, represented by the Russell 2000, returned 4.35%. International markets also had a positive week with developed markets (MSCI EAFE) and emerging markets (MSCI EM) up 2.11% and 0.42%, respectively. Fixed income, represented by the Bloomberg/Barclays Aggregate, was positive on the week recovering 0.64% during a volatile trading week for bonds. Treasury yields declined across the board as the 2s/10s yield curve saw its most inverted level in 20 years after the Fed’s press release. As a result, the 10 YR US Treasury closed at a yield of 2.67% (down 10 bps from the previous week’s closing yield of ~2.77%). Gold prices closed at $1,753/oz. – up by 2.04% on the week. Oil (WTI) closed at $98.62 per barrel, an increase of 4.1%.
Earnings were mostly the story last week as companies continue to report results that can be described as better than feared. About 279 S&P 500 companies have reported so far, of which 77.8% have topped analyst estimates for profit, according to Refinitive. Last week saw strong results and positive guidance from Amazon, Apple, Merck, Chevron, Exxon, and Microsoft.
In other economic news, it was widely expected and choreographed that the Federal Reserve would increase the Federal Funds rate by 75bps to a range of 2.25%-2.50%. In his post-meeting press conference, Federal Reserve Chairman Jerome Powell explicitly stated that he “does not think the U.S. is currently in a recession”. The Fed has prioritized the fight against inflation and we expect the continuation of rate hikes, albeit at a slower pace through the end of the year.
Real GDP fell 0.9% in 2Q, marking the U.S. economy’s second straight quarter of decline. Two consecutive quarters of negative GDP growth has generally been the rule of thumb in defining a “recession”. However, the National Bureau of Economic Research (NBER), the de-facto scorekeepers of recessions, believes we are not there yet. Their definition is much broader, which encompasses other economic factors such as employment (2Q22 added on average 375k jobs), industrial production (still expanding), household income and trade. Gains in consumer spending and trade marginally offset slowdowns in inventory rebuilding, construction, and capital spending from companies.
Markets have rocketed higher over the past several weeks as the S&P 500 returned 9.1% in July. Things could take a breather here as we move past earnings season and into a seasonally weak period for equity markets. The focus for equity markets will begin shifting towards economic releases and inflation data as earning season begins to move into the rear-view.
“The most important measure of how good a game I played was how much better I’d made my teammates play.” – Bill Russell
ND&S Weekly Commentary (7.25.22) – Bad News is Good News
July 25, 2022
The markets continued their summer rally, as investors welcomed signs of a slowing economy, possible peaking inflation, and earnings results that have come in better than feared.
For the week, the S&P 500 gained 2.6%, the DJIA was up 2.0%, and the tech-heavy Nasdaq gained 3.3%. International stocks sprang back with developed markets (MSCI-EAFE) soaring 4.4% and emerging markets increasing 3%. The second quarter earnings season is in full swing, with about a fifth of the S&P 500 companies reporting last week. Over two-thirds of the companies have exceeded their estimates. The S&P 500 is down 16.1% year-to-date and trading at 16.6 times expected earnings over the next twelve months. That is down from 21 times at the end of 2021.
The bond market also gained as the U.S. 10-year Treasury Note fell from 2.93%, the previous week, to 2.77%, its lowest level in nearly two months. Commodity prices have deflated with oil at $94.70 per barrel, down over 20% from its recent peak. Two economically sensitive commodities, copper and lumber have also fallen from their highs, 32% and 60%, respectively. The driving force has been the strength of the US dollar which is now near a twenty-year high relative to foreign currencies.
On the economic front, the job market might be cooling with weekly jobless claims hitting 251,000, the highest level in nine months. Also cooling is the housing market with existing home sales and housing starts missing consensus expectations.
Next week all eyes will be on Wednesday’s Federal Reserve meeting and a slew of corporate earnings reports for the 2nd quarter. The Fed is expected to announce another three-quarter point rate increase to the federal funds rate. Over one-third of the S&P 500 companies report, including Amazon, Microsoft, Apple, Google, and Meta Platforms. On Thursday, the Bureau of Economic Analysis will report their Q2 2022 estimate of U.S. Gross Domestic Product (GDP). GDP could be negative for the second straight quarter, which would indicate that the U.S. is in a technical recession.
We maintain a cautious posture and favor a high-quality and well-diversified portfolio to weather the expected volatility. The global economy continues to grapple with high inflation, war, and a pandemic that keeps finding ways not to end.
“Headlines, in a way, are what mislead you because bad news is a headline, and gradual improvement is not.” -Bill Gates
ND&S Weekly Commentary 7.18.22 – The Yo-yo Makes Investing Hard
July 18, 2022
Consumer and Producer Price Index (CPI, PPI) numbers were reported last week, and both came in a little hotter than the market was anticipating. The CPI was expected to be high at 8.8% but surprised at a 9.1% annual rate. Initially stocks sold off and bonds rallied. Surprisingly, the market shook off that initial drop and recovered only to slide back marginally. Then, the PPI came out at 1.1% versus 0.8% monthly increase and that was enough to push investors away from equities and drive markets lower. A decent rally on Thursday off those lows carried into Friday and though down for the week, markets were not off much.
The equity markets are searching for their bottoms. At any sign of recovery, the market has mini rallies -classic bear market action. This signals the investors are there, the cash is there, and when conviction returns, markets like this one often come screaming back to higher levels. The coming near-term news (earnings, guidance, actual rate hike, Fed comments) is likely to pull markets down a bit more, but there is real pent-up demand for equities, and it is easy to miss the opportunity by trying to time the market. Bonds were slightly higher over the week and the treasury curve has flattened.
For the week, the DJIA declined 0.16%, while the S&P 500 dropped 0.91%. The tech-heavy Nasdaq finished 1.57% lower. International markets were also lower, with the MSCI EAFE Index down 1.75% while emerging market equities (MSCI EM) gave back 3.68%. Small company stocks, represented by the Russell 2000, declined 1.40%. On a positive note, fixed income, represented by the Bloomberg/Barclays Aggregate recovered 0.89% for the week. The 10 YR US Treasury closed at a yield of 2.93%, down 16bps from 3.09% the week prior. Gold prices ($1,812/oz.) closed lower on the week to $1,706/oz. – down 1.95%. Oil (WTI) prices also retreated last week closing at $97.59 per barrel.
This week there will be reports on housing and home-building data. Expect continued deterioration as the economy is slowing. Leading economic indicators will be reported on Thursday as will Philadelphia Fed manufacturing index and jobs data. The jobs data is a key factor in predicting whether the monetary policy at work can avoid a strong recession or even dodge a recession altogether.
The 2022 equity and fixed income markets in the US and across the globe have been among the most difficult investors have ever experienced. Investing implies a long-term commitment with solid results reaped in the future. Because the public securities markets provide current prices at every moment, it is natural to observe these “marks” and then to be drawn into the emotional swings these near-term valuations can produce. This can undermine the efforts of even the very seasoned investors. It is challenging, but we must remember the time horizon of our investing and keep that perspective in mind, always. Watching markets is like watching a person play with a yo-yo on an escalator…if you do not keep the big picture in mind, the near-term results appear more dramatic than they will tun out be.
“Nothing great in the world has ever been accomplished without passion.” – Georg Wilhelm Friedrich Hegel
Weekly Commentary (7/11/22) – Investors Celebrate the Fourth of July
July 13, 2022
Markets rose across the board during the holiday-shortened week.
For the week, the DJIA gained 0.82% while the S&P 500 moved ahead by 1.98%. The tech-heavy Nasdaq had a good week and advanced 4.58%. International markets finished in the green. For the week, the All Country World Index ex-USA finished higher by 0.96% while emerging market equities (MSCI EM) tacked-on a gain of 0.97%. Small company stocks, represented by the Russell 2000, were strong and finished the week nicely higher by 2.43%. Fixed income, represented by the Bloomberg Aggregate, declined 0.87% for the week as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 3.08% (up ~ 20 bps from the previous week’s closing yield of ~2.88%). Gold prices closed at $1,740.60/oz – down 3.24% as the U.S. dollar rose 1.70% on the week. Oil prices retreated a bit to close at $104.79 per barrel, down 3.36% on the week.
Last week saw a number of economic important releases. The ISM Non-Manufacturing Index fell to 55.3% in June vs. 55.9% in May, yet the results were better than the consensus estimate of 54.2%. Friday’s release of non-farm payrolls was much better than expected as payrolls increased 373,000 in June, well above expectations for a gain of 265,000. The unemployment rate held steady at 3.6% while the labor force participation rate remained steady at 62.2% vs. 62.3% in May. The strength of the U.S. labor market will help to soften the blow from any potential recession.
The week ahead holds a few important events that investors will be watching closely – June CPI comes out on Wednesday while PPI gets released on Thursday followed by the University of Michigan Consumer Sentiment Index on Friday. This week also is the start of 2nd quarter earnings season with Pepsi, Delta Airlines, JP Morgan, Wells Fargo, Citigroup and others reporting. We expect companies to talk about the challenges of inflation, softening consumer demand and ongoing supply chain issues.
Enjoy the summer!
Weekly Commentary 7/5/22 – Happy Fourth of July
July 5, 2022
Major equity market indexes pushed higher on Friday afternoon but ultimately finished the week in the red. For the week, the DJIA declined 1.27%, while the S&P 500 dropped 2.18%. The tech-heavy Nasdaq finished 4.12% lower. International markets were also lower, with the MSCI EAFE Index down 2.18% while emerging market equities (MSCI EM) gave back 1.53%. Small company stocks, represented by the Russell 2000, declined 2.09%. On a positive note, fixed income, represented by the Bloomberg/Barclays Aggregate recovered 1.27% for the week. Treasury yields were lower across the board as the 10 YR US Treasury yield closed at 2.88% (down 25bps on the week). Gold prices ($1,797/oz.) have been under pressure lately due to a strengthening dollar. Oil prices were up modestly on the week closing at $108.43 per barrel.
Last week’s economic releases confirmed that economic activity is cooling (as if anybody needed reminding). Core PCE (the Fed’s preferred inflation gauge) came in at 4.69% year-over-year in May. This is small deceleration from the peak in February (5.31%). Oil has remained stubbornly elevated but other commodities like copper and timber have fallen to near year-to-date lows. It is likely we are at peak inflation levels which should show signs of moderating in the months ahead. The ISM manufacturing index declined to 53.0% in June, still in expansion territory but a deceleration from 56.1% in May. Last week’s reports, quite perversely, ought to put less pressure on the Fed as inflation and economic activity are cooling … bad news is good news at least for now.
We would like to wish our clients and friends a happy Fourth of July as we remain grateful for the many blessings bestowed on our great country.
“We’re blessed with the opportunity to stand for something, for liberty and fairness. And these are things worth fighting for, worth devoting our lives to.” – Ronald Reagan
Weekly Commentary (6/27/22) – Stocks Break Out
June 27, 2022
Wall Street finished the holiday shortened week with a bang as inflation showed signs of peaking, tempering investors’ fears of aggressive Federal Reserve interest rate hikes.
The S&P 500 gained 6.5% this past week, while the Nasdaq rose 7.5% and the Dow Jones Industrial Average advanced 5.4%. International equities also finished higher with developed markets (EAFE) and emerging markets (EM) up 2.8% and 0.8%, respectively. The yield on the 10-year U.S. Treasury slid to 3.13% from 3.25% from the previous week.
U.S. consumer sentiment declined to a record low in June, while inflation data pointed to slowing business activity in June. The Refinitiv/Core Commodity Index also came in at a two-month low. The S&P 500 Bank Index rose 3.7% after the major banks passed the Fed’s annual stress test, showing that they have enough capital to weather a recession. On Thursday, Jerome Powell, the Fed chair, stressed: “I don’t think a recession is inevitable.”
The price of oil came down with U.S. crude declining 0.4 % to $107.62 per barrel and is down nearly 8% this month. Housing showed signs of moderating as home sales rose unexpectedly last month, but the trend has been mostly lower as mortgage rates continue to climb.
With inflation remaining stubbornly high, affecting consumers’ pocketbooks, market volatility will continue. The Personal Consumption and Expenditures Index, the Fed’s preferred gauge for tracking inflation, will be announced on Thursday.
“To buy when others are despondently selling and to sell when others are avidly buying requires great fortitude.” –Sir John Templeton
Weekly Commentary (6/21/22) – A Hiking We Will Go…
June 21, 2022
It was another wild week for investors as the stock markets continued to process new information that, ultimately, moved valuations lower over the week. The Federal Open Markets Committee (FOMC) met and announced a rate hike of 75 basis points. While this move was 25 bps more than previously forecast, it was not really a surprise to markets as the general consensus was a 75bps increase, with some calling for a 100bps move. Initially, the market was slightly lower on the announcement but immediately rallied when Chairman Jerome Powell provided more color in his press conference. The following day, equities moved sharply lower, overcoming the gains of the rally, and then moving even further south. To say investors are confused and uncertain is an understatement.
For the week, the DJIA fell 4.73% and the S&P 500 dropped 5.75%. The tech-heavy Nasdaq slid 4.78%. International markets were also down. For the week, the MSCI EAFE Index (developed international) finished lower by 5.73% and emerging market equities (MSCI EM) dropped 4.65%. Small company stocks, represented by the Russell 2000, were down sharply (-7.43%) for the week. The 10 YR US Treasury closed at a yield of 3.25% (up 10 bps over the week).and as a result, fixed income, represented by the Bloomberg/Barclays Aggregate, fell 0.92% as yields moved higher. Gold prices finished at $1,842.60/oz – up 0.6% on the week. Oil prices retreated to $109.56 per barrel, down 9.21% on the week but still up 45.67% year-to-date.
The FOMC were not the only bankers “hiking” rates last week. Switzerland, while known for hiking (no pun intended), has not raised rates since 2007, but they did last week. The Bank of England joined in as well. However, Japan is sticking with zero rates on fears of shrinking their economy and China has pledged to step up policy support for their slowing economy. US banks moved the Prime Rate to 4.75 from 4.00. Global investors seeking yield are bidding up the U.S. Dollar (USD) and better USD exchange rates are benefiting holders of USD.
Looking ahead, existing home sales numbers are announced on Tuesday and new home sales on Friday. Initial jobless claims come Thursday, and U. Michigan consumer sentiment is released on Friday. That indicator is showing very high levels of pessimism and is a factor to watch during this period where the markets are showing great emotional influences.
Crypto “currency” is a great example of prices moving based on emotions and not valuations. Last week was a tough week for all in “crypto land”. We are highly skeptical about these “assets”. We have yet to be convinced of an investment thesis that makes sense to us and continue to consider this territory as speculative. The problem for speculators is when the interest in their domain evaporates, if there is no intrinsic value, prices can go to $0 and stay there.
The Fed will continue to hike the overnight borrowing rate higher until inflation is tamed. How the rest of the market interest rates settle out is a great unknown and forecasting future earnings is more difficult than usual with both high inflation and recession concerns looming. Taken together, these factors make confidently valuing equity securities more challenging than usual, and this is a major part of the reasons we are seeing such wild volatility.
We recommend patience and perseverance in this tumultuous period. We are sanguine on the US economy and equities in the long run and therefore we are not letting the near-term valuations distract us from the longer-term thesis.
“Everyone wants to live on top of the mountain, but all the happiness and growth occurs while you are climbing it.” – Andy Rooney
ND&S Weekly Commentary 6.13.22 – Inflation Report Spooks Markets
June 13, 2022
Equity and fixed income markets continued to struggle in the face of rising inflation. Last week’s Consumer Price Index (CPI) confirmed inflationary pressures that investors continue to grapple with. The CPI rose to 8.6% year-over-year (y/y) in May, overtaking the peak of 8.5% two months ago, and marking its highest reading since 1981. The month-over-month (m/m) increase came in at 1.0%, above expectations of 0.7%. When stripping out volatile components of food and energy, consumer core prices rose by 6.0% which was a slight deceleration from the previous month.
For the week, the DJIA declined 5.04%, while the S&P 500 dropped 4.56%. The tech-heavy Nasdaq finished 5.59% lower. International markets were also lower, with the MSCI EAFE Index down 4.64% while emerging market equities (MSCI EM) gave back 0.52%. Small company stocks, represented by the Russell 2000, declined 4.37%. The fixed income markets also came under pressure largely in response to the higher-than-expected CPI report on Friday. The Bloomberg/Barclays Aggregate declined 1.52% for the week. The 10 YR US Treasury yield jumped back to 3.20%. Gold was a bright spot increasing 1.42% on the week. Oil prices were also up modestly on the week closing at $120.67 per barrel.
In other economic news, jobless claims for the week rose slightly to 229k … this bears watching but weekly claims under 300k is considered a healthy jobs market. Consumer sentiment, as measured by the University of Michigan Consumer Sentiment Index, declined to 50.2% which is a record low. Sticker shock at the pump and grocery stores may be starting to impact consumer behavior and confidence. Consumer expectations had its worst reading since 1980 … another high inflationary environment. This week, there will be economic reports released on industrial production, new and existing home sales, and retail sales.
All eyes will be on the results of the Federal Reserve meeting on Wednesday when it announces how much it will raise short-term rates, as well as on Chairman Powell’s press conference. It’s clear that the Fed will raise the federal funds rate by a least 50bps each at the next two meetings. Their policy outlook for the second half 2022/23 is where things become pretty grey. Last week’s CPI showed that inflation has not yet started to moderate so commentary from the Fed will be closely watched.
Some investors are already pricing in a recession for 2022 or early 2023. Current valuations are already showing rough seas ahead, and we think that will be the case until inflation shows signs of moderating. In our view, equity and bond markets are exhibiting signs that traditionally point to a bottoming process (maximum pessimism and low sentiment, hedge fund liquidations, lack of reaction to positive news, capitulations, etc…). As always, diversification, patience, and a bias towards quality will continue to help investors navigate through this challenging period.
“(Investing) is the age-old, never-ending emotional battle between fear of the future and faith in the future.” – Nick Murray
Weekly Commentary (6/6/22) – Markets Continue Roller Coaster Ride
June 6, 2022
After rising over 6% the previous week, markets gave back some ground last week as investors continue to be cautious about the economic outlook. Comments from a few high-profile CEOs sounded alarm bells on the economy – Jamie Dimon from JP Morgan warned investors to prepare for an economic ‘hurricane’ while several other CEOs reduced earnings expectations citing foreign currency headwinds.
For the week, the DJIA lost 0.83% while the S&P 500 dropped 1.15%. The tech-heavy Nasdaq gave back 0.95%. International markets were mixed. For the week, the MSCI EAFE Index (developed international) finished lower by 0.27% while emerging market equities (MSCI EM) gained 1.78%. Small company stocks, represented by the Russell 2000, were slightly negative at -0.22% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, fell 0.88% as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 2.93% (up 19 bps from the previous week’s closing yield of ~2.74%). Gold prices closed at $1,845.40/oz – down 0.32% on the week. Oil prices continued their march higher to close at $118.87 per barrel, up 3.30% on the week and 58.05% year-to-date.
Economic news released last week was mostly supportive of a slowly growing economy rather than an economy headed for an imminent recession. May’s ISM Manufacturing Index increased to 56.1% from April’s 55.4% level with gains in new order activity. On the other hand, the Non-Manufacturing ISM Index dropped to 55.9% from 57.1% in April and below estimates of 56.4%. Consumer confidence numbers were better than expected at 106.4 (expectations were for a level of 103.7). On the jobs front, 390,000 non-farm jobs were created in May, much better than expected. Unemployment held steady at a low 3.6%.
The week ahead for economic data is rather light. Most interesting this week will be April’s read on consumer credit and May’s Consumer Price Index (CPI). May’s CPI is expected to rise 8% on a year-over-year basis with a core reading of 5.9%. No doubt, cost pressures will continue to impact consumers and businesses alike, but markets have already discounted a fair amount of uncertainty.
We suspect that markets will continue their roller coaster ride until the economic outlook becomes clearer. We continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias. The weather is improving – enjoy the summer!
“The secret of getting ahead is getting started.” – Mark Twain
Weekly Commentary (8/8/22) – Markets Mostly Higher as Earnings & Jobs Beat Expectations
August 8, 2022
Markets were mostly higher last week as earnings were generally better than expected and labor markets showed strong gains in July.
For the week, the DJIA lost 0.11% while the S&P 500 moved ahead by 0.39%. The tech-heavy Nasdaq had a good week and advanced 2.18%. International markets finished mixed. For the week, the MSCI EAFE Index (developed countries) finished lower by 0.65% while emerging market equities (MSCI EM) tacked-on a gain of 0.97%. Small company stocks, represented by the Russell 2000, were strong and finished the week nicely higher by 1.96%. Fixed income, represented by the Bloomberg Aggregate, declined 1.04% for the week as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 2.83% (up ~ 16 bps from the previous week’s closing yield of ~2.67%). Gold prices closed at $1,772.90/oz – up 0.57% as the U.S. dollar rose 0.63% on the week. Oil prices retreated to close at $89.01 per barrel, down 9.74% on the week.
Last week saw a number of important economic releases. The ISM Manufacturing Index fell to 52.8% in July vs. 53.0% in May, yet the results point to a still-growing manufacturing economy. Closing out the week was July’s payrolls report. Non-farm payrolls rose 528k, more than double expectations, while the unemployment rate fell to the lowest level since 1969. Average hourly earnings growth picked up 5.2% year-on-year compared to expectations of a 4.9% gain. The strong employment report will put pressure on the Fed to continue raising rates to slow down the economy and inflation. The next Fed meeting is September when they are expected to raise rates 50 bp followed by two 25 bp hikes before year-end for a terminal fed funds rate of 3.50%. July’s strong jobs number has some analysts pointing to a possible 75 bp rate hike in September.
The week ahead holds a few events that will provide investors a snapshot of how the economy and sentiment are holding up in August. Releases include: NFIB Small Business Index on Tuesday, CPI on Wednesday, PPI on Thursday, and University of Michigan Consumer Sentiment Survey on Friday. 2Q22 earnings season will be winding down this week and next.
We are likely not out of the woods yet, but the economic backdrop seems to be better than feared. We urge investment to stick close to long-term asset allocation targets with a slight defensive bias.
Enjoy the summer!
“Winners never quit and quitters never win.” – Vince Lombardi