ND&S Weekly 9.26.22 – What It Takes

September 26, 2022

It was another tumultuous week for investors as the markets continued to process new information from the Fed. One thing became clear, the equity markets are finally realizing the Fed will indeed “go bigger, for longer” on inflation. The Federal Open Markets Committee (FOMC) met and announced a rate hike of 75 basis points. Additionally, the FOMC laid out a hawkish path for rates, one that could take the policy rate to mid-4% range in 2023. In the wake of the meeting, US yields have risen sharply with 2yr US Treasury note reaching 4.2%, the highest since 2007.

For the week, the DJIA fell 4.00% and the S&P 500 dropped 4.63%. The tech-heavy Nasdaq slid 5.06%. International markets were also down. For the week, the MSCI EAFE Index (developed international) finished lower by 5.59% and emerging market equities (MSCI EM) dropped 4.02%. Small company stocks, represented by the Russell 2000, were down sharply (-6.58%) for the week. The 10 YR US Treasury closed at a yield of 3.69% (up 24 bps over the week) and as a result, fixed income, represented by the Bloomberg/Barclays Aggregate, fell 1.56% as yields moved sharply higher. Gold prices finished at $1,644/oz. – down 1.58% on the week. Oil prices retreated to $78.74 per barrel, down 7.4% on the week.

Looking ahead, concerns regarding a slowing economy and rising costs have increased. 2023 earnings expectations have remained high, still pointing to 8% year-over-year growth next year. A more realistic view suggests analysts will begin to cut expectations for future earnings if the continued tight monetary environment tips the economy into a recession. 3q22 earnings season will begin in a couple of weeks and we should see companies begin to reduce guidance. The bearish story is well known, and we are certainly in the mix of the chaos. In times of panic, we are reminded of the quote from investor Byron Wein, “disaster has a way of not happening”. Investor sentiment is at extreme levels and technical indicators are indicating oversold conditions. Markets have already begun discounting the slowdown and we wouldn’t be at all surprised if equity markets were to have a relief rally in the short-term.

“The science of today is the technology of tomorrow.” – Edward Teller

ND&S Weekly Commentary 9.19.22 – Fall, Leaves, Fall

September 19, 2022

Halloween came early as investors were spooked by higher-than-expected inflation, signs of slowing economic growth and the likelihood of the Federal Reserve hiking interest rates more than expected.

On Tuesday, the Consumer Price Index (CPI) release showed that the key drivers of inflation are not slowing down. The market reacted by sending U.S. stocks to their steepest one-day decline since the beginning of the pandemic.

For the week, the S&P500 slid 4.7%, the DJIA fell 4.1%, and the tech-heavy NASDAQ took back 5.5%. International equities were also weak with developed and emerging markets down 2.7% and 2.6%, respectively. The price of gold dropped to $1,683/oz. – down 2.6% for the week.

Interest rates advanced with the yield on the 10yr U.S. Treasury climbing for the seventh straight week to close at 3.45% … up from 3.32% the previous week. The yield curve remains inverted with the 2yr Treasury Note rising to 3.87% which is its highest level since 2007.

The August CPI report released last week came in at 8.2% y/y, a slight decline from July (8.5%) but higher than expected. When food and gasoline prices are excluded, core inflation rose 6.3%, much higher than the expected 5.9%. There was good news about U.S. Retail Sales rising in August by 0.3% following July’s 0.4% decline.

We expect the Federal Reserve to stick to their guns and increase the Federal Funds rate by 0.75% at this week’s meeting. The CEO of the shipping giant FedEx warned of a gloomy outlook for the global economy and expects that there will be a global recession. FedEx announced that it was pulling its full-year earnings guidance due to the “continued volatile operating environment.”

Despite more compelling stock valuations and a resilient consumer, we recommend that investors reassess their investment objectives, risk tolerance and fine-tune a diversified portfolio accordingly.

“There is a harmony in autumn, and a luster in its sky, which through the summer is not heard nor seen, as if it could not be, as if it had not been!” – Percy Bysshe Shelley

Weekly Commentary (9/12/22) – Markets Bounce Higher on Hopes of a Soft Landing

September 12, 2022

US Markets were sharply higher last week as investors’ fears of a recession slowing the economy, in the near term, abated. Reversing course from its reaction to the Fed’s reaffirmation of its resolve to fight inflation, investors were willing to pay higher prices for stocks in virtually all asset classes. This was despite bond yields still rising slightly.

For the week, the DJIA returned 2.72% and the S&P 500 was up 3.68%. The tech-heavy Nasdaq bounced back and climbed 4.15%. International markets were mixed and more muted. For the week, the MSCI EAFE Index (developed countries) added 0.89% while emerging market equities (MSCI EM) were off 0.13%. Small company stocks, represented by the Russell 2000, were strong and finished the week up 4.07%. Fixed income, represented by the Bloomberg Aggregate, declined 0.70% for the week as yields moved slightly higher. The 10 YR US Treasury closed at a yield of 3.33% (up ~ 13 bps from the previous week’s closing yield of ~3.20%). Gold prices closed at $1,713/oz. – up just slightly from $1,710 on the week. Oil prices were stable and closed only down $0.08 at $86.79 per barrel.

Last week’s economic data included the ISM Services PMI which unexpectedly edged higher to 56.9 in August of 2022 from 56.7 in July, beating market forecasts of 55.1, and pointing to the strongest growth in services activity in four months. There is evidence of some supply chain, logistics and cost improvements; however, material shortages remain a challenge. Consumer Credit Consumer credit in the United States increased by USD 23.81 billion in July of 2022, down from a downwardly revised USD 39.1 billion gain in the previous month and well below market expectations of a USD 33 billion rise. This may be an indicator of cautious consumers.

This week some key inflation metrics will be released: Monday – Consumer Inflation Expectations, Tuesday- CPI and Core Inflation numbers for August, Wednesday – Producer Price Index (PPI) data for August, Thursday- Retail Sales data. With so much attention focused on inflation rates and the consumers’ spending rates and how the Fed will/might execute its mandate to curb inflation, this data could move markets as investors typically have a dramatic initial reaction to any surprises. Even if there are no surprises, bullish investors will often take this as a very positive cue, in this environment.

The market tested a significant “technical level” of about 3,900 on the S&P 500 Index the week before last and bounced off it to make gains for the past week. If stock prices break down through this level, technical analysts would generally predict that the market could move even lower to test the June 14 lows. Regardless of whether this near-term movement takes place, we are sanguine on the long-term prospects for stocks and remind investors to avoid being distracted by near-term gyrations as we all juggle the data deluge and an unprecedented economic environment – of course, it always feels that way.

“You may not control all the events that happen to you, but you can decide not to be reduced by them.” – Maya Angelou

Weekly Commentary (9/6/22) – Markets Lower on Fed Resolve

September 6, 2022

Markets were lower across the board last week as investors reacted to hawkish comments from Fed Chair Powell at the Jackson Hole conference. The Fed reiterated their intention to tame inflation while being willing to sacrifice some softness in the economy to do so.

For the week, the DJIA lost 2.85% while the S&P 500 gave back 3.23%. The tech-heavy Nasdaq had a rough week as it declined 4.18%. International markets finished lower as well. For the week, the MSCI EAFE Index (developed countries) finished lower by 3.00% while emerging market equities (MSCI EM) dropped 3.41%. Small company stocks, represented by the Russell 2000, were weak and finished the week down 4.70%. Fixed income, represented by the Bloomberg Aggregate, declined 1.02% for the week as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 3.20% (up ~ 16 bps from the previous week’s closing yield of ~3.04%). Gold prices closed at $1,709.80/oz – down 1.51% as the U.S. dollar rose 0.81% on the week. Oil prices retreated to close at $86.87 per barrel, down 6.65% on the week.

Last week saw several important economic releases. The US Manufacturing PMI came in at 51.5 … down 0.7 points from July. Unemployment nudged up to 3.7% while the August Employment Report showed 315k jobs added for the month – slightly better than the expected 295k. Average hourly earnings for August rose 5.2% (unchanged versus July) while the report also showed downward revisions in the number of jobs created in June and July to 107k. The big news of the week, highlighted above, was from the Fed’s Jackson Hole conference. The Fed remained resolute in attacking inflation. The next Fed meeting is scheduled for September 20 – 21 when they are expected to raise rates 75 bp (up from pervious estimates of 50 bp) followed by two 25 bp hikes before year-end for a terminal fed funds rate of 3.50% – 4.0%. Markets were hoping for more dovish comments from the Fed.

The week ahead holds a few events that will provide investors a snapshot of how the economy and sentiment are holding up in early September. Releases include: August Services PMI, ISM Non-Manufacturing Index, Consumer Credit and an OPEC+ and ECB meeting.

We are likely not out of the woods yet and we look for markets to remain range-bound. September has not been overly kind to investors over the years with the median market return of -0.1%. When the S&P 500 is down YTD (like 2022) September has averaged a loss of 3.4%. But we all know that 2022 so far has been anything but normal. We urge investors to stick close to long-term asset allocation targets with a slight defensive bias.

“Opportunity is missed by most people because it is dressed in overalls and looks like work.” – Thomas A. Edison

ND&S Weekly Commentary 8.29.22 – Don’t Fight the Fed

August 29, 2022

The summer market rally cooled off last week as hawkish comments from the Fed portrayed a restrictive monetary policy.

For the week, the DJIA fell 4.20% and the S&P 500 dropped 4.02%. The tech-heavy Nasdaq slid 4.43%. International markets were mixed. For the week, the MSCI EAFE Index (developed international) finished lower by 1.91% and emerging market equities (MSCI EM) increased 0.55%. Small company stocks, represented by the Russell 2000, were down 2.93% for the week. The 10 YR US Treasury closed at a yield of 3.04% (up 6 bps over the week) and as a result, fixed income, represented by the Bloomberg/Barclays Aggregate, fell 0.36% as yields moved higher. Gold prices finished at $1,751/oz – down 0.66% on the week. Oil prices closed at $93.06 per barrel.

The Federal Reserve gathered last week for their Jackson Hole economic symposium. The Federal Reserve Chairman Jerome Powell spoke for roughly nine minutes and warned against any premature loosening of policy. “Reducing inflation is likely to require a sustained period of below trend-growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” said Powell. This hardline stance rattled equity markets on Friday sending all major U.S. indices down over 3% on the day.

Last week also brought a preliminary look at several manufacturing and services PMI data sets, all of which point towards a slowing economy and some progress on slowing inflation and improving supply chains. The headline Flash US PMI registered a reading of 45.0, down from a reading of 47.7 in July. The PMI reading for the service economy fell to 44.1, a sharp miss compared to expectations. The manufacturing reading fared a little better coming in at 51.3. Within the report, input prices eased for the third consecutive month, however companies are having higher cost burdens associated with the increase in interest rates. The July Durable Goods report showed a 0.4% increase in business spending in July. On Friday, the PCE Price Index (The Fed’s preferred inflation measure) came in at 6.3%, down from 6.8% in June. Core PCE came in at 4.8%, still well above the 2% target.

We think the Fed is ultimately doing the right thing to tackle inflation even if it means some short-term pain for the markets and economy. The markets have pulled back a bit over the last couple of weeks to levels we were at in late July. We are continuing to adjust portfolios to harvest some tax losses and will continue to take advantage of attractive short-term rates for cash and fixed income.

“The best way out is always through.” – Robert Frost

Weekly Commentary 8/22/2022 – A Cooling of the Summer Rally

August 22, 2022

Wall Street ended its 4th straight week of market advances as investors were nervous by possible signs of peaking consumer demand and a less than accommodative Federal Reserve.

The S&P 500 lost 1.2% this past week, the Nasdaq slid 2.6% and the Dow Jones Industrial Average inched lower by .05%. International Equities also finished in the red with developed markets (EAFE) and emerging markets (EM) down 2.2% and 1.5%, respectively. The yield on the 10-year U.S. Treasury rose to 2.98%, up from 2.85% from the previous week.

The 2nd Q earnings season is almost over and nearly 63% of the S&P companies beating revenue estimates and roughly 76% exceeding estimated earnings. Revenue growth year over year is coming in at 14.1% and earnings are higher by 8.2%.

On Wednesday, the Federal Reserve released minutes from their latest meeting showed that members felt that interest rates would need to continue being raised to bring inflation in line with targets. Investors are hoping for less aggressive rate hikes in the fall.

The price of Oil fell $0.80 with U.S. Crude ended the week at $90.77 per barrel. That is still way down from the high of $123 at the beginning of the war in Ukraine. Housing showed signs of weakening as housing starts fell 9.6% to the lowest level since August 2000, due to increased construction costs and higher mortgage rates. The July job reports came in much stronger than expected and retail sales were basically flat. However, other weak economic indicators were reported, and the inverted yield curve is rearing its recessionary head.

We would not be surprised by a market pull-back given our summer rally. With the uncertainty of inflation, interest rates, and geopolitical tensions, market volatility will continue. We recommend staying well-diversified and fine-tuning accordingly.

All eyes will be on the Fed’s annual Jackson Hole meeting, and Fed Chair, Jerome Powell, speaking on Friday. There will be a slew of economic reports on housing, durable goods orders, August manufacturing and service PMIs and consumer sentiment.

“Roll out those lazy, hazy, crazy days of summer.”- Sam Cooke

Weekly Commentary (8/15/22) – Everybody is a Winner

August 15, 2022

Inflation numbers were slightly more positive than the estimates and investors seized on these indicators and the good job growth and pushed prices higher. A rally that began in mid-June extended as all major equity and bond indices were positive for the week.

For the week, the DJIA gained 2.99% and the S&P 500 advanced 3.31%. The tech-heavy Nasdaq added 3.1%. International markets also had a positive week. The MSCI EAFE Index (developed countries) increased 2.17% while emerging market equities (MSCI EM) also 1.66%. Small company stocks, represented by the Russell 2000, had another strong week and ended up 4.97%. Fixed income, represented by the Bloomberg Aggregate, managed 0.24% gain for the week as, on the average, yields held their levels and corporate spreads tightened. As a result, the 10 YR US Treasury closed at a yield of 2.84% (up ~ 1 bps from the previous week’s closing yield of ~2.83%). Gold prices closed at $1,792/oz – up ~1%. Oil prices moved slightly higher and closed at $92.09 per barrel, up ~3.5% on the week.

Inflation was reported at 8.5% for the previous 12 months through July. The consensus forecast was an 8.7% CPI increase and investors took this to be a good sign that perhaps the Fed would be less aggressive in their planned rate hikes. Nevertheless, that still presents quite a gap to the 2% target rate and Fed interest rate tightening through year end is still the strong consensus. Consumer sentiment (University of Michigan sentiment index) reversed course and rose to 55.1 from 51.5. this was also a surprise and was likely due to lower oil and gas prices and strong job growth.

This week includes several economic reports related to housing, manufacturing levels, and retail sales. The index of leading economic indicators and the minutes from the last Fed meeting are also released this week. In addition, several Fed committee members have speaking engagements and along with the minutes will likely provide more texture to the Fed’s committee’s sentiment and outlook.

Investors will parse this week’s data and the weeks’ to follow and we shall soon see whether this rally is the beginning of another bull phase in the equity markets or just an extended bear market rally. With the move made since June, we are already pushing earnings multiples to bullish levels in the face of slowing growth. On a technical basis, this rally is at an inflection point. If it continues higher and then reverses, it will break from the norm. If it were to reverse from current levels and retest the lows, it would be quite normal, though it would go down as more substantial than the normal bear market rally.

The heat wave is over, and the school busses are coming – soak up all the summer you can!

“The real glory is being knocked to your knees and then coming back. That’s real glory. That’s the essence of it.” – Vince Lombardi

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

 

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