ND&S Weekly Commentary 7.27.20 – Markets Quiver Last Week
July 27, 2020
Markets gave some back last week over renewed tensions between the US and China. The US ordered China to close its consulate in Houston which prompted Beijing to revoke the license of the US consulate general in Chengdu, China. Adding to the uncertainty last week, US jobless claims came in at 1.4 million, snapping a 15-week run of declining claims, brought on from the Covid-19 spike. Plans to reduce business restrictions continue to be delayed as a result of the recent outbreak in confirmed cases around the US.
On the week, the S&P 500 declined 0.27% while the DJIA gave back 0.74%. The NASDAQ weakened 1.33% on the week as debate grows over technology stocks and their stretched valuations. The Russell 2000 which represents small/midsized US companies also moved lower as it declined 0.38% for the week. International markets were a bright spot on the week as developed international markets (MSCI EAFE) gained 0.42% while emerging markets (MSCI EM) increased 0.57%. Bonds were a bit higher as the Bloomberg Barclays Aggregate finished ahead by 0.41% on the week. The 10yr US Treasury ended last week at a yield of 0.59%. Gold prices continued their rapid ascent closing at $1,902 marking a 4.99% advance on the week as investors continue to seek out the safe-haven metal. Oil increased to $41.29 per barrel from $40.59 the week prior.
Economic news on the week was mixed. As mentioned above, jobless claims were a disappointing 1.4m which was a 109k increase from the week prior. It was noted on the release, “The Covid-19 virus continues to impact the number of initial claims and insured unemployment.” Housing continues to be a bright spot in the recovery as existing home sales jumped 20.7% in June. The median existing home prices have increased 3.5% year-over-year as housing inventory remains tight in a historically low-rate environment. New home sales in June also jumped 13.8%, greatly exceeding expectations. Worth noting, the Conference Board reported leading indicators increased 2.0% month-over-month in June after a 3.2% improvement in May.
Earnings season continues this week as a of number companies which includes Apple, Facebook, Amazon, Mastercard and Alphabet are scheduled to report. Earnings so far have come in better-than-feared as close to 80% of companies have reported earnings-per-share (EPS) better than analyst estimates while revenues have been generally in-line with expectations. Analysts’ forecasts were for a 10.9% decline in EPS with a 40% drop in revenues due mainly to the Covid-19 impact and restrictions.
Company results and guidance will likely drive the markets this week. We continue to recommend staying close to investment policy targets with an investment bias towards quality and safety.
“I never think of the future – it comes soon enough.” – Albert Einstein
NDS Weekly Commentary 7.20.20 – Earnings Season Starts to Ramp Up
July 20, 2020
Equity markets were somewhat mixed last week as the S&P 500 and DJIA advanced 1.3% and 2.3%, respectively. However, investors appeared to be taking profits in the technology sector, which has been the best performing sector YTD, as the NASDAQ was down -1.1% for the week. Also, value stocks outperformed last week as the Russell 1000 Value Index rose 3.4% vs the Russell 1000 Growth which was -0.8%. Reflecting that shift, the best performing sectors were industrials and materials and the worst were technology and consumer discretionary. International equities were mixed as the EAFE index rose 2.2% and emerging stocks declined 1.2%. Fixed income markets were relatively flat last week as the rate on the 10 year U.S. Treasury declined slightly to 0.64%.
In economic news last week, CPI for June was announced at 0.6%, a slight increase over expectations. Retail sales advanced 7.5% also exceeding expectations of 5.0% and housing starts were up 17.3% month over month. The Labor Dept. reported initial jobless claims of 1.3 million. This week look for economic reports on mfg. and srvs. PMI and new/existing home sales. Earnings season also ramps up this week with major companies Coca Cola, Microsoft, Intel, Tesla and Verizon to report. Last week major banks reported better-than-expected earnings in spite of large increases in loan loss reserves.
We expect going forward that investors will focus on the surge of confirmed cases of the Coronavirus in the southern and western U.S., its impact on the re-opening of the U.S. economy, and the upcoming election.
Don’t forget to wear your masks and stay safe.
“Nothing great in the world has ever been accomplished without passion.” – Georg Wilhelm Friedrich Hegel
ND&S Weekly Commentary 7.13.20 – Let The Earnings Season Begin
July 13, 2020
Last week stocks finished modestly higher with a resurgence of COVID-19 cases causing uncertainties and market volatility. The pandemic is spreading in several US states at record levels and its effects will continue to be the primary driver of the financial markets for the rest of the year. There are some bright spots from improving economic data, historically low interest rates and tremendous financial liquidity. However, the uncertainties over the rise of COVID cases, the political outcome of the US elections and an expected very weak earnings season have investors on edge.
The Dow Jones Industrials gained 1.0%, the S&P500 rose 1.8% and the tech heavy Nasdaq climbed 4.0%. Foreign markets also increased with developed markets as measured by the MSCI EAFE index up 0.3% and emerging markets gaining 4.7% with China’s markets leading the way.
Investors are preparing for a terrible earnings season next week. According to FactSet, estimated earnings for the S&P 500 for the second quarter will plummet 45% from the same period last year and revenues will be down by 10%. The major banks will report this week and all eyes will be on net interest margins, loan loss reserves and guidance. The S&P 500 is only down 0.4% this year and is selling at over 22 times forward twelve month earnings estimates which is expensive. The market could be in for some choppy times ahead.
The 10-year US Treasury note traded down to a yield of 0.57% but finished the week at 0.65% which indicates that rates should remain near zero for quite some time. If the Covid-19 cases continue to surge, the confidence of investors will suffer, increasing the demand for safe assets. The price of gold is already up nearly 20% for the year and gold mining shares are soaring.
The Institute for Supply Management’s (ISM) Non-Manufacturing Index which tracks the service sector of the economy rebounded into expansionary territory in June at 57.1, handily beating estimates of a reading of 50.0. Employment figures continue to improve as 4.8 million jobs were added in June. New drug treatments by Gilead Sciences showed good results and Pfizer and BioNtech expressed optimism that their mRNA vaccine candidate could be ready for approval by the end of the year.
All eyes will be on second quarter earnings announcements this week. Economic data to be reported are inflation on Tuesday, retail sales on Thursday and housing starts on Friday. With so many uncertainties and headwinds, we strongly encourage investors to not chase momentum stocks or higher yielding assets, and stay close to their long-term asset allocation.
“Together we can face any challenges as deep as the ocean and as high as the sky.” — Sonia Gandhi
Recovering Labor Market Pushes Stocks Higher
July 6, 2020
Despite record numbers of new daily Covid-19 cases in the United State and near-record cases globally, equity markets continued higher last week. For the week, the S&P 500 and DJIA rose 1.55% and 0.36%, respectively. The Russell 2000 increased 1.37%. International stocks were also strong with developed international (MSCI EAFE) up 1.62% and emerging markets up 2.16%. Treasury yields increased slightly last week with the 10yr US Treasury settling at a yield of 0.68%. Oil prices (WTI) rose to around $40 a barrel.
A strong labor market report, improving manufacturing PMIs globally and surging pending home sales propelled markets last week. The improving data has some momentum behind it but economic activity is still well below pre-coronavirus. More than 4.75 million workers returned to payrolls in June, which was well ahead of consensus estimates of about 3 million. The May payroll number was also revised higher. As a result, the unemployment number declined to 11.1%, down from 13.1% a month ago. Economic activity in manufacturing grew in June according to the The Institute for Supply Management (ISM) manufacturing purchasing managers’ report. The June PMI reading came in at 52.6%, up 9.5 percentage points from May’s reading of 43.1%. Pending home sales posted a record comeback in May with a 44.3% increase from April. This week, there will be reports on non-manufacturing, car sales, job openings and inflation.
Banks are set to kick off the second-quarter of earnings season in less than 2 weeks. Estimates are for an earnings decline in the Q2 2020 of 43%. It is anyone’s guess how accurate the estimates will prove to be, as over 400 S&P 500 companies failed to guide over the last 3 months. Stocks are coming off their best quarter in decades, so there is pressure to deliver good news or at least some clarity in company strategy to navigate the current Covid-19 environment.
We wouldn’t be surprised to see markets take a pause here. Continuing spikes in cases or temporary shutdowns on a local level will likely begin impacting markets. The uncertainty around company results won’t be answered for at least 3-4 weeks so some caution may be warranted.
“What then is freedom? The power to live as one wishes.” – Marcus Tullius Cicero
Weekly Review – 06/29/2020
June 29, 2020
Global stocks retreated last week on concerns that a recent surge of covid-19 cases will hamper economic growth. Adding to the uncertainty last week, the Fed released the results of this year’s stress tests on banks and announced that bank buybacks are suspended through September and dividend growth will be capped and payouts based on a formula tied to trailing earnings … not unexpected.
On the week, the S&P 500 lost 2.9% while the DJIA gave back 3.3%. The Russell 2000 which represents small/midsized US companies also moved lower as it declined 2.8% for the week. International markets were a bit better, but they still lost ground as developed international markets (MSCI EAFE) lost 1.3% while emerging markets (MSCI EM) closed lower by 0.1%. Bonds were a bit higher as the Bloomberg Barclays Aggregate finished ahead by 0.2% on the week. The 10yr Treasury ended last week at a yield of 0.64%. Gold prices closed at $1,772.50 for a 1.5% advance for the week as investors fled to the safe-haven metal. Oil prices dropped 3.4% to $38.49 per barrel as soft demand failed to dent more-than-adequate supply. Oil prices are down 37% year-to-date – a boom to consumers and most businesses.
Economic news last week was mixed. On Monday, the National Association of Realtors reported that existing home sales for May dropped 9.7% to a seasonally adjusted annual rate of 3.91 million, missing expectations of 4.09 million. On Tuesday, the U.S. Census Bureau reported that May new home sales jumped 16.6% month-over-month to a seasonally adjusted annual rate of 676,000, far exceeding consensus for 640,000. On Thursday, initial jobless claims were 1.5 million, exceeding expectations by 150,000 while continuing claims dropped 1 million to 19.5 million (beating expectations of 20.0 million). The Bureau of Economic Analysis reported on Thursday its final reading of first quarter GDP … results showed that economic growth contracted at a seasonally adjusted annual rate of 5.0%, in line with expectations. Also on Thursday, the Commerce Department released its reading of new orders for manufactured durable goods in May; orders surged 15.8% versus expectations for a 10.45% gain. Also on Thursday, U.S. initial jobless claims for the week ending June 20 declined from 1.54 to 1.48 million.
Investors will be watching the results of the re-openings in most states and countries around the world. Continuing spikes in covid-19 cases will likely cause investors to take profits until the path forward becomes less murky. We expect a bit of volatility during this holiday-shortened this week as the second quarter comes to a close.
Happy Fourth of July!
“Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it.” Thomas Paine
ND&S Weekly Commentary 6.22.20 – Re-openings Continue
June 22, 2020
Despite some volatility during the week, as investors continued to assess the reopening of the economy, equity markets rebounded posting their fourth weekly gain out of the past five weeks. Last week the S&P 500, DJIA and NASDAQ were up 1.9%, 1.1% and 3.7%, respectively. For the week, the strongest sectors were health care, technology and consumer staples. Technology stocks continued to be among the leaders and the sector is the best performing year-to-date in the S&P 500 up 12.1%. There is some evidence that the stock market advance is starting to broaden out as earlier this month more than 97% of stocks in the S&P 500 traded above their 50 day moving average … it is a fairly rare occurrence for breadth to be so strong and it usually forecasts good markets ahead. International equities also advanced last week with MSCI EAFE up 2.1% and emerging markets up 1.5%. Going forward, investors will continue to be focused on economic recovery signs, virus hot spots and increasingly on the upcoming Presidential election.
Fixed income markets also advanced slightly as the Fed continues to ensure that sectors of the bond market function normally. The 10yr Treasury closed at a yield of 0.70%, unchanged from the prior week. Interest rates are likely to remain quite low for the months ahead. Bonds should offer investors some protection in the event of a shock to the equity markets. Investors should continue to monitor their asset allocation targets and re-balance as appropriate.
The U.S. Commerce Department reported last week that retail and food-services sales rebounded 17.7% in May, greatly exceeding estimates for an 8.4% advance. This after retail sales plunged a combined 21.8% in March and April. Jobless claims from the previous week were 1,508K which missed estimates although continue to trend in a positive direction. This week we’ll get fresh numbers on durable goods orders, personal income and spending and existing/new home sales.
“It always seems impossible until it’s done.” – Nelson Mandela
ND&S Weekly Commentary 6.15.20 – Volatility
June 15, 2020
Last week US stocks suffered their worst week since March. Investors were rattled over fears of rising COVID-19 infections and very dovish comments by the Federal Reserve, “the Fed,” forecasting a weaker than expected economy. On Thursday, the Dow Jones Industrials (DJIA) fell more than 1,800 points representing a 6.9% drop. Stocks were unable to sustain their bullish pace for the last 11 weeks during which they gained over 44%.
For the week, the DJIA slid 5.6%, the S&P 500 declined 4.8% and the tech heavy Nasdaq was down 2.3%. Foreign markets also weakened with Developed (MSCI EAFE) and Developing International (MSCI EM) equities down 4.2% and 1.5% respectively. The Cboe Volatility Index (VIX) commonly referred to as Wall Street’s” fear gauge,” gained 44% for the week. Bankrupt companies like Hertz Holdings went wild, rocketing 115% on Monday, dropping 24% on Tuesday and 18% on Thursday. Traders and speculators are making a spectacle of themselves and stirring up tremendous volatility.
On Wednesday, Federal Reserve Chairman, Jerome Powell, stated that the economic recovery is going to be slower and more painful than many had hoped. Powell said the Fed has no plans to raise short-term rates through 2022 and would continue adding liquidity to the credit markets. The 10 year US Treasury yield ended the week at 0.71%, a 0.2% weekly decline. The Fed has been buying bonds for 10 straight weeks including high yield corporates and municipals which stabilized credit markets and enriched risky bond holders. In fact, high yield bonds have gained more than 21% since bottoming in late March. There’s an expression that you should never fight the Fed.
In May, the US surprisingly added 2.5 million jobs, far exceeding the consensus expectations of a 7.5 million job loss – though the added jobs only represented 11% of the 22 million job lost in the preceding two months. The manufacturing and services activity declined but showed improvement over April’s reports. The price of oil once again revealed its volatility on rising inventories declining 7.8% to $ 36.45 price per barrel.
With all of this uncertainty, let us not forget what boosted the market the last several weeks. The Fed’s massive liquidity stimulus, improving economic data, our adjusting to life and business in the new coronavirus world and investor’s fear of missing out have all contributed to the boost. Moreover, there was encouraging news by Eli Lilly and Regeneron Pharmaceuticals on their coronavirus treatments. Moderna also announced it will begin a Phase 3 study of its virus vaccine next month.
This week retail sales will be released on Tuesday, housing starts and building permits on Wednesday and the leading indicator on Thursday. Markets will continue to be quite volatile and we recommend investors try and remain patient and stay close to their long-term asset allocation targets.
Please stay safe!
“You pay a very high price for a cheery consensus. It won’t be the economy that will do in investors; it will be themselves. Uncertainty is actually the friend of the buyer of long-term values.” —-Warren Buffet
Weekly Commentary: Optimism Rules the Week
June 8, 2020
Global stocks surged last week as investors focused on improving, albeit still dismal, economic news. Investors seemed to shrug off concerns related to the coronavirus, trade tensions with China and widespread protests.
On the week, the S&P 500 gained 4.9% while the DJIA surged 6.8%. The Russell 2000 which represents small/midsized US companies also jumped higher as it added 8.1% for the week. International markets joined the party as developed international markets (MSCI EAFE) jumped 7.1% while emerging markets (MSCI EM) tacked-on 7.9%. Bonds sold off as the Bloomberg Barclays Aggregate finished lower by 0.49% on the week. The 10 yr Treasury ended last week at a yield of 0.895%, up 24.3 basis points on the week as bond yields reached their highest levels since March. Gold prices retreated last week and closed at $1,676.20 for a 3.5% drop for the week while oil prices continued their march higher and finished up 11.4% to $39.55 per barrel. Even after last week’s surge, oil prices are down 35.2% year-to-date.
Economic news continues to be dismal although many reports were better than feared. Investors are certainly betting that the worst is behind us. On Monday, the Institute of Supply Management reported that the purchasing mangers’ index (PMI) moved up 1.6% to 43.1% … consensus was for 43.7%. On Wednesday, the ADP National Employment Report (NER) indicated a loss of 2.76 million jobs in the private sector, better than an expected loss of 9 million jobs. May’s non-manufacturing index (NMI) grew 3.6% to 45.4%, ahead of expectations of 44.4%. Also on Wednesday, the U.S. Commerce Department reported that new orders for manufactured goods sank 13%, slightly better than expectations for a 13.4% decline. On Friday, the Labor Department reported that the country added 2.5 million jobs in May, a huge surprise given that consensus was for losses of 8.3 million jobs. The unemployment rate fell to 13.3% from April’s 14.7% level (a post-World War II high). Despite May’s gains, unemployment remains historically high – nearly four times the rate in February.
We mentioned last week that markets will need to broaden out beyond just technology stocks in order to meaningfully advance from here. The positive employment last week prompted just that … value/cyclical stocks moved nicely higher last week as investors bet that the economy might be able to recover from its downturn faster than originally thought. It is impossible to know whether or not this rotation persists, but a broadly diversified portfolio will benefit investors in such an environment.
Markets will be watching as more and more states begin their re-opening process. Stay safe.
“If you cannot do great things, do small things in a great way” – Oliver Napoleon Hill
ND&S Weekly Commentary 6.1.20 – Green Shoots?
June 1, 2020
Global stocks advanced last week for the second week in a row as investors pinned their hopes on a successful reopening of the economy.
On the week, the S&P 500 gained 3.0% while the DJIA advanced 3.8%. The Russell 2000 which represents small/midsized US companies also moved higher as it added 2.8% for the week. International markets joined the party as developed international markets (MSCI EAFE) jumped 5.1% while emerging markets (MSCI EM) tacked-on 2.9%. Bonds were a bit higher as the Bloomberg Barclays Aggregate finished ahead by 0.2% on the week. The 10yr Treasury ended last week at a yield of 0.65%. Gold prices closed at $1,736.90 for a 0.1% advance for the week while oil prices leapt 6.7% to $35.49 per barrel. Even after last week’s surge, oil prices are down 41.9% year-to-date.
Economic news continues to be dismal although many reports were better than feared. Perhaps some green shoots are beginning to appear. On Tuesday, the U.S. Census Bureau reported that April new home sales inched higher by 0.6% month-over-month and down 6.2% year-over-year. The news was much better than the consensus expectation of a 20% decline. On Thursday, the Commerce Department released its reading of new orders for manufactured durable goods; orders fell 17.2% versus expectations for a 19.1% drop. Also on Thursday, the Bureau of Economic Analysis reported a revised first quarter real GDP of -5.0% (driven by weaker than expected business investment spending), below expectations of a 4.8% decline. Pending Home Sales declined 21.8% in April while expectations were for a 17% drop. U.S. initial jobless claims for the week ending May 23 declined from 2.4 to 2.1 million. Of note, 41 million people have filed initial claims for unemployment insurance over the past 11 weeks.
We certainly recognize that markets have advanced handsomely off of the March 23rd bottom and that market valuations are no longer favorable. It is reasonable to expect that the market advance during the past two months or so is unlikely to persist. The five largest stocks in the S&P 500 represent 20% of the index, exceeding the previous 18% peak during the internet bubble in March 2000. The market will need to broaden out for the index to climb meaningfully higher from here … fortunately, we have seen such a broadening out over the past two weeks. We will keep a close eye on the persistency of this rotation.
Investors will be watching the results of the reopening in most states along with escalating trade tensions with China. After a strong May, we would not be surprised if the markets took a breather in June. Of course, the tragic and senseless killing of George Floyd and the resulting protests will cast a pall over the country until a healing process takes hold.
George Floyd – Rest in Peace.
Big Tech Survives the Week Pushing Major Indexes Higher
August 3, 2020
Major indices pushed higher last week on the back of positive earnings from tech titans – Amazon, Apple and Facebook. Despite contentious anti-trust hearings Wednesday on Capitol Hill, the mega-tech companies came through earnings relatively unscathed even with high expectations coming in.
On the week, the S&P 500 increased 1.75% while the DJIA slipped 0.15%. Small companies represented by the Russell 2000 increased 0.89%. International markets were volatile with developed markets giving back 2.12% and emerging markets increasing 1.77%. The yield on the on the 10yr US Treasury declined to 0.55%. Gold prices continued to advance closing at $1965/oz. marking a 3.3% advance on the week. Oil (WTI) pulled back to $40.25 per barrel.
U.S. economic data varied last week. Manufactured durable goods orders increased 7.3% in June, beating expectations. The Bureau of Economic Analysis reported that the economy contracted a “post-depression” record 32.9% in the 2nd quarter which was actually better-than-feared. Analyst expectations were for a 34.5% contraction. The economy likely bottomed out at the end of April/beginning of May so expectations are for a record advance in GDP in the 3rd quarter. Consumer spending increased 5.6% in June, outpacing expectations for a 5.2% increase. On the negative side, jobless claims increased for the second week in a row while personal income declined 1.1% in June. There will be reports released this week on manufacturing and services PMIs and July U.S. employment.
Earnings continue to come in well ahead of expectations. 83.9% of companies have reported a positive EPS surprise. Earnings growth is down roughly 33.4% year over year vs expectations of an overall decline of 37.7%. Revenues have declined 9% year over year versus expectations of a 10.5% decline. Earnings season will continue this week with CVS and Disney among those scheduled to report.
We anticipate markets taking a breather here. With earnings season more than half way over, investor attention will begin turning to COVID-19 response and the upcoming election. We are sticking close to our investment policy targets and selectively adding to dividend growth opportunities where prudent.
“If all economists were laid end to end, they’d never reach a conclusion.” – George Bernard Shaw