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

ND&S Weekly 5.31.22 – “A Bit of Reprieve”

May 31, 2022

Wall Street ended its 7th straight week of market declines as investors were calmed by signs of peaking inflation and consumer resiliency.
The S&P 500 gained 6.6% this past week, while the Nasdaq rose 6.9% and the Dow Jones Industrial Average advanced 6.3%. International equities also finished higher with developed markets (MSCI-EAFE) and emerging markets (MSCI-EM) up 3.5% and 0.9%, respectively. The yield on the 10-year U.S. Treasury moved 4bps lower last week to close at 2.74%.

On Wednesday, the Federal Reserve released minutes from their latest meeting that showed its members felt that raising interest rates by half a percentage point at their next two meetings could be enough to slow economic growth to tame inflation. Investors had feared a more aggressive rate hike policy might be needed. The Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index (PCE) rose at an annual rate of 6.3%, still elevated but down from 6.6% in March. The annualized GDP figure released on Thursday showed that the economy contracted by 1.5%, higher than the 1.4% estimated.

The price of oil surged with U.S. crude climbing 4.4% to $115 per barrel. That is still down from the high of $123 at the beginning of the war in Ukraine. Housing showed signs of slowing as home sales fell for the sixth straight month due to high prices and higher mortgage rates. There will be economic reports this week on the labor market and the release of the S&P Case-Shiller Home Price Index.

With the uncertainty of inflation, interest rates, and geopolitical tensions, market volatility will continue. We recommend revisiting investment objectives and risk tolerance and fine-tuning accordingly.

“Our debt to the heroic men and valiant women in the service of our country can never be repaid. They have earned our undying gratitude. America will never forget their sacrifices.”Harry S. Truman

ND&S Weekly Commentary 5.23.22 – The Bears Have Come out of Hibernation

May 23, 2022

A rough week for equities ended with all US indices down for the week. The S&P 500, a broad measure of the market, traded intra-day below a 20% decline from its 52-week high, signaling a possible “bear market.”

The equity markets’ wide swings are expressions of its varied views and lack of true conviction. There are as many pundits who believe we are at the bottom of this decline as there are who believe this is only stage one of a historic decline in equity values. If current levels are the bottom of this decline, we still have not seen the “capitulation” that typically comes before the true bottom. Capitulation is the market’s version of the last stage of grief – the denial, the anger, the bargaining, and the depression are over, and the market’s “acceptance” is usually a broad sell-off that goes well below fair valuations. The challenges include that there is no guarantee that these past behaviors will be repeated.

We see many reasons to be positive that even if we have a recession, it will be shallow and short-lived. We see reasons to be concerned, too. More important is our confidence in the longer-term outcomes from our investment decisions. Our clients are interested in the long-term values of their investments. Short-term price changes that are overly influenced by near term noise, greed, fear and other emotions are the enemy of sound investment decisions.

For the week, the DJIA declined 2.78%, while the S&P 500 dropped 3.05%. The tech-heavy Nasdaq finished 3.82% lower. International markets gained, with the MSCI EAFE Index up 1.53% while emerging market equities (MSCI EM) popped 3.13%. Small company stocks, represented by the Russell 2000, declined 1.05%. Fixed income, represented by the Bloomberg/Barclays Aggregate recovered 0.59% for the week. The 10 YR US Treasury rallied, dropping its yield to ~2.8%. Gold USD prices ($1,841/oz.) moved 1.9% higher as the USD traded slightly lower over the week. As we move into the high demand summer driving season, Oil prices were up about 2.5% last week to close at $113.23 per barrel.

Bonds, as measured by the benchmark US Treasury yield curve, rallied for the week. This was a positive sign of a typical market reaction of investors moving away from the struggling equity market to the higher quality of predictable cash flows from US Treasury obligations. In previous weeks, we saw stock and bond prices both declining. This is some indication that, for the time being, that investors are comfortable with the yield curve in place now. However, at the same time, yields on corporate obligations, relative to US Treasuries, increased. Corporate yields are measured by their “spread” (difference) over UST obligations with the same maturity. This increase in spreads is, perhaps, an early sign of investors’ credit concerns. As the risk of difficult conditions for corporations increases and their ability to service debts (potentially) declines, spreads increase, because investors demand higher compensation for taking on this risk. Such indicators bear watching as the bond market has a reputation of “getting things right” and is generally less emotional than the equity markets.

In the week ahead there are more earnings reports will be trickling in, with NVIDIA, a bellwether for semiconductor chips, being one to watch. Durable goods orders and GDP numbers come out Wednesday and Thursday and Personal Spending and Income numbers on Friday. The Bond Market – which gets this right too! – closes at 2PM on Friday. So, tell your employer that you follow the bonds and see if you can get out early for a nice long weekend!

“You make most of your money in a bear market, you just don’t realize it at the time.”
– Shelby Cullom Davis

Weekly Commentary (5/16/22): – Are We At The Peak?

May 16, 2022

Equity markets continued their poor performance last week despite a strong rally on Friday.  Last week’s Consumer Price Index (CPI) and Producer Price Index (PPI) confirmed inflationary pressures that investors continue to grapple with. While the Fed tries to navigate the “soft landing” with its recent shift in monetary policy, to combat inflation, investors have become increasingly concerned that the Fed has become too aggressive which could tip the economy into a recession.

For the week, the DJIA declined 2.08%, while the S&P 500 dropped 2.35%. The tech-heavy Nasdaq finished 2.77% lower. International markets were also lower, with the MSCI EAFE Index down 1.37% while emerging market equities (MSCI EM) gave back 2.60%. Small company stocks, represented by the Russell 2000, declined 2.50%. On a positive note, fixed income, represented by the Bloomberg/Barclays Aggregate recovered 0.89% for the week. The 10 YR US Treasury yield touched a multi-year high of 3.20% before closing the week at a yield of 2.93%. Gold prices ($1,812/oz.) have been under pressure lately due to a strengthening dollar ($). Oil prices were up modestly on the week closing at $110.49 per barrel.

The CPI eased to 8.3% year-over-year (y/y) which was slightly less than last month’s release of 8.5% y/y. The month-over-month (m/m) increase came in at 0.3%, slightly above expectations of 0.2%.  When stripping out volatile components of food and energy, consumer core prices rose by 6.2%. April producer prices also rolled over from peak levels with the headline number showing an 11% increase over the last year. PPI increased 0.5% m/m, which was the smallest monthly gain in over seven months. We have likely reached peak inflation; however, it should remain elevated in the near-term as higher energy prices and supply chain issues remain. This week, there will be economic reports released on industrial production, new and existing home sales, retail sales, and leading indicators.

Some investors are already pricing in a recession for 2022 or early 2023. 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, etc…). With inflation and rate trends driving pessimism in stocks and bonds alike, signs of moderating inflation could enable both asset classes to rally on the realization that investors have priced in too much fear about inflation, stagflation, and recession. Diversification, patience, and a bias towards quality will continue to help investors manage through this challenging period.

“Despite the forecast live like it’s spring” – Lilly Pulitzer