ND&S Weekly Market Commentary – Santa’s Rally
December 3, 2018
November was a volatile time for global markets. The price of oil tumbled, tech stocks were pressured and credit spreads widened. The risk-off scenario gave way to a rotation into defensive areas such as health care, consumer staples and utilities.
Last week was extremely busy, as U.S. stocks roared back buoyed by Fed Chair Jerome Powell’s commentary. Powell said that interest rates were just ”below” the neutral rate. This dovish comment was far from the long way off sentiment he had shared only a few months ago. The S&P 500 notched its best week in 7 years, returning 4.9% while the DJIA gained 5.3% and the NASDAQ rebounded 5.6%.
International markets fared well with the developed index (EAFE) gaining 1.0% and emerging (EEM) up 2.7%. The darkest cloud over global markets has been China/US trade relations. At Saturday’s meeting between President Trump and China’s Xi Jinping at the G-20 summit in Argentina, the two leaders agreed to a truce for 90 days to allow for further negotiations. Hopefully, a good sign and should provide a lift to markets.
Though oil finished the week marginally higher, the global glut sent prices down 20% for November. A retaliatory response is expected at OPECs meeting this Thursday.
In October, U.S. Housing markets have shown sharp declines in pending sales of existing homes and sales of new homes. The dramatic decline in oil, a softening in housing, and the possibility of an inverted yield curve point towards a lid on inflationary expectations. The fed will possibly exhibit more caution about next year’s rate hikes at their December 16th meeting.
As a result of weakening economic data and dovish Fed comments, the 10yr Treasury yield declined to 3.01%. This represents a decline of 3Bps for the week and its lowest yield since mid-September. The yield curve has been flattening of late as the spread between short and long-term rates has narrowed. An inverted yield curve historically has signaled a recession is on the horizon.
Several important economic reports and news are expected this week. On Monday, PMI manufacturing data and automobile sales will be reported. ISM non-manufacturing index will be released Wednesday and November’s Job report coming Friday. The much anticipated OPEC general meeting to determine production levels will begin on Thursday.
“No problem of human making is too great to overcome by human ingenuity, human energy and untiring hope of the human spirit.” – George H. W. Bush
Happy Hanukkah!
Weekly Commentary (11.19.18) – Rudderless Markets
November 19, 2018
Most equity markets were rudderless last week (once again) as the battle between bulls and bears continues. The 3Q’18 earnings season is coming to a close with 95.3% of companies having already reported. So far, S&P 500 earnings per share have grown 32.9% year-over-year in the third quarter … excellent results! Bears are pointing to the fact that global and S&P 500 earnings have likely peaked. We agree, but earnings for next year still look quite reasonable with S&P 500 earnings expected to grow roughly 10%. Despite excellent news on the economic front, continuing concerns over trade wars, Fed action (a December rate hike is already in the cards along 3 rate hikes for next year), political bickering in Washington and ongoing geopolitical tensions have kept the mood on Wall Street quite dour.
For the week, the DJIA lost 2.15% while the S&P 500 gave back 1.54%. The volatile Nasdaq declined 2.09% after some profit-taking in technology stocks. Developed international markets were also weak as the MSCI EAFE index dropped 1.42% for the week. Emerging markets were the only bright spot as the MSCI EM index gained 1.05% (finally). Small company stocks, represented by the Russell 2000, gave back 1.37% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week higher in a flight to safety. As a result, the 10 YR US Treasury closed at a yield of 3.08% (down ~11 bps from the previous week’s closing yield of 3.19%). Gold prices closed at $1,221/oz – up 1.2% on the week. Oil prices continued their sell-off during the week as oil closed at $56.46 – down 3.73% for the week (good for consumers and businesses …).
The week ahead will bring a host of economic reports – housing starts and existing home sales, durable goods, consumer sentiment and flash PMI. We expect the reports to be mostly positive, but investors will be focusing on any comments from the Fed and speculation about the upcoming G-20 meeting and a possible resolution of a deal with China.
Volatility is here. As always, we plan to look through the day-to-day news and focus on longer-term objectives. Investors should stay the course and stick close to their long-term asset allocation targets.
Most importantly, we wish to extend to all a very Happy Thanksgiving!
“An attitude of gratitude brings great things.” – Yogi Bhajan
ND&S Weekly Market Update (11.12.18) – U.S. Markets Bounce Back
November 12, 2018
U.S. markets responded positively to midterm election results that were in-line with expectations, with Democrats taking control of the House and Republicans retaining control of the Senate. For the week, the DJIA, S&P 500 and NASDAQ rose 3.0%, 2.2% and 0.7%, respectively. The best performing sectors last week were healthcare, real estate, utilities and consumer staples as investors favored those sectors that generate stable earnings and larger dividends. With 91% of S&P 500 companies having reported earnings for the 3rd quarter, 77% have beaten earnings expectations, but only 49% have exceeded on revenues. It appears that the market is penalizing earnings misses more than revenue misses. International equities did not fare as well for the week, as developed markets only advanced 0.2% and emerging markets declined -2.0%.
As expected, the FOMC did not hike rates at its November meeting. However, they noted in their minutes that unemployment has declined since the September meeting, which suggests that the Fed is still on track to hike rates one more time in December. For the week, the yield on the 10 year U.S. Treasury fell to 3.19% from 3.22% the week prior.
The week ahead will include reports on inflation, industrial production, and retail sales. For the balance of the year, U.S. economic and profit fundamentals continue to look solid suggesting that investors should allow economics to guide their investment decisions in the near-term.
On this Veterans Day, we thank all those who have honorably served our great nation. We are especially grateful for all those service members who never returned home as we are reminded of the inscription on the Tomb of the Unknown Soldier – “Here rests in honored glory an American soldier known but to God”
ND&S Weekly Commentary 11.5.18 – Spooky October is Over!
November 5, 2018
Last week investors breathed a sigh of relief as markets rebounded. October was a scary month as stocks fell 6.9%, which was their worst monthly performance since September 2011. Thankfully, stocks finished higher helped by a solid jobs report, positive earnings, and the signs of progress in China trade negotiations.
All major equity markets performed well with both the Dow Jones Industrial Average and S & P 500 returning 2.4%. Smaller stocks did very well, as the Russell 2000 gained 4.35%. The NASDAQ was up 2.7% despite a 7% decline in Apple shares, which suffered, as a result of the company’s lower revenues and guidance. International equities were the real winners. Developed International (EAFE) gained 3.4% while emerging equities (EM) returned 6.1%.
On Friday, the Labor Department reported that employers added 250,000 jobs in October, beating all consensus estimates. The unemployment rate remained at 3.7% and wages increased 3.1%. Economists have been watching data closely for signs of inflationary pressures. Interest rates, which rise as bond prices fall, climbed after the solid job report. The 10-Year Treasury rose to 3.21%, its highest over the last few weeks.
Oil prices plummeted 7% to $62.86 a barrel. Earlier last month, concern over Iranian sanctions and a reduction in crude supply drove the price of oil to $86 a barrel.
The third quarter earnings season is winding down with the 76 companies, in the S & P 500 reporting this week. Major economic news will include services PMI today, the Federal Reserve’s minutes, and consumer sentiment on Friday. Tomorrow, impactful and melodramatic mid-term elections will stir the political pot for a while so be prepared for more volatility. We strongly recommend investors be patient and stay the course. Please do not abandon goals and objectives based on emotional responses to market volatility and headline news.
“We live in a world where we need to share responsibility. It’s easy to say, “its not my child, not my community, not my world, not my problem.” Then there are those who see the need and responding consider those people my heroes”—Mr. Rogers
ND & S Weekly Commentary 10.30.18 HAPPY HALLOWEEN!
October 30, 2018
The numerous issues affecting the financial markets continues to grow. Last week all three major U.S. equity indexes were on track to end the month of October with their worst month in eight years, for the week the S&P 500, the DJIA and the NASDAQ were off 3.93%, 2.97% and 3.78% respectively. The worst performing sectors in the S&P were energy, industrials and financials. Worries about corporate revenues peaking and slowdowns in China and Europe spilling over into the U.S. sent markets lower. International markets also declined with the EAFE and emerging markets down 3.87% and 3.27%. Investors sought shelter in fixed income as U.S. Treasuries rallied and the rate on the 10 year fell from 3.20% to 3.08%. Overall earnings season has been decent but investors’ reactions have been critical. Though a few names reporting , like Intel, exceeded expectations, all eyes were on revenue growth and guidance and many stocks frightened the market like Caterpillar, Texas Instruments and 3M with less than expected third quarter results.
On the positive side, 3rd quarter GDP in the U.S. was reported last week to have grown at 3.5% slightly above expectations of 3.2%. Despite this deceleration from 4.2% in GDP growth is still robust. Housing was a weak spot, but consumer and government spending increased at a strong pace. October has typically been a scary month with a seasonal tailwind heading into year-end. We expect market volatility to continue and feel more comfortable with more reasonable valuations, attractive dividend yields, and solid US economic growth.
Investors should maintain their asset allocations consider opportunities to rebalance moving tactically towards defensive positioning.
“Double, double toil and trouble: Fire burn and caldron bubble.” From Shakespeare’s Macbeth.
ND&S Weekly Commentary 10.22.18 – Play Ball!
October 22, 2018
Market volatility continued last week as gains from Tuesday’s big rally were washed away as the week progressed. For the week, the DJIA closed higher by 0.45% while the broader-based S&P 500 finished up a modest 0.05%. Smaller companies representing the Russell 2000 closed lower by 0.29%. International equities also finished in the red with the MSCI EAFE and MSCI EM down .06% and .88%, respectively. Treasury yields pushed higher across the board as anticipation of additional Fed action grew. The 10yr US Treasury closed the week at a yield of 3.20%, up from 3.15% the week prior.
The equity markets and economy appear to be experiencing a bit of indigestion over the past few weeks. Economic data for the week, again, was a little soft. Retail sales rose 0.1% in September, less than an expected 0.5% increase. Industrial production rose 0.3% in September coming in slightly ahead of estimates. Housing starts fell 5.3% month over month to a seasonally adjusted 1.201M missing estimates. Housing starts is one of economist’s favorite leading indicators as it can offer a timely glimpse into the health of an economy. This week’s economic releases include reports on durable goods orders, manufacturing, consumer sentiment, and the 1st estimate of 3Q GDP.
Earnings season is well underway, and so far has been relatively positive versus expectations. 75% of companies have posted above expected earnings per share with y/y growth having increased to 24%. Revenues are up 7.6%, which is slightly below expectations and warrant monitoring. This week, 202 companies in the S&P 500 are scheduled to report. We will be watching earnings reports closely this week especially Amazon AMZN, Alphabet GOOGL, Verizon VZ, and Merck MRK to name a few.
We anticipate volatility to remain present through the remainder of earnings season and through the mid-term elections. For clients, be on the lookout for Q3 reports and our 3rd Quarter newsletter titled Fed Up.
Let’s Go Red Sox!
“Baseball is the only field of endeavor where a man can succeed three times out of ten and be considered a good performer.” – Ted Williams
ND&S Weekly Commentary (10/15/18) – Earnings Reports Begins
October 15, 2018
Equity markets declined for a second week as the S&P 500 fell for six consecutive sessions before a rally on Friday. It was its longest losing streak in nearly two years. For the week, the S&P 500 was off 4.07% and the DJIA and the NASDAQ were down 4.17% and 3.74%, respectively. International markets also declined with developed markets down 3.9% and emerging markets were off 2.0%. A combination of factors led to these declines including fears of inflation, a slowing Chinese economy, tariffs, FOMC rate hikes and elevated equity valuations. However, in spite of these concerns the outlook for the U.S. economy and corporate earnings is still positive. Inflation rose a modest 0.1% in September, which came in below expectations for a 0.2% increase. Year-over-year CPI is now 2.3%, which is a deceleration from August’s 2.7% reading. Third-quarter earnings are officially underway with positive reports on Friday from (C) Citigroup and (JPM) J.P. Morgan. This week, corporate earnings announcements continue with 68 companies in the S&P 500 scheduled to report.
Fixed income markets rose as investors looked for a safe haven during last week’s volatility. As a result, the rate on the 10 year U.S. Treasury closed the week at a yield of 3.15%, down from 3.23% the week prior. This week look for economic reports on retail sales and existing home sales.
Investors should resist the urge to try to time the market and instead ensure that portfolios are well balanced and diversified.
“Greatness is a road leading towards the unknown.” – Charles de Gaulle
Rates Continue to Rise
October 8, 2018
What a wild week on Wall Street!
As a result of rising interest rates, the US Stock Market fell sharply to close out the week after notching record highs on Tuesday and Wednesday. The S&P 500 closed lower by 0.95% for the week while the DJIA finished flat. In addition, a Bloomberg News article claims China hacked and infiltrated several top US Companies. This resulted in a selloff in tech firms (which also makes up a large portion of the S&P 500) and further complicates trade negotiations with China. The tech-heavy NASDAQ struggled closing the week down 3.18%. The international equity markets continued to suffer from the combination of a stronger US dollar, slowing global trade, high emerging market debt levels and China’s slowing growth rate. The MSCI EAFE declined 2.34% while the emerging market index lost 4.48% for the week.
The yield on the 10yr Treasury closed the week at 3.24% compared with 3.06% the week prior. This marks its highest level since 2011. There are concerns that inflation will continue creeping higher which will force the Fed to continue to respond with rate increases. There will be reports on inflation in the week ahead.
The unemployment rate declined to 3.7% in September, marking the lowest level since December 1969. Hurricane Florence contributed to a slightly less-than-expected addition of jobs … the US economy added 134,000 in September slightly below expectations of 185,000. Wage growth, a possible precursor of inflation, grew 2.8% from last year. Also worth noting: Amazon announced last week it would raise the minimum wage they pay their employees to $15hr. This will likely pressure other employers to take similar actions in an effort to compete for talent in a tight labor market.
There is still good news about dividend growth. So far this year, nearly 400 companies in the S&P 500 raised their dividends $117.2 billion, a 6.9% increase from a year ago.
We expect volatility to continue with the upcoming mid-term election, rising interest rate fears, and 3rd quarter earnings season. Earnings season kicks off this week with (C) Citigroup and (JPM) JP Morgan scheduled to report. We are expecting another strong quarter of earnings growth although it could be a slight decline from the two previous quarters of 24% year-over-year growth. Initial estimates according to FactSet are for earnings growth of 19.2%. Stay Diversified!
“Patriotism is supporting our country all the time, and your government when it deserves it.” – Mark Twain
NDS Weekly Commentary 10.1.18 – Fed Continues to Raise Rates
October 1, 2018
Markets closed the third quarter on a sour note with global equities declining modestly for the week. The DJIA closed lower by 1.07% while the broader-based S&P 500 was off 0.51%. International equities also closed the week in the red with developed international and emerging markets off 0.85% and 0.25%, respectively. Treasury yields closed slightly lower on the week, as the 10yr US Treasury yield closed at 3.05%. Gold continued to hover around $1200/oz. while oil prices jumped as investors questioned the impact of possible sanctions against Iran.
The FOMC two-day policy meeting concluded Wednesday with the committee voting unanimously to raise the benchmark rate by 25bps. This marks the third rate hike in 2018 with another likely increase in December. The Federal Reserve Chairman Jerome Powell reaffirmed the Fed’s outlook for gradual hikes while describing the US economy as strong. Noteworthy in the Fed’s comments was the removal of the word “accommodative” when referring to future actions … increasing the odds of a rate hike in December.
In the week ahead, look for economic releases on manufacturing, trade, car sales, and employment. It appears that progress is being made on a revised NAFTA agreement with Mexico and Canada. Most news coverage will continue to be focused on the nomination of Judge Kavanaugh to the Supreme Court; however, this will continue to have very little effect on the market as investors continue focusing on positive company earnings and strong economic fundamentals. As always, we suggest ignoring the day-to-day noise of the markets and get out and enjoy the beautiful colors that Fall brings.
“Autumn’s the mellow time.” – William Allingham
ND&S Weekly Commentary (11.26.18) – Markets Serve Up Cold Turkey
November 26, 2018
Markets were under pressure last week over global growth concerns. The U.S. trade relations with China and potential for increased tariffs beginning next year are weighing heavily on investors’ minds. In addition, the Federal Reserve is expected to raise rates at their December meeting while multiple rate increases are expected for next year. Any improvement on trade relations and/or some dovish fed comments will improve investors’ outlook.
For the holiday-shortened week, the DJIA declined 4.4% while the broader-based S&P 500 retreated 3.8%. International equities fared a bit better on the week, but were also negative. Developed International represented by the MSCI EAFE declined 1.1% and emerging markets were off 1.7%. Recently, bonds have offered a place for investors to hide but are still negative on the year. The 10yr US Treasury yield started the year at 2.40% and closed last week at 3.05%. We continue to favor shorter duration fixed income as the yield spreads are tight (i.e. 2yr treasury yield is 2.81% … a 24bps spread to the 10yr) while uncertainties over rates continue.
Economic data during the week was a bit light; housing starts increased 1.5% m/m slightly missing expectations … durable goods orders declined 4.4% in October missing expectations. The positive spin is these lower than expected results may give the Fed some pause and temper its guidance. In the week ahead, there will be reports on consumer confidence, new home sales, inflation and the 2nd release of 3Q18 GDP.
At ND&S, we view the recent “correction” (measured by a decline of at least 10%) in equities as a normal market reaction … unpleasant as it may seem. Markets also corrected in February of this year and normally experience one about every year. Stocks in cyclical sectors consisting of technology, consumer discretionary and energy have triggered the most recent declines. However, stocks that are classified as “defensive” have held up much better and in some cases appreciated. The economy appears strong and we are encouraged by strengthening consumer spending as evidenced by Black Friday online sales increasing 23.6%, according to Adobe Analytics, and confidence readings remaining near peak levels. Unemployment continues to hover around 3.7%, lowest since the late 1960s. In addition, wage growth is up 3.1% from a year ago. In times like this, we are reminded of a quote from Byron Wein: “Disasters have a way of not happening”