ND&S Weekly Commentary 12.31.18 – Auld Lang Syne
December 31, 2018
It was an unprecedented volatile week on Wall Street heading into 2019. While retailers were experiencing the biggest holiday sales increases in six years, investors were rattled by tumultuous trading in equity markets.
For the week, the DJIA advanced 2.8%, while the broader-based S&P 500 finished at 2.9%. The tech-heavy NASDAQ surged 4.0% and international markets were slightly weaker with the MSCI EAFE and MSCI EM up 0.5% and 0.8%, respectively. The 10yr US Treasury yield declined to 2.72% down from the previous week’s 2.79%. Investors sought safety in Treasuries as the risk-off scenario continued.
The National Association of Realtors reported that pending home sales fell 0.7% in November after declining 2.6% in October. Homebuilders and suppliers have been hit hard. Recently, mortgage rates have declined slightly which should help the housing market. US crude prices closed the week at $45.51 a barrel and have slid 11.2% for the month of December.
The partial government shutdown started a week ago Saturday closing down funding for nine cabinet-level departments and several agencies. President Trump, again at odds with Democrats, is holding the line on his demand for the border wall to be built.
The market’s decline that began in October has erased all of its 2018 gains. Several headwinds including the China and US trade conflict, the Federal Reserve tightening of monetary policy and the partial government shutdown have weighed heavily on investor minds. We expect market volatility to continue, hopefully, with less oscillation. The market needs reassurances that interest rates will remain somewhat steady, the US-China trade conflicts will de-escalate and that the government shutdown will end. While these issues are being resolved, we take solace in the strength of our economy and more than reasonable earnings expectations for 2019. The major banks begin reporting on January 18th.
Please try to avoid the media’s melodramatic coverage of financial and political instability and stay the course.
Happy New Year!
“And there’s a hand, my trusty fere!
And gie’s a hand o’ thine!
And we’ll tak a right gude-willie waught,
For auld lang syne.”
– Robert Burns
ND&S Weekly Commentary 12.24.18 – Selling Pressure Continues
December 31, 2018
Selling pressure in equity markets continued last week as less-dovish-than-expected commentary from the Fed failed to provide the spark investors were hoping. Last week, the DJIA closed down 5.1% while the broader-based S&P 500 closed lower by 7.0%. International equities weathered the week better but were still lower with the EAFE down 2.6% and EM off 1.5%. Bonds were positive for the week as yields moved lower for bonds with longer dated maturities; short-term rates moved higher as the Fed lifted the federal funds rate 25bps as expected. The 10yr US Treasury yield closed the week at 2.79%, down from 2.89% the prior week.
Just as markets become overbought when the fear of missing out sets in (remember January of this year?), the opposite can happen when markets become oversold with negative emotions and panic sets in. While in the midst of these sharp declines, it can feel like it will never end, history has shown otherwise. There is no shortage of negative headlines to point to: government shutdown, Brexit, slowing growth in China, inverted yield curve (if you can even call it that), peak earning growth, peak GDP growth, and nuttiness in Washington to name a few. We feel the market has discounted quite a bit of negative news into current prices and valuations; we have been patient but are tempted to deploy some of the cash we have built up in client accounts over the 3rd quarter. Money should begin flowing to equities as large institutions begin to rebalance for the year ahead and more buyers are drawn to these compelling prices.
We continue to wish our clients Happy Holidays and New Year.
“Many investors make the mistake of buying high and selling low while the exact opposite is the right strategy.” – John Paulson
Weekly Commentary 12.17.18 – Grinch-Like
December 17, 2018
It was a Grinch-like week. Equity markets finished in the red last week as investors fretted about ongoing trade tensions with China, slowing global growth concerns, Brexit bickering, the upcoming Fed meeting and legal problems for President Trump.
For the week, the DJIA lost 1.17% while the S&P 500 gave back 1.22%. The volatile Nasdaq declined 0.81%. Developed international markets were also weak as the MSCI EAFE index dropped 0.89% for the week. Emerging markets lost ground as well with the MSCI EM index ceding 0.95%. Small company stocks, represented by the Russell 2000, were beaten-down by 2.52% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week slightly higher (+0.06%) in a flight to safety. As a result, the 10 YR US Treasury closed at a yield of 2.89% (up 4 bps from the previous week’s closing yield of 2.85%). Gold prices closed at $1,237/oz – down 0.79% on the week. Oil prices continued their sell-off during the week as oil closed at $51.20 – down 2.68% for the week (good for consumers and businesses, but seemingly bad for the overall psyche of the market …).
The week ahead will bring a host of economic reports – housing starts and existing home sales, durable goods, consumer sentiment, final estimate of 3Q GDP and the all-important FOMC meeting. We expect most economic reports to be fairly positive, but investors will be focusing on any comments from the Fed regarding future interest rate hikes. It is widely expected that the Fed will raise interest rates by 25 bps this week. Of course, positive developments surrounding the lingering trade spat with China should provide a much needed boost to equities around the world (don’t hold your breath …).
Volatility is here. It certainly feels like this market downturn will never end, but we all know better. 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 peaceful and enjoyable holiday season.
“Every Who Down in Whoville Liked Christmas a lot…
But the Grinch,Who lived just north of Whoville, Did NOT!
The Grinch hated Christmas! The whole Christmas season!
Now, please don’t ask why. No one quite knows the reason.”
– Dr. Suess
A Sad Week for the US
December 10, 2018
Volatility continued with major U.S. equity indices ending the week in the red. During the week, the U.S. also observed a national day of mourning marking the passing of President George H. W. Bush. The DJIA, the S&P 500 and the NASDAQ were all down more than 4% for the week. Fixed income assets provided investors a safe-haven last week (although they are still negative YTD) as rates dropped sharply for the week. The yield on the 10 year U.S. Treasury fell to 2.85% from 3.01% the week prior.
International equities also declined with developed markets off 2.25% and emerging markets down 1.3%. However, in November, $34 billion in investor funds flowed into emerging stocks and bonds after one of the worst selloffs in years. The emerging market stock index is now up 5% from its October low.
Last week, the Institute of Supply Management (ISM) reported their manufacturing and non-manufacturing producer price indexes (PMI), and both releases exceeded expectations for November. The U.S. economy added 155,000 jobs in November – below expectations of 198,000. As a result, the unemployment rate remained unchanged at 3.7%, while wage growth kept its healthy pace of 3.1% y/y. Despite seemingly positive economic releases, investors seem most concerned about trade, Brexit and monetary policy.
This week look for economic reports on inflation, retail sales and industrial production. Also, the focus will be on hints as to whether the Fed will raise interest rates next week. There have been some indications that the Fed may not raise rates in 2019 as many times as previously thought.
“We are a nation of communities … a brilliant diversity spread like stars, like a thousand points of light in a broad and peaceful sky.” – George H. W. Bush
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!
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”
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 1/7/19 – Strong Jobs Report Eases Growth Concerns
January 7, 2019
Equity markets continued their volatile ways last week. On Thursday, the DJIA fell over 600 points on news from Apple that 4th quarter iPhone sales in China were below estimates. This marked the first negative sales revision for Apple in 15 years. Then on Friday, the DJIA soared over 700 points, recovering all of the previous day’s decline, as a blowout jobs report and comments from Fed Chairman Jerome Powell that the FOMC would be patient on future rate increases. Friday’s advance pushed equities into positive territory for the week with the DJIA, S&P 500 and NASDAQ up 1.7%, 1.9% and 2.8%, respectively. International equities were also positive with the MSCI EAFE increasing 1.4% and the MSCI EM advancing a modest 0.3% on the week.
The jobs report on Friday came in well above expectations with an increase of 312,000 jobs in December, with an additional 58,000 from upward revisions to prior months. Notably, the unemployment rate did rise to 3.9%, pushed up by over 400,000 workers entering the labor force last month. This moved the labor participation rate up to 63.1% from 62.9%. Perhaps, the best part of Friday’s report was that wages showed a healthy gain of 0.4% in December and are now up 3.2% from a year ago. Gains in payrolls, more workers joining the labor force and higher real wages should support additional consumer spending and bolster somewhat slower but stable economic growth in 2019.
Interest rates fell last week as the rate on the 10 year U.S. Treasury dropped from 2.72% to 2.67% further flattening the yield curve. This week, look for economic reports on ISM non-mfg. PMI, inflation and the release of FOMC minutes from last month. In addition, US-China trade talks would resume this week at the vice-ministerial level.
“Without investment there will not be growth, and without growth there will not be employment.” -Muhtar Kent