ND&S Weekly Commentary (2/20/18) … Bounce Back
February 20, 2018
Equity markets rebounded last week posting their best weekly return since 2013 … although we point out the week prior, the market’s decline was one of the worst in several years. History shows that sharp moves in the markets are typically clustered together and why market-timing is ultimately a fruitless endeavor.
For the week, the DJIA returned 4.36% while the broader-based S&P 500 closed higher by 4.37%. International equities also marched higher with the MSCI EAFE and MSCI EM up 4.28% and 5.04%, respectively. However, with equities bouncing back so fast, we are maintaining a bit of caution as history shows markets typically make a retest of the previous lows before moving structurally higher. For long-term investors, the bull market for equities remains intact.
Yields continued their move higher last week with the 10yr US Treasury trading as high as 2.94% before settling at 2.87%. The Barclay’s Aggregate (the most common bond proxy) is down over 2% on a total return basis YTD, but we are tempted to extend our duration at these levels. Inflation expectations have been the main cause for rising rates and the brief equity selloff which started on January 26th. The release of the Consumer Price Index (CPI) showed inflation rising 0.5% in January, exceeding expectations and now ahead 2.1% on an annual basis. So-called “core” inflation, which excludes food and energy, rose 0.3% in January and is up 1.8% y/y. The rise in inflation is bittersweet, on one hand it means the economy is strong and growing, but on the other hand consumer costs are on the rise. Despite the tough environment for bonds, it is important to remember that bonds will provide safety if equity markets disappoint.
Economic news in the week ahead will be fairly light due to the holiday-shortened week. 68 companies in the S&P 500 will report earnings this week. Key releases include Walmart (WMT), Home Depot (HD), Medtronic (MDT) and a number of utility companies. The release of the January FOMC meeting minutes will be on Wednesday. Current policy calls for 3 federal funds rate increases in 2018.
“Leave nothing for tomorrow which can be done today.” – Abraham Lincoln
Weekly Commentary (2/12/18) – Volatility Returns … Just a Correction
February 12, 2018
Ouch! Last week saw stocks give up their 2018 gains … and then some. Markets have now officially ‘corrected’ as the S&P 500 was down 10.2% from the all-time closing high set on January 26th to the close on February 8th. After experiencing the least volatile year on record in 2017, investors are now experiencing a return to volatility in the markets. While never enjoyable, market pullbacks and corrections are quite normal. It is worthwhile to remember that the average intra-year decline for equity markets over the past 30 years has been roughly 14%. The good news is that the economy remains quite strong and earnings growth for 2018 is fairly robust. Lastly, valuations have come down as the forward price-to-earnings multiple is now close to 16X (down from 17.8X at year-end).
For the week, the DJIA lost 5.08% while the S&P 500 finished lower by 5.10%. Developed international markets gave back even more as the MSCI EAFE index closed down 6.19% for the week. Emerging markets were down the most as the MSCI EM index sank 7.14% for the week. Despite the unwelcomed pullback last week, the DJIA and S&P 500 are down just 2% on a year-to-date basis. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week relatively flat. As a result, the 10 YR US Treasury closed at a yield of 2.83% (down 1 bp from the previous week’s closing yield of 2.84%). Gold declined $20.60 to close at $1,313.10/oz. Oil prices dropped $6.25 to close the week at $59.20/bbl.
The weeks ahead will most likely test investors’ patience as the markets attempt to find their footing. Past corrections have often led to a retest of the previous lows, and we suspect that last week’s lows will hold and markets will finish the year higher.
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.
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch
Good News Bad News
February 5, 2018
The U.S. equity markets capped their worst week in roughly two years on Friday, with the S&P 500 falling 2.1% and the DJIA down 2.5%. For the week, the indexes were down 3.9% and 4.1% respectively. International equities were only slightly better for the week as the MSCI EAFE closed lower by 2.74% and MSCI EM down 3.29%. Outside of some disappointing company specific earnings, positive economic news was the cause for concern.
The monthly jobs report on Friday was better-than-expected with 200,000 new jobs created and average hourly wages for private sector workers rose 2.9% in January, notching their largest year-over-year increase since June 2009. However, the news reinforced expectations of rising inflation and a growing market consensus that the Federal Reserve may raise short term interest rates more than 3 times this year. For the week, the rate on the 10 year U.S. Treasury rose from 2.66% to 2.84%.
Generally speaking, economic news continues to be good and corporate earnings continue to rise. With nearly half of S&P 500 companies reporting fourth quarter earnings, 80% have exceeded analysts’ revenue expectations and global economic growth looks stronger than it has been in years. Although markets seem overdue for a correction, there does not seem to be any signs of a recession. We believe any pullback will be likely short-lived. Stay the Course.
“Before anything else, preparation is the key to success.” – Alexander Graham Bell
Groundhog Day
January 29, 2018
Before the opening bell on Friday, the US Gross Domestic Product (GDP) was reported at 2.6%, lower than the consensus estimate of 2.9%. The resilient market didn’t even flinch. Last week, the DJIA, Standard & Poor’s 500 and the tech heavy NASDAQ all climbed over2% to new record highs. International markets, benefitting from a weaker dollar, also performed well with EAFE up 1.5% and the MSCI Emerging Market climbing 3.3%.
The stock of the week was Intel (INTC), which was up over 9% on Friday after reporting fabulous 4th quarter earnings and guidance.
Rising interest rates remain a threat to future economic growth and stock market valuations. The yield on the 10 year US Treasury closed at 2.66% on Friday, a big jump from 2.40% where it ended last year. We continue to expect slightly higher rates as the Fed tactfully raises short-term rates and unwinds its colossal balance sheet.
This week is filled with economic news and earnings announcements. President Trump’s first State of the Union address is on Tuesday and he’ll be his supercilious self pushing his infrastructure plan and America first. On Wednesday, Janet Yellen, the Fed chairperson will bid farewell and probably hint that a March rate hike is on the way.
We continue to stress portfolio diversification with prudent asset allocation and quality holdings.
Happy Super Bowl week and GO PATS!
It’s the same thing your whole life: “Clean up your room. Stand up straight. Pick up your feet. Take it like a man. Be nice to your sister. Don’t mix beer and wine, ever.” Oh yeah: “Don’t drive on the railroad track.”
–Phil Connors
Earnings Season Begins
January 24, 2018
Equity markets pushed higher last week in the face of a US government shutdown which stretched through the weekend. Fourth-quarter earnings began to pick up and so far have been mostly positive versus expectations. Expectations are for earnings to increase 12% against the same quarter a year ago while revenues are expected to increase 7%.
For the week, the S&P 500 climbed 0.88% while the DJIA closed higher by 1.08%. The Russell 2000 representing US small companies inched higher by 0.36%. International equities continued their advance with the MSCI EAFE and MSCI EM rising 1.25% and 2.02%, respectively. Yields moved higher as investors continue to move out of bonds in anticipation of higher inflation and continued global growth. The 10yr US Treasury closed at its highest yield since March 2017, closing the week at 2.64%. Oil markets saw little change last week closing at $63.38 a barrel.
Economic news for the week was mostly positive – industrial production came in at 0.9% month over month exceeding estimates of 0.4%; housing starts fell short of estimates (1.275mm) declining to a seasonally adjusted annual rate of 1.192 million; jobless claims were 220,000 as labor markets continue to show strength.
This week will continue with a deluge of company announcements with 44 S&P 500 companies scheduled to report. There will also be an advance estimate of 4q17 GDP and economic reports on durable goods and home sales.
Let’s make it a good week!
“It’s not what happens to you, but how you react to it that matters.” – Epictetus
Weekly Commentary (1/15/18) – Déjà Vu All Over Again
January 16, 2018
So what’s new? Markets finished higher last week. As Yogi Berra would say – “It’s déjà vu all over again.”
For the week, the DJIA gained 2.0% while the S&P 500 finished ahead by 1.6%. Developed international markets also moved higher as the MSCI EAFE index closed up 1.2% for the week. Emerging markets also gained as the MSCI EM index finished higher by 0.6%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week lower by 0.2%. As a result, the 10 YR US Treasury closed at a yield of 2.55% (up 8 bp from the previous week’s closing yield of 2.47%). Gold advanced $18.05 to close at $1,337.64/oz. Oil prices advanced $2.86 to close the week at $64.30/bbl.
Investors continue to show confidence in the markets as economic news once again points to a global economic recovery. The December consumer price index (CPI) showed headline CPI up 2.1% year-over-year (y/y) with core CPI up 1.8% y/y … all generally in-line with expectations. Despite energy prices being up 6.9% y/y, inflation numbers continue to be fairly tame. Ultimately the Fed’s easy money policies will produce higher prices, but stock prices should fare well in this low inflation, reasonable growth environment. The advance in bond yields will most likely be muted until inflation and economic growth pick up materially from today’s levels.
The week ahead will see more earnings and economic releases. We expect earnings releases to continue to beat expectations (as did JP Morgan, BlackRock and several other S&P 500 companies last week). Economic news this week will include housing starts, industrial production, NY/Philly Fed manufacturing surveys and January preliminary consumer sentiment.
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.
We hope that everyone had a happy and reflective Martin Luther King Jr. Day.
“Life’s most persistent and urgent question is, ‘What are you doing for others?’”- Martin Luther King Jr.
Equities Off to a Good Start
January 8, 2018
Equity markets started the year on a strong note last week. All major indexes crossed milestones with the S&P 500 passing 2700, the DJIA 25000 and the NASDAQ rising above 7000. The strongest sectors were technology, materials and energy as economic news continued to show strength. Global manufacturing PMI came in at 54.5 – the strongest reading since mid 2016. Crude oil and other commodity prices are being supported stronger global growth. International equities also started the year on a strong note as the EAFE was up 2.45% and emerging markets rose 3.69%.
Friday’s jobs number of 148,000 new jobs came in below estimates of 180,000 with the unemployment rate holding steady at 4.1%. In spite of the weaker number, interest rates rose for the week with rate on the 10 year U.S. Treasury rising from 2.40% to 2.47%. Expectations continue to be for three rate increases by the FOMC in 2018.
This week look for economic reports on retail sales and inflation. A reading on inflation above consensus would pressure the Fed to take a more hawkish stance. Corporate earnings reports start this Friday with major banks starting to report. The expectations for S&P 500 earnings growth for 2018 have risen to 11%.
“To succeed in your mission, you must have single-minded devotion to your goal.”– A.P.J. Abdul Kalam
Many Happy Returns
January 2, 2018
What a fabulous year for the equity and fixed income markets!
Before we pat ourselves on the back for making money for our clients, let’s look at the markets and economies for last week.
The US equity markets gave back some performance during Christmas week. The DJIA slipped 0.14%, S&P500 (0.33%), and NASDAQ (0.80%). Real estate and utilities were the best performing equity sectors and were up 1.5% and 0.4%, respectively. International markets were strong with the MSCI EAFE up 0.95% and emerging markets (MSCI EM) climbing 1.71%. Interest rates took a breather with the 10 Year Treasury closing at a yield of 2.40%, down 0.08% from the previous week.
For the year, the bullish markets were sustained by broad economic growth, strong corporate earnings, consistently strong investor inflows and corporate stock buybacks. The S&P 500 returned 21.83% while international markets soared with the MSCI EAFE up 25.62% and MSCI EM climbing 37.75%.
This short week will deliver several key economic reports: ISM manufacturing and non-manufacturing indexes; minutes from the December FOMC meeting; and reports on auto sales and employment.
For 2018, we expect an increase in the subdued market volatility, slightly higher interest rates and a little more time for the markets to digest, and the economy to feel, the benefits of the sweeping tax reform. Nevertheless, with improved global economic growth and continued inflows, investors should continue favoring equities within a well diversified and balanced portfolio.
Our team at ND&S would like to wish you and your loved ones all the very best for a healthy, happy and prosperous New Year!
“Write it on your heart that every day is the best day in the year.” – Ralph Waldo Emerson
2017 – A Year to Cheer
December 26, 2017
Last week, equity markets finished in the green as the S&P 500 was up 0.3% and the DJIA increased 0.42% largely driven by a 4.5% increase in energy stocks. For the week, value stocks outperformed growth stocks on the strength of the energy and material sectors. International markets were also positive with the MSCI EAFE and MSCI EM up 1.25% and 2.08% respectively. Bonds prices were under pressure closing last week in the red as interest rates rose across the board. The 10yr US Treasury closed at a yield of 2.48% which is up from 2.35% the week prior.
The GOP-sponsored tax bill officially crossed the finish-line as it was passed by both houses of Congress and was signed into law by the President. The key provisions being touted by its supporters include a lower corporate tax rate, lower rates on individuals, and a doubling of the standard deduction. Its passage set off a wave of corporate announcements touting wage hikes, investments, and employee bonuses.
For equity investors, the holiday season came early and often as there was plenty to cheer and be merry about in 2017. This year was one for the record books as major indexes continuously notched record closes throughout the year(DJIA – 70 record closes; Nasdaq – 72; S&P 500 – 62). Barring a disastrous close to the year, 2017 will be the first on record that the S&P 500 finished the year without a negative month. We can only hope that 2018 will be as prosperous for equities as 2017.
Our team at Newman Dignan & Sheerar would like to wish to everyone a happy and healthy New Year!
“No act of kindness, no matter how small, is ever wasted.” – Aesop
Rates on the Rise
February 26, 2018
Markets were volatile last week as investor focus was on the latest Federal Open Market Committee minutes released on Wednesday. The 10yr US Treasury hit a multi-year high (2.94%) after the release before ending the week at a yield of 2.88%. The FOMC acknowledged the strengthening growth outlook in the US with forecasts receiving a boost from tax cuts. They also indicated that the equity market’s recent correction earlier this month is unlikely to affect future hikes this year.
For the week, the S&P 500 closed higher by 0.58%, while the DJIA increased 0.36%. International equities were mixed with developed international closing down 0.44% and emerging markets up 1.42%. Oil pushed higher last week following news that inventories declined when expectations were for an increase. WTI closed at $63.55 a barrel.
Earnings season is coming to a close as 90% of S&P 500 constituents have reported Q4. Earnings have been positive relative to estimates with over 70% beating earnings estimates. Earnings have grown 16.3% year-over-year while revenues are up 7.9%.
Let’s make it a good week!
“I didn’t lose the gold. I won the silver.” – Michelle Kwan