ND&S Weekly Commentary 12.27.22 – Markets Finish Mixed
December 27, 2022
Equity markets were mixed last week as investors continued to worry about nagging inflation and a possible recession. The S&P 500, Russell 2000 and NASDAQ are all in bear market territory (down 20% or more from peak).
For the week, the DJIA gained 0.86% while the S&P 500 dropped 0.20%. The tech-heavy Nasdaq finished 1.94% lower as tech stocks struggled to move higher. For the week, the MSCI EAFE Index closed up by 0.38% while emerging market equities (MSCI EM) gave back 0.24%. Small company stocks, represented by the Russell 2000, advanced 0.53%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 1.47% for the week as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 3.75% (up 27bps from the previous week’s closing yield of ~3.48%). Gold prices closed at $1,795.90/oz – up 0.33%. Oil prices moved higher to close at $79.56 per barrel, up 7.09% on the week.
Economic news was fairly light last week. Housing starts fell 0.5% m/m. New home sales decreased to 600k (no surprise given higher mortgage rates and talk of a possible recession). Initial unemployment claims climbed to 216k. Surprisingly, consumer confidence increased to 108.3, its first increase in three months and above consensus of 101. Economic releases in the week ahead include: S&P Case-Shiller Home Price Index, December Consumer Confidence, November Pending Home Sales, Weekly Jobless Claims, and the Chicago PMI for December.
Markets will attempt to move higher this week as the Santa Claus rally kicks into high gear. Let’s hope the old saying is proven wrong this year – “If Santa should fail to call, bears may come to Broad and Wall’. Tax loss selling is mostly over and should take away some of the downside pressure that we saw over the past few weeks. We hope to be picking up bargains over weeks and months ahead. Diversification, patience and a bias towards quality will help investors manage through this challenging environment. As such, we continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias.
We hope that you have been enjoying the holidays. Stay safe.
“Let us be grateful to the people who make us happy, they are the charming gardeners who make our souls blossom.” – Marcel Proust
ND&S Weekly Commentary (12.19.22) – Fed Talks Tough
December 19, 2022
Equity markets were lower across the board last week after hawkish rhetoric from the U.S. Federal Reserve Bank dispelled the notion of a dovish monetary policy pivot any time soon. For the week, the S&P 500 declined 2.05%, the DJIA lost 1.65%, and the tech-heavy Nasdaq dropped 2.70%. The Russell 2000 small-cap index slid 1.81%. International equity markets also finished in the red as developed (MSCI-EAFE) and emerging (MSCI-EM) markets gave back 2.13% and 2.09%, respectively. The price of oil (WTI) increased to $76.11 a barrel. The price of gold declined modestly on the week to $1,793 per ounce. Fixed income was the only asset class to provide a positive return last week as the Bloomberg/Barclays U.S. Aggregate returned 0.80% on the week. Interest rates were surprisingly lower across the yield curve as the 10yr yield settled on Friday at 3.48%.
The U.S. Federal Reserve Bank delivered the 50 basis-point increase that was widely expected at the conclusion of their December meeting. The markets were caught offsides when the committee delivered their forecast for the terminal federal funds rate and expectations for inflation. The median forecast for the federal funds rate was increased to 5.1% from 4.6% at their September meeting. Their outlook for core PCE inflation was adjusted to 3.5% from 3.1%, despite softer inflation readings in recent months. Futures markets remain skeptical that the Fed will hold true to their forecasts.
In other economic reports released last week, the Consumer Price Index (CPI) reading showed only a 0.1% month-over-month increase which was a better-than-expected deceleration for inflation. The year-over-year CPI number fell to 7.1%, down from 7.7% in October. Retail sales declined 0.6% last month spooking the markets, this after a much better-than-expected 1.6% increase in October.
There is no question that valuations for both equities and even fixed income are more appealing than they have been in recent years … and over a decade when it comes to most fixed income. Most institutional investors, CNBC talking heads and market forecasters are extremely pessimistic – normally a positive sign. Markets will remain volatile, as there is a lot of tax-loss harvesting and re-balancing affecting markets from now until early next year. We are continuing to remain patient by slowly investing in high-quality assets when attractive within a well-diversified portfolio.
“Investing is laying out money now to get more back in the future.” – Warren Buffet
ND&S Weekly Commentary 12.12.22 – Will Fed Chair be the Grinch who stole Christmas?
December 12, 2022
The stock market retreated last week as investors grew anxious over the economic outlook and the Federal Reserve’s response to tame inflation. The ongoing strength of the job market and consumer spending are ironically causes of concern and may trigger the Fed to continue raising interest rates higher and longer than expected.
For the week, the S&P 500 dropped 3.35%, the DJIA lost 2.74%, and the tech-heavy Nasdaq slid 3.98%. The Russell 2000 small-cap index tumbled 5.06%. The decline in the U.S. dollar and China’s lifting of Covid restrictions helped international equities. Developed markets (MSCI-EAFE) declined only 0.19% while emerging (MSCI-EM) rose 0.48%. Since mid-October, EAFE and EM have risen roughly 19% and 15%, respectively. The price of U.S. crude oil fell 11% to $71.58 a barrel and is down almost 23% from its high in early November. The price of gold declined slightly to $1,796 per ounce.
Last Friday, the Producer Price Index (PPI) rose modestly on a year-over-year basis 7.4%, higher than the consensus estimate of 7.2%. Investors were hoping for a slightly lower number to show that the Fed’s policies were making progress. The spread between the 2-year U.S. Treasury note and the 10-year note is now the widest since the early 1980s. The yield on the 2-year note rose 5 bps to 4.34% and the 10- year note increased 6 bps to 3.57%.
All eyes will be on the Consumer Price Index (CPI) to be reported on Tuesday, and the Fed meeting concluding on Wednesday. We hope to see that inflation is continuing to moderate and that the Fed will only increase the Federal Funds Rate by 0.50%. Chairperson Jerome Powell’s remarks on the economy, inflation, and the Fed’s strategy going forward will be closely examined.
“Maybe Christmas doesn’t come from a store. Maybe Christmas, perhaps, means a little bit more.” -The Grinch
ND&S Weekly Commentary 12.05.22 – Markets Hearing What They Want to Hear
December 5, 2022
Global equities had a sharp positive response to Fed Chairman Jerome Powell’s mid-week comments, but then began backsliding as data that supports a continuation of a strong US labor market and that showed wage inflation above expectations was released. Powell had a mostly hawkish tilt to his message, but equity investors seized on hints that the Fed is likely slowing its pace of interest rate increases – information that was supposedly already discounted in stock prices.
For the week, the DJIA managed a gain of 0.41% while the S&P 500 added 1.19%. The tech-heavy Nasdaq advanced 2.12%. International markets were higher with the MSCI EAFE Index (developed countries) gaining 1.06% and emerging market equities (MSCI EM) jumping 3.51%. Small company stocks, represented by the Russell 2000, grew 1.33% last week. Fixed income, represented by the Bloomberg Aggregate, gained 1.54% for the week as yields generally moved lower, with the front of the curve being more stubborn and the ending result being more yield inversion from 1yr to 10yr. The 10 YR US Treasury was down 17 basis points on the week closing at a yield of 3.51%. Gold prices closed at $1,785/oz. – up 1.83%. Oil prices reversed a five-week trend and closed up ~4.9% at $79.98 on the week.
In last week’s data, housing showed some improvement over October but was still generally negative: the S&P Case-Schiller US Home Price Index was -8.7% vs -10.4% in October, the FHFA US home Price Index was 0.9% vs -7.5% in October, and the Pending Home Sales Index was -4.6% vs -8.7% in October. Real GDP was revised to 2.9% vs 2.6% and Consumer Confidence was unchanged at 100.2, and Consumer Spending was up 0.5% vs 0.3%.
This week’s economic data releases include Trade Deficit, Productivity revision, and PPI. It is a relatively quiet week. The following week is a very important one as the Consumer Price Index (CPI) data will be released, followed by the Fed Funds target rate announcement and then a press conference with Fed Chairman Powell.
There is more chatter about a “soft landing” but most money is betting against it. If you are looking for a reason why not a soft landing – look no further than it has never been done before… especially coming from where we were. We had a HUGE spike in the money supply and the CPI rocketed to near 10%. The Fed was slow to respond and now it is in a battle to land the economy in the goldilocks zone of ~2% inflation and ~4% unemployment. Imagine the space shuttle crew trying to land while blindfolded and the feedback from the ground is delayed 30 seconds. The chances they find the runway are slim. It will land, and there will be damage, but it will be temporary, and the shuttle/economy will fly again.
We hope that all of you and your families are continuing to stay healthy and safe this holiday season. There are only 13 days until Hanukkah and 20 days to Christmas and just 26 days left in 2022!
“Anyone who sits on top of the largest hydrogen-oxygen fueled system in the world, knowing they’re going to light the bottom, and doesn’t get a little worried, does not fully understand the situation.”
– John Young, Space Shuttle Astronaut
ND&S Weekly Commentary 11.21.22 – Little Changed
November 21, 2022
Global equities were little changed, and range bound last week as economic data reconfirmed that inflation is moderating.
For the week, the DJIA ticked higher by 0.11% while the S&P 500 shaved off 0.61%. The tech-heavy Nasdaq was taken down by 1.51%. International markets were higher with the MSCI EAFE Index (developed countries) adding 0.26% and emerging market equities (MSCI EM) gaining 0.80%. Small company stocks, represented by the Russell 2000, fell 1.70% last week. Fixed income, represented by the Bloomberg Aggregate, gained 0.48% for the week as the long end of the yield curve moved lower. The 10 YR US Treasury was unchanged on the week closing at a yield of 3.82%. Gold prices closed at $1,752/oz. – down 0.39%. Oil prices moved lower, for a fourth week in a row, to close at $80.08 per barrel, down 9% on the week.
Headline PPI (Producer Price Index) in October was up 0.2% m/o/m, half the estimate expected. The softer than expected report, much like the October CPI, remains far from where it needs to be but is showing improvement. In other economic news, retail sales for October increased a stronger-than-expected 1.3%, the largest jump in 8 months. Housing starts declined further in October and is showing softness in the face of higher interest rates. This holiday shortened week will have reports on durable goods orders, new home sales, and consumer sentiment.
We hope that all of you and your families are continuing to stay healthy and safe this holiday season. We wish to extend to all a very Happy Thanksgiving!
This week also, brings the return of the most watched sporting event in the world. US returns to the World Cup against Wales after 8-year wait. When the U.S. takes the field on Monday, it will have been 3,066 days since its last World Cup match … that seems like a lifetime ago…
“The World Cup is a very important way to measure the good players and the great ones. It is a test of a great player.” – Pele
ND&S Weekly Commentary 11.14.22 – What a Rebound!
November 14, 2022
The equity markets had a solid rebound from the previous week’s decline, highlighted by Thursday’s one day rally in response to the CPI Inflation Report. Investors cheered the lower-than-expected inflation reading and were glad to see a possible split in Washington for the next two years.
The S&P 500 and DJIA surged 5.9% and 4.2%, respectively. Technology stocks staged their biggest comeback since 2008, soaring 10.1%. As a result, the NASDAQ cashed in at 8.11% for the week. The USD($) declined last week in response to the inflation report and corresponding decline in interest rates which benefited foreign stocks. Developed international companies (MSCI EAFE) climbed 8.43% while emerging markets (MSCI EM) were up 5.74%. Gold rose 5.54% to $1,759/oz. and oil declined 4% to close at $88.96/barrel.
With the hopes that calming inflation would allow the Federal Reserve to begin scaling back the size of their interest rate increases, bond prices rose, which causes yields to decline. The yield on the 10yr Treasury declined from 4.16% last week to 3.82% on Thursday. The bond market was closed Friday in observance of Veteran’s Day.
On Thursday, it was reported that the October Consumer Price Index (CPI) was up 7.7% from a year ago, but it was much less than economists’ expected and down from September’s reading of 8.2%. The core index (excludes food and energy) rose 0.3% last month, below expectations for a 0.5% increase.
This week’s focus will be on the U.S. retail sector with retail sales reported for October and quarterly announcements from Walmart, Target, and T.J. Maxx. Analysts expect some disappointments due to big markdowns to move swelling inventories. Home Depot and Lowes also report this week, giving us a feel for the direction of the housing sector.
Inflation has peaked and is trending in the right direction which should give the Federal Reserve some breathing room to raise rates less aggressively moving forward. There is no question that valuations are appealing, and most institutional investors are extremely pessimistic – normally a positive sign. Markets will remain volatile, so we continue investing in high-quality assets within a well-diversified portfolio.
“The willingness with which our young people are likely to serve in any war, no matter how justified, shall be proportional to how they perceive the veterans of earlier wars were treated and appreciated by their nation.” – George Washington
Weekly Commentary (11/07/22) – Voting is a civic sacrament
November 7, 2022
It was another tough week for US growth investors as the Fed followed through on its signaled increase of the Discount Rate by 0.75% to 4.0%. There were some murmurs across markets that the Fed might come out with comments indicating a slowdown in its use of interest rate hikes to fight inflation. However, after an initial rally on the rate increase announcement and Fed’s statement, the market did not like the tone of the subsequent comments and press conference message and stock prices dropped in response.
For the week, the DJIA shaved off 1.38% while the S&P 500 fell 3.31%. The tech-heavy Nasdaq was taken down 5.62%. International markets were higher with the MSCI EAFE Index (developed countries) adding 1.25% and emerging market equities (MSCI EM) gaining 4.68% as these markets reversed course. Small company stocks, represented by the Russell 2000, had a setback last week after a strong week and gave up 2.53%. Fixed income, represented by the Bloomberg Aggregate, slipped 0.78% for the week as yields moved slightly higher with the Fed action. As a result, the 10 YR US Treasury closed at a yield of 4.17% (up ~ 15 bps from the previous week’s closing yield of ~4.02%). Gold prices closed at $1,674/oz – up ~ 2%. Oil prices moved higher, for a second week in a row, to close at $92.61 per barrel, up 5.36% on the week.
The big event last week was the Fed’s two-day meeting and rate increase announcement. However, important labor data was also announced indicating continued strength in labor rates and job creation. There might be slight signs of deterioration in labor strength, as the unemployment rate came in at 3.7% vs both the previous and expected level of 3.5%. The market consensus is that the Fed will not be letting up while employment data is so strong, and the Fed has stated that over doing the response to inflation is a better error than not containing it.
Important CPI data is released on Thursday, some consumer sentiment data on Friday, and several Fed Governors are speaking throughout the week. Obviously, the big event this week is the election. Those results will dwarf all the other chatter, unless we have a big surprise with inflation. The election results are likely to have a significant impact on markets. Historically, markets run warmer when we have divided power in Washington. The market can rely on less change when there is political gridlock and, in general, that higher degree of certainty is a bolster to conviction levels of models concerned with future sales and earnings. If we do not have some degree of gridlock, the market is not likely to be happy.
Despite the significant repricing of assets over the past 12 months, we have not seen evidence that we have formed a solid base, yet. The future may prove we have, but expectations still seem too optimistic and align more with a soft landing versus a true recession. We favor a cautious course until the fog lifts some more.
“Democracy is the only system that persists in asking the powers that be whether they are the powers that ought to be.” – Sydney J. Harris
Weekly Commentary (10/31/22) – Markets Treat Investors to Big Gains
October 31, 2022
Domestic markets were broadly higher last week – just as investors were about to lose hope. The month of October, typically a disappointing month for investors, has so far defied expectations and is on course to be the best October since 1976.
For the week, the DJIA jumped 5.72% while the S&P 500 gained 3.97%. The tech-heavy Nasdaq added 2.25% despite a rough week for many large-cap technology stocks. International markets were mixed with the MSCI EAFE Index (developed countries) finishing higher by 4.14% while emerging market equities (MSCI EM) dropped 2.24% as weak markets in China and Hong Kong dragged down emerging markets. Small company stocks, represented by the Russell 2000, were strong as they tacked on 6.02% for the week. Fixed income, represented by the Bloomberg Aggregate, advanced 1.65% for the week as yields moved lower. As a result, the 10 YR US Treasury closed at a yield of 4.02% (down ~ 19 bps from the previous week’s closing yield of ~4.21%). Gold prices closed at $1,639.60/oz – down 0.69%. Oil prices moved higher to close at $87.90 per barrel, up 3.35% on the week.
Last week saw several important economic releases. The U.S. Labor Department reported that GDP for the third quarter grew at an annual rate of 2.6%. The initial estimate was better-than-expected and a reversal from contractions in the first and second quarter. On a downbeat note, US Manufacturing PMI for October dropped to 49.9% from 52.0% in September missing expectations for a print of 51. The S&P Global Flash U.S. Services Business Activity Index slumped to 46.6 in October, down from 49.3 in September. The negative impact of inflation and higher prices was evident in both reports.
All eyes will be on the Fed as they wrap up their two-day meeting on Wednesday. Most indicators point to inflation having peaked, but we suspect inflation will remain sticky for a while – thus keeping the Fed on their aggressive tightening path. It is widely expected that they raise the fed funds rate by 0.75%. Expectations are then for a 50 basis point hike in December and perhaps a 25 basis point hike in February and/or March before being done with their tightening.
Last week’s move in the markets was impressive and welcomed, but we are likely not out of the woods yet. We urge investors to stick close to long-term asset allocation targets with a slight defensive bias.
“Have you come to sing pumpkin carols?” – Linus, It’s the Great Pumpkin, Charlie Brown
ND&S Weekly Commentary 10.24.22 – Fed Pause…?
October 24, 2022
Equity markets finished up strongly last week as earnings have been coming in better than expected and some investors believe the Fed could be closer to pausing rate hikes to allow the recent hawkish policy shift to work its way through the economy. The Fed is still widely expected to increase the federal funds rate another 75bps at their November meeting and another 50-75bps at their December meeting.
The S&P 500 gained 4.75% this past week, while the Nasdaq rose 5.22% and the Dow Jones Industrial Average advanced 4.93%. International equities finished modestly higher with developed markets (EAFE) and emerging markets (EM) up 0.55% and 0.21%, respectively. The 10 YR US Treasury closed at a yield of 4.21% (up 21 bps over the week) and as a result, fixed income, represented by the Bloomberg/Barclays Aggregate, fell 1.07% as yields moved higher across the yield curve. Gold prices finished at $1,643/oz. to finish virtually flat on the week. Oil prices were modestly lower last week closing at $85.05 per barrel.
It was a slightly mixed batch of economic data released last week. Declines in housing starts and existing home sales showed the impact that these higher mortgage rates are having on the sector. In a positive development, industrial production increased 0.4% in September.
The velocity of earnings reports ramps up this week with reports from Apple, Google, Amazon, Visa, and Microsoft to name a few. We will also get more inflation data this week with the release of the PCE price index (the Fed’s preferred measure of inflation). In other economic releases, there will be reports on housing and manufacturing/service PMIs. Markets volatility should be remain elevated this week given the onslaught of company reports.
“Our of difficulties grow miracles” – Jean de la Bruyere
Weekly Commentary (01/03/2023) – Markets Mixed Again in Choppy Last Week of 2022
January 3, 2023
Equity markets had mixed results last week in another choppy week of trading. Since mid-June of 2022, equity investors have clearly shown their desire that a new bullish environment takes hold while fighting the reality of the underlying fundamentals. Central banks across the globe are increasing interest rates to combat global inflation that shows some signs of being more stubborn. The Fed is signaling its resolve to “do what it takes” to move inflation to its target zone (~2-2.5%). As a result, equity prices have been volatile as the true conviction that a new period of growth in earnings is upon us has not formed.
For the week, the DJIA slipped 0.17% to finish down 6.86% for the year. The S&P 500 trimmed another 0.11% and finished 18.11% lower for the year. The tech-heavy Nasdaq dropped 0.28% and is down 32.54% as tech stocks have struggled against higher interest rates all year. For the week, the MSCI EAFE Index closed up by 0.07% while emerging market equities (MSCI EM) gained 0.34%. For the past year, these two international indices were down 14.01% and 19.74%, respectively. Small company stocks, represented by the Russell 2000, gained 0.08% to finish the year down 20.44%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 0.65% for the week as yields moved higher. For the year, “the Agg” was down 13.01%. The 10 YR US Treasury closed at a yield of 3.88% (up 13bps from the previous week’s closing yield of ~3.75%). For the year, the 10-year yield rose an amazing 236 bps from 1.52%. Gold prices closed at $1814/oz – up ~1% and basically unchanged over the $1,806 closing price in 2021. Oil prices moved lower to close at $78.40 per barrel, down 1.46% on the week and, remarkably, only ~4% higher than the $75.33 close on 12/31/21.
Economic news was very light last week. The S&P Case-Shiller Home Price Index declined another 3.1% and November Pending Home Sales fell 4%. The CSHPI fell far less than the 9% decline in October but the Pending Sales decline was over twice the expected amount. The coming week includes the Fed FOMC minutes on Wednesday and some inflation indicators in the ISM manufacturing data and Trade Deficit numbers. The following week will be of greater significance when the CPI numbers are released.
Equity investors are desperate for good news and have been willing to create bear market rallies in the face of some pressing realities. The Fed is on a mission to reduce inflation, and with the peculiar US domestic employment environment (at least the data makes it peculiar), the Fed is more emboldened to be tougher than most investors would like. This increases the likelihood of a difficult earnings environment and that keeps putting the brakes on equity prices rising. The fact the Fed and many economists allude to a longer period of persistent inflation (i.e, interest rates higher for longer) does not help the investment math arrive at higher prices, either.
We expect the shift to a positive environment is likely gradual and staying patient will be rewarded.
“The underlying driving force behind market timing decisions seems to be emotional — fear, greed, chasing performance — buying something after it has gone up, disappointment, and sales after something has declined.” – David Swensen