ND&S Weekly Commentary (7/22/19) – Earnings Season Kicks into Gear

July 22, 2019

Equity prices weakened last week as investors digested mixed earnings news and shifting expectations on Federal Reserve rate moves. For the week, the S&P 500 and DJIA were off 1.2% and 0.6%, respectively, while the NASDAQ declined 1.2%. International markets were mixed with developed markets down 0.1% and emerging markets up 0.8%. Communication services, energy and real estate were the weakest sectors last week.

In fixed income, the rate on 10 year U.S. Treasury fell to 2.05% from 2.12% last week. It’s widely believed that the Fed will reduce rates by 1/4% at its July meeting and that the chances for 1 or 2 more rate cuts before the end of the year are high. Globally other central banks are also in an easing mode.

Earnings reports accelerated last week with companies showing mixed results but many exceeding beaten down expectations. Microsoft reported earnings that beat expectations and the stock rose slightly on Friday. According to FactSet, earnings for companies in the S&P 500 will be down 1.9% from a year earlier. Actual results may be somewhat better given companies tendency to reduce expectations in advance.

In the week ahead, look for economic reports on existing home sales, durable goods orders and a first estimate for 2nd quarter GDP. Growth for the 2nd quarter is estimated at 1.8% vs 3.1% for the 1st quarter. Growth has moderated as a result of slowing global growth and trade uncertainty but still appears solid due to low inflation, solid job numbers and the prospect for lower rates. Chances of a recession in the near term appear to be low.

“Less is only more where more is no good” – Frank Lloyd Wright

ND&S Weekly Commentary (7.15.19) – Stock Market Milestones

July 15, 2019

US stocks achieved record highs last week buoyed by investors’ expectations that the Fed will lower interest rates at the end of the month. The Dow Jones Industrial Average (DJIA) was up 1.54%, while the S&P 500 climbed 0.82% and the NASDAQ rose 1.01%. International equities continue to be weighed down by trade tariffs and delayed negotiations. Developed international stocks (EAFE) slipped 0.54% and the emerging market equity index (EEM) declined 0.75%.

Fed chairman Jerome Powell hinted at a possible reduction in the Federal Funds Rate during the FMOC meeting on July 30-31. Powell said that below baseline inflation target of 2% could stifle economic growth and the central bank will “act as appropriate” to maintain the US expansion.

The Trump administration abandoned a proposal for rebates from governmental drug plans and a federal judge blocked the proposed rule requiring drug makers to list drug prices on television. Healthcare stocks rallied and then settled back down declining 1.64%.

Citigroup (C), JP Morgan (JPM), Goldman Sachs (GS) and Wells Fargo (WFC) report second quarter earnings on Monday and Tuesday. The low interest rate environment and weak trading volume have tempered earnings expectations. Bank revenues, earnings and guidance are key drivers of the stock market. However, they are cheap with the bank index trading at about 10.2 times estimates for the next 12 months compared to an average multiple of 12.4 for the last 10 years.

Oil prices continue to rally with the WTI now above $60 gaining 5% for the week. Tropical storm Barry shut down 53% of the oil production in the Gulf of Mexico. US inventories were already on the downswing over the last four weeks as a result of the instability in the Middle East.

Investors fear that Congress will fail to raise the US borrowing limit, which could be required in September, a month earlier than expected. Also, stronger than expected consumer prices were reported for June. As a result, the 10 year US Treasury yield rose to 2.12% up from last week’s 2.04%.

In addition to the kickoff of earnings season, this week the economic calendar is very active with reports on housing starts, manufacturing, industrial production, retail sales and consumer sentiment.

“Remember to celebrate milestones as you prepare for the road ahead.”Nelson Mandela

ND&S Weekly Commentary (7/8/19) – Equities Notch New Highs

July 8, 2019

Markets pushed higher during the holiday-shortened trading week, notching closing highs before giving some back on Friday to end the week. A better-than-expected nonfarm payroll report on Friday increased the uncertainty around potential Fed action at July’s meeting. Markets had been pricing in a potential 50bps cut in 2019. The dovish expectations which have given support to equity markets in previous weeks.

For the week, the DJIA gained 1.27% while the S&P 500 tacked-on 1.69%. The volatile NASDAQ jumped 1.96%. Developed international markets were also higher as the MSCI EAFE index increased 0.52% for the week while emerging markets increased 0.69%. International equities should benefit more if we have some certainty around trade resolutions with China. Small company stocks, represented by the Russell 2000, were up 0.59% last week. Treasury yields jumped higher on the week as the 10 year US Treasury closed at a yield of 2.04%, up 4bps from last week.

On Monday, the ISM reported its measures for the manufacturing sector, which came in at 51.7% beating estimates. However their reading for the services sector missed estimates and was reported as 55.1%. Any reading above 50.0% implies the sectors are expanding, but both readings are quite a bit below their 12 month highs affirming a slowdown of activity. On Friday, the US Labor Department reported that the unemployment rate ticked up to 3.7%, but remains near its lowest level seen in decades. Average hourly earnings are up a healthy 3.1% y/y. The economy added 224,000 jobs in June which easily surpassed analysts’ estimates of 165,000. The week ahead includes reports on inflation and congressional testimony from Federal Reserve Chairman Jerome Powell. His testimony will shape markets expectations for upcoming monetary policy.

Congratulations to the USA Women’s National Team for their victory on Sunday over Netherlands for the 2019 Women’s World Cup.

“Failure happens all the time. It happens every day in practice. What makes you better is how you react to it.”Mia Hamm

Weekly Commentary (7/1/19) – Trade Uncertainty Continues / Don’t Fight the Fed

July 1, 2019

Markets were mixed to slightly down last week as trade uncertainty with China raised concerns about the potential for a broad-based global slowdown. At the same time, the U.S. Federal Reserve and other central banks around the world gave investors reason for hope as they intimated that a round of interest rate cuts is right around the corner. The old expression – Don’t Fight the Fed – is alive and well.

For the week, the DJIA fell 0.45% while the S&P 500 dropped 0.27%. The volatile Nasdaq declined 0.30%. Developed international markets fared better. For the week, the MSCI EAFE index gained 0.67% while emerging market equities (MSCI EM) advanced 0.43%. Small company stocks, represented by the Russell 2000, improved nicely and finished ahead by 1.16% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week higher as investors reacted to comments by the Fed that interest rates would likely remain low for the foreseeable future. As a result, the 10 YR US Treasury closed at a yield of 2.00% (down ~07 bps from the previous week’s closing yield of 2.07%). Gold prices closed at $1,409.70/oz – up 0.89% on the week. Oil prices advanced as tensions with Iran pushed oil to close at $58.47 – up 1.81% on the week.

Negotiations with China over the weekend resulted in an agreement to continue talks with no immediate jump in tariffs. We expect markets to cheer the news, but a final resolution to trade with China will be necessary for markets to continue their advance through the summer. In the meantime, the Fed will continue to provide investors with a reason to stay in the game.

Most importantly, we wish our clients and friends a happy Fourth of July as we all celebrate the many blessings bestowed on our great country.

Enjoy the week ahead!

“They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.”Benjamin Franklin, Memoirs of the life & writings of Benjamin Franklin.

ND&S Weekly Commentary 6/24/19 – Easing Ahead

June 24, 2019

Last week at the June FOMC meeting the Federal Reserve decided to maintain the target range for Fed funds at the 2.25%-2.50% rate. However, they did abandon the word patience in the minutes and replace it with “will act as appropriate to sustain the expansion” implying easing ahead. Most economists now are predicting a rate cut at the July meeting with a possible second cut later in the year. As a result, global equity markets continued their advance with the S&P 500, DJIA and NASDAQ up 2.22%, 2.41% and 3.0%, respectively. International developed markets and emerging markets advanced 2.22% and 3.84%. For the week, the best performing sectors were energy, technology and healthcare. Energy stocks got a boost last week as Iran continues to rattle the Mid-East by shooting down a U.S. drone over the Strait of Hormuz. Look for volatility to continue for the near-term and maintain your diversified asset allocations.

In fixed income, bond prices also got a boost from easing comments from the Fed and the ECB. The 10 year U.S. Treasury finished the week at a yield of 2.07%, which was down from 2.09% and at one point traded below 2.0%. This week look for economic reports on consumer confidence, new home sales and durable goods orders.

“There is no risk-free path for monetary policy.”Jerome Powell

NDS Weekly Commentary (6.17.19) – Equities Grind Higher

June 17, 2019

Last week the markets were rather tame in quiet trading. All eyes will be on the Federal Reserve’s comments following Wednesday’s meeting. The recent tepid economic data is seen as a positive step for the Fed to signal a dovish stance and possibly lower the Federal Funds rate. Recent tensions in the Middle East, together with ongoing tariff battles, have weighed heavily on investors’ minds.

The S&P 500 gained 0.53% and the tech-heavy NASDAQ rose 0.73%. International equities were mixed with the MSCI EAFE Index down 0.26% and emerging markets up 0.90%. Holding up the markets were a lower than expected inflation outlook, increasing merger and acquisition (M&A) activity, and a surge of initial public offerings. Additionally, the recent strength of the US stock market can be attributed to investors rotating into utilities, consumer staples, and real estate. These sectors are all trading above their 50 day moving average, according to FactSet data.

The yield on the 10-year Treasury note remained at 2.09%. Market pundits and economists are at a loss as to why inflation remains low when the economy is growing with historic low unemployment. It will be very interesting to hear the Feds economic analysis and posture.

Investors are worried about the prolonged trade tensions between the U.S. and China and their effect on the global economy. China, the world’s second leading economy, showed further signs of weakness. The National Bureau of statistics reported that China’s industrial production slowed in May to its lowest level in 17 years.

Prices of oil have declined 12% in the last four weeks, another indicator of slower global economic growth. The uncertainty of global financial markets and slower growth together with rising tensions in the Middle East have rallied gold prices.

We strongly feel that a well-diversified portfolio with quality holdings in equities and fixed income will provide solid returns. Hopefully, trade tensions will ease and the Fed will assuage investors’ concerns.

“It does not matter how slowly you go as long as you do not stop.”Confucius

ND&S Weekly Market Commentary (6/10/19) – Stocks Roar Back

June 10, 2019

Markets surged more than 4% last week despite many current challenges and uncertainties. Storylines last week included antitrust probes of some of the largest companies that comprise the market, global service and manufacturing PMIs which show a slowing economy and the ongoing challenges with China on the trade front. It appears that a resolution with Mexico has been reached so at least one issue is now on the back burner. However, disappointing employment figures for May fanned expectations of loosening monetary policy.

For the week, the DJIA gained 4.77% while the S&P 500 tacked-on 4.46% notching their best week of 2019. The volatile NASDAQ jumped 3.91%. Developed international markets were also higher as the MSCI EAFE index increased 3.24% for the week. Emerging markets increased 1.04% on the week but should benefit more if we have some trade resolutions with China. Small company stocks, represented by the Russell 2000, jumped 3.36% last week. Fixed income, represented by the Bloomberg/Barclays Aggregate, also finished the week higher as speeches from Fed Officials were quite dovish last week. As a result, the 10 YR US Treasury closed at a yield of 2.09% (down 5 bps from the previous week’s closing yield of 2.14%). Gold prices increased to $1341/oz. and oil prices contracted to close at $53.94/b.

6.10.19

One thing that has perplexed professional investors and forecasters is the sharp decline in yields. Hopefully the bond market isn’t foretelling economic weakness in the back half of the year … This WSJ chart illustrates just how wrong economists were in their January survey. Based on the results, not one economist predicted the 10yr US treasury would fall below 2.5%. The consensus was that rates would be flat to slightly higher at year-end but so far this year they have been anything but that. The big drop in rates has certainly helped core bond funds and high-duration assets as the Bloomberg/Barclays Aggregate is up 5.17% year-to-date.

There are certainly some small signs of slowdown in the economy. Last week, it was reported that the manufacturing PMIs came in at 52.1%, missing estimates … any reading above 50 is considered an expansion. On Friday, it was reported that 75k jobs were added in May, which missed expectations for a 185k gain. Eyes will be on this week’s economic reports on inflation, retail sales, and consumer sentiment.

We continue to recommend that investors stay close to their intended asset allocation targets and remain patient. Let’s make it another good week!

“With the new day comes new strength and new thoughts.” – Eleanor Roosevelt

Weekly Commentary (06/03/19) –Another Tweet, Another Down Week

June 3, 2019

Markets pulled back for the 6th consecutive week as the trade rhetoric with China intensified and an unexpected threat of tariffs on Mexican imports weighed on an already frazzled investor psyche. The Trump administration reported that they would impose 5% tariffs on all Mexican imports beginning June 10th unless Mexico stepped up its efforts to thwart the illegal immigration issue. Very few people anticipated this blurring of social and economic policies, and this recent threat could hold up the ratification of the USMCA (United States-Mexico-Canada Agreement).

Economic news continues to be mostly reasonable. On Thursday, the Bureau of Economic Analysis reported that real GDP (GDP adjusted for inflation) rose a very respectable 3.1% in the 1st quarter. Also reported on Thursday, Pending Home Sales fell 1.5% (missing expectations of an increase of 0.5%) in April and marking the 16th straight month of year-over-year declines. Also on Thursday, the U.S. Labor Department reported initial jobless claims for the week ending May 25 were 215,000 – in-line with expectations. Claims have been below 300,000 (a level which indicates a healthy jobs market) for 221 consecutive weeks, the longest streak on record. On Friday, the Bureau of Economic Analysis (BEA) reported that Personal Income for April rose 0.5%, exceeding expectations for a gain of 0.3%. Personal disposable income also advanced a healthy 0.4% in April. Bottom line – the economic backdrop remains decent, but the trade rhetoric and political posturing will most certainly translate into economic challenges unless they are resolved shortly.

For the week, the DJIA fell 2.93% while the S&P 500 dropped 2.58%. The volatile Nasdaq declined 2.39%. Developed international markets fared better. For the week, the MSCI EAFE index retreated 1.85% while emerging market equities were the bright spot as the MSCI EM index advanced 1.24%. Small company stocks, represented by the Russell 2000, moved lower by 3.18% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week higher as investors fled to bonds as a safe haven. As a result, the 10 YR US Treasury closed at a yield of 2.14% (down ~18 bps from the previous week’s closing yield of 2.32%). Gold prices closed at $1,305.80/oz – up 1.73% on the week. Oil prices dropped as oil closed at $53.50 – down by 8.75% on the week.

Markets are certainly on edge, and we suggest investors remain patient and continue to stick close to long-term asset allocation targets (with slightly higher levels of cash). This period of heightened volatility will most certainly end … it always does.

Enjoy the week ahead!

“Hope is independent of the apparatus of logic.” – Norman Cousins

NDS Weekly 5.28.19 – Trade Concerns Continue

May 28, 2019

Equity prices declined for the 5th consecutive week as concerns about trade and tariffs continued to worry the markets. In the U.S., the DJIA, S&P 500 and NASDAQ declined 0.63%, 1.14% and 2.3%, respectively. The best performing sectors last week were utilities, health care and real estate as investors sought shelter in dividend paying stocks. International stocks also declined with the MSCI EAFE down 0.5% and MSCI EM off 0.9%. Investors continued a flight to safety trend as bonds continued to rally. As a result, the rate on the 10 year U.S. Treasury note dropped from 2.39% to 2.32% last week.

In economic news last week, durable goods orders dropped 2.1% in April which missed expectations for a 2.0% decline. Additionally, March’s reading was revised lower to a 1.7% advance painting a weaker picture for U.S. factory demand. New and existing homes sales for April came in at 5.19mm and 673k as both missed analysts’ estimates. JPMorgan last week also reduced its 2nd quarter estimate for GDP growth.

This week economic news is on the light side as only reports on consumer sentiment, personal spending and a 3rd revision to 1st quarter GDP are expected. Dividend paying stocks and non-cyclicals such as consumer staples will probably offer some protection if trade uncertainties continue to make equity markets volatile.

Another Memorial Day has come and gone. The official start of summer is here, and the charcoals from cookouts and barbecues are still warm. But let us never forget the real meaning of Memorial Day – to honor those who have gone before us and paid the ultimate price to ensure our freedom and to secure the blessings of liberty.

“We do not know one promise these men made, one pledge they gave, one word they spoke; but we do know they summed up and perfected, by one supreme act, the highest virtues of men and citizens. For love of country they accepted death. And thus resolved all doubts, and made immortal their patriotism and their virtue.”

James Garfield
May 30, 1868 Arlington National Cemetery

ND&S Weekly 5.20.19 – Stay Calm

May 20, 2019

The equity markets were a bouncing ball last week as continuing trade tensions weighed down the Dow Jones Industrials (DJIA) for a fourth straight week of losses, its longest losing streak in three years. The DJIA shed 0.61%, the S&P 500 declined 0.69% and the NASDAQ gave up 1.22%. US small caps suffered with the Russell 2000 losing 2.32%. Emerging market stocks fell 3.55% while developed international equities squeezed out a 0.23% gain.

The increasingly rancorous trade conflict has made investors nervous about the two economic powers damaging global supply lines and putting the brakes on an already slowing global economy. However, there was a positive trade development with the US lifting tariffs on Canadian and Mexican steel and aluminum.

It is important to note that corporate earnings fuel stock prices. With first-quarter earnings season almost over, 460 constituents of the S&P 500 companies have reported and 75% of them beat analyst expectations. The impact of trade conflicts will be on center stage again as large retailers, Home Depot, Nordstrom, Kohls, and Target report this week. According to the American Apparel and Footwear Association, 41% of apparel and 72% of footwear produced is manufactured in China.

Economists, analysts, and market pundits are recalibrating their data. Investors, meanwhile, have sought safe-haven assets as US Treasury yields fell, money market inflows surged and utility and telecommunication stocks rose. Overall yields on US Treasuries fell to their lowest levels in over a year. The benchmark 10 year US Treasury yield closed the week at 2.39%, down from 2.47% the week prior.

Though we expect President Trump tweeting about trade and China’s bellicosity to continue, Wall Street consensus is that there will be a trade deal with China. In another escalation with China last week, the US put Chinese hardware company Huawei and 26 of its affiliates on an export blacklist causing a number of US tech giants to halt business with them. The US and others have accused Huawei of committing espionage on behalf of the Chinese government. Hopefully, President Trump and Xi Jinping can settle things at the end of next month at the meeting of the Group of 20 nations. There are other geopolitical risks to take into account including, escalating tensions with Iran, Venezuela’s instability, Europe’s parliamentary elections and North Korean missile launches.

Economic news in the week ahead include reports on new and existing home sales, manufacturing PMIs, and durable goods orders. Despite all of the headline news we strongly feel that investors should remain diversified, not chase the momentum up or down and try to stay calm.

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” – Winston Churchill