The Long Awaited Tax Plan
October 2, 2017
Last week, Wall Street celebrated the Trump administration’s tax plan with the prospects for lower corporate taxes and less tax on repatriating profits back to the US. Major indices closed the week at new all time highs: the DJIA gained 0.2%, the S&P 500 was up 0.7% and the NASDAQ advanced 1.1% for the week. The recent increase in the dollar sent the MSCI EAFE index down 0.3%. However, small US stocks cheered the dollar rally, with the Russell 2000 index gaining 2.8% for the week — a record high.
The month of September historically has been the worst month of the year for the stock market, yet the DJIA was up 2.1%, the S&P 1.9% and the NASDAQ 1%. For the third quarter, the NASDAQ rose 5.8%, with its fifth straight positive quarter, the DJIA surged 4.8% while the S&P gained 4%.
The Feds hawkish comments and better-than-expected GDP numbers caused Treasury yields to continue to rise with the 10yr US Treasury settling at 2.34%.
US crude oil prices rose 2% to $51.67 a barrel which is a five month high as oil stocks responded nicely to the news. New home sales fell to an eight month low in August and pending home sales came in at close to its two year low. Without question, the devastation of the hurricanes is affecting our economic outlook.
This week the Institute for Supply Management index (PMI) will be reported on Monday, vehicle sales will come Tuesday and on Friday, the labor Department will announce its September employment report.
We are pleased and yet concerned about the second longest “Bull Market” in history. The forward price to earnings (P/E) ratio for the S&P 500 is 19 times with earning estimates of $131.38, while historically the long-term average P/E ratio is closer to 15 times. In addition, a marginal decline of non-financial companies buying back their own stock could raise some alarm. These larger US companies are in pretty solid financial shape with $2.3 trillion in liquidity. We hope more will begin to spend on infrastructure expansion and accretive mergers and acquisitions.
“Love is the most important thing in the world, but baseball is pretty good, too.” –Yogi Berra
The Great Unwind
September 25, 2017
Equity markets finished modestly higher last week, as the FOMC reaffirmed it will begin the process of reducing its oversized $4.5 trillion balance sheet (see chart below). For the week, the DJIA closed higher by 0.36% while the broader-based S&P 500 increased 0.09%. The market’s advance broadened out a bit as evidenced by the Nasdaq finishing the week down 0.33%, while smaller US companies represented by the Russell 2000 increased 1.35%. Developed international equities closed the week higher by 0.70% while emerging market equities were flat. Treasury yields moved higher across the board with the 10yr Treasury closing the week at a yield of 2.26%. Oil (WTI) closed above $50.00/barrel.
The Federal Reserve’s decision following last week’s two-day meeting was widely anticipated. It will begin by rolling off $10 billion every month and will increase the cap by $10 billion a quarter until the total reaches $50b a month. The committee continues to expect more rate hikes with one later this year (Dec?) and three more in 2018. The Fed also shaved 20bps off its long-run rate projection of 3.0%. The committee cited continuing strength in the labor markets and moderate growth as deciding factors to embark on its “balance sheet normalization program”.
“Quick decisions are unsafe decisions” – Sophocles
Onward and Upward
September 19, 2017
The stock market registered another solid advance last week, with the S&P up 1.6% [+11.7% YTD] and the Nasdaq up 1.4% [+19.8% YTD]. This was in response to Irma’s less-than-expected damage estimates and in spite of Friday’s latest North Korea missile launch [the chances of a “kinetic response” are increasing!]. After hitting a 10-month low last week, the 10 year treasury yield rose to 2.2%.
Total August CPI increased 0.4% [consensus 0.3%], while core CPI rose 0.2% as expected.
This raised the market’s expectations of a Dec FF rate increase to 58%, up from a previous 31%. The Fed will consider inflation and its outsized balance sheet [the Great Unwinding] during this week’s Tuesday-Wednesday FOMC meeting.
Finally, the Equifax hack [announced 9/7/17] has potentially exposed 143 million people to financial information theft over the summer. The federal investigation is still underway, but exposed individuals should take immediate action. Freeze your credit at each of the three credit bureaus. Begin monitoring your credit reports [experts suggest setting up a staggered report-request pattern so that every four months one of the three bureaus would provide a {free} credit report]. Consumer Reports offers additional suggestions for even better protection.
“A stitch in time saves nine” – Francis Baily
ND&S Weekly Commentary (9/11/17)
September 12, 2017
Last week, U.S. equity markets declined driven by concerns over severe weather and continuing tensions with North Korea. For the week, the S&P 500, the DJIA and the Nasdaq declined -0.58, -0.82 and -1.16% respectively. Shares of financial companies had their worst week in months as banks and insurance stocks were hit over concerns for lower interest rates and hurricanes damage. The financial sector declined 2.8% for the week. The best performing sectors were health care and energy.
International stocks and fixed income provided positive returns for the week as the EAFE index was up 0.83% boosted by the ECB’s upgrade to its forecast for Eurozone growth and emerging markets advanced .04%.
The rush into safe haven U.S. government bonds drove the yield on the 10 year U.S. Treasury Note down to 2.06% (it was 2.45% at the start of the year) and the U.S. Aggregate index was up 0.46% for the week. This week look for economic reports on retail sales, industrial production and inflation (with reports on CPI and PPI).
“One cannot and must not try to erase the past merely because it does not fit the present.” – Golda Meir
Weekly Commentary (09/05/17) – No Summer of Discontent
September 5, 2017
Summer is over and the markets forgot to sell off. Positive economic news and market momentum have trumped investors’ concerns about geopolitical risks … at least for the moment.
For the week, the DJIA rose 0.88% while the S&P 500 finished higher by 1.43%. Developed international markets finished the week ahead by 0.57% while their year-to-date performance remains stellar as the MSCI EAFE index is up a healthy 18%. Emerging markets continued their advance as the MSCI EM index finished higher by 0.65% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week barely up by 0.07% as bonds yields were relatively flat for the week. As a result, the 10 YR US Treasury closed at a yield of 2.16% (down 1 bp from the previous week’s closing yield of 2.17%). Gold rose $33.88 to close at $1,325/oz on increased fears due to more North Korea missile testing . Oil prices were essentially flat as they closed the week at $47.29/bbl. Cheap oil prices continue to be a boon to businesses and consumers.
In economic news released last week, nonfarm payrolls disappointed (as they normally do in August) as they rose 156,000 … missing estimates of 180,000; US second quarter GDP was revised higher to 3% from an earlier estimate of 2.6%; and ISM manufacturing rose to 58.8% from 56.3%. Despite a somewhat-expected soft nonfarm payrolls report, most economic news was encouraging and continues to point to a gradually improving economic backdrop.
The week ahead looks to be pretty quiet on the economic front as jobless claims, international trade balance numbers and non-manufacturing PMIs are set to be released.
The week ahead on the geopolitical front remains another story. North Korea will, no doubt, dominate headline news as their missile testing and firing continues. Markets will most likely experience increased volatility this week as a result of North Korea’s saber rattling. The S&P 500 has gone 10 months without a correction of at least 3% (the third longest streak since WWII), and we would not be surprised if the markets pullback. Nonetheless, the positive economic backdrop will likely limit any market pullbacks.
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.
Let’s make it a good week!
“Opportunity is missed by most people because it is dressed in overalls and looks like work.” – Thomas A. Edison
The Week That Was
August 28, 2017
First and foremost our hearts and prayers go out to all of the victims of hurricane Harvey.
Amid a devastating hurricane hitting Texas, a solar eclipse that hasn’t happened in 99 ½ years and the potential shutdown of our government as early as October 2nd, the markets last week were very tame: the number of shares traded on Wednesday fell to their lowest level so far this year.
The resiliency of the US stock market is impressive. Last week the DJIA increased 0.71%, the S&P 500 rose 0.75% and the Nasdaq composite gained 0.80%. The insatiable appetite of companies’ repurchasing their own shares, fed by easy monetary policy, has decreased the capitalization of the US stock market by 17.5% over the past six years. Companies are beginning to pair back purchases, buying $100 billion less in the past 12 months than in the prior year.
On the positive side, GDP growth has been improving and our labor market is expanding which will undoubtedly create stronger wage growth. Second-quarter earnings rose by 10.2% y/y, the second consecutive quarter of double-digit growth.
We are concerned, however, with pockets of equity overvaluation, such as some Large Cap Tech and Utility stocks. The Federal Reserve kept interest rates the same at their Jackson Hole meeting but reminded that they will be paring back their $4.5 trillion bond portfolio. The US budget showdown is now at the forefront of investors minds.
International equities continue to benefit from a weaker dollar with EAFE gaining 0.61% and EM surging 2.46% for the week.
The bond market barely budged after Fed Chair Janet Yellen and ECB President Mario Draghi made rather defensive and dovish comments.
With summer winding down we caution investors not to be too complacent and to keep in mind their long-term investment goals.
“Even if you’re on the right track, you’ll get run over if you just sit there.”-Will Rogers
Enough is Enough
August 21, 2017
Markets were volatile last week as investor focus shifted from geopolitics to aftershocks from the tragic events in Charlottesville, VA and Europe. The markets jumped higher to start the week as North Korea pulled back on threats against Guam easing tensions from the previous week. Disapproval to President Trump’s response prompted a number of CEOs to resign from advisory councils which he ultimately disbanded as the week wore on. Another ISIS inspired terrorist attack, this time in Barcelona, Spain added to the market’s uneasiness on Thursday. Additionally a knife attack in Turku, Finland occurred on Friday killing 2 and injuring several others. Enough is Enough
For the week, the DJIA closed down 0.77% while the broader-based S&P 500 was off 0.58%. Smaller US companies represented by the Russell 2000 shed 1.17%. Despite the terrorist events in Spain and Finland, international equities finished the week in the green with both Developing and Emerging Markets closing higher by 0.07% and 1.64% respectively. Yields were generally flat for the week as investors weighed the latest comments from FOMC and ECB. In minutes from recent policy discussions, both central banks had concerns with tepid inflation while Fed officials remain split over the next course of action.
Economic news for the week was a mixed bag: retail sales rose 0.6% in July ahead of expectations; housing starts fell to 1.115 million (seasonally adjusted annual rate) missing expectations of 1.122m; industrial production increased 0.2% month over month which was slightly below estimates of 0.3%; the labor market remained strong as initial jobless claims came in at 232k beating estimates.
Global equities should remain volatile given recent events around the world. Investors should continue to adhere to their long-term plan amongst all the noise!
“A single sunbeam is enough to drive away many shadows.” – Francis of Assisi
Fire and Fury
August 14, 2017
Complacency evaporated last week, as geopolitical uncertainty along with earnings disappointments [retail, upstart social media] and the fraying of the OPEC “production limitation” deal. A useful way to quantify investors’ mood is the CBOE Volatility Index (VIX). This year we have experienced a long-lived period of slowly advancing stock prices, which made the “short-volatility” trade one of the most popular [hence dangerous] trades. The VIX jumped 44% this week to 16.04, far above the previous ~10 complacency level. Since the VIX is a trading vehicle as well as well as an indicator, it can easily be part of a vicious circle. The following chart speaks volumes:
For the week, the DJIA closed down 0.91% while the broader-based S&P 500 was off 1.37%. International equities were even worse with developed international equites and emerging market equities lower by 1.48% and 2.24% respectively. As expected, money flowed into US Treasuries (along with gold) pushing yields lower across the board. The 10yr Treasury closed the week at a yield of 2.19% which was down from 2.27% the week prior.
In the week ahead, look for economic readings on retail sales, industrial production, consumer sentiment and the release of the FOMC minutes from July’s meeting. Volatility should remain heightened due to geopolitics, but any serious decline will likely be buffered by an improving US economy and earnings backdrop.
“Act as if what you do makes a difference. It does.” – William James
Moderate Growth to Continue
August 7, 2017
Last week, equity markets continued their advance driven by strong corporate earnings and better-than-expected job numbers. In the U.S., the S&P 500 was up 0.23% and the DJIA 1.22% while the NASDAQ declined -0.34%. Internationally MSCI EAFE and MSCI EM were up 0.88% and 0.45% respectively. For the week, value outperformed slightly but YTD growth continues to be a strong outperformer.
The July employment report was a better-than-expected 209,000 and the unemployment rate fell to 4.3%, the lowest level in 16 years. Employment numbers as well as corporate earnings and other economic numbers should provide support for moderate economic growth in the second half of 2017. This week, CPI and PPI inflation reports should show that inflation continues to be in check. We believe this will allow the Fed room to start reducing their balance sheet in the 4th quarter and raise short term rates for a third time in December.
This steady stock-market advance has taken it into fully-valued territory, which perforce raises bull market durability questions. Geopolitical disaster is currently the most likely bear-market catalyst, and the UN’s North Korean sanctions bring Pyongyang’s ongoing nuclear ambitions into sharp focus. Diplomacy will not be enough to prevent that rogue regime from acquiring deliverable [ICBM mounted] nuclear weapons, and the possibility of physical intervention [kinetic warfare?] is increasing. Please stay tuned.
“Without labor nothing prospers.” – Sophocles
ND&S Weekly Market Commentary 10.09.17
October 9, 2017
Markets extended their gains last week notching a series of new records for the headline indices before retreating on Friday. Solid economic data along with hopes of a tax reform package provided equities a boost and pressured bonds further.
For the week, the DJIA moved higher by 1.70% while the broader-based S&P 500 finished up 1.25%. Smaller US companies representing the Russell 2000 were also positive for the week as it gained 1.32%. International equities were mixed with the MSCI EAFE down .06% and MSCI EM up 2.00% for the week. Bond prices were again under pressure as yields moved higher last week. The 10yr US Treasury closed the week at 2.37% which is up from 2.06% one month ago. WTI slipped last week to $49.50/barrel.
Economic data for the week was generally positive. On Monday, the ISM reported the manufacturing index continued to expand with a reading of 60.8 handily beating expectations. This marks the fastest rate of growth for American manufacturers since 2004. The nonmanufacturing reading came in at a healthy 59.8, a reading not seen since 2005. On Wednesday, we saw a better-than-expected payrolls number showing an increase in 135,000 jobs beating expectations. On Thursday, the Commerce Department reported a 1.2% m/m increase in August factory orders which was ahead of estimates (durable and non-durable goods). Finally on Friday, the Labor Department reported the economy lost 33,000 jobs in September, missing expectations of an 80k increase. The negative report was largely shrugged off by the markets as most economists viewed it as a bad reading due to the devastation caused by hurricanes Harvey and Irma. We believe the reading is not a reflection of the overall long-term trend in employment.
Earnings season will kick into gear this week with most reports coming from the financial sector. In total, 10 S&P 500 companies will be reporting which include BAC, WFC, and JPM. In addition to earnings, we will have the release of FOMC minutes and reports on inflation, consumer sentiment, and retail sales.
“Following the light of the sun, we left the Old World.” – Christopher Columbus