Near-term Caution, Long-term Opportunities

May 16, 2016

The S&P 500 fell 0.5% last week, while the Dow and the small-cap Russell 2000 both registered a more significant -1.1% decline.  This marks the third consecutive weekly decline, the longest since the year-opening 10.3% air-pocket.  Commodities were mixed, with gold falling by 1.6% to $1,272/oz., while crude oil rose by 3.5% for the week.

The earnings reporting season was particularly depressing last week. Brick-and-mortar retailers like Macy’s, Kohl’s, and then Nordstrom all reported less-than-expected results, which resulted in double-digit stock declines.  Fortunately, total retail sales [much broader than just department stores] increased 1.3% for the month of April. Autos, gasoline and internet were important upside catalysts.

briefing 051616

We have now had a chance to review ~92% of the S&P 500 corporate results. So far, earnings have declined 7%, and further declines are expected in the second quarter. The good news is that this should reverse in the second half of the year.

“Plus ça change, plus c’est la même chose” – Jean-Baptiste Alphonse Karr

Lower For Longer

May 9, 2016

Equity markets were negative across the board last week as global growth concerns, tepid earnings, and soft economic data weighed on the markets. For the week, the DJIA declined 0.10% while the broader-based S&P 500 finished down 0.33%. International markets also struggled as the MSCI EAFE declined 2.99% and MSCI EM was off 4.1%. U.S. bond prices generally improved for the week as the yield on the 10 Year U.S. Treasury declined from 1.83% to 1.79%. Oil closed the week lower over supply concerns, and gold finished a volatile trading week roughly where it started.

The jobs report released Friday reported the U.S. economy added 160,000 non-farm jobs in April, much less than expectations of 202,000. February and March were also revised lower while the unemployment rate held steady at 5%.  The bright spot in the report was an increase in hourly wages, which could indicate higher consumer spending in coming months. Look for evidence of improving consumer spending on Friday when retail sales numbers are reported for April.

With weak GDP growth in the 1st Quarter and a soft April employment report, it is unlikely that the Fed will raise interest rates at their June meeting. Futures markets are now pricing in a 4% chance of a rate hike next month. In addition, several economists are now forecasting that the Fed will only raise interest rates once this year. So as far as interest rates go … lower for longer.

Stay The Course

“All that I am, or hope to be, I owe to my angel mother.”  –  Abraham Lincoln

Stocks Give Back Ground … Fond Memories

May 2, 2016

Equity markets gave back ground last week mostly as a result of weak earnings from major technology companies (Apple, in particular) and disappointing action out of the Bank of Japan (which voted to keep its monetary policy unchanged).   Tepid first quarter GDP growth of 0.5% didn’t help matters either (growth should pick up as the year advances).  The Federal Reserve continued its dovish tone as they decided to leave rates unchanged at their mid-week meeting.  The next Fed meeting is in June when the Fed will likely take no action to raise rates.   Interestingly, the dollar weakened as gold and crude prices moved higher on the week.

For the week, the DJIA finished lower by 1.28% while the broader-based S&P500 closed down 1.24%.  For the month of April, the S&P 500 advanced by 0.39%.  International markets were down less than domestic markets as the MSCI EAFE Index closed lower by 0.40% for the week.   Fixed income, represented by the Barclays Aggregate, finished the week slightly higher by 0.4%.  As a result, the 10 YR US Treasury closed at a yield of 1.81% (down 10 bps from the previous week).

Sell in May and Go Away … will it work this year?  It worked last year as the S&P500 declined 7.4% between Memorial Day and Labor Day; however, history points out that the markets tend to rise 1%, on average, between those two days.

Lastly, we remember with fond hearts our co-founder and friend, Paul Dignan, who passed away 14 years ago today (May 2, 2002).  We miss him dearly, and we are grateful for the precious time that he shared with us.

Enjoy every day …

ND&S Weekly Recap

April 25, 2016

US stocks closed slightly higher last week as the DJIA and the S&P 500 gained 0.62% and 0.53% respectively. Smaller US companies performed even better for the week with the Russell 2000 returning 1.40%, while international developed companies, as evidenced by the EAFE index, were up 1.31%. Yields moved higher across the board as the 10 year US Treasury closed at a yield of 1.89%. Despite OPEC’s inability to agree on a production freeze, oil prices were able to increase over 8% for the week.

First quarter earnings have been better than expected, with 59% of companies beating expected revenues and 82% exceeding earnings expectations. However, earnings reports from large technology companies disappointed investors as the more technology-focused NASDAQ ended the week down 0.66%. Developing technologies like cloud storage, mobile and worldwide internet usage are affecting technology, retail and media sectors.

The returns for other cyclical sectors last week were as follows: energy 5.5%, health care 2.6%, basic materials 2.5%, financials 2% and industrial 1%, all of which performed much better than the more defensive sectors. Utilities were the worst performers, down 3.1% for the week. This sector rotation and with emerging market stocks up 6.9% year-to-date suggests investors are beginning to diversify away from the past momentum winners like the FANG stocks.

Jobless claims declined to their lowest levels since 1973, surprising many economists. The improved employment numbers, could create hawkish comments from the Fed at this Wednesday’s meeting.

“Know what you own, and know why you own it.” – Peter Lynch

Market Recap

April 18, 2016

Last week’s momentum carried over to this week as equity markets finished the week positive across the board.  For the week, the DJIA closed the week at 17897 for a weekly gain of 1.85%.  The broader-based S&P500 ended the week at 2081 for a weekly gain of 1.65%. Smaller US companies represented by the Russell 2000 were even better as the index finished up 3.08% for the week.  International markets were also strong as both the MSCI EAFE and MSCI EM were up 3.61% and 3.69% respectively.  Treasury rates were slightly lower across the board with the 10yr US Treasury closing at a yield of 1.76%.

Earnings season kicked off this past week with only a fraction of S&P500 companies reporting.  Results have been relatively positive versus expectations with over 70% of companies reporting earnings ahead of analyst expectations.  In global economic news, the IMF (International Monetary Fund) cut its global economic growth outlook to 3.2% (down from 3.4%), largely due to China and weak commodity prices.  The revision marks the fourth straight cut in their 2016 forecast but the IMF does think conditions will be begin to normalize next year as they increased their 2017 Global GDP estimate to 3.6%.  Domestic economic news for the week was as follows: Retail sales declined 0.3% m/m vs. expectations of 0.1% gain; Import prices increased 0.2% m/m while PPI decreased 0.1% m/m; The consumer sentiment index fell to 89.7.

Be on the lookout for our client quarterly reports along with our 1st quarter newsletter Fed Trumps Market Anxiety. Have a great week.

“What you do today can improve all your tomorrows.”  –  Ralph Marston

Let the Drama Begin

April 11, 2016

The markets ended a tough week on an up note in response to the Fed’s late-Thursday verbal intervention. Yellen and three former Fed leaders talked up the prospects for the US economy and promised a “reasonable path” for interest-rate increases. Rising oil prices also helped Friday’s market uptick, but the week was still down 1.2% or more, depending on the index. The 10Yr US Treasury closed the week at 1.72%, mostly flat for the week.

The upcoming earnings season is already expected to be dismal, with S&P 500 contracting ~8.5% in the first quarter, the 4th consecutive quarterly decline. Unfortunately, these low expectations do not guarantee that “bad news is good news”. Witness Gap Stores’ late-Thursday warning about lower sales and shrinking profit margins, which produced a 14% stock price decline. Alcoa will initiate actual earnings reports on Monday.

On a lighter note, it is encouraging to see American private-sector risk-taking succeed. Last Friday Elon Musk’s 15 year-old Space X Corp successfully recovered the first stage of its Falcon 9 rocket [from a barge in the Pacific ocean!], which was part of a launch of its Dragon spacecraft to the International Space Station. The ability to recover and reuse rockets is key to achieve space access cost reduction.

“We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.”  ― John F. Kennedy

Earnings Season

April 4, 2016

U.S. stocks rose last week following positive economic news and dovish comments from Fed Chairwoman Janet Yellen indicating that the Fed will continue to move ”cautiously” in raising interest rates. The US Labor Department reported that the economy added 215,000 jobs in March – (in-line with expectations) while the unemployment nudged higher to 5% from an eight year low of 4.9%.  U.S. manufacturing expanded in March for the first time since last summer … perhaps portending an improvement in U.S. manufacturing as the economy moves past the effects of a strong dollar and low oil prices.  Consumer spending rose slightly in March, but January’s number was revised lower causing some economists to revise forecasts for first quarter GDP growth to the 1% area.

For the week, the S&P 500 was up 1.8% while the DJIA increased 1.6% marking the sixth weekly gain for both the S&P 500 and DJIA in the last seven weeks. International equities were positive for the week as the MSCI EAFE ticked up 0.07% while he MSCI EM closed 1.58% higher. Treasury yields moved lower last week as the 10YR Treasury closed at a yield of 1.79%.

First quarter earnings will likely be lackluster as 94 of the 500 S&P companies have already issued guidance which was below previous analysts’ estimates. According to the Wall Street Journal, first quarter earnings estimates for the S&P 500 are expected to decline by 8.5% marking the fourth consecutive quarter of declining earnings.  Earnings should start to look better as the year moves on as year-over-year comparisons become more favorable.

“It’s the little details that are vital. Little things make big things happen.”  –  John Wooden

Stocks Give Back Ground …

March 28, 2016

Equity markets snapped their five-week winning streak as domestic and worldwide markets gave back ground mostly as a result of comments from Fed President James Bullard and the horrific attacks in Brussels (and later in Pakistan).    Bullard commented on Wednesday that an April interest rate hike is possible should economic conditions continue to improve.  Other Fed members seemed to back away from Bullard’s comments as the week went on. We would note that the fed-funds futures market indicates the odds of an April hike at close to zero while the odds of a July hike remain less than 50%.  Interestingly, oil also broke its five-week rally with crude prices falling 4% to $39.46 per barrel … perhaps just a coincidence

For the week, the DJIA finished lower by 0.49% while the broader-based S&P500 closed down 0.67%.  International markets also were down with the MSCI EAFE closing down 2.7%.   Fixed income, represented by the Barclays Aggregate, finished essentially flat for the week.  As a result, the 10 YR US Treasury closed at a yield of 1.90%.

Economic conditions appear to be slowly improving.  Improving employment data, low inflation, low rates, slowly improving manufacturing and reasonable consumer confidence should keep markets mostly range-bound for the short-term.  First quarter corporate earnings, due out over the next month, will likely be challenged, but markets have mostly discounted this news.

Lastly, our hearts and prayers go out to the victims and their family members of the tragic attacks in Brussels and Pakistan … enough is enough.



March Madness

March 21, 2016

Equities continued their march higher for a fifth straight week as the S&P 500 and DJIA climbed out of the red in terms of year-to-date performance.  For the week, the DJIA closed at 17602 for a weekly gain of 2.26%. The broader-based S&P 500 closed at 2050 to finish up 1.37% for the week.  International markets were also strong as the MSCI EAFE and MSCI EM finished the week up 1.02% and 3.28% respectively.  Treasury yields closed the week lower across the broad; the dollar weakened vs most other currencies following the Fed’s decision to maintain interest rates; oil continued its rally with West Texas Intermediate (WTI) and global Brent closing above $40/barrel.

Major economic news for the week included: Commerce Department reported Tuesday that retail sales dipped 0.1% in February beating expectations; the producer price index (PPI) fell 0.2% in February in-line with expectations; on Wednesday, the Consumer Price Index (CPI) fell 0.2% in February and is now up 1% for the last twelve months.  The most important economic news for the week came Wednesday as the Federal Reserve announced it held benchmark rates constant and lowered its forecasts for both year-end 2016 and year-end 2017. Specifically, the statement noted that economic activity has been increasing at a moderate pace on the back of increased household spending.  The Fed left open the timing of future rate hikes and now expects two rate hikes in 2016 instead of four.

Despite more dovish guidance from the Fed, markets should continue to remain volatile as diverging monetary policies, oil volatility, and the political rhetoric remain.  As always, don’t look too much into the day-to-day noise of the markets and keep your eye towards the long-term.

“In politics stupidity is not a handicap.”  –  Napoleon Bonaparte

Getting Closer to Break-even

March 14, 2016

In the absence of any significant domestic economic headwinds, stocks were able to advance for the 4th consecutive week. The S&P 500 advanced 1.1% to 2022.18, regaining the level of its 200-day moving average of 2019.9, but still down 1.1% YTD.

Thursday’s European Central Bank policy meeting [temporarily] fulfilled all of the bulls’ hopes. The new stimulus included expanding quantitative easing by 33% [to €80 B/mo!] and added corporate bonds to its asset purchase program. Unfortunately, [or fortunately, depending on your position and time-frame] the euphoria was short-lived, since Mario Draghi suggested that rates were unlikely to be pushed any lower.

This week’s calendar is much more active, with retail sales, inflation, industrial production, employment energy and sentiment all vying for attention. Nonetheless, central banks will likely still hog the spotlight, with the Fed releasing its latest policy statement on Wednesday. The markets are not expecting any change in rates this month but are looking for additional FF increases this year. The Fed’s “dot plots” will confirm [or not] this likelihood.

“Monetary policy does not work like a scalpel but more like a sledgehammer” Liaquat Ahamed