Rate Hike 2.0
May 31, 2016
Global equities rallied last week as investors processed the possibility of a rate hike from the US Federal Reserve at either their June or July meeting. Assuming that the economic data stay close to the FOMC forecasts, a 0.25bps hike should be expected in the coming months. According to Bloomberg calculations, the probability of a June fed hike as of Friday was 34% but up significantly from earlier this month when it was in the low single digits. The May employment number is slated to be released on Friday (June 3rd) and will provide economists with another measure of whether a rate hike is imminent.
US equities had their strongest week since early March and are now within 2.0% of all-time highs. For the week, the S&P 500 closed up 2.32% while the DJIA finished the week higher by 2.15%. International markets were also strong as the MSCI EAFE and MSCI EM closed the week higher by 2.67% and 2.42%, respectively. Oil had its highest close of the year this past week as it closed over $50 for the first time since November.
Deja Vu? … Rate chatter will most likely dominate the headlines in the coming weeks. The market’s reaction last week seems to imply: if the Fed wants to raise rates … things must be good. We all know how volatility picked up around the last rate hike in December, but don’t forget that was the first hike in 9.5 years. We expect volatility to pick up again but not as much as earlier in the year. As always we encourage everyone to Stay The Course.
“Ask not what your country can do for you; ask what you can do for your country.” – John F. Kennedy
The Hawkish Fed
May 23, 2016
The stock market modestly advanced last week with the S&P 500 rising .3%, the Nasdaq, with AAPL up 5%, increased 1.1% while the Dow slipped .2%. Investors were caught off guard by the Fed’s hawkish comments and suggestion of a possibility of raising rates at the upcoming June meeting. As a result, interest sensitive stocks lost ground.
The housing market is improving, job growth is steady, and wages are increasing. Consumer prices rose 3% in April, which is the largest monthly gain in three years, though core inflation is rather tame at 2.1%.
International markets are jittery as global economies remain sluggish. Developed markets were up .33% as evidenced by the EAFE index but still down -5.9% year to date. The EM, emerging markets index, was off -1.3%. There is evidence that investors are growing weary of no earnings growth for 10 years in Europe, especially with bank stocks, which have so far this year fallen -19%.
The fixed income markets reacted negatively to the possibility of a June interest rate hike by the Fed. The 10-year Treasury yield rose 14 basis points to 1.85%. Economists are worried about the flattening yield curve and its affect on economic growth. A flat yield curve implies a lack of growth while an inverted curve can imply an upcoming recession. All eyes and ears are on the Fed’s comments and decision.
~“The four most dangerous words in investing are: “this time is different.” –Sir John Templeton
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.
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
Dismal Jobs Report … Fed Likely on Hold
June 6, 2016
Equity markets finished relatively flat during last week’s holiday-shortened trading despite the release of a number of important economic data.
For the week, the DJIA finished lower by 0.37% while the broader-based S&P500 was flat (0.00%). International markets moved slightly higher as the Dow Jones Global ex U.S. index gained 0.55% for the week. Fixed income, represented by the Barclays Aggregate, finished the week higher by 0.67%. As a result, the 10 YR US Treasury closed at a yield of 1.71% (down 14 bps from the previous week).
A plethora of economic news provided added volatility to the markets last week. On Tuesday, the Commerce Department reported that consumer spending jumped 1% in April … expectations had been for an increase of 0.7%. On Wednesday, the May Markit manufacturing PMI came in at 50.7 … down from 50.8 in April. Markit indicated that new business growth fell to its lowest level in 2016 (regulatory drag?). Construction spending fell in April by 1.8% versus consensus of a 0.6% increase (this was the biggest drop since January 2011). Lastly, on Friday the Department of Labor reported that the U.S. economy added only 38,000 jobs in May while expectations had been for a gain in jobs of 158,000. The dismal jobs report, combined with the other disappointing economic news, will likely keep the Fed on hold during its June 14-15 meeting. A July rate hike is still a possibility.
On the earnings front, the news is a bit better. First quarter earnings, although sluggish, have been better than expected. With earnings season just about over, 72.4% of companies have beaten expectations.
The week ahead holds the potential for a number of market-moving events. Most notably, Janet Yellen will speak on Monday in Philadelphia as she reviews the current economic climate … we suspect that Friday’s sobering jobs report will temper her enthusiasm for the economy.
Enjoy the summer …
“It’s the repetition of affirmations that leads to belief. And once that belief becomes a deep conviction, things begin to happen.” – Muhammad Ali