Commentary (9/19/16) – Volatility Returns

September 19, 2016

After trading for nearly 50 days without a move of +/- 1%, the S&P 500 saw moves of greater than 1% four times in the past six days. Seasonality (August/September/October tend to be more volatile than other months) along with chatter from various Fed Governors contributed to the market volatility. Weak retail sales numbers (first decline in five months) combined with tepid industrial production numbers (-0.4% m/m) more-or-less cemented the feeling among investors that the Fed would remain on hold for their September meeting.

For the week, the DJIA finished higher by 0.25% while the broader-based S&P500 gained 0.59%. Interestingly, the S&P 500 is at roughly the same level that it reached in July 2015 (i.e., little overall movement in the S&P 500 average in over 14 months). International markets were weaker as the EAFE Index lost 2.48% for the week while emerging markets gave up 2.59%. Fixed income, represented by the Barclays Aggregate, finished the week slightly lower by 0.11%. As a result, the 10 YR US Treasury closed at a yield of 1.70% (up 3 bps from the previous week’s closing yield of 1.67%). Gold fell by $24.50 to close at $1,306.20/oz. Oil prices trended a bit lower on the week to close at $43.03/bbl … the International Energy Agency released their September report highlighting a slowdown in the growth of global demand (we see oil prices between $40 – $50 per barrel until at least year-end).

We expect volatility to remain high as investors digest conflicting economic and political news in the week ahead. All eyes will be on the Federal Reserve’s Wednesday meeting and rate announcement. We expect the Fed to remain on hold, but Fed comments will likely point to a December rate hike (of course, being data dependent). As always, we plan to look through the day-to-day news and focus on longer-term objectives.

How ‘bout those Sox!

Enjoy the last few days summer

“Don’t watch the clock; do what it does. Keep going.” – Sam Levenson

The Bear Growls

September 12, 2016

The S&P 500 closed out the week on a sour note as it fell 2.45% on Friday, mostly a result of hawkish comments by Fed officials. For the week, the DJIA fell 2.15% while the broader-based S&P 500 closed down 2.38%. International equities were mixed with the MSCI EAFE off slightly (-0.13%) for the week while the MSCI EM closed higher by 1.12%. Bonds closed the week in the red as yields backed up across the board on “Fed talk”. The 10Yr Treasury closed the week at a yield of 1.67%, 20 bps higher than the week before.

Eric Rosengren, the Boston Fed President and a voting member on the Fed’s interest rate setting board, said that low interest rates are increasing the chance of overheating the U S economy. Gradual tightening monetary policy is appropriate to maintaining full employment, he added. Fed officials will meet on Sept 20-21 to decide on interest rates, and the quiet period when the Fed will not speak begins tomorrow.

One of the tell-tale signs of a bullish stock market is sector rotation where money-flows move from one industry sector to another, but not out of the market itself. Last week money flowed out of stocks and into money market funds. The sectors most hit were the so called defensive stocks – utilities, telecoms, and consumer staples, which are a little disconcerting, and energy shares amid a decline in crude oil futures. We expect a bouncy ride until the Fed meeting and let reasonable asset allocations and global diversification carry the day.

“Better to keep quiet and only let people think you’re an idiot than to speak up and confirm it.” – Rodney Dangerfield

Rate Hike Likely on Hold

September 6, 2016

Equity indices moved higher last week as the calendar turned to fall. For the week, the S&P 500 and DJIA finished higher by 0.56% and 0.61% respectively, with financial stocks leading the charge. Smaller US companies representing the Russell 2000 finished the week up 1.15%. International equities were mixed with the MSCI EAFE up 0.48% and MSCI EM down 0.10%. Although yields gravitated higher earlier in the week on hawkish statements from FOMC chair Janet Yellen, they ultimately finished the week roughly where they started after a lighter-than-expected jobs report on Friday.

On Monday, the Commerce Department reported personal consumption expenditures (PCE) rose 0.3% in July, marking the 4th straight month of increases. Consumer spending continues to show signs of strength, otherwise offsetting the weak manufacturing sector. Consumer spending remains the most important aspect of economic strength with roughly 2/3 of US economic activity directly related to it. Perhaps industries will begin to try and build inventories to meet demand, which would in turn help manufacturing and continue to support job growth. Also in the report, the PCE price index was (Fed’s preferred inflation measure) was flat in July and only up 0.8% compared to 12 months prior. This is well under the Fed’s desired target of 2% and has been for more than four years.

On Friday, the Department of Labor reported that U.S. employers added 151,000 jobs in August, below expectations of an 181,000 increase. Revisions for June and July were negligible as an increase in June’s number was offset by a reduction in July’s. For the past three months, the US has added a very solid 232,000 jobs per month. The jobless rate held steady at 4.9%, while the U6, a broader measure commonly referred to as “underemployment” is also holding steady at 9.7%.

The jobs report is notable in that it is the last significant report before the FOMC is scheduled to hold their September meeting. While the numbers weren’t bad, the report didn’t have the blowout numbers needed to nudge the doves off the fence and raise rates. The decision to do that was likely pushed back to December when they will have additional data to help support that decision.

Enjoy the Fall and Go Pats!

“A dream doesn’t become reality through magic; it takes sweat, determination and hard work.” – Colin Powell

Spending Restraint Evaporates

August 29, 2016

The large-cap markets took a breather last week, with the S&P 500 declining 0.67%, while the smaller-cap Nasdaq 100 only fell 0.37% and the Russell 2000 was able to advance by 0.11%. The Jackson Hole monetary commentary produced some late-week market volatility. Futures markets increased the probability of September [36% chance of an increase] and December [64%] Fed Funds increases, but the Fed won’t increase rates ahead of the presidential election. It has become clear that global economic conditions are key to Fed decisions, not US economic data reports.

On the fiscal front, the Federal government is ramping up spending far faster than tax revenues, producing the inevitable increase in the deficit. The Congressional Budget Office now forecasts that Fiscal 2016 federal spending will increase by $178 B while tax revenue [due to lackluster GDP growth] will increase by only $26 B, thus increasing the deficit to $590B [from $438B last year].

Putting this in perspective, debt held by the public will be back up to 76.6% of GDP, the highest since 1950, when the US was repaying the enormous cost of World War 2! Even more disturbing, as the following chart shows, current projections call for this burden to exceed 80% by ~2022. This is a lot, even for a reserve-currency country.

Past needn’t be prologue, but it will take uncommon resolve by the next administration to improve these trends.

“History is a gallery of pictures in which there are few originals and many copies”Alexis de Tocqueville

Fed Watch

August 23, 2016

Last week most equity markets advanced modestly as the S&P 500, the DJIA, and the NASDAQ were up .06%, .02%, and .16%, respectively. The utility and telecom sectors were the worst performers for the week as investors took profits in the two sectors which have been the best performers YTD. Interest rates rose slightly for the week with the yield on the 10 year U.S. Treasury going from 1.51% to 1.58%. International stocks were mixed, the EAFE declined by .58% but emerging markets rose .08%.

This week is a quiet one on the earnings and the economic front with reports on durable goods , existing home sales, and the second revision to the 2nd quarter GDP number. The second quarter earnings season is basically wrapped up and earnings for the S&P 500 index are expected to fall 2.1% compared to a year ago. This would mark the fourth quarterly earnings drop in a row. Much of the drop is due to the energy sector and lower oil prices, however, 5 of the 10 sectors in the S&P 500 will post declines as companies have struggled to increase sales in the face of slow global growth. The big news this week may be Fed chair Janet Yellen’s speech from the meeting in Jackson Hole as investors hope to get a reading on when the Fed will raise interest rates.

“I learned that courage was not the absence of fear, but the triumph over it.  The brave man is not he who does not feel afraid, but he who conquers that fear.” – Nelson Mandela


August 15, 2016

Global markets rose last week bolstered by a rebound in the price of oil and the ongoing sense that the Fed remains on hold.  One for the record books – for the first time since 1999, all three major stock indices in the United States closed at record highs on Thursday.  Boy, it certainly doesn’t feel like market averages are at all-time highs, but this just reinforces the theme of our last quarterly newsletter – Speculation/Crisis/Recovery.

For the week, the DJIA finished higher by 0.33% while the broader-based S&P500 eked out a gain 0.12%.  International markets were strong as the EAFE Index jumped 2.85% for the week while emerging markets posted an increase of 2.81%.  Fixed income, represented by the Barclays Aggregate, finished the week higher by 0.42%.  As a result, the 10 YR US Treasury closed at a yield of 1.51% (down 7 bps from the previous week’s closing yield of 1.58%).  Gold fell by 0.60% to close at $1,335/oz.

On Thursday, the Department of Labor reported that initial jobless claims for the week ending August 6th were 266k … another confirmation of a robust labor market.  Offsetting the labor news was yet another tempering of global oil demand by the International Energy Agency.  More sour news came on Friday as retail sales were flat for the month of July … lower than the 0.5% expected increase.  These data points along with recent comments from Fed officials reinforce the “lower for longer” mantra for both interest rates and oil prices (mostly good news for consumers).

We expect volatility to remain high as investors digest conflicting economic and political news in the week ahead.  As always, we plan to look through the day-to-day news and focus on longer-term objectives.

Congratulations to Team USA!  We are proud of our athletes competing in the Olympics in Brazil … what a great testament to the American spirit.

Enjoy the summer …

“If you don’t have confidence, you’ll always find a way not to win.”  –  Carl Lewis

Employment Picking Up

August 8, 2016

Markets continued muddling through a narrow trading range to finish slightly higher for the week. Investors patiently waited in anticipation for the Labor Department’s non-farm payroll report on Friday looking for more conviction in economic growth.  The report did not disappoint as 255,000 jobs were added in July (185,000 expected) in addition to upward revisions in previous months.  So far in 2016, the US economy has averaged 186,000 new jobs a month while showing an improving trend from May’s disappointing report that put any summer Fed Funds rate hike on hold. The markets rallied on Friday to finish the week slightly in the green with financials and technology leading the week.

For the week, the S&P 500 increased 0.49% to close at 2183. Smaller US companies representing the Russell 2000 were up 0.96% for the week.  International equities were mixed last week as the MSCI EAFE was down 1.35% while MSCI EM was up 1.44%. Yields backed up across the board as Friday’s payroll numbers likely increased the chances of a rate hike this year.  The 10yr US Treasury closed the week at a yield of 1.59, 13bps higher than the previous week’s close.

We look ahead to another week of company earnings with 24 companies in the S&P 500 reporting.  Economic data is fairly light this week, with Friday’s retails sales and the University of Michigan Consumer Sentiment Index being the only noteworthy reports.

“Action may not always bring happiness; but there is no happiness without action.” – Benjamin Disraeli

NDS Weekly Recap

August 1, 2016

Markets ebbed and flowed while digesting a week filled with company earnings, Fed guidance and the preliminary 2nd Quarter GDP estimate.  Tech earnings were the highlight of the week with Alphabet (GOOG), Facebook (FB), and Apple (APPL) reporting better-than-expected results.  The FOMC concluded their two-day meeting on Wednesday leaving benchmark interest rates unchanged at 0.25% to 0.50%. This news came as little surprise to markets, but the Fed upgraded their overall assessment of the economy leaving the door open for a hike later this year. The week ended on a sour note as 2nd Quarter GDP came in at 1.2% vs. expectations of 2.6%. Digging into the report, U.S. consumer activity was quite robust while corporate investment was a drag on the headline number.

For the week, DJIA closed at 18432 for a weekly decline of 0.75%.  The broader-based S&P 500 closed at 2174 finishing the week lower by 0.05%.  International equity markets were positive for the week as the MSCI EAFE closed up 2.38% while MSCI EM increased 0.52%.  Treasury yields moved lower, gold was slightly higher, and oil closed the week in the red as concerns arose from declining demand.

We look ahead to another busy week of company earnings as 110 companies in the S&P 500 are set to report. In addition, a lot of attention will be paid to the July payroll number, which will hopefully support continuing strength in the U.S. labor market.

“Life is 10% what happens to you and 90% how you react to it.”  –  Charles Swindoll

Further Stock Market Advances

July 26, 2016


Despite some mid-week challenges, the market closed the week with its 5th straight advance, with the S&P increasing by 0.6% and the Nasdaq by 1.4%. Post-Brexit uncertainty, recurring Fed debate [which produced a stronger dollar] and falling second quarter earnings [~25% of the reports are in, reporting a blended 3.6% decline] all buffeted financial markets.
Recent market strength has raised questions of sustainability. The VIX is below 12 and the S&P’s RSI is above 60, but Investors Intelligence Bull/Bear ratio is still below overbought levels:


Finally, this Wednesday’s release of the Fed’s July Policy Statement will attract more than its fair share of attention this week. The Fed has been playing Lucy with Charlie Brown’s football for several years now, but it is now apparent that the Fed wants to raise rates without tightening. Their “success” will be measured by a Fed funds increase not accompanied by an upward move in the Treasury yield curve as well as not producing any incremental dollar strength [this will be difficult].

“be careful what you wish for, lest it comes true” – anon

Economy Rebounding

July 18, 2016

Last week, equity markets continued their advance led by international stocks. For the week, the MSCI EAFE index was up 3.66% while the MSCI Emerging Market index increased 4.85%. In the U.S., the DJIA was up 2.04% while the S&P 500 increased 1.51%. Small caps as measured by the Russell 2000 finished up 2.39% for the week. Bonds declined as interest rates rose for the first time in several weeks. The 10 year U.S. Treasury rate went from 1.37% to 1.6% as the U.S. Bond Aggregate index declined 0.78% for the week.

Cyclical sectors still lag defensives YTD, but recent economic news suggests that investor optimism is improving.  Post Brexit, cyclical sector stocks in the U.S. are up 9.2% vs 5.9% for defensive stocks. Economic reports last week were generally positive as retail sales increased by 0.6% m/m, PPI improved 0.5% m/m, and CPI showed a 0.2% increase in June. Even though earnings expectations for the second quarter are expected to decline, headwinds from the stronger dollar and oil prices are starting to fade. Cyclical sectors may have some tailwinds moving forward.

Market sentiment this week should be dictated mostly by company earnings and guidance. This week, 88 companies in the S&P500 are set to report.

“Obstacles are those frightful things you see when you take your eyes off your goal.” – Henry Ford