ND&S Weekly Commentary 02.24.20 – Coronavirus Scare

February 24, 2020

Throughout the holiday-shortened week, reports of the COVID-19 coronavirus spreading to other countries created fears of a global economic slowdown. Investors and traders reversed course and went from risk-on to risk-off investments. As a result the Dow Jones fell 1.36%, the S&P 500 was down 1.22% and the tech-heavy NASDAQ slid 1.55%. International equities also suffered with Developed (EAFE) and Developing (EM) down 1.23% and 1.96%, respectively.

On Friday the World Health Organization reported that there were 76,767 confirmed cases of COVID-19 and 2,247 deaths. China’s shutdown of business activity has affected supply chains throughout the world. The second largest economy reported that during the first two weeks of February car sales declined 92% year over year.

In the U.S., the composite economic PMI (Purchasing Managers’ Index), which includes service and manufacturing indexes, came in below 50 for the first time since 2013. U.S. existing home sales were also weak falling 1.3% in January to a 5.46 million annual rate. Housing starts were down 3.6%. The price of a barrel of West Texas Intermediate Crude for March delivery fell over 2% on Friday. Gold was boosted again as a safe haven asset up 1.8% for the week at $1,648.80 an ounce, reaching a seven year high.

The U.S. 10-year Treasury Note slipped to 1.47% the lowest level since early September. The 30-year T-Bond yield dropped to 1.89% reaching an historic all-time low. Recession worries are indicative of an inverted yield curve with the three month T-Bill yielding 1.55% while the two-year notes are 1.34%.

Despite a 3.1% fourth quarter profit growth for the S&P 500 companies and excluding the energy sector the growth rate was 6%, the coronavirus dominated the financial markets. The FAANG’s – Facebook, Apple, Amazon, Netflix and Google are up 10% year to date. Their average price to earnings ratio is up to 35 times estimated earnings from 21 times last year. Another huge holding is Microsoft at $1.4 trillion in market cap. Microsoft is up 14% year to date and trades at 31 times estimated earnings. The stock hasn’t traded at that level since the dot-com crisis.

We anticipate volatility to increase while, hopefully, the coronavirus can be contained and cured. The concentration and size of FAANG and Microsoft within major indices and their exposure to a slowing global economy is worrisome. We strongly feel that raising cash balances for foreseeable needs, assessing the risk of owning sizable positions and diversification will pave the way to stable returns.

This week consumer confidence will be reported on Tuesday, new home sales on Wednesday and personal income and spending on Friday.

 
“Although the world is full of suffering, it is full also of the overcoming of it.” – Helen Keller

ND&S Weekly Commentary 02.18.20 – Markets Continue to Shrug Off Coronavirus Fears

February 18, 2020

Markets pushed higher last week despite ongoing uncertainty surrounding the coronavirus. Helping the markets move higher were encouraging comments from Fed Chair Jerome Powell and mostly better-than-expected economic news.

For the week, the DJIA advanced 1.17% while the S&P 500 gained 1.65%. The tech-heavy Nasdaq jumped 2.23% as investors flooded into cloud-related stocks. International markets were mixed. For the week, the MSCI EAFE index (developed markets) inched lower by 0.02% while emerging market equities (MSCI EM) jumped 1.37%. International markets remained under pressure due to uncertainty regarding the impact of the coronavirus on global growth. Small company stocks, represented by the Russell 2000, finished higher by 1.90% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week essentially unchanged as bond investors remained on the sidelines for the week. As a result, the 10 YR US Treasury closed at a yield of 1.59% (unchanged from the previous week’s closing yield of ~1.59%). Gold prices closed at $1,582.70/oz – up 0.81% on the week. Oil prices rose 3.38% to $52.05 despite adequate supply and weakening demand. Low oil prices serve as a tax cut to consumers and businesses and are a contributing factor (along with low unemployment) to robust consumer sentiment and retail sales.

Economic news released last week confirmed a resilient jobs market, still moderate inflation, and elevated consumer sentiment. On Thursday, The U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI)  advanced 0.1% in January, below expectations of a 0.2% gain. Over the past 12 months core CPI has risen 2.3%, ahead of the 2.2% consensus and in-line with annual gains seen in October, November and December. Also on Thursday, the Department of Labor reported that initial jobless claims for the week ending February 8 were 205,000, below expectations of 210,000 … another sign of a strengthening labor market. Jobless claims have remained under 300,000 for 257 consecutive weeks – the longest streak on record. On Friday, the U.S. Commerce Department reported that January retail sales advanced 0.3%, matching expectations. The Federal Reserve announced on Friday that January industrial production fell 0.3%, more than the expected 0.2% decline (likely due to fears around global growth as a result of the coronavirus outbreak). Finally, on Friday the University of Michigan Consumer Sentiment Index rose to 100.9 in February – the highest level since March 2018.

Most economic and market fundamentals remain reasonable although traditional market valuations are a bit stretched. We suggest investors stay close to their long-term target asset allocations with a slight defensive bias as markets are due for a pause.

“There are many ways of going forward, but only one way of standing still.” – Franklin D. Roosevelt

ND&S Weekly Commentary 2.10.20 – Coronavirus Takes a Backseat

February 10, 2020

Equity markets pushed aside fears from the coronavirus last week as better-than-expected U.S. job growth and strong manufacturing data provided the boost the markets needed. We would suggest some caution as the full impact of the virus is not yet fully known, but the Chinese government did indicate that the pace of new infections has slowed. With a significant percentage of industrial production shut down, global supply chains are still adjusting from the ripple effects of the virus.

For the week, the DJIA advanced 3.1%, while the broader-based S&P 500 finished at 3.2%. The tech-heavy NASDAQ surged 4.1% and international markets were slightly weaker with the MSCI EAFE and MSCI EM up 1.9% and 2.8%, respectively. The 10 year US Treasury yield rebounded to 1.59% after falling to 1.51% last week. Gold dropped back to $1,570 an ounce and Oil (WTI) closed at $50.35 a barrel.

Economic data on the week was quite strong. The Institute of Supply Management (ISM) reported that the manufacturing purchasing manager’s index (PMI) for January advanced to 50.9%. The release greatly exceeded expectations of 48.5% and indicated the first expansion in 6 months. The non-manufacturing index which tracks the service sector came in at 55.5% beating estimates. On Friday, the Department of Labor reported that 225,000 jobs were added in January which handily beat the consensus estimate of 155,000. The unemployment rate ticked up to 3.6% from 3.5% the month prior. The increase was driven by labor force participation which increased to 63.4%. Average hourly earnings have increased 3.1% from a year earlier.

Approximately, 65% of the S&P 500 constituents have reported earnings for Q4 2019. Blended earnings for the S&P 500 is showing a modest year-over-year increase while revenues are up 3.4% compared to the same quarter a year ago, according to FactSet Research. Expectations were for a 2.0% decline in earnings-per-share (EPS). This week, 101 companies comprising the S&P 500 are scheduled to report.

Let’s make it another good week!

“Get action. Seize the moment. Man was never intended to become an oyster.”Theodore Roosevelt

ND&S Weekly Commentary (2.3.20) – Coronavirus Rocks Markets

February 3, 2020

Uncertainty over the spreading coronavirus outbreak from China last week affected markets worldwide and disrupted travel and trade. China’s financial markets were shut down for a week and will re-open on Monday, February 3rd. Equity markets declined across the board and U.S. fixed income rallied as investors sought safe-haven assets. For the week the DJIA, S&P 500 and NASDAQ declined 2.1%, 2.5% and 1.8%, respectively. Internationally, developed markets were down 2.5% and emerging markets were off the most at 5.0%. The worst performing sectors in the S&P 500 were energy and materials and the best performing was utilities. U.S. Treasuries rallied strongly as interest rates dropped across the board. The rate on the 10 Year U.S. Treasury dropped 19 basis points to close the week at a yield of 1.51%. US West Texas Crude (WTI) declined 5% to $51.30 per barrel while Gold finished the week up 1.3%.

In economic news last week, 4Q real GDP growth came in at 2.1% with positive contributions from consumer spending, housing and government spending. Housing benefited from 3 rate cuts from the Federal Reserve last year. At the FOMC meeting last week, the Federal Reserve announced it would keep their rate target unchanged while continuing repurchase operations through April. This week, look for reports on employment, international trade and ISM mfg./non-mfg. PMIs. With 56% of S&P 500 companies reporting earnings so far, 70% have beaten their consensus estimates on earnings (Earnings per Share) and 51% on revenue. From a sector standpoint, financials have been the strongest and energy the weakest, while information technology earnings have been stronger than expected.

We expect volatility to continue until there is more assurance that the coronavirus is under control. In the past, markets have been affected by previous viruses but have been able to bounce back as they were brought under control. In the interim, portfolio diversification will help to moderate volatility.

“We didn’t lose the game; we just ran out of time.”Vince Lombardi

ND&S Weekly Market Commentary (1.27.20) – The Threat of Virus

January 27, 2020

During the holiday shortened week, investors and traders were shocked by the news of China quarantining two cities and locking down nearly 18 million people to prevent the coronavirus from spreading. As a result, the Dow Jones Industrials (DJIA) declined 1.2%, the S&P 500 dropped 1.0% and the tech-heavy NASDAQ also slipped 0.8%. Emerging markets stocks (MSCI EM) which includes China, slid 2.4% and developed international (EAFE) lost 0.6%.

The global growth fears as a result of the virus have also hit commodities especially metals, oil and refined fuels. On Friday, copper prices recorded their largest weekly decline in five years. For the week, the price of US crude oil plunged over 7.5% to $54.14 per barrel. Gold closed the week 1.3% higher as fears of a global economic slowdown sent investors to safe haven assets.

Corporate earnings for the 4th quarter of 2019 have mostly come in ahead of analysts’ expectations. Over 70% of the companies that have reported beat their expectations according to FactSet. The sector dragging down earnings results is again energy. Over the last 5 years, energy stocks in the S&P 500 are down roughly 24% and are by far the worst performing sector.

US Treasury yields continued their downward trend as a result of concerns about the coronavirus outbreak triggering a flight to safety. The 10-year U.S. Treasury finished at 1.70% down from 1.92% at the beginning of the year.

On the economic front, December existing home sales climbed 3.6% to 5.540 million, surpassing the 5.430 million consensus. Though jobless claims rose modestly to 211,000, they were still lower than the 215,000 expected. The January IHS Markit Flash U.S. Manufacturing PMI fell to 51.7 from a reading of 52.4 in December. However, the PMI reading on Services activity advanced to 53.2 from 52.8.

This coming week we will see major economic data reported: Q4 GDP, new home sales, durable goods orders, consumer confidence and personal income/consumer spending. Leading companies, Apple, Facebook, Microsoft and many more will be reporting their quarterly results.

In addition to the impeachment hearing, geopolitical conflicts and the virus threats to the global economy, there are concerns that market valuations are a bit extended. The forward price-to-earnings (PE) ratio of 18.5 is the highest since June 2002, aside from a brief period in early 2018. We recommend raising cash levels for foreseeable needs while maintaining longer term asset allocations. Remember that dividend growth will continue to provide substantial returns for patient investors. In the fourth quarter investors added $10 billion to dividend exchange traded funds and we expect dividend focused investing will continue.

“Courage is an inner resolution to go forward despite obstacles” – Martin Luther King, Jr.

NDS Weekly Commentary (1/21/20) – Positive Momentum Continues

January 21, 2020

Markets continued to grind to new record highs last week due to positive bank earnings and commentary, another round of analyst price target revisions, and the official agreement of the China-US phase one trade deal.

For the week, the DJIA advanced 1.84% while the S&P 500 gained 1.99%. The tech-heavy Nasdaq was up 2.29%. International markets were also strong as the MSCI EAFE index gained 0.86% while emerging market equities (MSCI EM) increased 1.17% (January – March is a seasonably strong period for emerging market equities). Small company stocks, represented by the Russell 2000, jumped ahead by 2.54% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week flat as the yield curve remained roughly the same. As a result, the 10 YR US Treasury closed at a yield of 1.84% (up ~1 bps from the previous week’s closing yield of ~1.83%). Gold prices closed at $1,558/oz. Oil prices pulled back under $59 per barrel last week as oil remains mostly range bound due to sufficient supply and tepid demand.

Economic data released last week was mostly in-line with expectations. The U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) advanced 0.2% in December, missing expectations of a 0.3% advance. CPI has increased 2.3% year over year. The BLS also reported that the Producer Price Index (PPI) for final demand edged higher by a modest 0.1%. Inflation remains well under control and of little risk to the market. Retail and food services increased 0.3% (month over month) in December to $529B, matching expectations. It increased 3.6% in 2019 showing consumer’s willingness to continue to spend and companies’ ability to pass on modest price increases.

We acknowledge that valuations on the market are elevated at current levels and momentum clearly has control of the market following a very strong 2019. Earnings season kicked off last week and so far the results have been positive versus consensus. Earnings reports will continue this week with 39 companies comprising the S&P 500 scheduled to report results. Over the next few weeks, earnings will be critically important for the positive momentum to continue. We continue to recommend investors stay close to their long-term target asset allocations and with a slight defensive bias.

“Life’s most persistent and urgent question is, ‘What are you doing for others?’ “Martin Luther King, Jr.

Weekly Commentary (01/13/20) – Markets up as Tensions Ease

January 13, 2020

Markets advanced last week as geopolitical tensions between the U.S. and Iran eased. Also helping the market move higher were multiple stock upgrades and mostly better-than-expected economic news.

For the week, the DJIA advanced 0.67% while the S&P 500 gained 0.98%. The tech-heavy Nasdaq jumped 1.76% following the upgrade of several FANG stocks and other bellwether tech names. International markets were mixed. For the week, the MSCI EAFE index (developed markets) inched lower by 0.08%% while emerging market equities (MSCI EM) jumped 0.88% (January – March is a seasonably strong period for emerging market equities). Small company stocks, represented by the Russell 2000, finished lower by 0.18% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week slightly lower as the yield curve continued to steepen. As a result, the 10 YR US Treasury closed at a yield of 1.83% (up ~3 bps from the previous week’s closing yield of ~1.80%). Gold prices closed at $1,557.50/oz – up 0.54% on the week. Oil prices fell 6.35% on receding geopolitical tensions.

Economic news released last week confirmed a resilient jobs market, moderate economic output and still moderate inflation. On Tuesday, the Institute of Supply Management (ISM) reported that the non-manufacturing index (services) increased 1.1% in December to 55.0%, ahead of consensus of a 54.3% level. New orders for manufactured goods in November declined 0.7% (slightly better than the expected 0.8% drop) as reported by the Commerce Department on Tuesday. On Wednesday, ADP released its employment report for the month of December. The report showed a 202,000 increase in private sector jobs, beating expectations for 160,000 additional jobs. On Thursday, the Department of Labor reported weekly initial jobless claims (for the week ending January 4) of 214,000, 6,000 below consensus of 220,000. Layoffs remain quite low and reflect a resilient labor market. On Friday, the Labor Department reported that 145,000 jobs were added in December – slightly below expectations for 160,000. Nevertheless, the unemployment rate held firm at 3.5% while the labor force participation rate was a 63.2% (close to its highest rate in over 6 years). This week will see the release of CPI, PPI, retail sales, industrial production, consumer sentiment, the Philly Fed survey and the Empire manufacturing survey. On the trade front, the U.S. and China are expected the sign the phase one trade agreement this week (fingers crossed …).

Economic and market fundamentals remain reasonable. We suggest investors stay close to their long-term target asset allocations with a slight defensive bias. The slight defensive bias is warranted in that U.S. markets have moved nicely higher over the past year and haven’t experienced a 1% daily pullback in over three months.

“Beware of little expenses. A small leak will sink a great ship.”Benjamin Franklin

NDS Weekly Commentary 1.6.20 – Volatility Ahead

January 6, 2020

Following 2019’s strong gains and momentum, stocks began 2020 and last week with a sense of optimism. However, by the end of the week, markets were rattled by increased tension in the Middle East resulting from the death of Iranian General Soleimani from a U.S. drone strike. Stocks finished down on Friday erasing gains from earlier in the week. For the week, the S&P 500 was off -0.1%, the DJIA and MSCI EAFE were flat with emerging equities up 0.48%. As a result of the increased volatility, investors sought safety in government bonds and gold. The rate on the 10 year U.S. treasury fell from 1.88% to 1.79% and gold rose 2.15% for the week. The best performing equity sectors last week were industrials, energy and technology.

Economic reports scheduled to be released this week include both the ISM and Markit non-mfg. Purchasing Manager’s Indexes (PMI), international trade, and the monthly jobs report. Geopolitics will likely grab headline news especially relations regarding Iraq and Iran. For 2020, most economic projections look for the year to have modest GDP growth of around 2% with no recession. A well-diversified portfolio should help you weather a volatile period in the markets.

Let’s make it a good year!

“We must stop politics at the water’s edge.” – Arthur Vandenberg

ND&S Weekly Commentary 12.30.19 – Happy New Year!

December 30, 2019

Santa brought investors a positive holiday-shortened week. The Nasdaq reached all-time highs on Thursday and the Dow Jones Industrial Average (DJIA) and S&P 500 finished at their highest levels as well. For the week, the tech-heavy Nasdaq gained 0.91%, while the S&P 500 and DJIA returned 0.60% and 0.67%, respectively. So far this year, technology stocks in the S&P 500 have risen 48%. Investor enthusiasm spread internationally with developed equity markets (MSCI EAFE) gaining 0.77% and developing markets (MSCI EM) surging 1.16%. Interest rates declined as the yield on the 10yr U.S. Treasury came down from 1.92% the previous week to end at 1.87%.

Investors felt better about improving trade relations between the U.S. and China, positive economic data and booming retail sales from November 1st through Christmas Eve. According to the MasterCard Spending Pulse™, online spending grew 18.8% compared to 2018 with 14.6% of all retail sales taking place online.

Oil prices continue to see support from OPEC efforts to curb supply as well as hopes that the U.S./China trade deal will bolster global oil demand. West Texas Intermediate (WTI) and International Brent Crude markets were both up over 2% on the week. Gold prices also rallied 2.25%, which is a sign investors are hedging a little against equities.

On New Year’s Eve, consumer confidence will be reported and the Federal Reserve’s December meeting minutes will be released Friday along with an ISM Manufacturing report.

Without question it has been an eventful and prosperous year. We continue to recommend staying diversified and favoring dividend income and growth. Dividends have accounted for approximately 33% of the S&P 500 total return since 1960.

Wishing the very best for the New Year!

NDS Weekly Commentary 12.23.19 – December Equity Rally Continues

December 23, 2019

Equities reached new milestones last week as all three major US indices touched new all-time highs. The rally persisted due to abating concerns on trade and geopolitics. Work continues on the details of the preliminary phase one trade deal struck between the US and China a week ago. US Treasury Secretary, Steve Mnuchin, said he expects the pact to be signed in early January. This, along with the imminent passage of the USMCA (revised trade deal with US-Mexico-Canada), has removed anxieties that weighed on the market throughout 2019.

For the week, the DJIA increased 1.1%, the S&P 500 rose 1.7%, and the tech-heavy NASDAQ climbed 2.2%.  International stocks were also positive on the week with developed country stocks (MSCI EAFE) and emerging markets stocks (MSCI EM) adding 0.6% and 2.0%, respectively. As expected, fixed income assets struggled on the week with the 10yr U.S. Treasury closing 9bps higher at a yield of 1.92%.

As is well known by now, the US House of Representatives passed two articles of impeachment against the US President. This is the third time in history a sitting US President has been impeached by the US House of Representatives. Without additional information, the equity markets will remain unfazed as it seems unlikely the President will be removed in a Republican-led senate.

Economic data on the week was quite positive. The Markit Flash U.S. Composite PMI Output Index for December registered a reading of 52.2, up from 52.0 in November. The improved reading was helped by services sector growth and improving manufacturing conditions. Industrial production increased 1.1% in November, which beat expectations of a 0.8% increase.  On Friday, the Bureau of Economic Analysis (BEA) reported that real U.S. Gross Domestic Product (GDP) increased to 2.1% (in-line with expectations) in the 3rd quarter. The BEA also reported that personal income rose 0.5% in November, which outpaced estimates of a 0.3% increase.

As a reminder, the U.S. markets will close at 1:00pm EST Tuesday and the full day Wednesday in observation of Christmas Day. Most importantly, we wish to extend to all a peaceful and enjoyable holiday season!