Newman Dignan & Sheerar, Inc.

Registered Investment Advisors

ND&S Weekly Commentary 10.17.22 – Roller Coaster Ride Continues

October 17, 2022

Sometimes the stock markets can be characterized as a roller coaster. That analogy could certainly be used to describe last week’s action. The up-down action started off the week, then a sharp selloff initially in reaction to Thursday’s CPI gave way to a rip your head off rally that saw all indexes higher by greater than 2.5% on the day. The week ended on a sour note Friday despite a reasonable kick-off to Q3 earnings season.

For the week, the S&P 500, Nasdaq and Russell 2000 finished in negative territory down 1.53%, 3.11% and 1.15%, respectively. International markets were also lower, with the MSCI EAFE Index down 1.35% while emerging market equities (MSCI EM) gave back 3.81%. On a positive note, the Dow Jones Industrial Average (DJIA) broke the trend and gained 1.17% last week. Fixed income, represented by the Bloomberg/Barclays Aggregate declined 1.19% for the week. Treasury yields were sharply higher across the board as the 10 YR US Treasury yield closed at 4.00% (up 11bps on the week). Gold prices ($1,649/oz.) have been under pressure lately due to a strengthening dollar. Oil (WTI) prices were lower on the week closing at $85.61 per barrel – down 7.59% on the week.

All eyes were on Thursday’s Consumer Price Index (CPI) release. We have likely seen peak inflation, but it remains stubbornly high. The year-over-year headline reading came in at 8.2% (down from 8.3% last month), while core (excluding food and energy) rose 6.6%, the highest since August 1982. Rising prices for services, mainly shelter and health care, helped fuel the advance. Last week’s inflation report keeps the Fed on track for another 75bps increase at the November FOMC meeting with another likely in December. In other economic news, retail sales flat-lined in September, but rose 0.1% excluding autos. This week’s economic calendar includes multiple reports on housing.

Looking ahead, barring any unforeseen geopolitical development, the focus this week will be on Q3 earnings announcements. We continue to maintain a cautious positioning near-term as markets continue to look for support. However, valuations have really pulled in and we are entering a seasonally attractive period for markets.

Enjoy the beautiful colors that Fall brings!

“Where there is no vision, there is no hope.” – George Washington Carver

Weekly Commentary (10/10/22) – Yo-yo Week ends in Positive

October 10, 2022

Markets came out of the gates much higher last week and despite a sharp reversal beginning late on Wednesday and continuing to Friday’s close, they held on to some decent gains. Several macro-economic figures and forecasts conspired to turn market sentiment.

For the week, the DJIA gained 2.03% and the S&P 500 added 1.56%. The tech-heavy Nasdaq eked out a 0.75% advance. International markets were also in the black as the MSCI EAFE Index (developed countries) ticked 1.94% higher and emerging market equities (MSCI EM) moved ahead 2.52%. Small company stocks, represented by the Russell 2000, also moved up and added 2.27% for the week. Fixed income, represented by the Bloomberg Aggregate, declined 0.25% for the week as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 3.89% (up ~ 6 bps from the previous week’s closing yield of ~3.83%). Gold prices closed at $1,696/oz – up 2.04%. Oil prices were a big story as OPEC+ cut production targets and WTI leaped over $13 to close at $92.64 per barrel, up 16.5% on the week.

Last week the WTO warned that global trade is expected to grow only 1% in 2023 and global economic growth could drop to 2.3%. OPEC+ announced its decision to reduce production targets and it cited slowing demand as a factor in its rationale. Higher oil prices portend continuing difficulties with inflation, and, at the same time, US payrolls decelerated a bit and unemployment rate dropped back to 3.5%.

There is almost no way to get a positive market reaction to labor news at this juncture. An increase in unemployment is associated with slower demand, lower earnings, and recession. If labor numbers are strong, it is associated with continued demand, persistent inflation, and higher interest rates for a longer time. There is no Goldilocks news in that space.

This week’s economic data releases include some key inflation data points: NY Fed 5-year inflation expectations on Tuesday, PPI index on Wednesday, and CPI data on Thursday. In addition, Retail Sales numbers come out Friday. FOMC minutes are released on Wednesday, and several Fed speakers are scheduled throughout the week. All this data, commentary and the opinions and forecasts it will stoke may create a lively week for securities trading.

Third quarter earnings results will begin to be announced this week. These results and the previews of future earnings that will accompany them could have a meaningful immediate impact on equity prices. In general, the market overreacts to its data inputs and pushes price levels too far past fair valuations – in both directions. We have an interesting few weeks ahead.

Clearly there are high levels of uncertainty across all markets and equity markets, particularly, show no sign of conviction. In such times, it is tempting to become either very bold or very timid. Prudent investors adhere to their investment policy in difficult markets. Panic has no place in any investment policy. A patient disciplined approach, over time, wins the war.

“The two most powerful warriors are patience and time.” – Leo Tolstoy

Weekly Commentary (10/3/22) – Markets Lower, Again

October 3, 2022

Markets failed to mount a quarter-end rally as investors fretted about persistent inflation and slowing economic growth. Comments from Fed Vice Chairwoman Lael Brainard on Friday didn’t help matters as she reiterated the Fed’s intention to maintain restrictive policy.

For the week, the DJIA lost 2.92% while the S&P 500 gave back 2.88%. The tech-heavy Nasdaq declined 2.69%. International markets finished lower as well. For the week, the MSCI EAFE Index (developed countries) finished lower by 1.31% while emerging market equities (MSCI EM) dropped 3.25%. Small company stocks, represented by the Russell 2000, were a bit better, but still managed to sink 0.82% for the week. Fixed income, represented by the Bloomberg Aggregate, declined 0.99% for the week as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 3.83% (up ~ 14 bps from the previous week’s closing yield of ~3.69%). Gold prices closed at $1,662.40/oz – up 1.04% as the U.S. dollar finally gave back some ground – closing 0.91% lower. Oil prices inched higher to close at $79.49 per barrel, up 0.95% on the week.

Last week saw several important economic releases. August headline Core Personal Consumption Expenditures (PCE) came in hotter than expected at 4.9%, up from 4.7% the prior month. Chicago PMI fell to 45.7 from 52.2 in August – widely missing the forecast of 51.8. Also, the Dallas Fed Manufacturing Survey for September fell to -17.2 from -12.9 in August … more challenging news from the manufacturing sector. Surprisingly, Consumer Confidence rose to 108.0 in September – up from 103.6 in August as the strong labor market and lower gas prices buoyed consumer’s confidence.

The week ahead holds a few events that will provide investors a snapshot of the economy. Releases include: Markit PMI, ISM Manufacturing, Durable and Factory Orders, ISM Services PMI, Trade Balance, Jobless claims, and Non-farm Payrolls. Also, several Fed Governors will be giving speeches this week that may give clues about future Fed moves.

Investor sentiment is at very low levels and markets appear to be oversold. We suspect that markets will bounce from here, but we caution investors not to chase any short-term rally. We urge investors to stick close to long-term asset allocation targets with a slight defensive bias.

We send our thoughts out to those who have been directly or indirectly impacted last week by Hurricane Ian.

“Just because something doesn’t do what you planned it to do doesn’t mean it’s useless.” – Thomas A. Edison

ND&S Weekly 9.26.22 – What It Takes

September 26, 2022

It was another tumultuous week for investors as the markets continued to process new information from the Fed. One thing became clear, the equity markets are finally realizing the Fed will indeed “go bigger, for longer” on inflation. The Federal Open Markets Committee (FOMC) met and announced a rate hike of 75 basis points. Additionally, the FOMC laid out a hawkish path for rates, one that could take the policy rate to mid-4% range in 2023. In the wake of the meeting, US yields have risen sharply with 2yr US Treasury note reaching 4.2%, the highest since 2007.

For the week, the DJIA fell 4.00% and the S&P 500 dropped 4.63%. The tech-heavy Nasdaq slid 5.06%. International markets were also down. For the week, the MSCI EAFE Index (developed international) finished lower by 5.59% and emerging market equities (MSCI EM) dropped 4.02%. Small company stocks, represented by the Russell 2000, were down sharply (-6.58%) for the week. The 10 YR US Treasury closed at a yield of 3.69% (up 24 bps over the week) and as a result, fixed income, represented by the Bloomberg/Barclays Aggregate, fell 1.56% as yields moved sharply higher. Gold prices finished at $1,644/oz. – down 1.58% on the week. Oil prices retreated to $78.74 per barrel, down 7.4% on the week.

Looking ahead, concerns regarding a slowing economy and rising costs have increased. 2023 earnings expectations have remained high, still pointing to 8% year-over-year growth next year. A more realistic view suggests analysts will begin to cut expectations for future earnings if the continued tight monetary environment tips the economy into a recession. 3q22 earnings season will begin in a couple of weeks and we should see companies begin to reduce guidance. The bearish story is well known, and we are certainly in the mix of the chaos. In times of panic, we are reminded of the quote from investor Byron Wein, “disaster has a way of not happening”. Investor sentiment is at extreme levels and technical indicators are indicating oversold conditions. Markets have already begun discounting the slowdown and we wouldn’t be at all surprised if equity markets were to have a relief rally in the short-term.

“The science of today is the technology of tomorrow.” – Edward Teller

ND&S Weekly Commentary 9.19.22 – Fall, Leaves, Fall

September 19, 2022

Halloween came early as investors were spooked by higher-than-expected inflation, signs of slowing economic growth and the likelihood of the Federal Reserve hiking interest rates more than expected.

On Tuesday, the Consumer Price Index (CPI) release showed that the key drivers of inflation are not slowing down. The market reacted by sending U.S. stocks to their steepest one-day decline since the beginning of the pandemic.

For the week, the S&P500 slid 4.7%, the DJIA fell 4.1%, and the tech-heavy NASDAQ took back 5.5%. International equities were also weak with developed and emerging markets down 2.7% and 2.6%, respectively. The price of gold dropped to $1,683/oz. – down 2.6% for the week.

Interest rates advanced with the yield on the 10yr U.S. Treasury climbing for the seventh straight week to close at 3.45% … up from 3.32% the previous week. The yield curve remains inverted with the 2yr Treasury Note rising to 3.87% which is its highest level since 2007.

The August CPI report released last week came in at 8.2% y/y, a slight decline from July (8.5%) but higher than expected. When food and gasoline prices are excluded, core inflation rose 6.3%, much higher than the expected 5.9%. There was good news about U.S. Retail Sales rising in August by 0.3% following July’s 0.4% decline.

We expect the Federal Reserve to stick to their guns and increase the Federal Funds rate by 0.75% at this week’s meeting. The CEO of the shipping giant FedEx warned of a gloomy outlook for the global economy and expects that there will be a global recession. FedEx announced that it was pulling its full-year earnings guidance due to the “continued volatile operating environment.”

Despite more compelling stock valuations and a resilient consumer, we recommend that investors reassess their investment objectives, risk tolerance and fine-tune a diversified portfolio accordingly.

“There is a harmony in autumn, and a luster in its sky, which through the summer is not heard nor seen, as if it could not be, as if it had not been!” – Percy Bysshe Shelley

Weekly Commentary (9/12/22) – Markets Bounce Higher on Hopes of a Soft Landing

September 12, 2022

US Markets were sharply higher last week as investors’ fears of a recession slowing the economy, in the near term, abated. Reversing course from its reaction to the Fed’s reaffirmation of its resolve to fight inflation, investors were willing to pay higher prices for stocks in virtually all asset classes. This was despite bond yields still rising slightly.

For the week, the DJIA returned 2.72% and the S&P 500 was up 3.68%. The tech-heavy Nasdaq bounced back and climbed 4.15%. International markets were mixed and more muted. For the week, the MSCI EAFE Index (developed countries) added 0.89% while emerging market equities (MSCI EM) were off 0.13%. Small company stocks, represented by the Russell 2000, were strong and finished the week up 4.07%. Fixed income, represented by the Bloomberg Aggregate, declined 0.70% for the week as yields moved slightly higher. The 10 YR US Treasury closed at a yield of 3.33% (up ~ 13 bps from the previous week’s closing yield of ~3.20%). Gold prices closed at $1,713/oz. – up just slightly from $1,710 on the week. Oil prices were stable and closed only down $0.08 at $86.79 per barrel.

Last week’s economic data included the ISM Services PMI which unexpectedly edged higher to 56.9 in August of 2022 from 56.7 in July, beating market forecasts of 55.1, and pointing to the strongest growth in services activity in four months. There is evidence of some supply chain, logistics and cost improvements; however, material shortages remain a challenge. Consumer Credit Consumer credit in the United States increased by USD 23.81 billion in July of 2022, down from a downwardly revised USD 39.1 billion gain in the previous month and well below market expectations of a USD 33 billion rise. This may be an indicator of cautious consumers.

This week some key inflation metrics will be released: Monday – Consumer Inflation Expectations, Tuesday- CPI and Core Inflation numbers for August, Wednesday – Producer Price Index (PPI) data for August, Thursday- Retail Sales data. With so much attention focused on inflation rates and the consumers’ spending rates and how the Fed will/might execute its mandate to curb inflation, this data could move markets as investors typically have a dramatic initial reaction to any surprises. Even if there are no surprises, bullish investors will often take this as a very positive cue, in this environment.

The market tested a significant “technical level” of about 3,900 on the S&P 500 Index the week before last and bounced off it to make gains for the past week. If stock prices break down through this level, technical analysts would generally predict that the market could move even lower to test the June 14 lows. Regardless of whether this near-term movement takes place, we are sanguine on the long-term prospects for stocks and remind investors to avoid being distracted by near-term gyrations as we all juggle the data deluge and an unprecedented economic environment – of course, it always feels that way.

“You may not control all the events that happen to you, but you can decide not to be reduced by them.” – Maya Angelou

Weekly Commentary (9/6/22) – Markets Lower on Fed Resolve

September 6, 2022

Markets were lower across the board last week as investors reacted to hawkish comments from Fed Chair Powell at the Jackson Hole conference. The Fed reiterated their intention to tame inflation while being willing to sacrifice some softness in the economy to do so.

For the week, the DJIA lost 2.85% while the S&P 500 gave back 3.23%. The tech-heavy Nasdaq had a rough week as it declined 4.18%. International markets finished lower as well. For the week, the MSCI EAFE Index (developed countries) finished lower by 3.00% while emerging market equities (MSCI EM) dropped 3.41%. Small company stocks, represented by the Russell 2000, were weak and finished the week down 4.70%. Fixed income, represented by the Bloomberg Aggregate, declined 1.02% for the week as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 3.20% (up ~ 16 bps from the previous week’s closing yield of ~3.04%). Gold prices closed at $1,709.80/oz – down 1.51% as the U.S. dollar rose 0.81% on the week. Oil prices retreated to close at $86.87 per barrel, down 6.65% on the week.

Last week saw several important economic releases. The US Manufacturing PMI came in at 51.5 … down 0.7 points from July. Unemployment nudged up to 3.7% while the August Employment Report showed 315k jobs added for the month – slightly better than the expected 295k. Average hourly earnings for August rose 5.2% (unchanged versus July) while the report also showed downward revisions in the number of jobs created in June and July to 107k. The big news of the week, highlighted above, was from the Fed’s Jackson Hole conference. The Fed remained resolute in attacking inflation. The next Fed meeting is scheduled for September 20 – 21 when they are expected to raise rates 75 bp (up from pervious estimates of 50 bp) followed by two 25 bp hikes before year-end for a terminal fed funds rate of 3.50% – 4.0%. Markets were hoping for more dovish comments from the Fed.

The week ahead holds a few events that will provide investors a snapshot of how the economy and sentiment are holding up in early September. Releases include: August Services PMI, ISM Non-Manufacturing Index, Consumer Credit and an OPEC+ and ECB meeting.

We are likely not out of the woods yet and we look for markets to remain range-bound. September has not been overly kind to investors over the years with the median market return of -0.1%. When the S&P 500 is down YTD (like 2022) September has averaged a loss of 3.4%. But we all know that 2022 so far has been anything but normal. We urge investors to stick close to long-term asset allocation targets with a slight defensive bias.

“Opportunity is missed by most people because it is dressed in overalls and looks like work.” – Thomas A. Edison

ND&S Weekly Commentary 8.29.22 – Don’t Fight the Fed

August 29, 2022

The summer market rally cooled off last week as hawkish comments from the Fed portrayed a restrictive monetary policy.

For the week, the DJIA fell 4.20% and the S&P 500 dropped 4.02%. The tech-heavy Nasdaq slid 4.43%. International markets were mixed. For the week, the MSCI EAFE Index (developed international) finished lower by 1.91% and emerging market equities (MSCI EM) increased 0.55%. Small company stocks, represented by the Russell 2000, were down 2.93% for the week. The 10 YR US Treasury closed at a yield of 3.04% (up 6 bps over the week) and as a result, fixed income, represented by the Bloomberg/Barclays Aggregate, fell 0.36% as yields moved higher. Gold prices finished at $1,751/oz – down 0.66% on the week. Oil prices closed at $93.06 per barrel.

The Federal Reserve gathered last week for their Jackson Hole economic symposium. The Federal Reserve Chairman Jerome Powell spoke for roughly nine minutes and warned against any premature loosening of policy. “Reducing inflation is likely to require a sustained period of below trend-growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” said Powell. This hardline stance rattled equity markets on Friday sending all major U.S. indices down over 3% on the day.

Last week also brought a preliminary look at several manufacturing and services PMI data sets, all of which point towards a slowing economy and some progress on slowing inflation and improving supply chains. The headline Flash US PMI registered a reading of 45.0, down from a reading of 47.7 in July. The PMI reading for the service economy fell to 44.1, a sharp miss compared to expectations. The manufacturing reading fared a little better coming in at 51.3. Within the report, input prices eased for the third consecutive month, however companies are having higher cost burdens associated with the increase in interest rates. The July Durable Goods report showed a 0.4% increase in business spending in July. On Friday, the PCE Price Index (The Fed’s preferred inflation measure) came in at 6.3%, down from 6.8% in June. Core PCE came in at 4.8%, still well above the 2% target.

We think the Fed is ultimately doing the right thing to tackle inflation even if it means some short-term pain for the markets and economy. The markets have pulled back a bit over the last couple of weeks to levels we were at in late July. We are continuing to adjust portfolios to harvest some tax losses and will continue to take advantage of attractive short-term rates for cash and fixed income.

“The best way out is always through.” – Robert Frost

Weekly Commentary (8/15/22) – Everybody is a Winner

August 15, 2022

Inflation numbers were slightly more positive than the estimates and investors seized on these indicators and the good job growth and pushed prices higher. A rally that began in mid-June extended as all major equity and bond indices were positive for the week.

For the week, the DJIA gained 2.99% and the S&P 500 advanced 3.31%. The tech-heavy Nasdaq added 3.1%. International markets also had a positive week. The MSCI EAFE Index (developed countries) increased 2.17% while emerging market equities (MSCI EM) also 1.66%. Small company stocks, represented by the Russell 2000, had another strong week and ended up 4.97%. Fixed income, represented by the Bloomberg Aggregate, managed 0.24% gain for the week as, on the average, yields held their levels and corporate spreads tightened. As a result, the 10 YR US Treasury closed at a yield of 2.84% (up ~ 1 bps from the previous week’s closing yield of ~2.83%). Gold prices closed at $1,792/oz – up ~1%. Oil prices moved slightly higher and closed at $92.09 per barrel, up ~3.5% on the week.

Inflation was reported at 8.5% for the previous 12 months through July. The consensus forecast was an 8.7% CPI increase and investors took this to be a good sign that perhaps the Fed would be less aggressive in their planned rate hikes. Nevertheless, that still presents quite a gap to the 2% target rate and Fed interest rate tightening through year end is still the strong consensus. Consumer sentiment (University of Michigan sentiment index) reversed course and rose to 55.1 from 51.5. this was also a surprise and was likely due to lower oil and gas prices and strong job growth.

This week includes several economic reports related to housing, manufacturing levels, and retail sales. The index of leading economic indicators and the minutes from the last Fed meeting are also released this week. In addition, several Fed committee members have speaking engagements and along with the minutes will likely provide more texture to the Fed’s committee’s sentiment and outlook.

Investors will parse this week’s data and the weeks’ to follow and we shall soon see whether this rally is the beginning of another bull phase in the equity markets or just an extended bear market rally. With the move made since June, we are already pushing earnings multiples to bullish levels in the face of slowing growth. On a technical basis, this rally is at an inflection point. If it continues higher and then reverses, it will break from the norm. If it were to reverse from current levels and retest the lows, it would be quite normal, though it would go down as more substantial than the normal bear market rally.

The heat wave is over, and the school busses are coming – soak up all the summer you can!

“The real glory is being knocked to your knees and then coming back. That’s real glory. That’s the essence of it.” – Vince Lombardi