Funds Flowing Overseas
February 23, 2015
Last week, U.S. equity markets continued their advance with both the DJIA and the S&P 500 hitting record highs. For the week, the DJIA was up 0.71% and the S&P 500 increased by 0.68%. Growth stocks continue to lead value stocks helped by healthcare and technology. This week, look for economic reports on durable goods, CPI, and the second revision to GDP for the 4th quarter. CPI is estimated to be -0.7% driven by lower gasoline prices, and GDP numbers may be revised downward to 2.1% from 2.6%.
Bond prices slipped last week as the rate on the 10 year U.S. Treasury rose to 2.13% from 2.02% the previous week. However, lower inflation numbers will probably allow the Fed to take more time before beginning to raise interest rates this year.
Last year, international diversification was a drag on equity returns, but this year it is helping with the MSCI EAFE index up 5.37% and MSCI EM up 3.11% YTD (much better than US returns). International economies have stabilized and valuations are more attractive than in the U.S.. As a result, funds have started to flow into foreign equities.
(Click chart for additional information)
“Price is what you pay, value is what you get.” – Warren Buffett
Dollar Domination
February 18, 2015
The market extended last week’s rally, with the S&P up 2% and the Nasdaq advancing 3.1%. Both the Greek and the Ukraine difficulties induced mid-week volatility, but were [temporarily?] put on the back-burner by week’s end.
We expect that several unresolved financial issues will soon reappear on center stage: when [and at what pace] will the Fed start to raise rates? How much pressure will the stronger $ put on S&P earnings [currently below $120/share]? Will oil prices make new lows [as the still-rising production and inventories suggest] or stabilize at current levels [as the financial markets seem determined to effect]? Finally, will further European QE actions drive rates to even lower negative real-return levels?
What is certain is that the US economy is maintaining its forward momentum, and that the dollar bull market, as the following chart illustrates, has just gotten started:
“Writing is an act of invention” – David Carr
Back To Where We Started…
February 9, 2015
Markets rebounded nicely last week on the back of generally positive economic data. The DJIA closed at 17,824 for a weekly gain of 3.8% while the S&P 500 closed at 2055 for a gain of 3.0%… essentially wiping out January’s loss of 3.6% for the DJIA and 3.0% for the S&P 500. Bond yields moved higher as the 10 year Treasury closed the week with a yield of 1.94%. Crude prices moved higher by 7% due to increased tensions overseas and short-covering by traders. Crude closed at $51.69 per barrel. Good news out of China (lowering their reserve requirements) pushed international stocks higher as well.
61% of S&P 500 companies have reported 4th quarter earnings with 72% of those companies reporting better-than-expected earnings. So far, 4th quarter earnings have grown 4.6% on average. Friday’s January non-farm payrolls came in at 257,000… nicely ahead of an expected gain of 237,000. Along with robust jobs gains came an unexpected gain of 0.5% in wages. Lower oil and gas prices along with better jobs numbers and payroll gains should lead to healthy consumer spending as the year goes on.
Deteriorating news out of Greece will present headwinds for the markets in the week ahead. A debt downgrade along with indications that Greece will run out of money soon (thus defaulting on debt payments and not having funds to pay pensioners) will certainly weigh on markets going forward. We continue to expect increased volatility in the weeks ahead.
“If you want to see the sunshine, you have to weather the storm.” – Frank Lane
NDS Weekly Commentary 2/2/2015
February 2, 2015
Stocks reversed course last week after a choppy week of trading due to mixed earnings, dollar strength, plunging oil, and the release of the Federal Reserve minutes. The U.S. economy continues to make steady improvement despite weaker than expected 2014 GDP numbers of 2.4% (see chart below). The personal consumption data (4.6% for the 4th qtr.) in Friday’s GDP report shows that consumers are in fact spending, due to lower prices at the pump and a surge in hiring (despite low wage growth).
For the week, the S&P 500 finished lower by 2.75% while the DJIA was down 2.83%. Smaller US companies measured by the Russell 2000 fared a little better, but were still down 1.96% for the week. International markets continue to outperform their US-based counterparts as the MSCI EAFE was down 0.25% for the week. Emerging Markets did not fare as well as the MSCI EM was down 2.94% for the week (but still remains positive for the year up 0.61%). Rates continued their move lower as the 10 yr. US Treasury finished at a yield of 1.68%.
We continue to expect volatility as we are in the thick of earnings season. Congratulations to Patriot’s Nation!! As the great Bill Belichick says, “Ignore the noise”; in our case, we suggest not reading too much into the day to day movements in the market.
“We’re on to Cincinnati.” – Bill Belichick
“Don’t fight the Fed” Part II…?
January 26, 2015
It was an eventful week in the markets with corporate earnings, huge swings in currencies due to central bank activities, and continued pressure on oil (-7% for the week) dominating the headlines. Although we are in the early innings of earnings season (15% of S&P 500 companies have reported so far), 74% of companies have beat, 11% are in line, and 16% missed expectations. The most impactful news came from European Central Bank’s (ECB) President Mario Draghi, as he announced a quantitative-easing program (“Q.E. for the E.U.”) with monthly bond purchases of €60m for a total commitment of €1.2t. As a result, the (€)Euro is now trading at level relative to the ($)Dollar not seen since 2003($1.12/€1).
Equity markets finished with its first positive week of 2015 with the DJIA gaining 0.96%, while the broader-based S&P500 gaining 1.62%. International markets fared a bit better as the MSCI EAFE finished up 2.64% and MSCI EM finished up 3.50% for the week. Rates continued to trend lower with the 10yr US Treasury closing at a yield of 1.79% despite expectations of the Fed raising rates at some point in 2015.
As we move forward into 2015, we see the U.S. economy continuing to muddle along, albeit at a modest 3.0% rate. U.S. multinationals may start to feel negative effects on earnings from a stronger dollar. On the other side of the pond, valuations in Europe are reasonable, with the weaker Euro and lower oil prices providing a nice tail wind for European equities. In addition to that, dividend yields on European equities are quite attractive. We suggest investors continue to maintain a globally diversified portfolio consistent with one’s long term objectives.
“Wherever you go, no matter what the weather, always bring your own sunshine.” – Anthony J. D’Angelo
Wither Interest Rates?
January 20, 2015
Last week equity markets declined as retail sales disappointed and major bank earnings came in below estimates. The S&P 500 was down 1.2% for the week. YTD the best performing sectors are utilities and healthcare and the worst performers are financials and energy. Bonds continued to surprise as the U.S. 10 year Treasury finished the week with its largest 3 week decline in yield since 2011 ending the week at 1.81%. Lower yields have been driven by a flight to safety by investors and concerns about global growth.
Also, last week the CPI was reported to have fallen 0.4% for the month of December largely due to lower gasoline prices. From a year ago the CPI was only up 0.8%. For January the CPI may come in below year earlier levels. Lower inflation may cause the Fed to hold off on its plan to increase interest rates. Many forecasters have predicted that the Fed would raise short term rates in in June but lower CPI readings may cause the Fed to hold off.
“A day of worry is more exhausting than a week of work.”
-John Lubbock
… “Must” Come Down
January 12, 2015
The market ended the first full week of the New Year on the downside, with the S&P 500 down 0.7% and the small-cap R2000 down by 1.1%. On the international front, the Dow Jones es-US index is down 1.8% YTD. The week was volatile, with concerns about the sustainability of Greek Eurozone membership [and its willingness to sustain “austerity”] offset by Bloomberg’s assertion that Germany will help facilitate Greek debt restructuring. Midweek Fed uncertainty emerged as Charles Evans argued for continued ease [what-me-worry?] while William Dudley [supported by the WSJ’s John Hilsenrath] argued that an influx of capital [seeking dollar denominated investments] argues for an earlier rate increase [to avoid a surge in prices and/or another {housing?} bubble creation].
The situation got even more interesting on Friday, when Payroll numbers of 252,000 beat expectations by 7,000, and the unemployment rate fell to 5.7%. But average hourly wages counter-intuitively shrank by 0.2%, resulting in no change in aggregate income in the month of December. This by itself suggests that overall consumption growth will continue to be limited.
Of course, the ongoing energy price decline is significantly helping consumer’s disposable income [when will gasoline fall below $2.00/gal in New England?]. The challenge here will be for voters to keep their politicians from picking their pockets by raising the gasoline taxes [which we do not expect].
“… I’m sure that we’re never going to see $100 [again] …” – Prince Alwaleed bin Talal
What Goes Up…
January 5, 2015
Not every week is an up week for the markets. Equity markets finished the holiday shortened week lower on fairly light volume. Economic data was a bit weaker-than-expected as the ISM manufacturing index declined to 55.5 from 58.7 (the lowest level in six months). Pending homes sales rose 0.8% in November, but growth remains less-than-robust especially given the decent jobs market and overall GDP growth. Oil prices continued their downward slide as supply remains quite healthy due to sub-par global growth/demand. OPEC seems intent on maintaining current production levels … an attempt to slow down US oil production and to keep political pressure on Russia. The big economic news this week will be Friday’s labor report … a gain of 240,000 jobs is expected for December.
For the week, the Dow Jones Industrial Average finished at 17,833 to close down 1.2%. The broader-based S&P 500 closed at 2,058 for a loss of 1.5% for the week. The Nasdaq Composite closed the week at 4,727 for a drop of 1.7%. International markets fared a bit better as the Dow Jones Global (ex US) Index dropped 0.9% for the week. The 10-year Treasury closed the week at a yield of 2.12% (down from 2.25% the prior week) as bond prices rose due to falling oil prices, troubles in the Eurozone and abnormally low yields overseas.
As always, we urge investors not to get caught up in the day-to-day noise of the markets. Instead, focus on long-term goals, and enjoy the gift of each day. Happy New Year!
“As cool as the other side of the pillow.” – Stuart Scott
Happy 2015!
December 29, 2014
Stocks continued their record run during a holiday-shortened trading week. For the year, the DJIA has posted 38 record highs while the S&P500 has notched 52. The positive news out of the week was 3Q GDP, which was revised to 5.0% q/q from 3.9% (despite a strong 3rd Quarter, we see GDP around 2.8% y/y), strong consumer sentiment, and accommodating moves from China’s central bank looking to further ease liquidity. Oil continued its retreat, and was down 4.2% for the week on oversupply concerns.
The S&P500 finished at 2089, up .90% for the week while the DJIA closed above 18000 for the first time (18,054 to be exact). Small Cap US companies fared a little better for the week with the Russell 2000 up 1.64%. In international markets, the MSCI EAFE finished up 0.47% while the MSCI EM was up 0.98% for the week. The 10-year Treasury closed the week at a yield of 2.25% up from 2.17% the week prior.
This will be our last weekly post for 2014. From all of us at ND&S, we want to wish you happy, healthy and prosperous 2015!
“And now we welcome the New Year. Full of things that have never been.” – Rainer Maria Rilke
Markets Take A T.O.
March 2, 2015
Markets returns were mixed last week, with strong earnings and guidance from some well established U.S. companies [Lowe’s (L), Home Depot (HD), Macy’s (M) to name a few] offsetting weaker economic news and lower oil. On Tuesday and Wednesday, Fed Chair Janet Yellen delivered her semiannual economic and policy report to Congress. The Fed will continue to be patient for an interest rate increase while also expressing confidence in the economic strength and employment recovery. On Friday, according to the Commerce Department (see chart below), 4th Qtr. GDP was revised to 2.2% which was weaker than the 2.6% estimate last month. For 2014 as a whole, GDP expanded 2.4%, slightly better than 2.2% average during the 2010-2013 recovery.
For the week, the S&P 500 finished at 2,105, down -0.24% after three straight weeks of positive performance while the DJIA finished up .02% to close at 18,133. International markets continued their upward trend as the MSCI EAFE returned 1.09% and MSCI EM gained 0.61% for the week. Interest rates finished mostly lower for the week as the yield on a 10yr Treasury is now 1.99%. Oil (WTI) finished at $49.60 a barrel which was down 3.1% for week.
While the Fed continues to contemplate a rate increase… when its does occur, it will be sure to bring with it market volatility and uncertainty. Historically speaking, equities have performed well at the start of rate hikes. We recommend investors continue to be globally diversified in-line with one’s long term objectives.
“Nothing so needs reforming as other people’s habits.” – Mark Twain