Recovering Labor Market Pushes Stocks Higher

July 6, 2020

Despite record numbers of new daily Covid-19 cases in the United State and near-record cases globally, equity markets continued higher last week. For the week, the S&P 500 and DJIA rose 1.55% and 0.36%, respectively. The Russell 2000 increased 1.37%. International stocks were also strong with developed international (MSCI EAFE) up 1.62% and emerging markets up 2.16%. Treasury yields increased slightly last week with the 10yr US Treasury settling at a yield of 0.68%. Oil prices (WTI) rose to around $40 a barrel.

A strong labor market report, improving manufacturing PMIs globally and surging pending home sales propelled markets last week. The improving data has some momentum behind it but economic activity is still well below pre-coronavirus. More than 4.75 million workers returned to payrolls in June, which was well ahead of consensus estimates of about 3 million. The May payroll number was also revised higher. As a result, the unemployment number declined to 11.1%, down from 13.1% a month ago. Economic activity in manufacturing grew in June according to the The Institute for Supply Management (ISM) manufacturing purchasing managers’ report. The June PMI reading came in at 52.6%, up 9.5 percentage points from May’s reading of 43.1%. Pending home sales posted a record comeback in May with a 44.3% increase from April. This week, there will be reports on non-manufacturing, car sales, job openings and inflation.

Banks are set to kick off the second-quarter of earnings season in less than 2 weeks. Estimates are for an earnings decline in the Q2 2020 of 43%. It is anyone’s guess how accurate the estimates will prove to be, as over 400 S&P 500 companies failed to guide over the last 3 months. Stocks are coming off their best quarter in decades, so there is pressure to deliver good news or at least some clarity in company strategy to navigate the current Covid-19 environment.

We wouldn’t be surprised to see markets take a pause here. Continuing spikes in cases or temporary shutdowns on a local level will likely begin impacting markets. The uncertainty around company results won’t be answered for at least 3-4 weeks so some caution may be warranted.

“What then is freedom? The power to live as one wishes.” – Marcus Tullius Cicero


Weekly Review – 06/29/2020

June 29, 2020

Global stocks retreated last week on concerns that a recent surge of covid-19 cases will hamper economic growth.  Adding to the uncertainty last week, the Fed released the results of this year’s stress tests on banks and announced that bank buybacks are suspended through September and dividend growth will be capped and payouts based on a formula tied to trailing earnings … not unexpected.

On the week, the S&P 500 lost 2.9% while the DJIA gave back 3.3%. The Russell 2000 which represents small/midsized US companies also moved lower as it declined 2.8% for the week.  International markets were a bit better, but they still lost ground as developed international markets (MSCI EAFE) lost 1.3% while emerging markets (MSCI EM) closed lower by 0.1%. Bonds were a bit higher as the Bloomberg Barclays Aggregate finished ahead by 0.2% on the week. The 10yr Treasury ended last week at a yield of 0.64%.  Gold prices closed at $1,772.50 for a 1.5% advance for the week as investors fled to the safe-haven metal.  Oil prices dropped 3.4% to $38.49 per barrel as soft demand failed to dent more-than-adequate supply. Oil prices are down 37% year-to-date – a boom to consumers and most businesses.

Economic news last week was mixed.  On Monday, the National Association of Realtors reported that existing home sales for May dropped 9.7% to a seasonally adjusted annual rate of 3.91 million, missing expectations of 4.09 million.  On Tuesday, the U.S. Census Bureau reported that May new home sales jumped 16.6% month-over-month to a seasonally adjusted annual rate of 676,000, far exceeding consensus for 640,000.  On Thursday, initial jobless claims were 1.5 million, exceeding expectations by 150,000 while continuing claims dropped 1 million to 19.5 million (beating expectations of 20.0 million).  The Bureau of Economic Analysis reported on Thursday its final reading of first quarter GDP … results showed that economic growth contracted at a seasonally adjusted annual rate of 5.0%, in line with expectations.  Also on Thursday, the Commerce Department released its reading of new orders for manufactured durable goods in May; orders surged 15.8% versus expectations for a 10.45% gain.  Also on Thursday, U.S. initial jobless claims for the week ending June 20 declined from 1.54 to 1.48 million.

Investors will be watching the results of the re-openings in most states and countries around the world.  Continuing spikes in covid-19 cases will likely cause investors to take profits until the path forward becomes less murky.  We expect a bit of volatility during this holiday-shortened this week as the second quarter comes to a close.

Happy Fourth of July!

“Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it.”     Thomas Paine


ND&S Weekly Commentary 6.22.20 – Re-openings Continue

June 22, 2020

Despite some volatility during the week, as investors continued to assess the reopening of the economy, equity markets rebounded posting their fourth weekly gain out of the past five weeks. Last week the S&P 500, DJIA and NASDAQ were up 1.9%, 1.1% and 3.7%, respectively. For the week, the strongest sectors were health care, technology and consumer staples. Technology stocks continued to be among the leaders and the sector is the best performing year-to-date in the S&P 500 up 12.1%. There is some evidence that the stock market advance is starting to broaden out as earlier this month more than 97% of stocks in the S&P 500 traded above their 50 day moving average … it is a fairly rare occurrence for breadth to be so strong and it usually forecasts good markets ahead. International equities also advanced last week with MSCI EAFE up 2.1% and emerging markets up 1.5%. Going forward, investors will continue to be focused on economic recovery signs, virus hot spots and increasingly on the upcoming Presidential election.

Fixed income markets also advanced slightly as the Fed continues to ensure that sectors of the bond market function normally. The 10yr Treasury closed at a yield of 0.70%, unchanged from the prior week. Interest rates are likely to remain quite low for the months ahead. Bonds should offer investors some protection in the event of a shock to the equity markets. Investors should continue to monitor their asset allocation targets and re-balance as appropriate.

The U.S. Commerce Department reported last week that retail and food-services sales rebounded 17.7% in May, greatly exceeding estimates for an 8.4% advance. This after retail sales plunged a combined 21.8% in March and April. Jobless claims from the previous week were 1,508K which missed estimates although continue to trend in a positive direction. This week we’ll get fresh numbers on durable goods orders, personal income and spending and existing/new home sales.

“It always seems impossible until it’s done.” – Nelson Mandela

ND&S Weekly Commentary 6.15.20 – Volatility

June 15, 2020

Last week US stocks suffered their worst week since March. Investors were rattled over fears of rising COVID-19 infections and very dovish comments by the Federal Reserve, “the Fed,” forecasting a weaker than expected economy. On Thursday, the Dow Jones Industrials (DJIA) fell more than 1,800 points representing a 6.9% drop. Stocks were unable to sustain their bullish pace for the last 11 weeks during which they gained over 44%.

For the week, the DJIA slid 5.6%, the S&P 500 declined 4.8% and the tech heavy Nasdaq was down 2.3%. Foreign markets also weakened with Developed (MSCI EAFE) and Developing International (MSCI EM) equities down 4.2% and 1.5% respectively. The Cboe Volatility Index (VIX) commonly referred to as Wall Street’s” fear gauge,” gained 44% for the week. Bankrupt companies like Hertz Holdings went wild, rocketing 115% on Monday, dropping 24% on Tuesday and 18% on Thursday. Traders and speculators are making a spectacle of themselves and stirring up tremendous volatility.

On Wednesday, Federal Reserve Chairman, Jerome Powell, stated that the economic recovery is going to be slower and more painful than many had hoped. Powell said the Fed has no plans to raise short-term rates through 2022 and would continue adding liquidity to the credit markets. The 10 year US Treasury yield ended the week at 0.71%, a 0.2% weekly decline. The Fed has been buying bonds for 10 straight weeks including high yield corporates and municipals which stabilized credit markets and enriched risky bond holders. In fact, high yield bonds have gained more than 21% since bottoming in late March. There’s an expression that you should never fight the Fed.

In May, the US surprisingly added 2.5 million jobs, far exceeding the consensus expectations of a 7.5 million job loss – though the added jobs only represented 11% of the 22 million job lost in the preceding two months. The manufacturing and services activity declined but showed improvement over April’s reports. The price of oil once again revealed its volatility on rising inventories declining 7.8% to $ 36.45 price per barrel.

With all of this uncertainty, let us not forget what boosted the market the last several weeks. The Fed’s massive liquidity stimulus, improving economic data, our adjusting to life and business in the new coronavirus world and investor’s fear of missing out have all contributed to the boost. Moreover, there was encouraging news by Eli Lilly and Regeneron Pharmaceuticals on their coronavirus treatments. Moderna also announced it will begin a Phase 3 study of its virus vaccine next month.

This week retail sales will be released on Tuesday, housing starts and building permits on Wednesday and the leading indicator on Thursday. Markets will continue to be quite volatile and we recommend investors try and remain patient and stay close to their long-term asset allocation targets.

Please stay safe!

“You pay a very high price for a cheery consensus. It won’t be the economy that will do in investors; it will be themselves. Uncertainty is actually the friend of the buyer of long-term values.” —-Warren Buffet

Weekly Commentary: Optimism Rules the Week

June 8, 2020

Global stocks surged last week as investors focused on improving, albeit still dismal, economic news. Investors seemed to shrug off concerns related to the coronavirus, trade tensions with China and widespread protests.

On the week, the S&P 500 gained 4.9% while the DJIA surged 6.8%. The Russell 2000 which represents small/midsized US companies also jumped higher as it added 8.1% for the week. International markets joined the party as developed international markets (MSCI EAFE) jumped 7.1% while emerging markets (MSCI EM) tacked-on 7.9%. Bonds sold off as the Bloomberg Barclays Aggregate finished lower by 0.49% on the week. The 10 yr Treasury ended last week at a yield of 0.895%, up 24.3 basis points on the week as bond yields reached their highest levels since March. Gold prices retreated last week and closed at $1,676.20 for a 3.5% drop for the week while oil prices continued their march higher and finished up 11.4% to $39.55 per barrel. Even after last week’s surge, oil prices are down 35.2% year-to-date.

Economic news continues to be dismal although many reports were better than feared. Investors are certainly betting that the worst is behind us. On Monday, the Institute of Supply Management reported that the purchasing mangers’ index (PMI) moved up 1.6% to 43.1% … consensus was for 43.7%. On Wednesday, the ADP National Employment Report (NER) indicated a loss of 2.76 million jobs in the private sector, better than an expected loss of 9 million jobs. May’s non-manufacturing index (NMI) grew 3.6% to 45.4%, ahead of expectations of 44.4%. Also on Wednesday, the U.S. Commerce Department reported that new orders for manufactured goods sank 13%, slightly better than expectations for a 13.4% decline. On Friday, the Labor Department reported that the country added 2.5 million jobs in May, a huge surprise given that consensus was for losses of 8.3 million jobs. The unemployment rate fell to 13.3% from April’s 14.7% level (a post-World War II high). Despite May’s gains, unemployment remains historically high – nearly four times the rate in February.

We mentioned last week that markets will need to broaden out beyond just technology stocks in order to meaningfully advance from here. The positive employment last week prompted just that … value/cyclical stocks moved nicely higher last week as investors bet that the economy might be able to recover from its downturn faster than originally thought. It is impossible to know whether or not this rotation persists, but a broadly diversified portfolio will benefit investors in such an environment.

Markets will be watching as more and more states begin their re-opening process. Stay safe.

“If you cannot do great things, do small things in a great way” – Oliver Napoleon Hill

ND&S Weekly Commentary 6.1.20 – Green Shoots?

June 1, 2020

Global stocks advanced last week for the second week in a row as investors pinned their hopes on a successful reopening of the economy.

On the week, the S&P 500 gained 3.0% while the DJIA advanced 3.8%. The Russell 2000 which represents small/midsized US companies also moved higher as it added 2.8% for the week. International markets joined the party as developed international markets (MSCI EAFE) jumped 5.1% while emerging markets (MSCI EM) tacked-on 2.9%. Bonds were a bit higher as the Bloomberg Barclays Aggregate finished ahead by 0.2% on the week. The 10yr Treasury ended last week at a yield of 0.65%. Gold prices closed at $1,736.90 for a 0.1% advance for the week while oil prices leapt 6.7% to $35.49 per barrel. Even after last week’s surge, oil prices are down 41.9% year-to-date.

Economic news continues to be dismal although many reports were better than feared. Perhaps some green shoots are beginning to appear. On Tuesday, the U.S. Census Bureau reported that April new home sales inched higher by 0.6% month-over-month and down 6.2% year-over-year. The news was much better than the consensus expectation of a 20% decline. On Thursday, the Commerce Department released its reading of new orders for manufactured durable goods; orders fell 17.2% versus expectations for a 19.1% drop. Also on Thursday, the Bureau of Economic Analysis reported a revised first quarter real GDP of -5.0% (driven by weaker than expected business investment spending), below expectations of a 4.8% decline. Pending Home Sales declined 21.8% in April while expectations were for a 17% drop. U.S. initial jobless claims for the week ending May 23 declined from 2.4 to 2.1 million. Of note, 41 million people have filed initial claims for unemployment insurance over the past 11 weeks.

We certainly recognize that markets have advanced handsomely off of the March 23rd bottom and that market valuations are no longer favorable. It is reasonable to expect that the market advance during the past two months or so is unlikely to persist. The five largest stocks in the S&P 500 represent 20% of the index, exceeding the previous 18% peak during the internet bubble in March 2000. The market will need to broaden out for the index to climb meaningfully higher from here … fortunately, we have seen such a broadening out over the past two weeks. We will keep a close eye on the persistency of this rotation.

Investors will be watching the results of the reopening in most states along with escalating trade tensions with China. After a strong May, we would not be surprised if the markets took a breather in June. Of course, the tragic and senseless killing of George Floyd and the resulting protests will cast a pall over the country until a healing process takes hold.

George Floyd – Rest in Peace.

ND&S Weekly Commentary 5.26.20 – Markets Cheer Vaccine News

May 26, 2020

Equity markets rose across the board last week as investors focused on state “reopening plans” and positive initial results for Moderna’s Coronavirus vaccine. For the week, the S&P 500, DJIA and NASDAQ were up 3.27%, 3.43% and 3.48%, respectively. International equity markets also advanced with developed markets, as measured by EAFE up 3.03% and emerging markets up 0.5%. Cyclical stocks were strong last week in spite of continuing negative economic news. The best performing sectors in the S&P 500 were industrials, energy and real estate. Fixed income markets also rallied as corporate bonds and municipals rose 1.5% and 1.1% respectively for the week. The yield on the 10yr U.S. Treasury settled at 0.66%.

Economic news continued to reflect the impact from Covid-19 shutdowns. Initial jobless claims for the week of May 16 came in at 2.438 million slightly higher than consensus. Existing home sales declined 17.8% in April to a seasonally adjusted annual rate of 4.33 million, its lowest reading in a decade. On the positive side, the flash PMI for manufacturing increased to 39.8 in May from 36.1 in April and the flash PMI for services rose to 36.9 in May from 26.7 in April.

This week look for economic reports on consumer confidence, new/existing home sales and personal consumption. Investors will be hoping for signs that the reopening will have a positive social and economic impact without triggering a spike in virus cases.

“And if words cannot repay the debt we owe these men, surely with our actions we must strive to keep faith with them and with the vision that led them to battle and to final sacrifice.” – Ronald Reagan

ND&S Weekly Commentary 5.18.20 – Reopening

May 18, 2020

Last week US Stocks sold-off on dour retail sales, escalating tensions between the US and China and historic rising unemployment.
The decline in consumer spending was an unprecedented 16.4% in April while economists were expecting a 12% decline. On Friday, the Trump administration moved to halt shipments of semiconductors to Huawei Technologies in China. The Chinese countered by threatening to restrict investments in US companies if shipments were blocked. The weekly jobless claims reached 3 million creating 36 million unemployed Americans in roughly 2 months.

Major news headlines surround the Covid-19 pandemic and states reopening. There is tremendous pressure by business owners against health guidelines and restrictions. Also, employees who have received stimulus checks and unemployment benefits may be taking a pay cut by going back to work. A political battle continues with the House pushing their HEROES stimulus package and Republicans fighting to lessen the liability and burden around worker and customer safety now squarely on employers.

US stocks ended the week lower with the DJIA declining 2.6%, the S&P 500 down 2.2% and the NASDAQ slipping 1.2%. Oil stocks lost 7.0% and banks declined 5.6% for the week. Though oil increased 20.0% to close at $29.65 a barrel, oil demand remains suspect. Bank stocks received a momentary boost with rumors that Goldman Sachs may be looking to acquire. They lost ground, however, as consumer demand indicators weakened. Foreign stocks also were weak with developed (MSCI EAFE) and emerging markets (MSCI EM) down 3.2% and 1.1%, respectively. The US stock market has rebounded over 30% from its March 23rd lows. We are hopeful that the developing vaccines will be available sooner than expected.

Interest rates are anemic and there are concerns that US rates could turn negative. However, Jerome Powell, Fed Chairman, stated that “negative interest rates is probably not an appropriate or useful policy for us here in the United States.” The Fed has and will continue their monetary easing and various other liquidity facilities to support the flow of credit in several markets. As a result, the Fed’s balance sheet could grow to $10 Trillion by year-end. The 10yr Treasury yield ended the week down fractionally at 0.64%.

Our cautious posture towards the financial markets accounts for having slightly higher cash balances, safe and quality holdings and diversification in client’s portfolios. With earnings season winding down, this week will feature important housing market data, manufacturing and service PMIs, jobless claims and Fed Commentary.

We wish everyone to be healthy and safe. Our hearts go out to those affected and the medical personnel helping us get through this horrific pandemic.

“More compassionate mind, more sense of concern for other’s well-being, is source of happiness.”– Dalai Lama

NDS Weekly Commentary 5.11.20 – Markets Continue Higher

May 11, 2020

Markets rallied again last week as investors continue to take historically bad economic data in stride. Market optimism around the economic reopening and successes on the therapeutic front has provided the recent boost.

For the week, the DJIA advanced 2.67% while the S&P 500 gained 3.57%. The tech-heavy NASDAQ jumped ahead by 6.05%. The MSCI EAFE index (developed markets) increased 0.90% while emerging market equities (MSCI EM) gave back 0.52%. Small company stocks, represented by the Russell 2000, jumped by 5.52% for the week. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week lower by 0.33% as interest rates increased on the week. As a result, the 10 YR US Treasury yield closed the week at a yield of 0.69% (up from the previous week’s closing yield of 0.64%). Gold prices closed at $1,704/oz. Oil continued higher as traders anticipate the demand picking up slightly due to the soft reopening of the economy. Oil is likely to remain low for an extended time period with low oil prices serving as a tax cut to consumers and businesses.

The scope of the coronavirus economic impact became clearer last week as non-farm payrolls fell 20.5 million in April. This represents the first full month of the lock-down in response to the pandemic. As expected, the unemployment rate rose to a post-World War II record of 14.7%. While the data was horrific, it did eclipse analyst’s estimates. Over 18.1 million workers have reported that they are on temporary layoff, and therefore a portion should be rehired as the country gradually reopens. This will likely be a slow recovery in jobs as beefed up unemployment benefits (at least through July …) have discouraged some employees from going back to work right away.

With 86% of the constituents of the S&P 500 having reported, year over year earnings are showing a decline of 13.8% according to FactSet Research. Revenues have held up slightly better so far as they are down less than 1% from a year earlier. Technology, healthcare and consumer staples are the sectors which have held up the best.

We would not be at all surprised for the market to give a little back in the short-term as the range of plausible outcomes moving forward remains wide right now. Key variables, usually used to forecast markets, have given way to how quickly the economy reopens, the number of new virus cases, and how quickly therapies and vaccines to fight the disease are developed. We plan to take advantage of sizable price dislocations that present themselves as we remain optimistic for markets and the economy long-term.

“Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.” – Helen Keller

ND&S Weekly Market Commentary 5.4.20 – A Ray of Hope …

May 4, 2020

We hope that all of you and your families are well. The country is edging ever-so-slowly towards a cautious reopening of the economy, and we hope that people act prudently and continue to follow the Covid-19 protocols in their communities. Promising results from Gilead’s Remdesivir trial gave investors a ray of hope as the National Institute of Allergy and Infectious Diseases (NIAID) announced that “hospitalized patients with advanced COVID-19 and lung involvement who received remdesivir recovered faster than similar patients who received placebo, according to a preliminary data analysis from a randomized, controlled trial involving 1063 patients, which began on February 21.” Of course, an effective vaccine is still the ultimate goal, and dozens of trials for potential vaccines and therapeutics are underway.

In contrast to recent weeks, large-cap U.S. stocks under-performed last week as investors bid-up lagging U.S. small company stocks and foreign stocks. On the week, the S&P 500 and the DJIA gave back 0.2%. The Russell 2000 which represents small/midsized US companies bucked the trend and gained 2.22%. International markets gained ground as developed international markets (MSCI EAFE) advanced 3.1% while emerging markets (MSCI EM) jumped 4.3%. Bonds were off slightly as the Bloomberg Barclays Aggregate finished lower 0.12% on the week. The 10yr Treasury ended last week at a yield of 0.64%. Gold prices declined 3.1% on the week while oil prices leapt 23.3% to $19.78 per barrel. Even after last week’s surge, oil prices are down 68% year-to-date.

The first quarter earnings season is underway with nearly 67% of S&P 500 companies reporting better-than-expected earnings (albeit from lowered expectations due to the economic shutdown). So far, earnings growth is down 16.75% year-over-year while revenues are up 1.49%. Most large-cap technology companies reported in-line to slightly-better top and bottom line results last week. As one would expect, over 160 companies in the S&P 500 have either withdrawn or suspended forward guidance as the outlook for the economy remains cloudy.

The S&P 500 finished last week 27% higher than the lows experienced in March. After such a powerful set of relief rallies, we suspect that markets are ahead of themselves. Worldwide economies will not return to anything close to normal for quite some time, and we would not be surprised if markets pulled back a bit until the path forward becomes clearer.

This time is not different … we will get through this crisis just like we have gotten through every other crisis. Warren Buffett, at his virtual annual meeting this past weekend, summed it up well – “We’ve faced tougher problems, and the American miracle, the American magic, has always prevailed.”