Newman Dignan & Sheerar, Inc.

Registered Investment Advisors

ND&S Weekly 5.31.22 – “A Bit of Reprieve”

May 31, 2022

Wall Street ended its 7th straight week of market declines as investors were calmed by signs of peaking inflation and consumer resiliency.
The S&P 500 gained 6.6% this past week, while the Nasdaq rose 6.9% and the Dow Jones Industrial Average advanced 6.3%. International equities also finished higher with developed markets (MSCI-EAFE) and emerging markets (MSCI-EM) up 3.5% and 0.9%, respectively. The yield on the 10-year U.S. Treasury moved 4bps lower last week to close at 2.74%.

On Wednesday, the Federal Reserve released minutes from their latest meeting that showed its members felt that raising interest rates by half a percentage point at their next two meetings could be enough to slow economic growth to tame inflation. Investors had feared a more aggressive rate hike policy might be needed. The Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index (PCE) rose at an annual rate of 6.3%, still elevated but down from 6.6% in March. The annualized GDP figure released on Thursday showed that the economy contracted by 1.5%, higher than the 1.4% estimated.

The price of oil surged with U.S. crude climbing 4.4% to $115 per barrel. That is still down from the high of $123 at the beginning of the war in Ukraine. Housing showed signs of slowing as home sales fell for the sixth straight month due to high prices and higher mortgage rates. There will be economic reports this week on the labor market and the release of the S&P Case-Shiller Home Price Index.

With the uncertainty of inflation, interest rates, and geopolitical tensions, market volatility will continue. We recommend revisiting investment objectives and risk tolerance and fine-tuning accordingly.

“Our debt to the heroic men and valiant women in the service of our country can never be repaid. They have earned our undying gratitude. America will never forget their sacrifices.”– Harry S. Truman

ND&S Weekly Commentary 5.23.22 – The Bears Have Come out of Hibernation

May 23, 2022

A rough week for equities ended with all US indices down for the week. The S&P 500, a broad measure of the market, traded intra-day below a 20% decline from its 52-week high, signaling a possible “bear market.”

The equity markets’ wide swings are expressions of its varied views and lack of true conviction. There are as many pundits who believe we are at the bottom of this decline as there are who believe this is only stage one of a historic decline in equity values. If current levels are the bottom of this decline, we still have not seen the “capitulation” that typically comes before the true bottom. Capitulation is the market’s version of the last stage of grief – the denial, the anger, the bargaining, and the depression are over, and the market’s “acceptance” is usually a broad sell-off that goes well below fair valuations. The challenges include that there is no guarantee that these past behaviors will be repeated.

We see many reasons to be positive that even if we have a recession, it will be shallow and short-lived. We see reasons to be concerned, too. More important is our confidence in the longer-term outcomes from our investment decisions. Our clients are interested in the long-term values of their investments. Short-term price changes that are overly influenced by near term noise, greed, fear and other emotions are the enemy of sound investment decisions.

For the week, the DJIA declined 2.78%, while the S&P 500 dropped 3.05%. The tech-heavy Nasdaq finished 3.82% lower. International markets gained, with the MSCI EAFE Index up 1.53% while emerging market equities (MSCI EM) popped 3.13%. Small company stocks, represented by the Russell 2000, declined 1.05%. Fixed income, represented by the Bloomberg/Barclays Aggregate recovered 0.59% for the week. The 10 YR US Treasury rallied, dropping its yield to ~2.8%. Gold USD prices ($1,841/oz.) moved 1.9% higher as the USD traded slightly lower over the week. As we move into the high demand summer driving season, Oil prices were up about 2.5% last week to close at $113.23 per barrel.

Bonds, as measured by the benchmark US Treasury yield curve, rallied for the week. This was a positive sign of a typical market reaction of investors moving away from the struggling equity market to the higher quality of predictable cash flows from US Treasury obligations. In previous weeks, we saw stock and bond prices both declining. This is some indication that, for the time being, that investors are comfortable with the yield curve in place now. However, at the same time, yields on corporate obligations, relative to US Treasuries, increased. Corporate yields are measured by their “spread” (difference) over UST obligations with the same maturity. This increase in spreads is, perhaps, an early sign of investors’ credit concerns. As the risk of difficult conditions for corporations increases and their ability to service debts (potentially) declines, spreads increase, because investors demand higher compensation for taking on this risk. Such indicators bear watching as the bond market has a reputation of “getting things right” and is generally less emotional than the equity markets.

In the week ahead there are more earnings reports will be trickling in, with NVIDIA, a bellwether for semiconductor chips, being one to watch. Durable goods orders and GDP numbers come out Wednesday and Thursday and Personal Spending and Income numbers on Friday. The Bond Market – which gets this right too! – closes at 2PM on Friday. So, tell your employer that you follow the bonds and see if you can get out early for a nice long weekend!

“You make most of your money in a bear market, you just don’t realize it at the time.”
– Shelby Cullom Davis

Weekly Commentary (5/9/22) – Markets Finish Lower as Uncertainty Continues

May 9, 2022

Equity and bond markets were negative last week as investors fretted about uncertainty surrounding Federal Reserve policy, rising inflation, the ongoing war in Ukraine and continued China lock-downs. The Dow Jones Industrial Average is riding a six-week losing streak while the 10-year Treasury yield hit its highest level since late 2018.

For the week, the DJIA lost 0.24% while the S&P 500 dropped 0.21%. The tech-heavy Nasdaq finished lower by 1.54%. International markets provided no shelter as the MSCI EAFE Index closed lower by 2.78% while emerging market equities (MSCI EM) gave back 4.13%. Small company stocks, represented by the Russell 2000, dropped 1.32%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 1.11% for the week as yields jumped higher on continued inflation worries. As a result, the 10 YR US Treasury closed at a yield of 3.12%. Gold prices closed at $1,881.20/oz – down 1.47% on continued dollar strength. Oil prices moved higher from last week’s levels and closed at $109.77 per barrel, up 4.85% on the week. High oil and gas prices continue to strain consumers’ pocketbooks.

As widely anticipated on Wednesday, the FOMC raised the Fed funds target range by 50 basis points (bps). It was the biggest increase in the Fed funds rate since May 2000. The Fed also confirmed that it will begin to reduce its bloated balance sheet beginning in June. Fed Chair Powell squelched the idea of a potential 75 bps and reaffirmed the Fed’s bias to increase rates by another 50 bps at its June meeting. Friday’s stronger-than-expected jobs report for April fueled investors’ concerns about rising wage inflation. The report also showed the unemployment rate was unchanged at 3.6% while the labor force participation rate slipped to 62.2% – its lowest reading in the last three months. Many economists believe that the Fed is too late in its efforts to raise rates and slow down the economy and inflation.

Economic news this week will focus on the release of April’s Consumer Price Index on Wednesday and the Producer Price Index on Thursday. April’s CPI is expected to come in around 8% (March’s reading was 8.5% year-over-year). We expect April’s CPI to be close to peak inflation as higher rates and rising inflation will ultimately slowdown consumer spending and inflation’s rise. One encouraging sign regarding inflation showed up in April’s Manheim Used Vehicle Index as the index fell 1%, its third consecutive decline. The reading suggests that one of the main contributors to last year’s run-up in core CPI (CPI for used cars and trucks) should also be moderating in the months ahead.

Expect ongoing volatility until inflation concerns abate and a resolution in Ukraine is achieved. Markets are exhibiting signs that traditionally point to a bottoming process (maximum pessimism and low sentiment, hedge fund liquidations, lack of reaction to positive news, etc…). Diversification, patience and a bias towards quality will help investors manage through this temporary set-back. As such, we continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias.

“If the world were perfect, it wouldn’t be.” – Yogi Berra

NDS Weekly Commentary 5.2.22 – Weak Week

May 2, 2022

The stock market suffered another volatile week with a hard sell-off on Friday. Investors struggled with China’s economic slow-down, the ongoing war in Ukraine, surging inflation, and a hawkish Federal Reserve.

For the week, the Dow Jones Industrial Average (DJIA) slid 2.47%, the S&P 500 lost 3.26%, and the Nasdaq fell 3.92%. Foreign markets were mixed with developed equities (MSCI EAFE) down 2.17%, while emerging markets (MSCI EM) returned 0.09%, Small company stocks, represented by the Russell 2000, finished the week in the red by 3.94%. April was a cruel month for investors as the S & P 500 index lost 8.8%, the worst month since Covid 19 began, and the Nasdaq plunged 13.3%, the most since October 2008. Oil prices (WTI) closed at $104.35 per barrel, up 2.2%, gold declined 1.2%, and the Dollar Index advanced 0.5% to 103.43.

Corporate earnings for the first quarter were stronger than expected with 279 of the S&P 500 companies reporting. Roughly 66% have exceeded sales expectations and about 81% have beat profit projections. Overall, sales growth is tracking to increase 12.8% and earnings should grow 2.6% year over year.

Bond yields, which rise as bond prices fall, continue to increase as inflation has remained stubbornly high. The yield on the U.S. 10 year note closed at 2.89%, roughly the same as the previous week, however, up from 2.32% at the end of March. The Federal Reserve is expected to aggressively lift interest rates to stave off inflation and reduce its bond holdings. Investors and economists are concerned that the Fed’s tightening may come at a difficult time and could dampen economic growth.

On the economic front, the US economy’s overall health gauge, the gross domestic product (GDP), shrank by a 1.4% annual rate in the first quarter. The Fed’s preferred measure of inflation, the personal consumption expenditures index (PCE), gained 6.6% year over year in March, spelling more trouble for the economy.

The highlight of this coming week’s calendar is Wednesday’s Federal Reserve meeting and their policy decisions and commentary. The monthly jobs report is scheduled to be released on Friday.

We look for markets to continue to be volatile and focused on inflationary pressures, the Fed’s response, and the war in Ukraine.

“Spring is the time of year when it is summer in the sun and winter in the shade” – Charles Dickens

ND&S Weekly 4.18.22 – Should I Stay or Should I Go?

April 26, 2022

The US and other major economies face the multiple challenges of global supply chain disruptions, massive increases in oil prices, dramatic increases in inflation rates, central banks pushing interest rates higher, and the potential that COVID could still have significant impacts – as it has in China throughout most of April. While these issues are plenty, the war in Ukraine adds more uncertainty, as it continues to have negative impacts on energy prices, supply chains, food supply and general concerns about geopolitical stability and what Russia might do, if they cannot achieve their objectives by “conventional means”.

For the week, the DJIA declined 2.86% and the S&P 500 dropped 2.75%. The tech-heavy Nasdaq finished even lower, down 3.83%. International markets were also lower with the MSCI EAFE Index down 1.53% and emerging market equities (MSCI EM) gave back 3.35%. Small company stocks, represented by the Russell 2000, decreased 3.21%. Fixed income, represented by the Bloomberg/Barclays Aggregate finished lower by 1.04% for the week. The 10 YR US Treasury closed at a yield of 2.90%, an increase of 7bps last week. Even Gold prices were lower, closing at $1931/oz. – down 0.98%. Oil prices slumped to close at $103.07 per barrel – off 3.76% on the week.

Markets continue to wrestle with this difficult environment and, over the past three weeks, equity and bond investors have shown more eagerness to sell their positions than the new buyers have in taking on those positions. This brings assets prices down and that accelerated during this most recent week.

At the same time, the micro rallies within a generally down trend that began in 2022 across virtually all asset classes reveals the underlying optimism embedded in investors’ psyches in the ability of the US and other economies to fight back and overcome these recent and “temporary” challenges. The amount of time in “temporary” is the major unknown. The lack of conviction in the markets about this is unmistakable. It is clearly the clash of “should I stay, or should I go?”!

Ultimately, equity investors care about earnings and sustainable growth. Q1 22 earnings report have begun. With close to 25% of the S&P 500 companies reported by the end of last week, EPS results were mildly exciting with 76% beating expectation by ~7.2%. Earnings growth estimates also brought positive news: 6.4% overall and 15.4% Ex-Financials. Close to 50% of the S&P 500 will report this week. The Federal Reserve’s upcoming meeting and subsequent members’ comments will have major implications on how long “temporary” might be.

In the week ahead, as noted, the bulk of earnings announcements will be reported. The Consumer Confidence Index will be reported on Tuesday. Friday is a big day for more inflation numbers with the PCE index and Chicago PMI levels released.

While it is tempting to try to outsmart the market by deciding “when to go and when to come back”, nobody has proved that can be done consistently. The successful long-term investor “stays”. The difference is investors can pull back, without leaving. We are doing that – we are on the low side of allocation targets for both stock and bonds, and we are more cautious/defensive in how we are invested in those asset classes.

“”This is an important fact: people prefer to dance than to fight wars.”.” – Mick Jones, The Clash

ND&S Weekly 4.18.22 – Inflationary Pressures Persist

April 18, 2022

Markets experienced another challenging week as they were hit with several key economic reports confirming the ongoing inflation problem.

For the week, the DJIA declined 0.78% while the S&P 500 dropped 2.11%. The tech-heavy Nasdaq finished 2.62% lower. International markets were also lower with the MSCI EAFE Index down 1.03% while emerging market equities (MSCI EM) gave back 1.23%. On a slightly more positive note, small company stocks, represented by the Russell 2000, increased 0.57%. Fixed income, represented by the Bloomberg/Barclays Aggregate finished lower by 0.70% for the week. The 10 YR US Treasury closed at a yield of 2.83%, an increase of 13bps last week. Gold prices rallied as a flight-to-safety trade to close at $1970/oz. – up 1.51%. Oil prices jumped higher to close at $106.95 per barrel – up 8.84% on the week. It was reported by Baker Hughes that active rig counts climbed by 253 last week so we are starting to see the influence of high oil prices. Let’s hope that we start to see some moderation in oil prices.

There were three key March economic reports released during the holiday-shortened week. The March Consumer Price Index (CPI) and Producer Price Index (PPI) both showed annual increases. The March CPI reading came in at 8.5% (year-over-year), ahead of estimates of 8.4% and the highest since December 1981. Following that report, the March PPI jumped 11.2% (year-over-year) which suggests continued inflation pressures in the months ahead even as oil prices level off. Retail sales in March rose 0.5% as consumers spent more on essentials like gasoline and food. Looking through the report, Gasoline Stations sales soared 37% (Y-o-Y) while sales at grocery stores increased 9.5% (Y-o-Y). There were declines in online shopping and auto sales that held back spending totals.

In the week ahead, there will be a modest number of economic reports as most investor eyes will be on the first full week of Q1’22 earnings announcements. In 2021, companies benefited from easy year-over-year comparisons with Covid-ravaged 2020 results. Expectations for this reporting season are expected to have earnings for the S&P 500 overall grow at less than 5%. As is normally the case, it is expected that companies will at a minimum meet their expectations, but forward guidance will be extremely important in the face of inflation pressures and the moderating economic outlook.

Equity markets seem a bit oversold again after the jump off the mid-March lows while bond yields have soared higher in the face of a more hawkish Fed. It is our hope that we are at or close to peak inflation which should offer some relief for both stocks and bonds. Patience is still warranted as investors should continue to stick close to long-term allocation targets with a slight defensive bias.

“The hardest thing to understand in the world is the income tax.” – Albert Einstein

ND&S Weekly Commentary 4.11.22 – Markets Finish Lower as Uncertainty Continues

April 11, 2022

Equity and bond markets were negative last week as investors fretted about uncertainty surrounding Federal Reserve policy and the continuing war in Ukraine. Despite last week’s setback, the S&P 500 has rebounded 7.6% from its March 8th low.

For the week, the DJIA lost 0.28% while the S&P 500 dropped 1.27%. The tech-heavy Nasdaq finished lower by 3.86%. International markets provided no shelter as the MSCI EAFE Index closed down 1.36% while emerging market equities (MSCI EM) gave back 1.53%. Small company stocks, represented by the Russell 2000, dropped 4.62%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 1.82% for the week as yields jumped higher on continued inflation worries. As a result, the 10 YR US Treasury closed at a yield of 2.70%. Gold prices closed at $1,941.60/oz – up 1.17%. Oil prices moved lower from last week’s high and closed at $98.26 per barrel, down 1.02% on the week. A further drop in oil prices will ease the strain on consumers’ pocketbooks.

Last week’s release of the latest FOMC minutes essentially confirmed a 50-basis point move at its May meeting. Fed governors were unanimous in their intent to limit the damage from inflation. As a result, bond yields moved materially higher last week (explaining the hit to tech stocks last week). Last week also saw the release of the Markit ISM Services Purchasing Managers Index (PMI). March’s index registered 58.0, up from 56.5 in February as output quickened amid stronger demand conditions (a reading above 50 indicates that the services sector is expanding). Interestingly, client demand strengthened despite a sharp increase in cost burdens. Backlogs expanded at the fastest rate since 2009 reflecting not only strong demand, but capacity pressures as well.

Economic news this week includes CPI, PPI, retail sales and import prices. Tuesday’s CPI will likely be a bit hot given pricing comments from last week’s PMI reports. Wednesday’s PPI should continue to reflect rising input costs. Thursday’s retail sales report should be decent given last week’s release of Mastercard’s Spending Pulse Report for March that showed total retail sales excluding autos rose 8.4% year-over-year. Markets close this Friday for Good Friday. Next week will be the beginning of earnings season.

Expect ongoing volatility until inflation concerns abate and a resolution in Ukraine is achieved. Diversification, patience, and a bias towards quality will help investors manage through this temporary set-back. As such, we continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias.

Best wishes for a Happy Passover and Happy Easter.

“With the new day comes new strength and new thoughts.” – Eleanor Roosevelt

ND&S Weekly Commentary 4.4.22 – Recession Signals

April 4, 2022

Stocks ended the week mixed, as investors struggled with the war in Ukraine, an inverted yield curve and higher inflationary expectations. For the week, the DJIA was down 0.12%, while the S&P 500 ticked up 0.08% and the tech-heavy Nasdaq rose 0.66%. Foreign equities fared well with developed markets (MSCI-EAFE) up 0.83% while emerging markets (MSCI-EM) gained 1.92%. The stock markets have been amazingly resilient, given the convincing evidence that inflation is elevating, which will undoubtedly force the Federal Reserve to act more aggressively to taper bond purchases and hike interest rates.

The Federal Reserve’s preferred inflation metric, the core personal consumption index, rose 5.4% in February, which is well above its target of 2%. Other inflationary data included wages increasing 5.6% year over year in March, the unemployment rate falling 3.6%, and the labor force participation rate climbing to 62.4%. During March, there were 431,000 jobs created in the U.S., the eleventh consecutive month that job gains exceeded 400,000.

The Institute for Supply Management Purchasing Manager Index (PMI), slowed down in March to 57.1% from February’s 58.6% and below expectations of 59.0%. The price of oil dropped below the $100 level for a weekly decline of nearly 13%, largely a result of the Biden Administration announcing a plan to release up to 180 million barrels from strategic reserves over the next several months.

The 2-year and 10-year yields inverted for the first time since 2019. This part of the yield curve is closely watched as a warning signal that a recession could be on the horizon. Last week, the yield on the 2-year U.S. Treasury rose 14 basis points (bps) to 2.44%, the yield on the 10-year note dropped 10 bps to 2.38%, while the 30-year bond rate declined 16 bps to 2.44%. While the yield curve has been a reliable predictor of pending recessions, there has often been a long lag time between the inversion and actual recession.

Important economic data released this week will include the Institute for Supply Management’s non-manufacturing index, the release of the March 15-16 Federal Reserve meeting minutes, and wholesale inventories. We suggest that investors maintain their longer-term focus, well-diversified portfolios, and manage fixed income investment risks by keeping duration short and credit quality strong.

“Avoiding inflation is not an absolute imperative but rather is one of a number of conflicting goals that we must pursue and that we may often have to compromise.”-Paul Samuelson

ND&S Weekly Commentary 3.28.22 – Spring Is Here and Interest Rates Take It Literally

March 28, 2022

Russia’s invasion of Ukraine continues to dominate the world’s attention. The endgame remains unclear and Ukraine’s resilience and resolve in the defense of their country has surprised and impressed us all. Ukraine and other issues contribute to the heightened uncertainty that continues to weigh on the financial markets. We are in a period where numerous rogue factors are bearing on investors and markets simultaneously:
• the effect of the war in Ukraine on supply chains for manufacturing, energy and food
• the possibility of COVID variants surging and disrupting the recovery from the pandemic
• huge increases in oil prices
• the concerns that China may see this period as its best opportunity to invade Taiwan
• substantial, if not rampant, inflation rates in the global economies
• the central banks’ natural response of tightening money supplies to fight the inflation.

Fortunately, economic fundamentals in the US and European economies are strong. GDP growth is good, unemployment rates are low, and consumer balance sheets are strong. While everyone is on the alert for signs of recession, most indicators are not pointing in that direction. However, the equity markets do show a lack of conviction, and we continue to see intraday and intraweek volatility without any clear trends established.

Nearly all Major US and World equity indices were higher over last week. The S&P 500 moved 1.81% higher and the DIJA moved ahead 0.31%. The Nasdaq rallied 1.99%, but the small-cap Russell 2000 dropped 0.38%. MSCI EM added 0.23% and the MSCI EAFE was also up for the week by 0.20%.

Comments from some FOMC members indicate the Fed may move more aggressively and more quickly than previously indicated in its already forecasted plans to raise the discount rate to ~2% over its next six meetings. It raised the rate by 0.25% to the current 0.50% in mid-March. The Fed avoids actions that surprise markets, and such comments are a means of preparing the markets for what seems to be a more hawkish plan for fighting inflation. Bond investors responded by signaling their needs for higher rates of return as they forced bond prices lower, thus increasing the effective yield on bonds’ fixed streams of future payments. The 10-year US Treasury bond saw its yield spring to over 2.5% before ending the week at 2.48%. This is the highest yield for the 10-year since April 2019.

Bond prices were lower across the maturity spectrum. The US 2yr added 13 bps, the 10yr added 34 bps, and the 30yr added 18 bps to their effective yields to close the week at 2.3%, 2.48% and 2.6%, respectively. This steepens the front of the yield curve, and, for the time being at least, indicates a sanguine attitude from the bond market regarding the Fed’s ability to bring inflation under control without undue harm to GDP growth. For the week, the US Aggregate Bond Index dropped 1.82%. Oil moved ~$9 higher to finish at $113.90 per barrel and Gold added ~1% during the week to close at $1,954 per oz.

Patience and conviction bring successful investors through the storms of uncertainty to reach their goals. Investors with a long-term investment thesis are undeterred by momentary setbacks and avoid the temptations to “do something clever” that is in direct conflict with their overarching plan.

” The key to everything is patience. You get the chicken by hatching the egg, not by smashing it.” – Arnold H. Glasow