ND&S Weekly Commentary 7.12.21 – Let the Second Quarter Earnings Season Begin

July 12, 2021

During the short week of July 4th, interest rates moved lower, unsettling the financial markets. Investors debated the benefits of lower rates for financial assets versus whether the declining rates spelled a weakening of global economic growth. The spread of the highly transmissible delta variant of the coronavirus is also of grave concern.

For the week, US equities prevailed as the DJIA increased 0.25%, the S&P 500 was up 0.42% (an all-time high) and the tech-heavy NASDAQ rose 0.43%. International equity markets were under a little pressure. Developed markets (EAFE) declined 0.07%, while emerging markets (EM) dropped 2.58% as a result of China’s crackdown on Big Tech monopolistic practices. Small U.S. stocks, represented by the Russell 2000 finished in the red by 1.11%. Gold prices closed at $1,806/oz. and the price of oil finished at $74.63, hitting a six year high after OPEC+ was unable to agree to further production increases.

Surprisingly, the U.S. 10-year Treasury is now at its lowest yield since February, dropping 7bps from the prior week to 1.36%. Lower rates have and will continue to benefit more growth oriented companies. The fear of more than transitory inflation has subsided at least for now.

On the economic front, weekly unemployment claims came in higher than expected. Also, both the Institute for Supply Management (ISM) service sector numbers for June and the Economic Index came in lower than expected. Mortgage application activity in the U.S. was at its lowest level since January of last year, despite rates continuing to trend lower with 30-year average fixed mortgage rates hovering near 3%.

This week all eyes will be on second quarter earnings announcements. Second quarter corporate earnings for the S&P 500 companies are expected to have improved by nearly two thirds over the same period a year ago. On Tuesday, June consumer inflation (CPI) will add insight as to how transitory inflation is. Retail sales for June will be announced on Friday.

“Underlying most arguments against the free market is a lack of belief in freedom itself.”

-Milton Friedman

ND&S Weekly Commentary 7.6.21 – Happy 4th of July!

July 6, 2021

Equity markets climbed their way to all-time highs again last week. While investors anxiously wait on second quarter earnings announcements, economic data continues to confirm an improving economic landscape.

For the week, the DJIA advanced 1.03% while the S&P 500 gained 1.71%. The tech-heavy Nasdaq increased 1.96%. Small company stocks, represented by the Russell 2000, finished lower by 1.18% for the week. International markets also disappointed last week as the MSCI EAFE index (developed markets) closed lower by 1.09% while emerging market equities (MSCI EM) slipped 1.63%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week higher as yields declined. As a result, the 10 YR US Treasury closed at a yield of 1.44% (down ~10 bps from the previous week’s closing yield of ~1.54%). Gold prices closed at $1,786/oz. – up 0.50% on the week. Oil prices closed at $75.16/bbl. nearing a three-year high.

Economic news released last week came in better than expected. The big news came on Friday when the Labor Department reported that 850,000 jobs were added in June – surpassing estimates for a gain of 706,000 jobs. The unemployment rate increased slightly to 5.9% as more people than anticipated entered the workforce. The labor market remains extremely tight as there are more job openings than unemployed people looking for work. The Institute of Supply Management (ISM) reported their PMI for June at 60.6%, marking the 13th straight month of expansion in the manufacturing sector and economy overall. The National Association of Realtors reported that Pending Home Sales in May rebounded 8.0%, much stronger than estimates of a 1.0% decline.

Economic and market fundamentals remain quite reasonable as we closed out the 1st half of 2021. Although we are concerned about the new delta variant spreading around the globe, vaccines have proven to be mostly effective against Covid-19 and its variants. Markets will focus their attention on Q2 earnings, details of the infrastructure plan and the massive partisan reconciliation bill that Congress is debating. Of course, the burden will fall to taxpayers with corporate and capital gains taxes expected to increase from their current levels.

Most importantly, we wish our clients and friends a happy Fourth of July as we remain grateful for the many blessings bestowed on our great country.

“We must be free not because we claim freedom, but because we practice it.” – William Faulker

ND&S Weekly Commentary (6/28/21) – Investors Celebrate the Start of Summer

June 28, 2021

Investors welcomed the start of summer with a push higher in all market averages. Comments from Federal Reserve members eased concerns about inflation as the Fed reiterated their transitory outlook for inflation.

For the week, the DJIA gained 3.44% while the S&P 500 moved ahead by 2.74%. The tech-heavy Nasdaq had a good week and advanced 2.35%. International markets finished in the green. For the week, the All Country World Index ex-USA finished higher by 1.5% while emerging market equities (MSCI EM) tacked-on a gain of 1.42%. Small company stocks, represented by the Russell 2000, were strong and finished the week nicely higher by 4.32%. Fixed income, represented by the Bloomberg/Barclays Aggregate, declined 0.41% for the week as yields moved higher. As a result, the 10 YR US Treasury closed at a yield of 1.54% (up almost 9 bps from the previous week’s closing yield of ~1.45%). Gold prices closed at $1,776.60/oz – up 0.49% on the week. Oil prices continued their march higher to close at $74.05 per barrel, up 3.87% on the week.

Last Tuesday’s National Association of Realtors (NAR) report on May’s existing home sales indicated that sales fell 0.9%, better than expectations. Existing home sales are up 44.6% from the same time last year. On Wednesday, The IHS Markit Group reported that the IHS Markit Flash U.S. Composite PMI Output Index for June came in at 63.9, down from 68.7 in May – any reading over 50 indicates an expanding manufacturing sector. On Thursday, the Bureau of Economic Analysis reported Real GDP for the first quarter increased at a seasonally adjusted annual rate of 6.4%, in-line with expectations. Lastly, on Friday the Bureau of Economic Analysis indicated that personal income fell 2.0% in May, better than expectations for a 2.5% drop. Importantly, personal consumption expenditures (PCE) advanced less than 0.1% in May, missing expectations for a 0.4% advance (PCE is one of the Fed’s favorite gauges of inflation).

We see a relatively quiet week ahead as Americans prepare for the upcoming 4th of July weekend. Easy monetary policy and strong economic growth should continue to support risk assets. We continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias. Enjoy the summer!

“The summer night is like a perfection of thought.” – Wallace Stevens

ND&S Weekly Commentary 6.21.21 – The Fed Rattles the Market

June 21, 2021

Investors were a little unnerved last week by a shift in the Federal Reserve’s monetary policies. The Fed raised its inflation expectations and said interest rates may increase in 2023, rather than their previous forecast of 2024. Though the Fed will maintain the current level of $120 billion a month in asset purchases, its members have started talking about a tapering. The Fed’s stimulus has been a powerful force behind the Covid-19 recovery and bull market.

For the week, the DJIA fell 3.4%, the S&P 500 declined 1.9% and the Nasdaq slipped 0.26%. The worst performing sectors were materials, financials and energy. Investors moved away from small U.S. stocks with the Russell 2000 dropping 4.2%. International equities also declined for the week with the MSCI EAFE and MSCI EM declining 2.4% and 1.4%, respectively. In addition, the strengthening in the dollar has weakened gold which fell last week by 5.9%, the largest decline in over a year. Oil (WTI) closed at $71.64/bbl – up 1.03% on the week.

Fixed income markets were fairly volatile last week as long rates declined and short rates jumped higher resulting in a small flattening of the yield curve. The 10year U.S. Treasury fell slightly from 1.47% the previous week to 1.45%.

Inflationary pressures have been increasing as consumer prices have soared and wages are rising as the demand for labor outpaces supply. Complicating things further, almost 4 million people quit their jobs in April, the highest on record. In economic reports last week, the Producer Price Index (PPI) for May was up 0.8% m/m and has jumped 6.1% over the last 12 months. Retail sales declined in May, however, the total value of retail sales was $620.2 billion, well above the $526 billion in February 2020. Lastly, unemployment claims rose for the first time in several weeks to 412,000. This week, look for economic reports on existing and new home sales, durable goods orders and consumer sentiment.

It’s not surprising that the markets declined given that the markets are less than 2% from their all-time highs. Historically, the market averages three 5% pull backs a year but we haven’t experienced one in 8 months. We feel that markets may have over reacted to the Fed last week and we expect volatility to continue this summer. Investors will continue to focus on inflation news and when the Fed might take their foot off the gas. Continue to maintain a well-diversified portfolio. Let’s Make it a Great Week!

“A father carries pictures where his money used to be.” – Steve Martin

ND&S Weekly Commentary 6.14.21 – Markets Grind Mostly Higher

June 14, 2021

Markets were mostly higher last week as interest rates declined despite the highest monthly increase in the CPI since August 2008.

For the week, the DJIA declined 0.80% (snapping a two week winning streak) while the S&P 500 gained 0.41%. The tech-heavy Nasdaq had a good week and advanced 1.85%. International markets finished in the green. For the week, the All Country World Index ex-USA finished higher by 0.21% while emerging market equities (MSCI EM) eked out a gain of 0.03%. Small company stocks, represented by the Russell 2000, were strong and finished the week higher by 2.16%. Fixed income, represented by the Bloomberg/Barclays Aggregate, advanced 0.47% for the week as yields moved lower. As a result, the 10 YR US Treasury closed at a yield of 1.47% (down ~9 bps from the previous week’s closing yield of ~1.56%). Gold prices closed at $1,877.40/oz – down 0.66% on the week. Oil prices jumped 1.85% on the week to close at $70.91 per barrel. Oil prices are up a whopping 46.15% year-to-date.

Last Tuesday’s Job Openings and Labor Turnover Survey (JOLTS) report surprised to the upside as job openings on the last business day of April reached a record 9.3 million. Current labor market tightness appears to be a result of low immigration (Covid related) and stimulus payments that, in many cases, provide workers with an incentive to remain unemployed. We’ll be watching signs of inflation as recent labor market tightness will likely lead to upward pressure on wages. On Thursday, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 5% in May, compared to a year ago. As mentioned earlier, the CPI reading was the highest yearly increase since August 2008. Interest rates moved lower on the news as more and more investors seem to agree with the Fed’s view that rising inflation is transitory.

All eyes will be on the Fed this week as they meet on Tuesday and Wednesday. We see the Fed sticking to their accommodating stance while perhaps hinting about future tapering. Investors also expect the Fed to elaborate on their ‘transitory’ view of inflation.

Easy monetary policy and strong economic growth should continue to support risk assets. We continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias. Enjoy the summer!

“Formula for success: rise early, work hard, strike oil.” – J. Paul Getty

ND&S Weekly Commentary 6.7.21 – Equities Limp Higher

June 7, 2021

Markets again closed the week in positive territory thanks to a Friday rally that came after a weaker-than-expected payroll report. The economy added fewer jobs than anticipated and wage gains were relatively tame suggesting the Fed won’t be forced to act on its interest policy anytime soon.

For the holiday-shortened week, the S&P 500 increased 0.88% while the DJIA finished 0.52% higher. The best performing sectors were energy, real estate, and financials. International markets were mixed with developed (MSCI EAFE) up 0.85% and emerging (MSCI EM) slipping 0.15%. The yield on the 10yr U.S. Treasury ticked lower to close at 1.56%. Gold prices declined to $1,889/oz. – down 0.67%. Oil jumped to $69.62/bbl – up 4.98% last week.

Economic data released last week was mixed. The big economic news was that the economy added 559,000 jobs in May, a miss against expectations for an increase of about 671,000. As a result, the unemployment rate declined 0.3 percentage points to 5.8% which was slightly better than estimates. The labor force participation rate, which accounts for the number of Americans looking for work or currently employed, dropped to 61.6%. In other economic news, the Institute of Supply Management (ISM) reported the manufacturing PMI index in May increased to 61.2%. The services PMI for May also came in better-than-expected. Jobless claims last week were 385,000, the lowest level for initial claims since the Covid-19 outbreak.

For now, we remain cautiously optimistic about equity markets. Investors should continue to maintain risk exposure in-line with one’s long-term investment objectives and goals. Let’s make it a good week!

“There are no shortcuts in evolution.” – Louis D. Brandeis

ND&S Weekly Commentary 6.1.21 – Markets Continue Rally

June 1, 2021

Stocks finished higher last week despite concerns about higher inflation.

For the week, the S&P 500, DJIA and NASDAQ were up 1.2%, 1.0% and 2.1%, respectively. The best performing sectors were communication services and consumer discretionary which benefited from a number of good earnings announcements from the retail sector. International equity markets also advanced with MSCI EAFE up 1.2% and MSCI EM up 2.4%. Covid-19 trends in Europe have shown continued improvement. Fixed income markets were also positive for the week with the rate on the 10 year U.S. Treasury Note declining from 1.63% to 1.58%. Gold closed at $1900/oz. – up 1.3% and oil (WTI) jumped 4.3% to close at $66.32/bbl.

First quarter earnings are on pace to rise by 50% from a year ago, marking the fastest growth rate since the Global Financial Crisis. Of companies who have reported, over 85% have had a positive earnings surprise (earnings-per-share above Wall Street consensus). In terms of revenues, over 75% have reported revenues above estimates. The forward 12-month P/E has adjusted lower due to the improved earnings outlook and is now at 21x.

Core Personal Consumption Expenditures (PCE), the Fed’s preferred measure for inflation, came in at 3.1% year-over-year reflecting a surge in demand after Covid-19 restrictions were lifted in a number of states. The Fed aims to maintain core PCE at around 2% but it has remained below that level for years. Most economists are expecting that higher inflation numbers will only be transitory. Personal income fell 13.7% in April after surging the previous month due largely to stimulus payments. This week look for economic reports on mortgage applications and the May jobs report. Estimates are for 700,000 jobs to be added but they may come in lower as companies have said they can’t find enough workers to fill open positions.

Let us never forget the real meaning of Memorial Day – to honor those who have gone before us and paid the ultimate price to ensure our freedom and to secure the blessings of liberty.

“Their sacrifice was great, but not in vain. All Americans and every free nation on earth can trace their liberty to the white markers of places like Arlington National Cemetery. And may God keep us ever grateful.”

George W. Bush

ND&S Weekly Commentary (5.24.21) – Cryptocurrency vs. Kryptonite

May 24, 2021

It was a volatile week on Wall Street as investors struggled with rising inflation concerns and the Federal Reserve’s accommodating monetary policy.
For the week, the Dow Jones Industrial Average (DJIA) slid 0.5%, the S&P 500 lost 0.4%, and the Nasdaq rebounded 0.3% from four straight down weeks. Foreign markets were the bright spot with developed equities (MSCI EAFE) up 1.08% and emerging markets (MSCI EM) climbing 1.75%. Oil (WTI) prices took a breather down 2.3% for the week and are still up 32% year-to-date.

The corporate profit recovery has been strong with earnings rising 49% in the first quarter of the year. Earnings are expected to grow roughly 30% in 2021. The concern is that stock prices, as measured by the S&P 500, have risen 75% in the last 12 months of the pandemic recovery. The market is now selling at 22x forward price to earnings while the historical average is 16x.

On Wednesday, the Federal Reserve’s Open Market Committee (FOMC) disclosed that some members are preparing to talk about tapering asset purchases as a result of our rapid economic recovery. Lessening their purchases would place pressures on interest rates which could lower bond prices and raise concerns over slowing economic growth. Treasury yields initially rose after the FOMC meeting minutes were released but later subsided. Rates were virtually unchanged last week.

There was mixed economic data during the week. Jobless claims reached another pandemic low of 444,000; though small businesses are finding it difficult to find workers. The April housing market was weaker than expected with housing starts at 1,569k vs. 1,740k estimate. Existing home sales were 5.85m vs. the estimate of 6.07m. The Markit Manufacturing and Services indexes exceeded consensus.

The topic of the week was the 29% decline in the price of Bitcoin, the primary cryptocurrency and most speculative of assets. The People’s Bank of China banned financial and payment institutions from accepting digital currencies. Bitcoin’s price reached $64,829 on April 16th and hit $30,202 on Wednesday, sending jitters throughout the speculative areas of financial markets.

For now, we remain cautiously optimistic about equity markets, we would refrain from speculative investing and keep bond duration short.

“Bitcoin is really a fascinating example of how human beings create value, and is not always rational …” – Alan Greenspan

ND&S Weekly Commentary (5.17.21) – Inflation Concerns Spark Investor Angst

May 17, 2021

The markets pulled back during a volatile week as inflation concerns sparked a sell-off in high-growth and technology stocks.

For the week, the S&P 500 and DJIA returned -1.35% and -1.08%, respectively. The tech-heavy NASDAQ closed down 2.32%. International markets didn’t fare any better with the MSCI EAFE declining 1.28% and MSCI EM off 2.99%. Fixed income was also under pressure as the Bloomberg Barclays U.S. Aggregate bond index finished down 0.37%. As a result, the 10yr U.S. Treasury yield rose 3bps to close at 1.63%. Gold inched higher by 0.37% to close at $1,838/oz. Oil (WTI) closed at $65.51/bbl – up 0.72% last week.

The catalyst for the pullback was a much hotter than expected April Consumer Price Index (CPI) reading that heightened inflation concerns last week. On Wednesday, the Dept. of Labor Statistics reported that the CPI increased 0.8% in April, well ahead of expectations of 0.2%. Year-over-year, the CPI has increased 4.2% which is the largest 12 month reading since September 2008. Looking at inflation from the producer side, the Producer Price Index (PPI) for April also doubled expectations with a reading of 0.6%. There are widespread supply shortages of materials including semi-conductor chips which are driving up production costs.

In other economic news, the JOLT’s report showed that 266,000 jobs were added last month and job openings hit a record 8.1 million at the end of March. Retail sales were virtually unchanged in April missing an estimate of 0.9% increase. Retail sales are still up 17.9% from February 2020, which marks the onset of the pandemic.

We are closely monitoring economic data around inflation. Inflation usually increases above trend at the beginning of an economic recovery. The Federal Reserve has indicated that this spike in inflation is transitory and will let it run above its 2% target for now before changing it’s accommodating policies. The concern is that the Federal Reserve will be forced to tighten monetary policy faster than markets are currently discounting. Rising prices and costs could also limit consumer demand and corporate profitability. Investors should continue to maintain risk exposure in-line with one’s long-term investment objectives and goals.

“If inflation were to move up in ways that are unwelcome, we have the tools for that, and we will use them. No one should doubt that. When the time comes to raise interest rates, we’ll certainly do that, and that time, by the way, is no time soon” – Jerome Powell (March 20, 2021)

ND&S Weekly Commentary 5.10.21 – Markets Inch Higher

May 10, 2021

Equity markets mostly advanced last week which reflected a continued shift out of large cap growth companies who benefited from the Covid-19 response into economically sensitive areas that are more leveraged to an economic reopening. The best performing sectors last week and a year-to-date basis are energy, materials, financials and industrials.

For the week, the S&P 500 increased 1.26% while the DJIA jumped 2.72%. The tech-heavy NASDAQ declined 1.48%. International developed had a strong week with the MSCI EAFE up 2.63%. Emerging markets inched higher by 0.10%. Fixed Income, represented by the Bloomberg/Barclays Aggregate, finished higher last week as the index gained 0.28%. As a result, yields drifted lower last week with the 10yr U.S. Treasury closing at a yield 1.60% (down from 1.63% the week prior). Oil (WTI) prices jumped 2.03% last week to close at $64.82 per barrel. Gold prices closed at $1837/oz. – up 3.61% last week.

Earnings releases will continue this week, and we continue to expect companies to report mostly better-than-expected numbers. So far, 87.0% of companies have reported EPS ahead of consensus. Earnings are up 52.4% year over year vs. expectations for an overall 51.1% advance. S&P 500 revenues are up 14.3% vs. expectations of a 13.0% advance.

Economic data last week was mostly below Wall Street estimates. ISM manufacturing and services PMIs for April came in at 60.7% and 62.7%, respectively. Both releases were below expectations but still represent strong expansion in each sector. On Friday, it was reported that the U.S. economy gained 266,000 jobs in April, a significant miss against expectations of 1,000,000. Some businesses are cautious about ramping up hiring given the pandemic and uncertainty. Other industries are reporting they can’t find enough workers due to expanded unemployment benefits, workers fear of contracting the virus, and child-care constraints due to school closures.

Equity markets have been strong in 2021 and have correctly discounted the jump in corporate earnings. Many companies have issued strong guidance for the rest of the year but have seen a tepid market response. It would seem markets have discounted much of the good news and we wouldn’t be surprised if they take a breather here. Investors should maintain discipline in-line with their long-term goals.

“What would life be if we had no courage to attempt anything.” – Vincent Van Gogh