Weekly Commentary (3/14/22) – Markets Finish Lower as the War in Ukraine Intensifies
March 14, 2022
Equity markets were negative last week as a cornucopia of headwinds weighed on investor sentiment. The war in Ukraine, rising inflation, negative real wage growth, declining consumer confidence and decelerating GDP growth are all weighing heavily on investors’ minds. We suspect most of these concerns are reflected in current market levels.
For the week, the DJIA lost 1.99% while the S&P 500 dropped 2.88%. The tech-heavy Nasdaq finished lower by 3.53%. On a slightly more positive note, the MSCI EAFE Index closed up by 0.57% while emerging market equities (MSCI EM) sunk 5.17%. Small company stocks, represented by the Russell 2000, dropped 1.06%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 1.76% for the week as yields jumped higher on continued inflation worries. As a result, the 10 YR US Treasury closed at a yield of 2.00%. Gold prices closed at $1,982.70/oz – up 0.90%. Oil prices moved lower from last week’s high and closed at $109.33 per barrel, down 5.49% on the week. Despite the drop in oil prices, the national gas price average rocketed higher by almost 13% week-over-week to $4.33 per gallon … another tax on consumers and businesses.
The big economic focus of last week was on the release of the February Consumer Price Index – both headline and core figures matched expectations of 7.9% and 6.4%, respectively. Consumer inflation is now running at the fastest pace in 40 years and calls into question future consumer spending power. The University of Michigan Consumer Sentiment Index fell to 59.7 for the early weeks of March, its lowest level since 2011. On a more positive note, the Department of Labor reported last week that non-farm payroll employment rose by 678,000 in February (ahead of consensus). The unemployment rate fell to 3.8% even with more people entering the labor force and looking for employment. Normally such a strong employment figure would be well received by Wall Street, but investors are rightfully concerned about the war in Ukraine and rising inflation.
All eyes will be on the Fed this week as it wraps up its two-day meeting on Wednesday. It is widely expected that the Fed will raise the fed funds rate by 0.25% as it embarks on what is expected to be a series of seven rate hikes over the next 12 months. Other economic news this week includes Retail Sales, Import Prices and the Producer Price Index.
Expect ongoing volatility until 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.
Happy Pi Day!
“Ask five economists and you’ll get five different answers – six if one went to Harvard.” – Edgar Fiedler
ND&S Weekly Commentary 3/7/22 – The Markets Loathe Uncertainty
March 7, 2022
Investors are processing the reality of a sovereign nation being invaded by its neighbor in style reminiscent of 1939. Many people had believed that such war mongering by a global power was a relic of the past. Putin’s provocations had planted doubts and worries in the minds of market participants, around the world, over recent months. So, Russia’s invasion of Ukraine on February 24th triggered a decline in stock prices and a rally in less volatile investments.
The Russian invasion has increased the probabilities of a set of dire possibilities. Asset prices gyrating, signals the lack of conviction about how this conflict will affect business around the globe and whether Putin’s ambitions will expand beyond Ukraine.
The human tragedy in Ukraine defies description. We join the billions of others who share sincere care and concern for the sufferings of the Ukrainian people, and we are hoping for a sharp decline in Russia’s unprovoked hostilities with Ukraine’s sovereignty intact.
All Major US and World equity indices were down for the week. The S&P 500 moved 1.24% lower but did avoid revisiting the “technical correction” level of 10% off its January 3 high, that it had reached in the previous week. The DJIA was off 1.23% while the Nasdaq slid even further and was down 2.76%. MSCI EM was off 2.29% and the MSCI EAFE had a significant retreat as it moved 6.5% lower. The small company stocks of the Russell 2000 dropped 1.92%.
As investors traded out of equities, bonds had a small rally. The US Aggregate Bond Index gained 0.95% and the 10 YR US Treasury yield dropped to 1.74% at the end of stock trading on Friday, signifying a rise in its price, for the week. Commodity prices in general were higher as Oil surged higher to $115.68 per barrel, up over 26%(!!) and Gold was higher at $1,945 per oz., up another 3.2%.
During his testimony on Capitol Hill this past week, US Federal Reserve Chairman, Jerome Powell, shared his inclination to propose that the FOMC raise the federal funds target rate by 0.25% at its March 15-16 meetings. This is in line with most investors’ expectations and typical of the Fed’s efforts to not surprise the markets with changes in its Monetary Policy. The Fed is working to combat the highest levels of inflation in 40 years. However, Powell also added that the FOMC was prepared to move more aggressively at future 2022 meetings, if inflation remains high.
The US Consumer Confidence numbers are down from recent peaks in mid-2021 but are still strong through February. Consumer Spending remains solid and job growth is still strong. A slow-down in growth is the Fed’s objective. The delicate balance is not provoking a recession. Despite the heightened level of uncertainty, markets are not discounting a recession and the prospects for a “soft landing” from the COVID stimulus growth rates are still good.
Over longer periods, investors’ asset allocation strategies have proved to be the major determinant in their investment results. Volatility is a function of how often prices are observed. Modern investors constantly face the temptation to constantly observe prices. Short term volatility is a distraction for investors with long-term objectives.
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” — Warren Buffett
ND&S Weekly Commentary 2.28.22 – “Russian Roulette”
February 28, 2022
To say the least, it was a turbulent week for the stock market, as Russia followed through with their threats and invaded Ukraine. Investors feared that Russia’s invasion will push up inflation, especially energy prices, and that the Federal Reserve will begin increasing interest rates at the wrong time. Although Russia and Ukraine together account for only 2% of global market-based GDP, Russia produces 11% of the world’s oil and 17% of its natural gas. Ukraine and Russia account for roughly 25% global wheat exports.
Despite the geopolitical headwinds, the S&P 500 index was up 0.8% for the week, and Nasdaq gained 1.1%. The Dow Jones Industrial Average (DJIA) fell 0.1%. As expected, foreign markets were under pressure, with Developed (MSCI-EAFE) sliding -2.5% and emerging markets (MSCI-EM) down -4.8%.
Corporate earnings for the fourth quarter of 2021 have been solid. With 470 (94%) of the S&P 500 companies reporting an overall increase in Q4 earnings of 30.2% year over year and 16% revenue growth.
According to the ADP Employment Change Report, there were 467,000 jobs added to payrolls in January, well above consensus, and 400,000 new jobs are expected in February. The core personal consumption expenditures (PCE) price index rose 5.2% over the year ended in January, in line with estimates. With historically low inventory and rising mortgage rates, pending home sales slid to a nine-month low.
The bond market was also volatile with investors at first rushing into safe assets and then back into stocks on Friday. The U.S. 10 year Treasury note rose above 2.00% only to fall to 1.98% for the week. Gold prices declined 0.7% to $1,886/oz. Oil prices rose above $100 per barrel on Thursday for the first time since 2014. The price of oil settled back to $91.59 on Friday, up 1.9% for the week.
On Wednesday, Federal Reserve Chair Jerome Powell will give his semi-annual monetary policy update to the U.S. House Financial Services Committee. He will appear before the Senate Banking Committee on Thursday. Investors are hoping for clarifications on the Federal Reserves position on tapering and raising interest rates. President Biden will deliver his first State of the Union Address on Tuesday. He is expected to discuss the U.S. response to Russia’s invasion of Ukraine. Economic data this week will include reports on construction, factory orders, and employment.
We anticipate volatility will continue until the Ukranian war ends and there is more clarity about the direction of interest rates. Again, we recommend re-visiting investment objectives, risk tolerance and asset allocation goals. Our thoughts and prayers go out to the Ukranian people.
“Older men declare war. But its youth that must fight and die.”–Herbert Hoover
ND&S Weekly Commentary 2.22.22 – The Wall of Worry is Alive and Well
February 22, 2022
Equity markets finished broadly lower last week as investors worried about higher interest rates, inflation and increasing Russia-Ukraine tensions.
For the week, the DJIA lost 1.77% while the S&P 500 dropped 1.52%. The tech-heavy Nasdaq finished 1.73% lower. International markets were also lower with the MSCI EAFE Index down 1.86% while emerging market equities (MSCI EM) gave back 0.67%. Small company stocks, represented by the Russell 2000, fell 1.0%. Fixed income, represented by the Bloomberg/Barclays Aggregate finished lower by 0.24% for the week. The 10 YR US Treasury closed at a yield of 1.92% to finish flat on the week. Gold prices rallied as a flight-to-safety trade to close at $1,894/oz. – up 3.14%. Oil prices moved lower to close at $91.07 per barrel – down 2.18% on the week.
The Federal Reserve released their minutes from the January FOMC meeting. Interest rates have reached an inflection point, and the Fed will begin raising interest rates for the first time in several years to combat inflation. Market expectations are that the Fed will raise rates 4-5 times during the coming year. The Fed is also expected to begin unwinding some of its nearly $9 trillion balance sheet in 2022. Separately, St. Louis Federal Reserve President James Bullard reiterated that he thinks the central bank needs to increase its benchmark short-term rate to 1.00% as early as July.
In economic reports released last week, the U.S. Department of Labor reported that wholesale prices increased 1% in January, twice the expected level. Over the past 12 months, the gauge has risen 9.7%, close to a record level. Retail sales rose a surprising 3.8% m/m in January, beating 1.9% consensus estimates. The retail sales report was well received by the market as it points to continued strength and confidence from the consumer.
Markets are still in correction mode and are moving towards an oversold condition. As we have seen in recent weeks, concerns over increasing Russia-Ukraine tensions have overshadowed what has been a solid earnings season. Historically, conflicts like this have had minimal impact on markets overall. 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.
Stay well!
“Observe good faith and justice toward all nations. Cultivate peace and harmony with all.” – George Washington
Weekly Commentary (2/14/22) – Markets in Flux
February 14, 2022
Equity markets were mixed last week with domestic large-cap equities finishing in the red while domestic small-cap equities along with international equities (developed and emerging) finished in the green. Investors were rightfully concerned about hotter-than-expected inflation reports and rising geopolitical issues.
For the week, the DJIA lost 0.96% while the S&P 500 dropped 1.79%. The tech-heavy Nasdaq finished lower by 2.17%. On a more positive note, the MSCI EAFE Index closed up by 1.61% while emerging market equities (MSCI EM) gained 1.43%. Small company stocks, represented by the Russell 2000, recovered by 1.42%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished lower by 0.41% for the week as yields jumped higher on inflation worries. As a result, the 10 YR US Treasury closed at a yield of 1.92%. Gold prices closed at $1,840.80/oz – up 1.89%. Oil prices moved higher on tensions around the world to close at $93.10 per barrel, up 0.86% on the week.
Encouraging news earlier in the week on the waning of Covid cases around the world and the lifting of restrictions was offset by disappointing inflation news. The Labor Department released data on Thursday morning that showed U.S. inflation accelerated at a 7.5% annual rate in January – a four decade high. Despite rising input costs, U.S. businesses have been able to hold operating margins steady (at least for now). Fourth quarter operating margins are coming in around 13.2% (with over 82% of companies having reported) … only 0.4% below the 2Q21 peak of 13.6%. The week ahead will include reports on January Producer Price Index, Retail Sales and Industrial Production.
Expect ongoing volatility until markets finally discount the Fed’s upcoming rate hikes. Remember, at the beginning of the year markets were anticipating three-to-four rates hikes for all of 2022. Today the consensus is five or more rate hikes this year. History points to equity markets moving higher 3-4 months after the first rate hike and often making news highs within 6-12 months. 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.
Stay safe.
“Perfection is not attainable, but if we chase perfection we can catch excellence.” – Vince Lombardi
ND&S Weekly Commentary 2.7.22 – Choppy Waters
February 7, 2022
It was another bumpy ride on Wall Street last week, with conflicting earnings reports from big-tech companies.
The S&P 500 gained 1.6% this past week, while the Nasdaq rose 2.4% and the Dow Jones Industrial Average advanced 1.1%. Investors were frightened on Thursday after Meta Platforms’ (FB) disastrous earnings report. FB fell 26% triggering a 3.7% drop in the Nasdaq. Solid earnings reports, however; from Apple, Alphabet, Microsoft and Amazon buffered investors’ fears. International equities also finished higher with developed markets (MSCI-EAFE) and emerging markets (MSCI-EM) up 2.1% and 2.5%, respectively.
Despite a few major disappointments, corporate earnings continued to improve. Roughly, 56% of companies within the S&P 500 index reported an increase of 29% in fourth-quarter profits from the 2020 fourth-quarter according to FactSet.
On Friday, the Labor Department reported that there were 467,000 new jobs created in January, blowing away economists’ expectations. The strong jobs report weighed heavily on the bond market, sending the yield of the 10-year U.S. Treasury to 1.93%, which is the highest level since December 2019.
The price of oil surged with U.S. crude climbing to $92 per barrel, the highest level in eight years. Oil prices are up 23% year-to-date and 55% last year.
The strong jobs report and soaring energy prices reinforced the expectation that the Federal Reserve will be more aggressive in lifting interest rates. The so called “punch bowl” of monetary stimulus may be taken away sooner than expected.
With higher inflation, interest rates, and geopolitical tensions expected, market volatility will continue. We recommend revisiting investment objectives and risk tolerance. A globally diversified portfolio should be fine-tuned accordingly, keeping bond durations short while maintaining asset quality. Please avoid the temptation to chase high risk, momentum investments as they sell off.
All eyes will be on inflation numbers to be reported later this week. The consumer price index (CPI) will be reported on Thursday and expectations are as high as 7.2%.
“Things don’t correct themselves. You’ve got to go out there and work hard to correct them.” – Tom Brady
NDS Weekly Commentary 1.31.22 – The Fed is Ready to Raise Rates
January 31, 2022
Equity and bond markets were quite volatile last week in response to increasing geopolitics with Russia, numerous corporate earnings reports, and monetary policy shifting at the Federal Reserve. Equities rebounded Friday to salvage a positive week for US markets.
For the week, the S&P 500 closed up 0.79%, the Dow Jones Industrials Average gained 1.34% and the tech-heavy Nasdaq rose 0.02%. International equities were weak due to geopolitical tensions between Russia and Ukraine with developed markets (MSCI EAFE) down 3.61% and emerging markets (MSCI EM) declining 4.26%. U.S. Treasuries fell last week as concerns about inflation and shifting monetary policy pressured yields. The yield on the 10 year U.S. Treasury increased from 1.75% to 1.78%. Gold closed at $1,778/oz. to close down 2.9%. Oil (WTI) reached its highest level since September 2014 as it closed at $86.82/bbl.
The US Federal Reserve left rates unchanged at the January meeting of the Federal Open Market Committee (FOMC); however, Chairman Jerome Powell made it clear in his post-meeting press conference that they will end their open-market asset purchases and begin raising the federal funds rate at their next meeting in March. As of this morning, the futures market for federal funds was pricing in 5 rate hikes in 2022. In economic releases last week, it was reported that the US economy expanded at a 6.9% annual rate in the final quarter of 2021, beating estimates. Markit Research reported their U.S. manufacturing and services PMI readings at 55.0 and 50.9, respectively. The release showed a significant slowdown from the acceleration in December, but is still showing the economy is in an expansion environment.
Markets should remain volatile this week as the pace of earnings announcements accelerate further. Markets are still in correction mode, but the resiliency it showed last week has us believing there is a more reasonable margin of safety in prices today. We will continue to have a bias towards companies with strong earnings qualities which have weathered the recent storm better than lower quality stocks.
Stay Well!
“The price of greatness is responsibility.” – Winston Churchill
Weekly Commentary (1/24/22) – Markets in Correction Mode
January 24, 2022
Equity markets finished broadly lower last week as investors worried about higher interest rates, inflation and geopolitical uncertainties. The Nasdaq and S&P 500 suffered their steepest drops since March 2020.
For the week, the DJIA lost 4.58% while the S&P 500 dropped 5.68%. The tech-heavy Nasdaq finished 7.55% lower and is now in correction mode – down 12.0% year-to-date. For the week, the MSCI EAFE Index closed down by 2.44% while emerging market equities (MSCI EM) gave back 1.05%. Small company stocks, represented by the Russell 2000, sank 8.07%. Fixed income, represented by the Bloomberg/Barclays Aggregate, was essentially flat as it finished higher by 0.05% for the week as yields moved slightly lower. As a result, the 10 YR US Treasury closed at a yield of 1.76% (down 2bps from the previous week’s closing yield of ~1.78%) as investors moved to the perceived safety of treasuries. Gold prices closed at $1,831.80/oz – up 0.84%. Oil prices moved higher on tensions around the world to close at $85.14 per barrel, up 2.21% on the week.
The Federal Reserve meets on Tuesday and Wednesday, and investors will be waiting for further guidance on the Fed’s plan to hike rates and contain inflation. Earnings season is in full swing with roughly half of the Dow 30 companies having already reported. Earnings have been fairly robust, but 5 out of 6 companies providing guidance have lowered expectations given Covid-related supply chain issues and higher input costs. Economic reports due this week include 4Q’21 GDP, December PCE, December New Home Sales, Durable Goods Orders and Consumer Confidence.
Markets are in correction mode and are moving towards an oversold condition. We hope to be picking up bargains over the days and weeks ahead. 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.
Stay safe.
“Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.” – John Quincy Adams
ND&S Weekly Commentary 1.18.22 – Stocks Decline Again
January 18, 2022
Stock markets suffered their second straight week of losses as inflation fears, higher interest rates and a disappointing start to earnings season worried investors.
For the week, Standard & Poor’s 500, the DJIA and the tech-heavy Nasdaq declined 0.3%, 0.9%, and 0.3%, respectively. Smaller companies represented by the Russell 2000 closed lower by 0.8%. International equities were the lone bright spot with the MSCI EAFE index up 0.2% and the MSCI EM increasing 2.6%.
On Friday, the quarterly profits of JP Morgan Chase and Citigroup fell by double-digits, which was worse-than-expected. The U.S. dollar gained ground while gold lost $4.60 to $1,816.80 per ounce. Oil prices (WTI) climbed to $83.82 from $78.90 the previous week and are up 55% from a year ago. Despite a spike in inflation, the U.S. 10-yr yield was relatively unchanged for the week at 1.78%. However, it has moved much higher since the Federal Reserve reiterated their hawkish stance earlier in the year.
There was a slew of economic data that disappointed, causing concerns that the economic recovery could be vulnerable. For December, consumer inflation matched headline figures of a staggering 7% year-over-year jump, the highest since 1982. There was an unexpected 1.9% decline in retail sales that missed expectations.
Using the consensus 2022 operating earnings estimate of $220, the stock market is now selling at 21.2 times earnings which is not overly expensive. We are, however, concerned about the concentration of the stock market. The five largest holdings of the S&P 500 have a 22.4% weighting and the top five stocks in the Nasdaq represents 40.2%. With the estimated earnings growth of the S&P 500 slowing to 9%, rising interest rates and inflation, not to mention our political and geopolitical issues and Covid, higher volatility is expected. We recommend a cautious approach to maintaining a well-diversified portfolio.
There will be one-third of the S&P 500 companies reporting this week. The hope is that companies will exceed expectations of 20% growth year-over-year. Economic reports will include the Fed’s Empire State manufacturing survey on Tuesday and the Philadelphia Fed manufacturing survey on Thursday. Existing home sales will also be reported on Thursday. Let’s make it a better week in remembrance of Martin Luther King Jr.
“Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate, only love can do that.” –Martin Luther King Jr.
ND&S Weekly Commentary (3.21.22) – March Madness
March 21, 2022
Equities rebounded hard last week, as the Fed unveiled its monetary policy plans for the balance of 2022. The rally in risk assets came even amid Covid-19 lock-downs in China, data pointing to inflationary pressures, and a worsening situation in Ukraine.
For the week, the DJIA gained 5.53% while the S&P 500 recovered 6.19%. The tech-heavy Nasdaq jumped higher by 8.20%. Small company stocks, represented by the Russell 2000, returned 5.43%. International markets also had a strong week with developed markets (MSCI EAFE) and emerging markets (MSCI EM) up 5.63% and 3.51%, respectively. Fixed income, represented by the Bloomberg/Barclays Aggregate, was down 0.39% during a volatile trading week for bonds. Treasury yields increased across the board with the yield curve narrowing considerable after the Fed’s press release. As a result, the 10 YR US Treasury closed at a yield of 2.14% (up 14 bps from the previous week’s closing yield of ~2.00%). Gold prices closed at $1,936/oz. – down by 2.78% on the week. Oil prices fell last week amid concerns over the impact of widespread lock-downs in China. Oil closed at $104.70 per barrel, down 4.22%.
Last week, the Federal Open Market Committee (FOMC) delivered on a very well communicated 25 bps hike in its Federal Funds rate. The Fed made it clear that it plans to hike rates more quickly than it did in previous cycles to combat the inflation pressures. Accordingly, its members are now signaling a hawkish path ahead with 6 additional hikes expected during the remainder of 2022.
In economic data released last week, the Bureau of Labor Statistics reported that the Producer Price Index (PPI) rose 0.8% in February and 10.0% y/y. Retail sales rose 0.3% in February, below the 0.4% estimate as inflation seemed to impact consumer spending. Online spending pulled back sharply as sales for gasoline soared as prices jumped higher. Other categories of strength were food services, building materials and garden. This week’s economic calendar will include reports on consumer sentiment, durable goods orders, and the Markit manufacturing/services PMIs (Flash).
As we prepare for higher interest rates, we continue to utilize a flexible approach to fixed income with below market-weight duration. In terms of equities, we continue to focus on valuations and quality stocks with durable profits. The path ahead will continue to be filled with uncertainty with regards to geopolitical risks, elevated inflation, and supply chain disruptions. As such, we continue to stick close to asset allocation targets with a slight defensive bias.
Congratulations to the Providence College Friars, who have reached the Sweet Sixteen for the first time in 25 years. They will try to keep a dream season alive as they take on the Kansas Jayhawks on Friday night.
“… Providence is in the damn building.” – Ed Cooley