Updates

Dumaine Investments Weekly Market Update – November 1, 2023

– After a brief rally at the start of October, US stocks traded lower over the second half of the month as elevated interest rates, mixed earnings, and heightened tensions in the Middle East took a toll on markets. The S&P 500 posted its worst October performance in three years, dropping more than 2%. More alarmingly, the Nasdaq Composite had its worst October since 2018 as the tech sector, priced for perfection, saw a material selloff.

– On Wednesday, The Federal Reserve opted not to hike the Fed Funds target rate for the second consecutive meeting, the third pause overall in 2023. While the Fed appears to have completed the most aggressive campaign of interest-rate increases in a generation, Chairman Powell still has a lot to worry about, and it would seem unwise to completely rule out another hike before the end of the year. The CME Fedwatch tool is currently pricing in a 25% probability of a December rate increase.

– Economic data released Tuesday showed wage growth is indeed cooling, but not as quickly as the Fed would like. At the same time, year-over-year home prices continue to rise appreciably more than consensus forecasts. Moreover, the United Auto Workers (UAW) union recently won a 25% hourly pay raise from all three auto makers. While the UAW’s success was great for its members, Fed officials may wonder if this move sets a precedent for other workers who are still feeling the pinch of two years of high inflation.

– Prior to the Fed announcement Wednesday, the U.S. Treasury decided to moderate sales of its longer-dated debt, a move that is expected to push down bond yields—and buoy bond prices—while also providing support for stocks. The department said it would sell $112 billion in long- and medium-term securities in its coming auctions but reduce the increase in 10-year and 30-year auctions as compared with the amount sold in August.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – October 24, 2023

• US stocks traded down over the last week amid an environment of rising long-term rates, mixed earnings results, and an escalating conflict in the Middle East. The 10-year Treasury yield almost hit 5.0% Monday before retreating to 4.9% later in the day. On the macroeconomic front, month-over-month retail sales were well ahead of consensus forecasts while new building permits were in-line with expectations.

• Economists raised their projections for US growth through early 2024 and trimmed the odds of a downturn as consumers continue to spend. The American economy likely expanded at an annualized 3.5% rate in the third quarter—the fastest in nearly two years—as forecasters increased their household spending forecasts. And while growth is expected to slow in the following two quarters, economists in the latest Bloomberg monthly survey still raised their future estimates for gross domestic product growth.

• Treasury yields retreated quickly on Monday after almost hitting the key technical level of 5.0%. Prominent bond bears said the rout had been excessive. Billionaire investor Bill Ackman wrote on Monday that he unwound his bet against US government bonds amid rising global risks, while Bill Gross, renowned co-founder of PIMCO, wrote that he is buying short-dated interest-rate futures in anticipation of a recession by year-end. Their comments coincided with a swift turnaround in yields to finish Monday’s session.

• Looking forward, there’s plenty of news in the pipeline ahead of the Fed’s next meeting on Nov 1. Official GDP data will be released Thursday while Core PCE inflation data (the Fed’s preferred inflation measure) are to be published on Friday. On the earnings front, four of the largest technology companies—the cohort that is largely responsible for stock gains this year—report this week, along with a bevy of other firms as earnings season hits high gear.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – October 17, 2023

• US stocks have traded flat over the past week as investors digest a host of new earnings and economic data, as well as attempt to assess the implications of the conflict in the Middle East. Markets moved down modestly after last week’s CPI reading came in largely in-line with expectations, before rebounding on Monday with no clear catalyst. Heightened geopolitical tensions together with a less than favorable global macroeconomic picture create an environment of extreme uncertainty and asymmetric risks in our view.

• Israel’s defense minister told the US to brace for a ‘long war’ against Hamas amid a global push to prevent the conflict from spreading. President Biden will travel to Israel on Wednesday to meet with Israeli leaders. US officials are worried about the potential for regional escalation by Hezbollah should Israel invade Gaza. On Monday, Iran said that an expansion of the war between Israel and Hamas was increasingly becoming unavoidable. More than 600,000 Palestinians have left northern Gaza on warnings from Israel and amid a bombing campaign that has killed thousands.

• The bond market continues to be marked by extraordinary volatility, including the highest levels of turbulence in the 30-year yield since the peak of the pandemic-era panic. For traders, the focus keeps shifting between rising geopolitical risks, an impending supply glut, concern over deficits, and expectations that the Federal Reserve’s interest-rate hiking cycle will tip the economy into recession.

• Looking forward, the next week will be full of potentially market-moving events. As earnings season kicks into full gear, technology and communication majors will begin to report, as well as several large industrial and financial firms. Johnson & Johnson reported Tuesday, Netflix and Tesla report Wednesday with American Express reporting on Friday. Ahead of the blackout before the central bank’s next decision, Federal Reserve Chairman Jerome Powell will speak in New York on Thursday.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – October 3, 2023

• US stocks continued to trade lower over the past week amid growing concerns about rates staying higher for longer, inflated tech stock valuations, and a decidedly mixed global economic picture. While a last-minute stopgap measure over the weekend prevented an imminent government shutdown, there remains plenty of room for doubt about an ultimate resolution to the budget showdown. The existing funding bill kicked the can down the road for only 45 days. Given the current state of division in congress, there is still a high probability of a government shutdown before year-end.

• The Federal Reserve’s message is finally being heard loud and clear by Wall Street. As discussed last week, the central bank was finally successful in shifting the focus toward higher-for-longer interest rates at its September meeting. Markets appear to have given up anticipating imminent rate cuts, and Treasury yields have shifted higher accordingly. The yield on the 10-year Treasury note reached 4.78% Tuesday, its highest level since 2007. The timing of the move—on the first two days of the fourth quarter and with little news—means last week’s rising yields cannot be attributed to end-of-quarter positioning. Rather, the ongoing change in interest rates appears to be a material market shift that is gaining momentum.

• While historically October has been a sanguine month for stocks, we remain concerned about risks on the horizon. The major risk factors that markets faced in September—sticky inflation, elevated oil prices, higher-for-longer rates—are all still on the table, and many trends in the global economy continue to worsen. We continue to maintain an underweight to stocks, and to be defensively positioned within the asset class—favoring lower beta sectors with less cyclical exposure. On the fixed income front, we are beginning to lengthen our bond maturities at the margin.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – September 26, 2023

• US stocks traded down nearly 4% over the past week as the September market selloff accelerated. Appetite for equities appears to be subsiding after a 20% rally this year fueled by artificial intelligence euphoria. Behind the recent wave of pessimism is the resolve by the US Federal Reserve to keep interest rates higher for longer—creating pressure on already stretched market valuations. Adding fuel to the fire, this comes amid existing concerns about workers’ strikes, global economic woes, resilient core inflation, and the possibility of a government shutdown.

• The Fed may have kept rates on hold last week, but it managed to jolt markets into finally believing borrowing costs are going to stay higher for quite a while. As we have noted repeatedly in our newsletters and weekly posts this year, this is by far the most probable scenario, and appears almost unavoidable. Nevertheless, markets are only now beginning to recognize the real possibility of ‘higher rates for the longer term,’ and the consequences for the economy and equity valuations. In short, the market has been obsessed with when rate cuts will begin and how plentiful they will be in 2024. That appears to have been replaced by the abrupt realization that interest rate policy will remain restrictive for some time.

• Last week’s jobs data release showed a surprise decline in weekly jobless claims to 201,000 in August, the lowest since January. This number, well below expectations, suggests the labor market is still hot. After the Fed’s economic projections Wednesday showed interest rates staying higher for longer, the labor data further solidified that concept for investors.

• Moody’s Investors Service, the only remaining major credit grader to assign the US a top rating, has signaled that its confidence is wavering ahead of a potential government shutdown. The blunt warning by Moody’s follows a downgrade last month by Fitch which cited concerns over the nearly catastrophic US debt default that almost happened earlier this year.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – September 20, 2023

• US stocks extended their September pullback over the past week, as markets remain concerned about inflationary pressures, productivity, and workers’ strikes. The Fed chose not to raise interest rates at the September meeting on Wednesday—keeping borrowing costs in a range of 5.25-5.50%.

• Chair Powell indicated that the central bank opted for a pause to further evaluate the impact of the cumulative effects of past rate hikes. Nevertheless, he reiterated his concerns about persistent inflation and the challenges ahead in navigating the ‘last mile’ of inflation reduction, and importantly, keeping baseline inflation consistently at the target level.

• The dollar is strengthening again as the US economy defies pessimistic forecasts, while growth falters in China and Europe. The US currency rapidly reversed its declines from July, upending bets on a pullback predicated on the prospect that Fed rate hikes are nearing an end. Now, its revival is evoking memories of last year when the dollar delivered economic shocks by pushing commodities prices higher in global markets and increasing the burden of foreign debts.

• Oil rose to a 10-month high yesterday, as global benchmark Brent crude topped $95/barrel for the first time since November, extending a strong rally that continues to spur inflation. Supply cuts from OPEC+ tightened the market, with Saudi Arabia’s energy minister declining to indicate any change in course. The tighter market has led to a multitude of predictions that $100/barrel oil could again be on the horizon.

• As the quarter comes to a close, all eyes will be on next week’s official GDP and inflation data. With at least one additional rate hike expected in the fourth quarter, any upside surprise to inflation could serve as a meaningful shock to markets.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – September 13, 2023

• After beginning September with a renewed pullback on concerns about rising yields and oil prices, US stocks have traded flat over the past week. With earnings season finished and little of consequence in terms of major news items, Wednesday’s inflation report took center stage. Headline inflation came in slightly above consensus due largely to the significant recent increase in energy prices. Core inflation was in-line with forecasts though there was a slight rise in month-over-month numbers, and the annual rate of 4.3% remains elevated relative to the Fed’s target.

• Digging a bit deeper into CPI, there are some troubling signs of advancing inflation. The so-called “super-core” CPI, which measures core services extracting housing costs, rose 0.4% in August after a 0.2% increase in July and a flat June. “This confirms a reacceleration,” says Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research. Still, stocks popped back Wednesday from their initial weak response to the report, perhaps because the data didn’t indicate any sign of inflation running away and most of the rise was energy-related, as expected.

• US-China tensions are spurring a reorganization of global trade as the US seeks to reduce supply-chain reliance on geopolitical rivals and source imports closer to home. Mexico looks better placed than most countries to seize the business opportunities being created by this new Cold War. It has just overtaken China as the largest supplier of goods to the US and boasts the world’s strongest currency this year, in addition to one of the best performing stock markets. Foreign direct investment is already up more than 40% in 2023. We believe Mexico will be a key market to watch as the world realigns.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – September 6, 2023

• Having finished August with a slight rally on optimism about a Fed pause, US stocks resumed their pullback in the first week of September. Rising Treasury yields, a strong dollar, and an extended rally in crude oil prices have continued to serve as headwinds to a market priced for perfection. After briefly falling below 4.1% at the end of August, the 10-year Treasury yield is again approaching its recent 15 year high of 4.3%, while WTI crude oil had been holding firm above $86/barrel.

• The CME Fedwatch tool is now forecasting a 90%+ probability of a pause at the September Fed meeting. While recent economic data have been mixed, markets appear to expect the Fed to abstain from raising rates due to figures suggesting a softening picture for the labor market and manufacturing, including a higher-than-expected August unemployment report.

• WTI crude oil prices have accelerated sharply in the last few weeks – you would have to turn the clock back more than a year to June 2022, to find petroleum prices so elevated.

• The renewed advance in the US dollar is raising concern in Asian countries as their currencies fell to multi-month lows, prompting policymakers in Japan and China to step up defense of their beleaguered exchange rates. Japan issued its strongest warning in weeks against rapid declines in the yen while China’s central bank also offered forceful guidance regarding its targeted rate for the yuan as the currency weakened toward a level not seen since 2007.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – August 30, 2023

• After posting meaningful losses in the first half of August, US stocks rebounded over the past week on optimism about a possible pause in interest rate hikes by the Federal Reserve. Job openings for July were meaningfully lower than consensus forecasts, and markets responded by rising sharply on the view that Fed officials would be more likely to take a pause in raising interest rates at their September meeting. Hawkish comments by Fed Chair Powell last week in Jackson Hole have been largely discounted by Wall Street.

• In our view, there continues to be a conspicuous dislocation between Fed policymakers and the direction of the market. In his remarks last week, Chair Powell alluded to concerns about recent economic growth being above expectations as well as consumer spending remaining robust. He also emphasized the Fed’s ongoing focus on core inflation, which continues to be well above trend and has proven to be more persistent than headline CPI. Perhaps most significantly, Powell closed his speech with this simple declaration: “We will keep at it [the task of restoring price stability] until the job is done.” By using this specific wording, Powell was wrapping himself in the mantle of Paul Volcker – widely respected for his success in the early 1980s for quelling the biggest burst of inflation in the modern era.

• With a large batch of economic data released Wednesday, the overall picture for the US economy continues to be mixed. While second-quarter GDP came in slightly below expectations, the closely-watched consumption component of the report rose modestly. Likewise, ADP employment data once again came in below expectations, but the July number was also revised upward by roughly 50K jobs. Additionally, European inflation continues to be stubbornly high, as data for both Spain and Germany were slightly above forecasts.

• Looking forward, all eyes will be on Thursday’s inflation and personal spending data, as well as Friday’s unemployment and non-farm payrolls. These reports will be closely monitored by the Fed as it considers an interest rate action at their meeting on September 19.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – August 23, 2023

• After two consecutive weeks of declines, stocks have traded flat over the last week as markets digest rising long-term rates, mixed economic data, and the final stages of earnings season. Investors hoping for a rebound from a rough first half of August had to tap the brakes as disappointing earnings from big retailers combined with bank rating downgrades dampened enthusiasm. On Monday, S&P downgraded ratings for several US banks including KeyCorp and Comerica, two weeks after Moody’s cut ratings for ten American lenders. Many depositors have “shifted their funds into higher-interest-bearing accounts, increasing banks’ funding costs,” S&P wrote in a note summarizing the moves. Non-interest-bearing deposits have fallen 23% in the past five quarters as Fed rate hikes prompted consumers to seek higher deposit rates elsewhere.

• Nvidia’s highly anticipated earnings announcement will come after market hours Wednesday, and will be heavily scrutinized as a bellwether for the generative AI thematic and the tech sector more broadly. While the options market is pricing in a 10% increase in the stock – on an assumption revenue will beat forecasts – anything less than an exceptional result could trigger a sharp selloff for Nvidia with knock-on effects in broader markets. Next, investors will shift their focus to Federal Reserve Chairman Jerome Powell’s keynote annual speech on Friday at Jackson Hole. His speech will be closely dissected for clues to the Fed’s next moves on interest rates. A string of stronger-than-expected economic data have recently raised concerns that the Fed may not yet be done with its current rate-hike cycle.

• As the outlook for China continues to darken, global investors have offloaded the equivalent of more than $10 billion of Chinese blue-chip stocks in under 13 days. The most-sold stocks in the latest rout were among the largest companies in the benchmark CSI 300 Index, which has extended its loss this month to almost 8% — among the worst performances in equity markets globally.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.