Weekly Market Commentary

December 04, 2023

The Markets

We’re cycling along.

It’s easy to forget that economic activity tends to move in cycles. A full cycle, known as the business cycle, typically includes four stages:

·        Contraction occurs when economic growth slows as an economy produces fewer goods and services. Economic contractions often include recessions. As productivity contracts, it can negatively affect the profitability of companies, as well as the number of jobs available and the income security of workers. The United States economy contracted during the first two quarters of 2022.

·        Trough is the stage at which economic growth hits bottom for the cycle. It occurs before an expansion begins. The month following a trough is the first month of an expansion.  

·        Expansion occurs when an economy produces more goods and services. The United States economy has been expanding since mid-year 2022. Productivity, as measured by gross domestic product, grew 5.2 percent year-over-year in the third quarter of this year.

·        Peak is the stage at which economic growth reaches its highest point for the cycle, just before a contraction begins. The month following a peak is the first month of a contraction.  

“It might be tempting to think the stages of the business cycle are like the cycles on your dishwasher – regular cycles that occur in predictable patterns: The rinse cycle always begins after the wash cycle has completed, and each rinse always lasts the same length of time…But there is nothing ‘regular’ about the business cycle,” wrote Scott A. Wolla in the St. Louis Federal Reserve’s Page One Economics^® blog.

At the start of the fourth quarter, the United States was in the late cycle stage of expansion, according to Fidelity Insights. That doesn’t necessarily mean we’re heading into a contraction, though. Expansions usually end when the economy experiences a shock of some kind, reported Wolla.

“Economists suggest that shocks that cause recessions might include financial market disruptions, international disturbances, technology shocks, energy price shocks, and actions taken by monetary policymakers to restrain inflation.”

Major U.S. stock indices finished last week higher, reported Barron’s, and U.S. Treasury yields moved lower as investors embraced the idea that rate cuts may be ahead in 2024.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. 

Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

THE WORD OF THE YEAR IS HERE! Last week, the Merriam Webster Dictionary unveiled its 2023 Word of the Year, as well as other words that gained attention as the dictionary’s 2023 data was analyzed. Some of the words that stood out were:

·        Rizz was the most frequently looked up word after it was added to the dictionary in September. It’s slang that describes someone’s ability to flirt with, or charm, a person they are romantically interested in. Rizz can be a noun or a verb, and it might be derived from “charisma.”

·        Deepfake also gained interest from the public in 2023. A deepfake is “an image or recording that has been convincingly altered and manipulated to misrepresent someone as doing or saying something that was not actually done or said,” explained Merriam Webster.

·        EGOT came to the fore after Viola Davis won a Grammy for the audiobook of her memoir. EGOT describes a person who has won an Emmy, a Grammy, an Oscar and a Tony. The word has been in the dictionary as a noun since 2019, although it may also become a verb after Davis exclaimed, “I just EGOT!”

·        Doppelgänger, which means two people who look extremely similar, gained notoriety for several reasons in 2023. In one case, two minor league baseball players, who share the same name, also resemble each other. The pair are mistaken for one another so often, they took a DNA test to find out whether they’re related. They’re not. They’re just doppelgängers.

While all of these words gained attention in 2023, the editors at Merriam Webster chose authentic as the word of the year. “A high-volume lookup most years, authentic saw a substantial increase in 2023, driven by stories and conversations about AI, celebrity culture, identity, and social media. Authentic has a number of meanings including ‘not false or imitation,’ a synonym of real and actual; and also ‘true to one’s own personality, spirit, or character.’ Although clearly a desirable quality, authentic is hard to define and subject to debate – two reasons it sends many people to the dictionary.”

Weekly Focus – Think About It

“I would define, in brief, the poetry of words as The Rhythmical Creation of Beauty.”

—Edgar Allan Poe, author

Weekly Market Commentary

November 27, 2023

The Markets

In November, investors were more optimistic than consumers.

At the start of November, investors were decidedly bearish. During the week of November 1, the AAII Investor Sentiment Survey found that about 50 percent of respondents were pessimistic about the prospects for stocks over the next six months, and about 24 percent were bullish. The current historic averages are 31 percent bearish and 37.5 percent bullish. (The remainder are neutral.)

Many believe the survey is a contrarian indicator, meaning that stocks are likely to rise when investors are bearish and fall when investors are bullish. November offered some data to support the theory as United States stocks trended higher during the month.

As stock markets gained, participants in the AAII survey became more bullish. The Thanksgiving week survey found that more than 45 percent of respondents were feeling bullish, and as we already mentioned, just 24 percent were feeling bearish. Quite a reversal from four weeks earlier.

Consumers were considerably less optimistic. While sentiment improved from last year, it dropped almost 4 percent from October to November, according to the University of Michigan Consumer Sentiment Survey. It was the fourth consecutive month of declining sentiment.

“November’s reading reflects a balance of factors, some of which improved while others worsened. More-favorable current assessments and expectations of personal finances were offset by a notable deterioration in expected business conditions…Younger and middle-aged consumers exhibited strong declines in economic attitudes this month, while sentiment of those age 55 and older improved from October,” wrote Surveys of Consumers Director Joanne Hsu.

The survey found consumers expect inflation to average 4.5 percent over the next 12 months, and 3.2 percent over the longer term even though inflation has slowed significantly and was just 3.2 percent over the last 12 months. Despite recent declines, consumers are worried inflation could change course.

Stocks moved higher last week as many investors remained confident the Federal Reserve was done raising rates. Some anticipate rate cuts early next year, reported Barron’s. Bond markets weren’t so sure, though, and U.S. Treasury yields moved broadly higher during the week.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. 

Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

DRIP. DRIP. DRIP. As inflation recedes, fees and charges may continue to affect the cost of some goods and services. Last summer, NPR’s Stacey Vanek Smith reported on the phenomenon after having lunch delivered.

“I decided to splurge and order a burger and fries for delivery. Subtotal for my meal? $14.07. A little pricey, but it’s a good burger and $14 seemed like a totally acceptable price for dinner, especially when it's delivered to my door. Then came the fees: Delivery fee: $5.49; Service fee: $3; Tip: $4; Tax: $1.25. Grand total for my delivery burger: $27.81. My lazy Monday went from costing me $14 to almost $30. The price had doubled. What was going on?”

The answer is drip pricing. It happens when the price of a good or service is broken into multiple components that the buyer becomes aware of as the purchase proceeds, according to an article published by Alexander Rasch, Miriam Thöne and Tobias Wenzel in the Journal of Economic Behavior and Organization. 

Many industries employ this pricing strategy. For example, travelers may purchase airline tickets by choosing the lowest base price and then find themselves paying additional fees to check bags, select desirable seats or sit in seats adjacent to younger family members.

One luxury automobile company added a new twist to car buying. It asked buyers in the United Kingdom, Germany, New Zealand and South Africa to pay a subscription fee to activate its factory-installed seat warmers. The automaker eventually abandoned the subscription, but it plans to expand pay-on-demand services. In an interview with James Attwood of Autocar, a company board member explained:

“We actually are now focusing with those ‘functions on demand’ on software and service-related products, like driving assistance and parking assistance, which you can add later after purchasing the car, or for certain functions that require data transmission that customers are used to paying for in other areas.”

Inflation and rising prices are critical aspects of retirement planning. If you would like to talk about how inflation may affect your savings and investments over time, please get in touch.

Weekly Focus – Think About It

“It isn't what we don’t know that gives us trouble, it’s what we know that ain’t so.”

—Will Rogers, comedian

Weekly Market Commentary

November 20, 2023

The Markets

Is it done? (We’re not talking about the turkey.)

Last week, investors enthusiastically embraced the idea that the Federal Reserve (Fed) could be done raising rates – and that it might even begin to lower them. As conviction about the possibility of rate cuts increased, stock and bond markets rallied, reported Koh Gui Qing and Dhara Ranasinghe of Reuters.

The catalyst was easing inflation.

Last week, the Consumer Price Index indicated that inflation in the United States was flat from September to October, and 3.2 percent for the preceding 12-month period. Core inflation, which excludes volatile food and energy prices, also slowed, up 0.2 percent month-to-month and 4 percent year-over-year.

The change in headline inflation was largely due to lower energy prices, which were down 2.5 percent in October and down 4.5 percent for the preceding 12-month period. In addition, the prices of gasoline and fuel oil dropped. The cost of shelter also grew more slowly – up 0.3 percent in October compared to up 0.6 percent in September – but it was 6.7 percent higher year-over-year.

There were other signs the U.S. economy may be softening, too. Earlier in the month, the October employment report saw the unemployment rate rise and hiring slow. Last week, the number of people filing unemployment claims increased more than expected, and continuing claims rose to the highest level since 2021, according to Angela Palumbo of Barron’s.

The market rallies lost some steam after Boston Fed President Susan Collins indicated she wasn’t yet ready to call the inflation fight by ruling out additional rate increases, reported Reuters. It was an important reminder. While a slower pace of overall price increases is great news, inflation remains well above the Fed’s two percent target.

Last week, major U.S. stock indices moved higher with the Standard & Poor’s 500 Index gaining 2.2 percent, the Dow Jones Industrial Average advancing 1.9 percent, and the Nasdaq Composite up 2.4 percent, according to Jacob Sonenshine of Barron’s. Treasury yields moved lower across all maturities.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. 

Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

WHAT IS THE LONG-TERM AVERAGE ANNUAL RETURN FOR U.S. STOCKS? Theodore Roosevelt is credited with saying, “The more you know about the past, the better prepared you are for the future.” That’s often true when it comes to investing. Investors who have a longer-term perspective on financial markets tend to be less likely to make impulsive decisions that are driven by short-term market volatility and could negatively affect longer-term performance.

Here’s an interesting piece of investment trivia from the Credit Suisse Global Investment Returns Yearbook 2023 (2023 Yearbook).

·        In 1899, the United Kingdom’s stock market was the largest in the world.* It comprised about 24 percent of world capitalization. The next largest markets were the United States (15 percent), Germany (13 percent), France (11 percent), Russia (6 percent), and Austria (5 percent).

·        By 2023, the United States boasted the world’s largest stock market with about 58 percent of world capitalization. The next largest markets were Japan (6 percent), the U.K. (4 percent), China (4 percent), France (3 percent), and Canada (3 percent).

Market data is valuable because it can help investors understand what has happened in the past and use the knowledge to set realistic expectations for the future. What is your estimate for the long-term average annual return of U.S. stocks?

The 2023 Yearbook provided us with the data. From 1900 through the end of 2022, the average annual return for U.S. stocks before inflation was 9.5 percent. After adjusting for inflation, U.S. stocks returned about 6.4 percent per year. The inflation-adjusted return for stocks outside the United States was 4.3 percent in U.S.-dollar terms.

Over the same period, from 1900 through 2022, U.S. bonds returned 4.7 percent per year before inflation, on average, and 1.7 percent per year after inflation, on average. Bills, which are very short-term investments, had an average annual return of 3.4 percent before inflation and 0.4 percent after inflation.

Over the long term, “[Stocks] were the best-performing asset class everywhere. Furthermore, bonds outperformed bills in every country except Portugal. This overall pattern, of [stocks] outperforming bonds and bonds beating bills, is what we would expect over the long haul since [stocks] are riskier than bonds, while bonds are riskier than cash,” reported Elroy Dimson, Paul Marsh and Mike Staunton who authored the 2023 Yearbook.

*Size was determined using the free-float market capitalizations of the countries in the FTSE All-World index.

Weekly Focus – Think About It

“Although it's easy to forget sometimes, a share is not a lottery ticket...it's part-ownership of a business.”

—Peter Lynch, asset manager

Weekly Market Commentary

November 06, 2023

The Markets

Will there be a year-end rally?

Last week, there was a lot of speculation about whether the United States will see a year-end stock market rally. Some say yes, and some say no.

For example, at Bank of America, “Chief investment strategist Michael Hartnett broke from his usual bearish view to say technicals no longer stand in the way of a year-end rally for the S&P 500 Index. Savita Subramanian, head of U.S. equity and quantitative strategy and an optimist on stocks this year…[said] a contrarian indicator from the bank is also close to offering a buy signal…,” reported Alexandra Semenova and Farah Elbahrawy of Bloomberg.

In contrast, Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson thinks a fourth-quarter rally is unlikely. One bearish sign is that some higher-quality mega-cap growth stocks traded lower even after reporting strong earnings. In addition, “given the significant weaknesses already apparent in the average company earnings and the average household finances, we think it will be very difficult for these mega-cap companies to avoid these headwinds too...Finally, with interest rates so much higher than almost anyone predicted six months ago, the market is starting to call into question the big valuations at which these large cap winners trade.”

The bottom line is no one knows with any certainty what the future will bring.

Instead of trying to predict market lows and highs, we help investors manage risk by building well-allocated and diversified portfolios that are designed to help them meet their financial goals. These portfolios typically include a mix of stocks, bonds and other assets. By holding a variety of assets that respond differently to market conditions, investment portfolios may provide more consistent and less volatile returns over time. It’s important to remember, though, that while diversification is a valuable tool, it does not ensure a profit or prevent a loss. 

After three months of weakness, investors cheered last week’s gains in U.S. stock and bond markets. Major U.S. stock indices moved higher over the week, and yields on U.S. Treasuries moved lower.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. 

Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

PREDICTIONS VS. REALITY. It is notoriously difficult to predict the future, but that doesn’t stop people from trying. In 1904, a banker advised Horace Rackham not to invest in the new Ford Motor Company because, “The horse is here to stay, but the automobile is only a novelty — a fad.” Fortunately for Rackham, he was persuaded otherwise.

In 1950, the New York Time’s science reporter predicted a revolution in house cleaning by 2000. Since everything in a home would be made of synthetic fibers, cleaning would require a hose, some detergent, and a few well-placed drains. While many things in homes are made of synthetic materials, hosing down the interior is not a practical method for cleaning.

One problem with predicting the future is that forecasts are based on current knowledge – and unexpected things happen all the time. For example, during the past three years, we’ve experienced a few unexpected events:

·        A pandemic that caused economies to lockdown around the world,

·        A war in Ukraine that caused a sharp increase in energy prices,

·        Aggressive central bank tightening in many countries,

·        A war in Israel that could expand into the Middle East, and

·        Harry Styles on the cover of Better Homes & Gardens.

To get an idea of how difficult forecasting is, let’s step back in time to 2020. In January 2020, the Congressional Budget Office (CBO) released The Budget and Economic Outlook: 2020 to 2030. The CBO forecast the U.S. economy would grow 2.2 percent in 2020, and unemployment would be 3.5 percent. Then the COVID-19 pandemic arrived, and the economy went on lockdown. By the end of 2020, the economy had shrunk by 2.2 percent, and unemployment had risen to 8.1 percent.

CBO Projections vs. Reality

Notes: The table includes the latest data available for 2023. Inflation shows the 12 months through December for 2020 and through September for 2023. Unemployment shows data for December 2020 and October 2023. The 2020 10-year U.S. Treasury rate is as of December 31, 2020. The 2023 10-year U.S. Treasury rate is as of November 3, 2023.

Forecasting proved to be challenging in 2023, too, as the table shows. At the start of the year, the CBO expected economic growth to be very weak (0.3 percent), following aggressive Federal Reserve rate hikes. Instead, as the table shows, economic growth exceeded expectations largely because of strong consumer spending. In addition, inflation and unemployment were lower than forecast and the 10-year Treasury rate was higher.

While many organizations, teams, and individuals try to predict the direction of markets and economies, it’s not an easy thing to do.

Weekly Focus – Think About It

"You can only predict things after they have happened.”

—Eugene Ionesco, playwright

Weekly Market Commentary

October 30, 2023

The Markets

The Mark Twain Effect?

Historically, economic theory was based on the idea that financial decisions were grounded in rational thought. In recent years, behavioral economists have recognized that people don’t always behave rationally. In fact, research has found that investors like shortcuts that help simplify decision-making. While rules of thumb can be helpful, it’s important to use common sense. Some investment theories are a bit wacky, such as:

• The Aspirin Indicator: This theory holds that there is an inverse correlation between aspirin production and stock market performance. When aspirin production is down, markets are up (fewer headaches). When production is up, stocks are down (more headaches).

• The Hemline Index: The idea behind this theory is that market rises and falls in line with skirt lengths. When skirts are shorter, the market rises. When hemlines move lower, the stock market does, too.

• The October Effect: This theory is that stock returns will be lower in October than in other months of the year. While there have been some impressive October stock market declines, the data doesn’t support the theory. Some believe the October Effect derives from a book written by Mark Twain. In The Tragedy of Pudd’nhead Wilson, Pudd’nhead cautions, “October. This is one of the peculiarly dangerous months to speculate stocks in.”

This year, U.S. stocks moved lower in October. Last week, the Standard & Poor’s 500 and Nasdaq 500 Composite Indices both entered correction territory, reported Connor Smith of Barron’s. A correction occurs when an Index (or stock) drops 10 percent to 20 percent from its previous high. In general, corrections are normal adjustments as stocks trend higher. On occasion, a correction can mark the start of a bear market, reported the Corporate Finance Institute.

No one likes to see a negative return on an account statement. Sometimes, when markets have moved lower, investors are tempted to make portfolio changes to minimize losses. This is rarely a good idea. Timing the market is exceptionally difficult. Missing just a few days of returns can dramatically affect long-term performance. A better choice is to have a well-diversified portfolio that is invested according to your long-term financial goals and then make changes when your goals change, or you experience a life transition.

Last week, major U.S. stock indices moved lower, and yields on most longer-term U.S. Treasuries finished the week lower.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. 

Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

THINGS PEOPLE DON’T LIKE – AND THINGS THEY DO. Many people have strong opinions, especially when it comes to what they like and don’t like. Research has found that preferences are affected by our experiences, genetics, environment, family, friends and other factors, reported Ana Clemente in The Conversation. Some people, for example, have neophobia, an aversion to anything new or unfamiliar. Here are a few things that people have said they dislike, gathered from surveys and social media.

·        Driving at night or in bad weather.

·        Redoing a home repair because it was done poorly the first time.

·        Making multiple trips to the hardware store for the same project.

·        Working from 9 to 5 (commenters preferred a flexible schedule).

·        Waiting in line.

·        Rising prices, aka inflation.

·        Oversharing on social media.

·        Taking surveys.

·        Worrying about income after retirement.

Sometimes, an unexpected event can spark delight and change your outlook. A snack company in the United Kingdom asked people the kinds of spontaneous surprises that improve their mood during the day or week. Here are some of the moments survey respondents enjoyed.

• Finding forgotten cash in the pocket of a jacket.
• Receiving a compliment from a stranger.
• Having someone let them go first at a store checkout.
• Hearing a favorite song on the radio.
• Being recognized with a bonus at work.
• Hitting all green lights as they drive along the road.
• Getting a whiff of a favorite scent from childhood.
• Having a loved one say they’re proud of you.
• Doing something nice for someone else.

Many respondents said spur-of-the-moment events brought joy, or restored their faith in humanity, about twice a week on average, reported The Good News Network.

What brings delight to your life?

Weekly Focus – Think About It

"But we overlay the present onto the past. We look back through the lens of what we know now, so we’re not seeing it as the people we were, we’re seeing it as the people we are, and that means the past has been radically altered.”

—Ann Patchett, author (Dutch House)