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Weekly Market Commentary August 7, 2023

Weekly Market Commentary

August 07, 2023

 

The Markets

 

An unwelcome surprise.

 

Last week, Fitch Ratings startled markets by lowering the credit rating of United States Treasuries from AAA to AA+. It was the second rating agency to downgrade U.S. Treasuries; Standard & Poor’s cut its rating to AA+ in 2011, reported Benjamin Purvis and Simon Kennedy of Bloomberg.

 

The decision to lower the rating was not a comment on the strength of the U.S. economy, which expanded faster than expected in the second quarter on the strength of business investment in equipment, particularly transportation equipment, reported Erik Lundh of The Conference Board. 

 

While many were baffled by the decision, as well as its timing, Fitch had warned it was considering a rating downgrade in May when lawmakers were haggling over the debt ceiling while the possibility of default loomed, reported of Bloomberg.

 

Last week, Fitch Senior Director Richard Francis told Davide Barbuscia of Reuters, “Fitch downgraded the U.S. credit rating due to fiscal concerns, a deterioration in U.S governance, as well as political polarization reflected partly by the Jan. 6 insurrection.”

 

There are now 10 countries with government bonds that are rated AAA by at least two rating agencies: Germany, Denmark, Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore, Australia, and Canada, reported Tania Chen of Bloomberg.

 

Markets did not take the downgrade well. Stocks sold off and Treasury rates rose mid-week. Jacob Sonenshine of Barron’s reported:

 

“Of course, the [stock] market always needs a reason to fall, and this past week it found one in surging Treasury yields. It’s hard to tell exactly what made them pop. Though some blamed Fitch’s downgrade of the U.S. credit rating to AA+ from AAA, it’s more likely a combination of massive issuance—the Treasury said it plans to issue more debt than had been expected—and solid economic data that forced market participants to reconsider their growth targets. Higher yields make stocks worth less, all else being equal.”

 

Markets briefly reversed course later in the week when the U.S. employment report showed jobs growth easing. Overall, employment data supported the idea that a recession may be avoided. The number of new jobs created remained above the pre-pandemic monthly average, and average hourly earnings were up 4.4 percent year-over-year, according to Barron’s Megan Leonhardt.

 

At the end of the week, major U.S. stock indices were lower, reported Barron’s. Yields on longer U.S. Treasuries rose more than yields on most shorter Treasuries, steepening the yield curve.

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 ARE BONDS? Bonds are loans that investors make to governments, companies and other entities. When an investor buys a bond, they agree to lend their money for a specific period of time. In return, the issuer of the bond agrees to pay interest and return the investors’ principal when the bond matures.

 

Bonds are a part of many investment portfolios because they:

 

1)   Offer a source of income, and

2)   Help manage overall portfolio risk.

 

Generally, bonds are thought to be safer than stocks; however, they are not risk-free. Bonds have interest rate risk, which means the value of a bond changes over time, depending on how attractive its interest rate is to investors. For example:

 

Bond values fall when rates rise. If interest rates move from 3 percent to 5 percent, and new investors will earn a 5 percent interest, then the value of bonds offering 3 percent are likely to drop. The opposite is also true.

Bond values rise when rates fall. If interest rates move from 5 percent to 3 percent, and new investors will earn a 3 percent rate of interest, the value of older bonds offering a 5 percent return are likely to increase.

 

The risk and reward profile of a specific bond depends on a variety of factors, including:

 

The length of time until the bond matures. When a bond “matures,” the issuer is expected to repay the money it borrowed. Maturities may range from one month to 30 years. Bonds with shorter maturities tend to pay less interest because the chance that interest rates will change significantly is lower.

 

The creditworthiness of the borrower. Creditworthiness reflects whether the borrower is expected to pay interest and return principal in a timely way. Independent rating agencies – Fitch, Standard & Poor’s and Moody’s – review the financial and credit histories of governments and companies that are issuing bonds, and then assign ratings. There are two broad rating categories:

 

·        Investment grade (AAA/highest quality, AA/high quality, A/strong quality and BBB/medium investment grade), and

·        Below-investment grade (BB/low investment grade, B/highly speculative, CCC/substantial risk, CC/high probability of default, C/default in process and D in default).

 

There are many nuances to bond investing. If you have questions, please get in touch.

 

Weekly Focus – Think About It

“There is nothing either good or bad but thinking makes it so.”

—William Shakespeare, playwright

 

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Weekly Market Commentary July 31, 2023

Weekly Market Commentary

July 31, 2023

 

The Markets

 

Central bank palooza!

 

While music lovers attended concerts and festivals across the United States, central banks had a lollapalooza of their own. The U.S. Federal Reserve (Fed) led things off last Wednesday, followed by the European Central Bank (ECB) on Thursday, and the Bank of Japan (BOJ) on Friday. Here’s what happened:

 

The Fed continued to play a familiar tune at July’s Federal Open Market Committee (FOMC) meeting, raising the effective federal funds rate from 5.08 percent to 5.33 percent. Fed Chair Jerome Powell stated, “Inflation remains well above our longer-run goal of 2 percent…Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.”

 

In addition to raising rates, the Fed is engaged in quantitative tightening (QT) – selling assets, or letting them mature, to reduce the Fed’s balance sheet. Like rate hikes, QT is intended to slow economic activity and the pace of inflation. Currently, the Fed is reducing its balance sheet by about $60 billion a month.

 

The ECB was singing the Fed’s tune. It lifted rates from 3.50 percent to 3.75 percent, reported CNBC. In the European Union, the inflation rate was 5.5 percent in June, down from a high of 8.6 percent last summer. Prices are rising at the slowest pace in Luxembourg (1.0 percent, annualized) and the fastest in Hungary (19.9 percent, annualized).

 

The BOJ sent a shiver through markets when it unexpectedly changed its yield curve policy, while leaving its short-term policy interest rate unchanged. For years, Japan’s central bank has kept rates very low to encourage spending and investment. The change in its policy caused yields to surge higher, reported Toru Fujioka, and Sumio Ito of Bloomberg.

 

The surprise move is important because, “Japanese investors have spent more than $3 trillion offshore in search of higher yields. Economists warn that even a small shift to policy normalization may prompt Japanese cash to flood out of global markets and back home,” reported Garfield Reynolds of Bloomberg,

 

The BOJ’s policy change wasn’t the only surprise last week. The U.S. economy also upended expectations as its growth accelerated in the second quarter. Gross domestic product (GDP), which is the value of all goods and services produced in the U.S., grew by 2.4 percent from April through June. That was well above both first quarter growth (2.0 percent) and economists’ expectations for second quarter growth (1.5 percent), reported Angela Palumbo of Barron’s. Economists who thought the July rate hike might be the Fed’s rate-hiking-cycle finale headed back to their spreadsheets to reassess the data.

 

Last week, major U.S. stock indices finished higher, reported Barron’s. Yields on short U.S. Treasuries finished the week above 5 percent and most longer maturity Treasuries offered yields above 4 percent. The exception was the benchmark 10-year U.S. Treasury.

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.

 

TRIVIAL SUPERPOWERS. Several publications, blogs and social media sites have asked people to share their trivial or useless superpowers. The editor of the Annals of Improbable Research, Marc Abrahams, defines this as, “the ability to reliably do some particular task that seems mundane to them, but that most people find impossible to do except once in a while by sheer luck.”

 

Here are a few of the responses readers shared with Abrahams and Marginal Revolution, which is the economics blog of George Mason University professors Tyler Cowen and Alex Tabarrok.

 

“I can recall being amazed to learn at age 7 that my father, a broadly competent outdoorsman, after only ten minutes of walking in a jungle in Mexico had gotten lost. I knew exactly which way our car was and led him back to it, coming out of the jungle onto the road about 20 feet from the car…Of course, GPS and smartphones have made this not very useful.”

 

“I usually can estimate pretty closely what time it is, which was fairly useless back when people wore watches and is almost totally useless in cellphone era.”

 

“…one of my Useless Super-Powers is the ability to pour nearly identical amounts of liquid without thought or effort. In practice, for example: if I’m pouring wine for four people, there is almost always no visible difference between the contents of the glasses.”

 

“[I have] the ability to reorganize fridges/freezers and always find more room for whatever needs fitting.”

 

“…had a friend who could recite back to you the letters of any word you supplied, but in alphabetical order, and instantly. We tried to stump him with crazy complex words, to no avail.”

 

“I can always tell if someone is lying just by looking at them…I can also tell, just by looking at them, if they are standing up.”

 

Some might say that investors’ ability to remain invested and focused on long-term goals in uncertain markets is a superpower. If you have questions about the market or your investments, please get in touch.

 

Weekly Focus – Think About It

“Having a superpower has nothing to do with the ability to fly or jump, or superhuman strength. The truest superpowers are the ones we all possess: willpower, integrity, and most importantly, courage.”

—Jason Reynolds, author

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Weekly Market Commentary July 24, 2023

Weekly Market Commentary

July 24, 2023

 

The Markets

 

Better than expected.

 

In January of this year, the Bloomberg’s MLIV Pulse survey collected and shared investors’ expectations for stock markets. Survey participants were generally a gloomy group. Seventy percent believed the United States stock market would move lower in 2023, and most indicated the drop would happen in the latter half of the year, according to Jess Menton and Liz Capo McCormick of Bloomberg. The pair reported:

 

“Stock bulls are solidly in the minority, with only 18% of survey participants saying they expect to increase their exposure to the S&P 500 in the next month. Over half say they will keep their exposure the same, while some 27% anticipate decreasing it.”

 

Recently, analysts have revised their estimates.

 

So far this year, the Standard & Poor’s 500 Index has rocketed past many analysts’ year-end estimates for the Standard & Poor’s (S&P) 500 Index, reported John Authers and Isabelle Lee of Bloomberg. It is so far ahead of projections that even analysts who remain bearish – and think the S&P 500 will drop before year end – recently adjusted their expectations, moving year-end targets for the index higher.

 

“New information has emerged over the last six months, and events have moved the market. They might well justify a higher year-end index value than seemed likely Jan. 1…To borrow the famous quote from Keynes, if the facts change then you should be prepared to change your opinion…But now the… market takes a role. Markets can create their own reality. As the index rises, and influential investment houses raise their targets for it, so that adds to the momentum upwards in the share price,” wrote Authers and Lee.

 

As analysts revise performance forecasts, economists are rethinking the likelihood of recession. With inflation falling and the economy showing continued strength, a July survey found that economists raised their estimates for economic growth in the U.S. during second and third quarters of this year. In addition, they see a lower chance of recession, 60 percent, over the next 12 months, according to Rich Miller, Molly Smith and Kyungjin Yoo of Bloomberg.

 

Last week, The Dow Jones Industrial Average and S&P 500 Index finished higher, according to Barron’s. The Nasdaq Composite lost ground after some technology companies reported disappointing earnings, reported Cecile Gutscher and Isabelle Lee of Bloomberg. Yields on many maturities of U.S. Treasuries finished the week flat or slightly higher.

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’S YOUR FAVORITE PODCAST? Since the early 2000s, podcasts – audio shows – have been growing in popularity. Today, there are about 5 million podcasts and 70 million podcast episodes, reported Daniel Ruby of Demand Sage.

 

Podcasts can be about almost anything. Some capture audiences by poking fun at terrible movies, inspiring with heart-warming (or heart-breaking) stories, and terrifying with tales of true crime or the paranormal. Others offer practical advice and how-to’s about things like dental practice management, sleeping more soundly, and parenting children of all ages.

 

In 2022, Pew Research reported the top-ranked podcasts focused on:

 

·        True crime (24 percent)

·        Diverse topics (20 percent)

·        Politics and government (10 percent)

·        Entertainment, pop culture and arts (9 percent)

·        Self-help and relationships (8 percent)

·        Sports (6 percent)

·        History (4 percent)

·        Money and finance (2 percent)

 

The shows can be influential. “Six-in-ten podcast listeners say they have watched a movie, read a book or listened to music because of a podcast they listened to...About a third of podcast listeners (36%) say they’ve tried out a change to their lifestyle because of a podcast, such as a workout routine, a diet or journaling. And 28% have bought something promoted or discussed on a podcast,” reported the research team at Pew.

 

If you have questions about money and finance, please get in touch. It’s a subject we know well!

 

Weekly Focus – Think About It

“There are years that ask questions and years that answer.”

—Zora Neale Hurston, author

 

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Weekly Market Commentary July 17, 2023

Weekly Market Commentary

July 17, 2023

 

The Markets

 

Disinflation was in the air!

 

To the great relief of the Federal Reserve, the American economy has been experiencing “disinflation,” which is a slowdown in the rate of inflation. For example, last week we learned that:

 

Inflation fell to a two year low in June. The Consumer Price Index (CPI) showed that prices rose just 3 percent from June 2022 through June 2023. That was lowest inflation has been in two years, reported Augusta Saraiva of Bloomberg.

 

Core inflation was lower, but not as low. The core CPI, which excludes volatile food and energy prices, also dropped to a two-year low, coming in at 4.8 percent. While inflation is still well above the Federal Reserve’s target rate of two percent, the slower rate of increases was welcome news for everyone who has been concerned about the effects of higher costs on their budgets.

 

Producer prices flattened. The Producer Price Index followed on the heels of the CPI. It showed that prices were almost flat for producers, rising just 0.1 percent over the 12 months through June 2023. Reade Pickert of Bloomberg reported, “Normalizing global supply chains, stabilizing commodity prices, and a broader shift in consumer demand toward services and away from goods have generally helped alleviate inflationary pressures at the producer level.”

 

Disinflation should not be confused with deflation, which happens when the inflation rate is negative, and prices fall. While deflation may sound attractive, it is usually associated with undesirable economic conditions, including recessions and stagnant growth, reported the Federal Reserve Bank of Richmond.

 

Last week, major U.S. stock indices finished higher, according to Barron’s. The Standard & Poor’s 500 and Nasdaq Composite Indexes hit new highs mid-week on positive inflation and earnings news. U.S. Treasuries rallied early and then changed direction with yields moving higher toward the end of the week, reported Rita Nazareth of Bloomberg.

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.

 

NEW FRONTIERS IN FUNGUS. Anyone who has watched The Last of Us, a series that features a fungus mutation that turns humans into zombies, may be interested to learn that scientists and engineers have been exploring and developing new ways to harness the power of fungi and bacteria. Here are some of the ideas they’re working on:

 

·        Knitted biostructures. Scientists, engineers and designers have been collaborating to develop bio-fabricated architecture – buildings made from the roots of fungus combined with wool, sawdust and other natural materials. The stumbling block was that fungus roots, a.k.a. mycelium, need a lot of oxygen to grow. The solution was textile knitting that allows a lot of oxygen into the frame, helping mycelium grow more quickly. The research team created a “prototype structure… a nearly six-foot-tall, freestanding three-dimensional dome constructed as a single piece without any joins,” reported Andrew Paul of Popular Science.

 

·        Mushroom-skin computer chips. Researchers think a biodegradable microchip composed of mushroom skin is a possibility. If they’re right, the development could “reduce electronic waste and cut greenhouse gas emissions from plastic,” reported Alan Truly of Digital Trends. Mushroom skin has also been used to print circuit boards. Fungi could play additional roles in the computers of the future.

 

·        SCOBY technology platforms. If you make kombucha, you may be familiar with SCOBY (a.k.a. Symbiotic Culture of Bacteria and Yeast). While it’s often called a mushroom, it’s not actually a fungus. It’s a cellulose mat that may be used as a kombucha starter. It is also being used as “a malleable surface on which to print simple circuit boards,” explained Andrew Paul of Popular Science. Augmented kombucha surfaces are nonconductive and may prove to be just right for wearable technology because the surfaces are cheaper, lighter, and more flexible than traditional plastic options.

 

Mushrooms may help make technology more eco-friendly.

 

Weekly Focus – Think About It

“Courage is like — it’s a habitus, a habit, a virtue: you get it by courageous acts. It’s like you learn to swim by swimming. You learn courage by couraging.”

—Marie M. Daly, chemist

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Weekly Market Commentary July 10, 2023

Weekly Market Commentary

July 10, 2023

 

The Markets

 

Markets are playing Federal Reserve (Fed) Clue.

 

Last week, investors parsed the monthly Employment Situation Summary from the Bureau of Labor Statistics for clues about whether the Fed will raise the federal funds rate at its next meeting or leave the rate unchanged, reported Megan Leonhardt of Barron’s. The Fed has been aggressively raising the rate to slow the pace of inflation. Higher rates typically lead to slower economic growth and fewer jobs, so the employment report offers some signals about the Fed’s progress so far and what may come next.

 

After perusing the report, investors appeared to agree the Fed was likely to continue raising the federal funds rate. Barron’s reported, “The labor market is still running more warm than cool—June’s jobs data is still well above the baseline standards of a tight labor market—and it builds the case for Fed officials to press the play button and again increase rates in July. On Friday, the likelihood that the Fed would raise rates during the upcoming July [meeting] stood at 94.9%, according to the CME FedWatch tool.”

 

Here are some of the report highlights:

 

Overall, the unemployment rate ticked lower (3.6 percent). Generally, low unemployment a sign of economic strength. The unemployment rate varied by race. It was 3.1 percent for the White population, 3.2 percent for the Asian population, 4.3 percent for the Hispanic/Latino population, and 6.0 percent for the Black population.

 

Fewer jobs were created in June (209,000) than in May (306,000). The slower pace of job creation is one sign the economy may be losing steam. It’s also possible the jobs numbers could prove to be less robust than the first estimate suggests. The preliminary employment numbers for April and May were revised lower in the June report.

 

Workers took home more pay. Average hourly earnings increased in June and were up 4.4 percent over the last 12 months. That means consumers had more money in their pockets to spend. Since consumer spending is the main driver of economic growth in the United States, this was probably not what the Fed wanted to see.

 

Last week, major U.S. stock indices finished lower, reported Barron’s Data. Yields on U.S. Treasuries finished the week higher.7

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.

 

IT’S OLD FASHIONED. From cuff-and-collar boxes to floppy disks, the accoutrements of “modern” life change over time. Gadgets and gizmos that were once essential become obsolete as fresh, and often more efficient, options gain a following. See what you know about the way life used to be by taking this quiz.

 

1.   Hand-cranked churns were an important tool in many households from the mid-1800s through the 1940s. What were they used for?

a.   Drying clothes

b.   Canning vegetables

c.    Producing butter

d.   Making wine

 

2.   At the time of the Civil War, what was the most common form of communication?

a.   Letters

b.   Gossip

c.    Newspapers

d.   Telegraph

 

3.   Patterns of holes in stiff paper proved to be quite valuable in various industries during the 1800s and 1900s. Some punched cards had the phrase “do not fold, spindle or mutilate” printed on them. What were punched cards used to do?

a.   Automate weaving

b.   Record and replay harmonium (pump organ) performances

c.    Process business and government data

d.   All of the above

 

4.   Before computers and smart phones became ubiquitous, people used rotating card files to organize contact information. What were these devices called?

a.   Spinfiles

b.   Rotarchives

c.    Rolodexes

d.   Spindexes

 

Bonus: The correct answer is a mashup of two words. What are they?

 

Weekly Focus – Think About It

“That men do not learn very much from the lessons of history is the most important of all the lessons of history.”

—Aldous Huxley, author

 

Answers: 1) c; 2) b; 3) d; 4) c; Bonus: Rolling and Index

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