Weekly Market Commentary

April 10, 2023

The Markets

Ambiguous images.

Some illustrations are optical illusions. When two people view the picture, they may see completely different images. A good example is Rubin’s Vase. One viewer may see a vase, while another sees two faces.

Current economic conditions can be interpreted in different ways, too. Recent economic data and a possible credit crunch, resulting from upheaval in the banking sector, suggest growth is slowing. After viewing the data, some say we’re heading for a soft landing, and others say a recession is coming. Here is the recent data:

• Consumer spending. This is the main driver of economic growth in the United States. While Americans are still buying, the pace of spending slowed in February, according to a late-March report from the Bureau of Economic Analysis. Less spending means lower demand for goods and services – and that effects production.

• Production of goods and services. Last week, the Institute for Supply Management reported that activity in the manufacturing sector – automakers, food producers, pharmaceutical companies and other companies that make products – shrank for the fifth consecutive month. Activity in the services sector – airlines, banks, building maintenance and other companies that provide services – continued to expand but at a slower pace.

• Employment. The employment report indicated the labor market in the U.S. remained resilient and jobs growth was solid in March. It’s notable that there were fewer job openings and more Americans returned to the workforce. The unemployment rate remained steady at 3.5 percent. In addition, average hourly earnings edged higher, according to the U.S. Bureau of Labor Statistics.

Randall Forsyth of Barron’s reported, “The solid employment report for March further raises the odds that the U.S. economy is headed for a proverbial soft landing.” Not everyone agrees.

Economist and former Treasury Secretary Lawrence Summers gives more weight to manufacturing and services data than employment data. He also pointed to the Dallas Federal Reserve’s Banking Conditions Survey, which showed lending volumes declined sharply in March. Summers told Bloomberg’s Wall Street Week with David Westin:

“Employment and unemployment are lagging indicators of what’s happening in the real economy…There is some substantial amount of constriction in credit. If you looked at the forward-looking numbers this week from the PMI surveys, those numbers were quite weak…Recession probabilities are going up at this point. The Fed has a very, very difficult decision ahead of it.”

Major U.S. stock indices finished the week with mixed results, reported Carleton English of Barron’s. In the Treasury market, yields on many shorter-maturity increased, while yields on longer-maturities fell. 

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.

INVESTORS VS. THE FEDERAL RESERVE. In the 1970s, Martin Zweig cautioned investors: Don’t fight the Fed. He believed there was a correlation between Federal Reserve monetary policy and the direction of stock markets, reported Steve Sosnick of Barron’s. Here’s generally how it worked:

• The Fed makes more money available – pursuing loose or expansionary monetary policy – during economic downturns or recessions. It adjusts the money supply by moving the federal funds rate lower so companies can borrow inexpensively and hire workers. In turn, workers spend more, and the economy grows. Stock markets tend to rise when the Fed is pursuing loose monetary policy.

• The Fed makes less money available – pursuing tight or restrictive monetary policy – during periods when the economy is overheating, and inflation swings higher. It adjusts the money supply by moving the federal funds rate higher, making borrowing more expensive for companies, which can lead to layoffs. Workers have less to spend, and the economy slows or enters a recession. Stock markets tend to fall when the Fed is pursuing tight monetary policy.

Ultimately, Zweig’s advice meant that investors should be more aggressive when the Fed was pursuing loose monetary policy, and more conservative when it was pursuing tight monetary policy. Will Daniel of Fortune reported:

“Investors understood this dynamic during the recovery from the bursting of the U.S. housing bubble, buying stocks in droves while the Fed held interest rates near zero…The central bank’s loose policies helped bring about the second longest bull market in the S&P 500’s history, between Mar. 9, 2009, and the COVID-19–induced bear market of 2020…”

Today, the Federal Reserve is pursuing tight monetary policy, and has indicated that lower rates are not on the table for 2023. Investors seem to think otherwise, though. The Fed raised the federal funds rate in March, but not all Treasury yields followed suit. Yields on longer-dated Treasuries moved lower, suggesting investors think rate cuts are ahead.

Who’s right? Stay tuned. (And remember that many factors influence financial market performance. Fed policy is just one of them.)

Weekly Focus – Think About It

“One of my fondest sayings is fail, fast, forward. Recognize you’ve failed, try to do it fast, learn from it, build on it, and move forward. Embrace failure, have it be part of your persona.”

—Carol Bartz, former CEO and president

Weekly Market Commentary

April 03, 2023

The Markets

Perhaps we should call this a pushmi-pullyu market.

The first quarter of 2023 brought Dr. Dolittle’s pushmi-pullyu – the rarest animal of all – to mind. It is the offspring of goat-antelopes and unicorns, and has a head at each end of its body. The pushmi-pullyu’s unusual anatomy allows it to easily and rapidly change direction, making it difficult to catch.

So far this year, the direction of the economy and financial markets has been elusive, too.

Is inflation headed in the right direction? Inflation changed course late in 2022. The monthly change in the rate of inflation, as measured by the PCE Core Price Index (one of the Federal Reserve’s preferred inflation gauges) accelerated late in 2022 and continued to move higher in January 2023. Then, it slowed in February, creating uncertainty about the state of inflation.

The latest University of Michigan Consumer Sentiment Survey indicated that Americans expect inflation to fall over the coming year and over the longer term. That’s important because there is a psychological aspect to inflation. When people expect inflation to rise, they spend more, which can push inflation higher.

If inflation is trending lower, then it gives weight to the opinion of investors who are optimistic the Fed will reverse course this year.

Will rate hikes continue or pause? Amid persistent inflation, the Federal Reserve delivered the message that rates might go higher than expected and stay there longer than expected. Then three banks failed, and speculation that the Fed would slow the pace of rate increases began. “The challenge for the Fed is figuring out how to buttress banks and cool inflation at the same time, without triggering a recession,” reported Megan Cassella of Barron’s.

The Fed raised rates in March, despite turmoil in the banking sector. Treasury yields fell across much of the yield curve following the rate hike. Yields moved higher last week, which suggests that bond investors may anticipate further rate hikes.

While many investors appear to be optimistic that the Fed will take a breather on rate hikes, Fed projections suggest it will continue to raise rates in 2023, although it may ease in 2024.

Are we headed for a recession? It’s a question that economists and analysts have been trying to answer for more than a year as central banks in the U.S., Europe, and elsewhere raised rates aggressively. Last week, Bloomberg’s survey of economists found the probability of a recession over the next 12 months was 65 percent, up from 60 percent in February.

“After the Fed last week raised rates a quarter percentage point to the highest since 2007, economists worry not only about the impact on demand but the effect on the banking system…Financial institutions risk becoming more guarded in their lending approach, restricting access to capital needed by businesses to expand and consumers to buy homes, cars and other big-ticket items,” reported Augusta Saraiva and Kyungjin Yoo of Bloomberg.

While the odds of recession crept higher last week, not everyone agrees that a recession is ahead.

Is the economy weakening or strengthening? We’ve seen strong jobs growth, yet the unemployment rate has risen as labor force participation increased. In addition, business activity was up sharply in March 2023.

“U.S. companies signaled a renewed expansion in business activity in March...Output grew at a solid pace that was the fastest since May 2022 as demand conditions improved and new order growth returned. Manufacturers and service providers alike registered upturns in output, with service sector firms driving the increase,” reported the S&P Global Flash US Composite PMI™ report.

The economic tea leaves have not provided a definitive answer about the strength and direction of the economy.

Despite all of the uncertainty, stock investors were optimistic last week, and major U.S. stock indices rose, reported Nicholas Jasinski of Barron’s. The Treasury market headed in the other direction as rates across most maturities of Treasuries rose and bond prices fell.

In a pushmi-pullyu market, it’s important to stay focused on your long-term financial goals. Basic principles of investing such as asset allocation, diversification and portfolio rebalancing remain sound. If you are feeling unsettled by market volatility, get in touch. We can review your goals and allocations to make sure they’re aligned.

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.

IF YOU’RE WONDERING ABOUT TAXES AND RETIREMENT… Tax Day is almost here – it’s April 18 this year. If you’re retired or planning for retirement, it’s important to know that some states are more tax-friendly for retirees than others. Typically, in tax-friendly states, Social Security benefits are exempt from state tax and pension payments and/or IRA withdrawals may receive more favorable state tax treatment, reported David Muhlbaum and Rocky Mengle of Kiplinger.

“Our results are based on the estimated state and local tax burden in each state for two hypothetical retired couples with a mixture of income from wages, Social Security, traditional IRAs, Roth IRAs, private pensions, 401(k) plans, interest, dividends, and capital gains. One couple had $50,000 in total income and a $250,000 home, while the other had $100,000 in income and a $350,000 home.”

The most tax-friendly states were:

1.   Delaware

2.   Hawaii

3.   Colorado

4.   Wyoming

5.   Nevada

The least tax-friendly were:

1.   New Jersey

2.   Illinois

3.   Kansas

4.   Vermont

5.   Connecticut

When you’re deciding where to settle in retirement, there’s a lot more to consider than taxes. Family, friends, cost of living and weather also are key considerations. Weather is becoming more important as the number and intensity of natural disasters has been increasing, raising the cost of insurance significantly in some places, reported Kate Dore of CNBC.

Weekly Focus – Think About It

“Il n'est pas certain que tout soit incertain.” (It is not certain that everything is uncertain.)

—Blaise Pascal, mathematician and philosopher

Weekly Market Commentary

March 27, 2023

The Markets

What’s your jam?

When you think of fun, are you running an Arctic marathon? Biking to your favorite burger place? Gaming with friends online? Each has inherent risk: Polar bears and hypothermia, traffic and flat tires, and viruses and identity theft. Those who enjoy these activities, understand the possible risks and manage them.  

Investing is similar. Investors are willing to take on risk to achieve their long-term financial goals, but not everyone manages it in the same way. Some people are willing to embrace risk, and others prefer a less adventurous option. While it’s not possible to completely eliminate the risks associated with investing, it is possible to manage investment risk with asset allocation, diversification, and other strategies.

Last week, investors responded to the uncertainty created by bank closures in a variety of ways. Some sold assets they felt had too much risk for the current market environment, opting for sectors and industries that have historically shown resilience during economic slowdowns. Others snapped up investments at discounted prices, reported Ryan Ermey of CNBC. Some investors did nothing.

“The smartest thing to do when you have a lot of uncertainty is to sit back and gather information and do your analysis and not jump trying to make big changes,” stated a source cited by Lu Wang and Isabelle Lee of Bloomberg.

Uncertainty is likely to persist as economists and analysts assess how the American economy may be affected. “Banking panics aren’t something to be trifled with. As Fed Chairman Jerome Powell acknowledged on Wednesday, the latest one is sure to slow the economy…The problem, however, isn’t the possibility of more bank failures. It’s that banks are likely to curtail lending—lending they had already started to limit,” reported Ben Levisohn of Barron’s.

As bank lending tightens, economic growth in the United States will probably slow. When it becomes more difficult for households and businesses to get credit, consumer spending tends to fall. Since consumer spending is the primary driver of economic growth in the U.S., the economy is likely to be affected and we may enter a recession, reported Rich Miller of Bloomberg.

Major U.S. indices finished the week higher, while U.S. Treasury yields rose before retreating again.

If you are feeling unsettled by market volatility, get in touch. We can review your goals and allocations to make sure they’re aligned.

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.

IS THERE A NO-VENTING ZONE? When the dangers of secondhand smoke were confirmed, an early solution in many restaurants was the no-smoking section. Now, researchers report that emotions may be contagious. When an expressive friend, family member or stranger shows emotion, it can influence the mood of those around them.

In other words, exposure to positive emotions can invoke happiness and goodwill in others, while negative emotions may spread stress and anxiety.

“Over the past decade, we have learned how our brains are hardwired for emotional contagion. Emotions spread via a wireless network of mirror neurons, which are tiny parts of the brain that allow us to empathize with others and understand what they’re feeling…if someone in your visual field is anxious and highly expressive — either verbally or non-verbally — there’s a high likelihood you’ll experience those emotions as well, negatively impacting your brain’s performance,” wrote Shawn Achor and Michelle Gielan in the Harvard Business Review.

Here's an interesting sidenote: stress can spread by scent, too.

No matter how stress is triggered, there are actions you can take to keep from being overwhelmed by secondhand stress and anxiety. These include:

·        Identifying three things you are grateful for,

·        Writing a brief email praising someone else,

·        Discussing or writing about a positive experience,

·        Exercising for half an hour, or

·        Meditating for a few minutes.

The research has important implications for the workplace and the home.

Weekly Focus – Think About It

“For every minute you are angry you lose sixty seconds of happiness.”

—Ralph Waldo Emerson, Philosopher

Weekly Market Commentary

March 20, 2023

The Markets

Unknowns and uncertainty.

Financial markets were volatile last week as investors parsed the risks around bank closures, central banks offered additional protections for depositors, and regulators took a harder look at bank balance sheets.

“For much of last year, volatility was elevated, but the risks were somewhat ‘known’ (chiefly inflation and recession)…Now, the introduction of the banking crisis has created a new unknown, which could ultimately mean a sharper increase in volatility (if worse than expected) or a quick reprieve (if fears prove unfounded),” opined a source cited by Nicholas Jasinski of Barron’s.

Unknown risks create uncertainty, and you know what they say about markets and uncertainty.

Yields on Treasuries dropped sharply as investors sought opportunities they perceived to be safe, reported Lawrence C. Strauss of Barron’s. The yield on the two-year U.S. Treasury dropped from 4.6 percent to 3.8 percent, and the yield on the 30-year U.S. Treasury fell from 3.7 percent to 3.6 percent.

While Treasuries are considered to be quite safe, one lesson from recent events is that there are circumstances in which even safe-haven investments may produce a loss. For example, in general, bonds expose investors to interest-rate risk. When interest rates rise, the value of bonds falls. If a bondholder must sell a bond before it matures, the seller may realize a loss.

In stock markets, bearish sentiment was high. Almost half (48.4 percent) of participants in the AAII Survey of Investor Sentiment were bearish. That’s well above the historic average of 31.0 percent.

In contrast, just about one-fifth (19.2 percent) were bullish. That’s well below the historic average, which is 37.5 percent. The Survey of Investor Sentiment is widely considered to be a contrarian indicator and, in general, the market moves in opposition to contrarian indicators.

Despite investor pessimism, the Standard & Poor’s 500 Index and Nasdaq Composite finished the week higher, while the Dow Jones Industrial Average finished slightly lower.

Markets are likely to remain volatile this week. If you find yourself wondering how short-term market fluctuations may affect your long-term financial goals, get in touch. We’re happy to talk about any concerns. 

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.

IS MY MONEY SAFE? The run on a California bank brought the Bailey Brothers Building and Loan to mind. If you’re a fan of It’s A Wonderful Life, you probably remember the scene where George and Mary Bailey distribute their honeymoon savings to make sure the Building and Loan remains solvent. George explains to the townspeople:

“You're thinking of this place all wrong. As if I had the money back in a safe. The, the money's not here.

Well, your money's in Joe's house...that's right next to yours. And in the Kennedy House, and Mrs. Macklin's house, and, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can.”

While banking is not that simple or straightforward, programs are in place to protect depositors.

For example, the Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 in qualifying accounts at FDIC-insured banks per depositor. If you have accounts at multiple FDIC-insured banks, each account may be insured up to the maximum. (In many cases, depending on how various accounts are titled, more than $250,000 may be insured at a single FDIC-insured institution.)

Last week, the Treasury Department, the Federal Reserve, and the FDIC augmented FDIC protections by introducing the Bank Term Funding Program (BTFP). The program offers one-year loans to banks, savings associations, credit unions, and other eligible depository institutions.

Participants in the program, “can pledge their assets such as bonds and mortgage-backed securities at par, or the value at which they were originally issued, instead of market value, giving banks a greater borrowing capacity since bond prices have fallen” reported Karishma Vanjani of Barron’s. The measure makes it possible for banks to avoid selling long-dated bonds at a loss when depositors withdraw money.

Federal Reserve officials indicated the BTFP provides enough financial support to protect all of the deposits in the United States, reported Craig Torres and Christopher Condon of Bloomberg.

Weekly Focus – Think About It

“The intelligent investor is a realist who sells to optimists and buys from pessimists.”

—Benjamin Graham, father of value investing

Weekly Market Commentary

March 13, 2023

The Markets

Thrown for a loop.

Early last week, Federal Reserve Chair Jerome Powell told Congress the Fed is committed to bringing inflation down to 2 percent. If economic data continues to come in hot, he said, then it’s likely the Fed will raise rates higher than expected and keep them higher for longer.

Economist Lawrence Summers estimates there is 50 percent chance that the Federal funds rate will be 6 percent or higher before the Fed will reach its inflation target, reported Chris Anstey of Bloomberg. Currently, the effective Fed funds rate is 4.57 percent.

A similar statement made by another Fed official the previous week caused United States Treasury yields to rise in anticipation of rate increases and had little effect on the stock market. After Powell’s comments last week, the stock market headed lower.

As investors considered the Fed’s higher-for-longer stance, news broke that a publicly traded bank had been put into receivership by the FDIC. The bank was not huge, but it was a major lender for technology start-ups. Here’s what happened:

Technology companies began to withdraw money from their accounts at the bank to fund operations. This was necessary because rapidly rising rates have made borrowing more expensive and venture capital is more difficult to attract. In turn, the bank liquidated some of its Treasury portfolio at a loss to cover the withdrawals. When the sale and loss was announced, there was a run on the bank as some large venture capitalists and start-up technology firms withdrew their money, reported Low De Wei and Priscila Azevedo Rocha of Bloomberg.

The bank’s closure had a ripple effect, and the value of many bank stocks fell sharply in the United States and overseas. “At first glance, this does not look like a systemic issue. Markets are very sensitive to bad news from the banking sector and worries about it are never good. That being said, one must be very vigilant about any kind of domino effect…,” the head of capital markets strategy at a global asset manager told reporters at Bloomberg.

As some speculated that events in the banking industry might cause the Fed to slow the pace of rate hikes, Friday’s employment report was released. The number of jobs created exceeded expectations again. Molly Smith of Bloomberg reported:

“The U.S. labor market continued to surprise with another month of robust job creation in February. But under the surface, the details were a bit more mixed. The good news is that more people joined the workforce, including women and minorities, and wage growth for many workers actually accelerated. On the other hand, job gains were concentrated in just a few industries and the number of hours worked on average declined.”

Markets are likely to be volatile this week. Major U.S. stock indices finished last week lower. Treasury yields also moved lower, and the yield curve remained inverted.

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.

INSECT FARMING. At the intersection of environmental sustainability and food security, scientists are learning more about insects as a sustainable food source. Beetles, caterpillars, ants, bees, wasps, grasshoppers, locusts, crickets and other bugs are already staples in human diets in many parts of the world.

ScienceDirect recently shared a paper on the topic from Journal of Future Foods, which explained the basis for the research:

 “Compared to cattle raising, insects emit relatively few greenhouse gases and little ammonia and require significantly less land and water. The nutritional quality of edible insects appears to be equivalent and sometimes superior to that of foods derived from birds and mammals. Insect farming may offer a sustainable means of food production. Since edible insects are calorie dense and highly nutritious, their consumption has the potential to reduce famine worldwide. The presence of high-quality protein and various micronutrients as well as potential environmental and economic benefits render edible insects globally a major potential future food.”

The topic has created a bit of a kerfuffle in Poland, which (along with Norway) has helped fund research into the consumption of insects (entomophagy). One political party has accused the other of planning to force the Polish people to give up meat and eat worms, reported Alan Charlish and Anna Wlodarczak-Semczuk of Reuters.

If you’re ever ready to give bugs a try, recipes for Ginger Cricket Cookies (made with cricket flour), Spicy Critter Fritters, Wax Worm Tacos, gluten-free insect Macaroons, and more buggy treats are available online.

Weekly Focus – Think About It

“Your assumptions are your windows on the world. Scrub them off every once in a while or the light won't come in.”

 —Alan Alda, actor