Weekly Market Commentary

February 06, 2023

The Markets

What do Samuel Clemens (a.k.a. Mark Twain) and the current economic expansion have in common?

Author and humorist Twain was prematurely reported to be dead. It first happened in 1897. Twain was on a speaking tour in London when rumors that he had fallen ill and died began to circulate. Then, about a decade later, The New York Times reported that a yacht Twain was on had sunk.  

Ben Welter of the StarTribune wrote that Twain responded to the latter story by saying, “I sincerely hope that the report is not true and I suggest that all my friends suspend judgment until such time as I can ascertain the true state of affairs.”

There has been a lot of speculation about the death of the current economic expansion in the United States, too. The Federal Reserve has increased the federal funds rate at an unprecedented pace in 2022 to slow economic growth and price increases. Economists, business leaders, and even Fed officials have indicated that a recession – a period of economic contraction – may be ahead.

Last week’s economic data suggests that reports about the death of economic growth may have been exaggerated. The Bureau of Labor Statistics reported that more than 500,000 jobs were created in January – about twice as many as economists expected.

“Hiring topped all economist estimates, putting to rest any concerns that a manufacturing downturn and layoffs in the technology sector translate into weaker hiring across the country — at least for now. Payroll gains were broad-based, as factories, retailers and restaurants added jobs. Even construction increased employment amid a slump in housing. The robust demand for labor also pulled in traditionally sidelined workers, including Black Americans, whose jobless rate matched a historic low of 5.4% last month,” reported Augusta Saraiva and Katia Dmitrieva of Bloomberg.”

In addition, last week the International Monetary Fund raised its growth forecast for 2023. The global economy is expected to expand by 2.9 percent this year, largely due to resilient demand in the United States, falling energy costs in Europe, and the reopening of China’s economy.

While the outlook for the economy appears to have improved, the outlook for company earnings remains mixed. About half of the companies in the Standard & Poor’s 500 Index have reported fourth quarter results so far and earnings are down 5.3 percent, year-over-year. “Looking ahead, analysts expect earnings declines for the first half of 2023, but earnings growth for the second half of 2023,” reported John Butters of FactSet.

Major U.S. stock indices finished the week mixed. The S&P 500 and Nasdaq Composite Indexes moved higher, while the Dow Jones Industrial Average finished slightly lower, reported Nicholas Jasinski of Barron’s. Treasury yields moved lower for much of last week before bouncing higher after the strong jobs report.

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.

A NEW LAW MAY AFFECT YOUR RETIREMENT PLANS. Late last year, Congress passed the SECURE 2.0 Act into law. Many provisions of the new law are expected to help improve retirement readiness in the United States. For example, the law changes the rules that apply to required minimum distributions. Here are a few of the highlights:

·        Retirement savers can keep their savings invested longer. Many Americans save for retirement in employer-sponsored retirement plans, Roth and Traditional IRAs, and other tax-advantaged investment vehicles. The government requires participants to begin withdrawing money from these plans at a certain age. The new law raises the age for required minimum distributions (RMDs) from 72 to 73 in 2023 and to age 75 in 2033.

That may not seem like a big deal, but it could be. Hypothetically, a person with a million dollars saved for retirement could be required to withdraw about $36,500 in RMDs at age 72. In contrast, a person with a million dollars for retirement who didn’t have to take RMDs until age 75, could see the value of their savings increase by about $191,000 over three years, if they earned 6 percent a year, on average, and the interest compounded annually.

·        Roth accounts are exempt from RMDs. Many people choose to contribute to Roth accounts in their employer-sponsored retirement plans even though the contributions are taxable. They prefer Roth accounts because any distributions are tax-free. The new law says that, starting in 2024, Roth account owners will not have to take RMDs.

·        RMD penalty taxes have been reduced. When retirement plan accountholders fail to take full RMDs, they owe a tax penalty. In the past, the penalty was 50 percent on insufficient or late withdrawals. Now, the penalty will be 25 percent if the issue is not corrected quickly, and 10 percent if it is.

The new law includes dozens of provisions. If you would like to talk about how the changes may affect your retirement or estate plans, give us a call.

Weekly Focus – Think About It

“Live as if you were to die tomorrow. Learn as if you were to live forever.”

—Mahatma Gandhi, political and spiritual leader

Weekly Market Commentary

January 30, 2023

The Markets

The vicious cycle of inflation.

Last week, we learned that pay increases at central banks in many parts of the world won’t keep pace with inflation. As a result, their employees may not be able to maintain the standards of living they had before inflation began rising. For example, at the United States Federal Reserve (Fed) the maximum pay increase was 5.1 percent for 2022. That’s significantly below inflation which averaged 8 percent last year, reported Jana Randow and Enda Curran of Bloomberg.

It’s a similar story elsewhere in the world. Inflation in the Eurozone averaged 10.6 percent in 2022, yet the average salary increase at the European Central Bank (ECB) and Bank of France was 4.0 percent. Germany’s Bundesbank offered a 1.8 percent raise. In the United Kingdom, where inflation was 9.1 percent on average last year the Bank of England offered a 4.5 percent annual pay increase.

Central banks have a reason for not raising pay enough to cover price increases. It’s called the wage-price spiral. The Richmond Federal Reserve explained it like this:

“In a wage-price spiral, inflation is fed by a vicious cycle where, as the cost of living rises, workers demand higher wages to pay their bills, leading firms to increase prices even further to cover labor costs.”

Since central banks are trying to reduce inflation, they want to avoid a wage-price spiral. Consequently, giving employees raises that don’t keep pace with inflation means that central banks are practicing what they preach.

Understandably, central bank employees are not happy about it. In January, a spokesperson for the ECB’s trade union told Bloomberg’s Alexander Weber, “‘With inflation in Germany and the euro area likely around 8.5% this year, it means a substantial loss in purchasing power.’”

Last week, data suggested that central banks’ efforts to push inflation lower are working. The Bureau of Economic Analysis reported the Personal Consumption Expenditures Index, which is one of the Fed’s preferred measures for inflation, dropped from 5.5 percent in November 2022 to 5.0 percent in December. The core PCE index, which excludes food and energy prices, fell from 4.7 percent year-over-year to 4.4 percent over the same period.

Investors were enthusiastic about the progress on inflation and major U.S. stock indices finished the week higher. The yield on the one-year U.S. Treasury ended the week at 4.68 percent.

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.

OH, TO BE 18 FOREVER. You’re likely to live a lot longer than your great grandparents did. In 1900, average life expectancy at birth in the U.S. was about 47 years. It rose to 68 by 1950 and, in 2021, average life expectancy was about 76 years, reported Harvard Health.

Science is working to extend life expectancy further by looking for ways to reduce biological aging. Dr. Morgan Levine develops tools to measure biological aging, reported Zoë Corbyn of The Guardian.

“Most people’s biological age will be within plus or minus five years of their chronological age, but you can have outliers of up to 10 or more years. The wonderful thing, compared with chronological age, is that biological age is modifiable. We don’t yet know exactly how to modify it to the greatest extent, but the clock can be made to tick slower, or even possibly go backwards, in response to our behaviors (though it can also speed up),” reported Levine.

Bryan Johnson, a 45-year-old software entrepreneur, has his sights set on achieving a biological age of 18, reported Ashlee Vance of Bloomberg Businessweek. To that end, Johnson has enlisted a team of 30 doctors who are “committed to help reverse the aging process in every one of Johnson’s organs…” The endeavor is expected to cost Johnson about $2 million this year.

Regaining lost youth is a full-time job, according to the doctor who leads the team. In addition to following a specific diet, exercise, and sleep plan, Johnson, “endures dozens of medical procedures, some quite extreme and painful, then measures their results with additional blood tests, MRIs, ultrasounds and colonoscopies.” His medical team reports that, so far, he has reduced his biological age by at least five years.

We all have goals for the future. No matter what you want to accomplish, it’s important to have a financial plan that will support your progress. If you would like to talk about your plans for the future, get in touch.

Weekly Focus – Think About It

“There is no cure for birth and death save to enjoy the interval”

—George Santayana, philosopher

Weekly Market Commentary

January 23, 2023

The Markets

“It’s hard to be a contrarian for very long these days because the consensus seems to change so quickly,” opined Ed Yardeni via LinkedIn last week.

We’ve certainly seen a shift in investors’ preferences during the first few weeks of this year. Despite widespread expectations that markets would move lower early in 2023, major U.S. stock indices have trended higher. Year-to-date through January 20, 2023:

·        The Standard & Poor’s 500 Index, which is comprised of 500 of the largest publicly traded companies in the United States, was up 3.5 percent.

·        The Nasdaq Composite, which is comprised of stocks listed on the Nasdaq Stock Exchange and includes a significant number of technology stocks, was up 6.4 percent.

·        The Dow Jones Industrial Average, which is comprised of 30 large U.S. stocks, was up 0.69 percent.

The year-to-date gains reflected stock investors’ optimism about where the economy may be headed, reported Nicholas Jasinski of Barron’s.

“Stocks have embraced the concept of a soft landing so far in 2023…The communication-services and consumer-discretionary sectors of the S&P 500 are trouncing the market, each up at least 5% year to date. Defensive consumer-staples, utilities, and healthcare stocks, on the other hand, have declined more than 2%. If stock investors were worried about a recession, shares of companies that sell electricity, toilet paper, and [cereal] should be doing better than riskier firms in more discretionary areas. They’re not.”

That’s a significant change from last year when the communication services and consumer discretionary sectors were the worst performers in the S&P 500, and energy and utilities were the top performers.

It’s quite possible we will see another shift in investors’ expectations so be prepared for a bumpy ride.

Major U.S. stock indices delivered mixed performance last week. The S&P 500 and Dow moved lower over the five-day period, while the Nasdaq moved higher. Yields on most longer-dated 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.

WHEN WAS THE LAST TIME YOU TALKED WITH YOUR PARENTS/KIDS ABOUT MONEY? It still surprises many people that the oldest millennials are in their mid-40s, but it’s true. Millennials have been rapidly moving into sandwich generation territory – where they may need to provide care for older parents and school-age children at the same time.

Caring for aging parents can be an expensive responsibility. One often overlooked cost is that adult children may have to work fewer hours or take leave from work to care for a loved one. On average, the cost of lost work time for caregivers is more than $10,000 a year, according to AARP Research. Take this brief quiz to learn more about the costs typically associated with caregiving.

1.   About 48 million Americans provided unpaid care to an adult family member or a friend in 2021. In addition to the emotional costs of caregiving and lost income, most (8/10) caregivers spent a significant amount of money on caregiving costs such as home modifications, medical bills and parents’ rent or mortgage payments. On average, annual caregiving costs more than:

a.   $3,000

b.   $7,000

c.    $9,000

d.   $11,000

2.   In a recent survey, 70 percent of respondents said their parents were financially prepared for the future. How many of the survey’s respondents had actually talked with their parents about whether the parents were financially prepared for the future?

a.   31 percent

b.   42 percent

c.    65 percent

d.   All of them

3.   Sometimes, care may be needed for a significant period of time. The average life expectancy at birth in the United States is 76.1 years, but life expectancy changes as people age. What is average life expectancy at age 70?

a.   6.5 years

b.   8.7 years

c.    12.1 years

d.   14.8 years

4.   Talking about money with parents can be difficult. In a recent survey, many participants said they would rather not do it. In fact, they would rather:

a.   Discuss their parents’ funeral plans than their parents’ finances.

b.   Inherit less rather than deal with their parents’ finances.

c.    Deal with a parent’s estate after death rather than talk about it while the parent was alive.

d.   All of the above.

Whether caregiving is in your future or not, it’s important for adult children to understand their parents’ current finances and the plans they have for future. If you would like to have some help getting the ball rolling, just let us know. We can guide and facilitate these important financial conversations.

Weekly Focus – Think About It

“I want my children to have all the things I couldn’t afford. Then I want to move in with them.”

—Phyllis Diller, comedian

Answers: 1) b ; 2) b; 3) d; 4) d

Weekly Market Commentary

January 17, 2023

The Markets

Bullish or bearish?

After last year’s geopolitical turmoil, economic malaise, and tumultuous stock market decline, many financial professionals – from investors to asset managers – have strong opinions about what will happen in 2023.

Some are bullish. While individual opinions are quite nuanced, in broad terms, bulls tend to think the Federal Reserve (Fed)’s rate hikes will slow soon since headline inflation has been trending lower. Some bulls anticipate an economic recession in the United States and expect the Fed to reverse course and begin lowering rates to pull the country out of recession. Lower rates, in turn, may reinvigorate the economy and corporate earnings, and the stock market will move higher. Some expect the market to move lower before it moves higher.

Barron’s Roundtable member and stock asset manager Todd Ahlsten told Lauren R. Rublin of Barron’s, “The S&P 500…is trading for 17 times forward earnings, down from 21 times, which looks attractive. We see 60/40 odds that inflation is defeated and the economy has a soft landing or mild recession, as opposed to a hard landing. This is the year the Fed pivots. Rates probably peak in March…You’ve got to fasten your seatbelt for the next three to six months, but the S&P 500 could end the year above 4300.”

Some are bearish. Again, individual views are nuanced but, in broad terms, bears tend to think inflation will remain elevated. They see economic strength, particularly in the labor market, as a sign that the Federal Reserve will need to continue to pursue its current course and sustain interest rates at a higher level over a longer period time. Economic growth and corporate earnings may slow, and markets might finish the year flat or lower.

Barron’s Roundtable member and bond asset manager Sonal Desai told Barron’s, “I am not an equity person, but based on my macro[economic] outlook, I expect the S&P 500, and equity markets generally, to be flat this year. The current market volatility is less about the data and more about everyone trying to second-guess what the Fed’s reaction will be. An unemployment rate of 5% isn’t massively recessionary. Interest rates of 5% aren’t massively contractionary. We just happened to have a 15-year period in which interest rates were close to zero. That isn’t normal.”

Whether they were bullish or bearish, many financial professionals (Barron’s Roundtable members included) agree on one thing – there are attractive opportunities for investment, regardless of what 2023 brings.

Last week, the Consumer Price Index showed headline inflation slowing for the sixth consecutive month, although core inflation, which excludes food and energy prices, moved higher. Investors focused on the headline numbers and major U.S. stock indices gained last week. Yields on 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.

Heal thyself! Scientists have been developing smart materials that can heal themselves. These substances have the potential to make everything from bridges to bicycles more durable by repairing damage as it occurs. Last week, we learned that self-healing materials were engineered and used by the ancient Romans.

For years, scientists have marveled at the durability of Roman concrete. It was used to build the Pantheon Dome, harbors, and other structures, and proved to be more robust than modern concrete. The Pantheon was built two thousand years ago, and it remains the world’s largest unreinforced concrete dome.

Scientists recently discovered that Roman concrete included lime clasts, a material that contains calcium oxide. When damage occurred in Roman concrete, cracks would form through the lime clasts. Then, as water traveled through the crack, a calcium-saturated solution would form and crystalize, repairing the crack.

Knowing the secret to the durability of Roman concrete is likely to improve modern concrete and extend the lifespan of many types of infrastructure. Concrete isn’t the only material that has the potential to repair itself, though. Scientists are engineering other smart materials to fight the effects of age, wear-and-tear, and defects in all kinds of products. Typically, these substances contain microcapsules filled with some type of repair material. When damage occurs, the microcapsules rupture, releasing their contents to combine with a catalyst and repair the damage. In some cases, the catalyst is water, light, or another environmental factor. In other cases, the catalyst is engineered into the material, too.

Self-healing materials could have many interesting applications. Imagine airplanes that can repair wing and fuselage cracks. The same might be possible for spaceships, satellites, automobiles, motorcycles, and bikes. Already, there is a coating that mends scratches in automobile paint. All you need is a self-healing clearcoat and some sunshine.

The global market for self-healing materials is expected to grow rapidly.

Weekly Focus – Think About It

“We live in a society exquisitely dependent on science and technology, in which hardly anyone knows anything about science and technology.”

—Carl Sagan, astronomer and astrophysicist

Weekly Market Commentary

January 09, 2023

The Markets

It’s being called the “Goldilocks” report.

Last Friday, we learned that demand for workers in the United States remained strong in 2022. The unemployment rate dropped to 3.5 percent in December. (It was 3.7 percent in November.) That brought U.S. unemployment back to where it was before the pandemic – at the lowest level in more than 50 years, reported Megan Cassella of Barron’s.

“Hopes the Federal Reserve can tame inflation without widespread job losses mounted Friday after a government report showed robust hiring and a historically low unemployment rate paired with a cooling in wage growth. In some respects, the December jobs report offered a best-case scenario for the Fed — Americans keep their jobs but inflationary pressures of earnings are easing — giving policymakers room to slow the pace of interest-rate hikes,” reported Reade Pickert of Bloomberg.

Financial markets responded enthusiastically, making Friday the best day for U.S. stocks in more than a month. The Standard & Poor’s 500 Index, Dow Jones Industrial Average, and Nasdaq Composite Index all gained more than 2 percent on Friday, reported Bloomberg. The bond market rallied, too. Yields on U.S. Treasuries dropped lower across most maturities.

It’s important to note that not all companies were hiring in December. Thursday’s private payrolls report showed 235,000 jobs were created in December despite larger companies cutting more than 150,000 jobs. The drivers of jobs growth in the U.S. right now are small- and medium-sized businesses, which added enough jobs to offset layoffs by larger employers, reported Bloomberg.

Large technology firms are among the companies laying off workers. Many borrowed and spent significant amounts of money to grow during the pandemic when demand for tech products and services was high. However, consumer demand has diminished, and large tech firms have been forced to reevaluate. Weak performance among tech stocks is one reason 2022 was a dismal year for the Nasdaq Composite Index, reported Tae Kim of Barron’s.

Last week, major U.S. stock indices moved higher and the yield on the 10-year U.S. Treasury 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.

WHAT HAPPENS IN VEGAS DOESN’T ALWAYS STAY IN VEGAS. This month, Las Vegas hosted the Consumer Electronics Show, also known as CES. It’s where everyone goes to gawk at the latest technology innovations. Some of the wacky and delightful products will arrive in stores this year while others are aspirational. Here is a glimpse at what the future may hold in transportation:

Jetson-style flying vehicles. It seems that a flying car may soon be approved by the Federal Aviation Administration. Imagine a large SUV with wings that are tipped with propellers. The vehicle holds four people, runs on electric batteries, has a small gas engine (just in case), and can hover into a conventional parking space. The company that builds this space-age vehicle plans to start a ride-sharing service in 2026, reported Bree Fowler of CNet.

A smart baby stroller. It can’t tell you why the baby is crying or change a diaper, but a baby stroller equipped with artificial intelligence can make it easier to go up hill and stay in control when going downhill. It also will move on its own when your child wants to walk instead of ride, reported Popular Science.

Your new best friend. Fans of Herbie, The Love Bug and Knight Rider may be intrigued by the prospect of sentient vehicles. DEE, short for Digital Emotional Experience, is a futuristic mid-sized sedan intended to strengthen the bond between humans and autos. The model at CES featured “a digital assistant, color-changing technology and an augmented-reality windshield,” reported Nelson Aguilar of CNet.

Other notable transportation innovations included an electric pickup truck with “shadow mode” that allows it to follow its driver around, a dashboard security camera that records what’s happening inside and outside of the vehicle, and a surround sound system that makes you feel as though you’re at a concert.

Weekly Focus – Think About It

“If you think in terms of a year, plant a seed; if in terms of ten years, plant trees; if in terms of 100 years, teach the people.”

—Confucius, philosopher