Weekly Market Commentary

January 03, 2023

The Markets

It’s finally over.

2022 was a dismal year for financial markets. Major United States stock indices moved lower, trimming or eliminating the previous year’s gains.

^·         The Standard & Poor’s 500 Index, which had gained about 27 percent in 2021, dropped almost 20 percent in 2022.

^·         The Nasdaq Composite Index, which had gained more than 21 percent in 2021, lost about 33 percent in 2022.

^·         The Dow Jones Industrial Average, which had gained about 19 percent in 2021, fell almost 9 percent in 2022. It’s performance reflected the improved performance of value stocks.

Bond markets didn’t fare much better. As rates moved higher, the value of previously issued bonds moved lower. The Bloomberg U.S. Aggregate Bond Index dropped about 13 percent during 2022. The silver lining is that bonds now offer more attractive yields, opening new opportunities for income investors.

2022 may be remembered for inflation, rising interest rates, and geopolitical turmoil

Inflation was a dominant concern throughout the year. In January, the Consumer Price Index showed that prices were up 7.5 percent year-over-year. Inflation issues were exacerbated when Russia invaded Ukraine at the end of February.

“Despite weeks of buildup, Russia’s invasion of Ukraine on Feb. 24 was unexpected and sent shock waves through commodities markets still struggling with the after-effects of the pandemic…the price of Brent crude oil [rose] to $123 on March 8, up from $92 a barrel on Feb. 23…The war also upended grain markets. Ukraine and Russia both export masses of wheat plus other food, and prices leapt as the Black Sea, through which much grain gets dispatched, descended into a battle zone…However, the laws of economics worked, and higher prices did become the cure for high prices,” reported Simon Constable of Barron’s.

From March through December, the Federal Reserve aggressively tightened monetary policy in an effort to slow the economy and inflation. The Fed raised the federal funds rate seven times and lifted the effective federal funds rate from near zero to 4.33 percent. Despite the Fed’s efforts, inflation persisted as consumer spending, which is the primary driver of U.S. economic growth, proved resilient for much of the year. In November, consumer spending slowed significantly.

Will 2023 bring a recession or a soft landing?

The question that has been on everyone’s mind is whether the slowdown will become a recession. Opinions differ widely. In late December, economists participating in a Bloomberg poll said there was a 70 percent chance of recession in 2023. In contrast, economists at a major investment bank say the U.S. will experience a soft landing in 2023. A soft landing occurs when the economy slows, and inflation falls, without a recession.

The inverted U.S. Treasury yield curve tells its own story. The New York Federal Reserve wrote, “The yield curve – specifically, the [difference] between the interest rates on the ten-year Treasury note and the three-month Treasury bill – is a valuable forecasting tool. It is simple to use and significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead.”

At the end of 2022, the three-month Treasury yielded 4.42 percent and the 10-year Treasury yielded 3.88 percent. The difference is -0.54, which puts the chance of recession between 40 percent and 50 percent, according to the New York Fed’s model.

“2022 will likely be remembered as a year when conventional wisdom about a new market and new economy was destroyed, and investors once again learned that ‘it’s not different this time’…Investors were once again brought back to economic and financial reality, a reality where profits matter, interest rates can go up, inflation can rise, and geopolitical risks are real,” stated a source cited by Jack Denton of Barron’s.

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.

OPTIMISM AND HOPE FOR THE NEW YEAR. As 2022 ended, many people shared what they anticipated in the new year. From a World Cup record to peak China, here are a few of the stories that caught our attention:

The beautiful game. “…the U.S. Women’s National Team will look to defend their 2019 [World Cup soccer] title at the tournament cohosted by Australia and New Zealand. The four-time World Cup champs…could become the first team in either the women’s or men’s game to win three successive World Cups,” reported Lisa Antonucci of NBC Sports.

The Great American Solar Eclipse. On October 14, “…the Moon will again pass directly between Earth and the Sun – but this time it will not quite completely cover the solar disk, instead turning it into a thin ‘ring of fire.’ This annular (Latin for ring-shaped) eclipse will be visible within a roughly 125-mile-wide path from Oregon to Texas and on into Mexico and northern South America,” reported the American Astronomical Society.

Healthcare advances. “According to reports, science seems on the threshold of unlocking the mysteries that could lead to cures or game-changing treatments for diabetes, Parkinson’s, HIV, many types of cancers and heart conditions, and more. When it comes to modern medicine, there’s reason to hope that 2023 will be the Year of Miracles,” wrote Gary Abernathy for the Washington Post.

A change in China’s influence. “Some time in April China’s population will be overtaken by India’s, at around 1.43 [billion]. With China’s population in decline, and its economy facing headwinds, expect much discussion of whether China has peaked,” wrote Tom Standage of The Economist.

Strength in optimism. “… conventional wisdom is likely to be wrong. That’s what makes me so hopeful and so eager for the future: the widespread doom and gloom. What good is pessimism? I used to think hope was a product of external facts, but the school of life has convinced me otherwise. Hope is a choice, strengthened through practice; not a reflection of light, but light itself,” wrote David Von Drehle for the Washington Post.

What are you looking forward to in 2023?

Weekly Focus – Think About It

“We cannot direct the wind, but we can adjust the sails.”

—Dolly Parton, singer and philanthropist

Weekly Market Commentary

December 27, 2022

The Markets

What a year!  

In some ways, it feels as though we lived through several years in 2022. The onslaught of events included, “The first major European war since the 1990s, unprecedented sanctions, energy-price mayhem, bail-outs, global interest rates rising at their fastest pace in four decades, a faltering Chinese economy, an overheating American one, housing markets looking peaky across the rich world, [and] a crypto blow-up for the ages…,” reported Hamish Birrell in The Economist’s Money Talks newsletter.

The impact of these events was felt around the world. Global inflation averaged 10 percent, and global stock markets were down about 20 percent through November, reported The Economist. Yet, some countries showed remarkable economic resilience, performing far better than average. The Economist surveyed economic and financial data from 34 wealthy countries. The data included gross domestic product or GDP (which is the value of all goods and services produced in a nation), inflation, breadth of inflation, stock market performance and government debt.

Many of the top performers were in the Mediterranean. They tended to have better-than-average stock market performance, declining debt-to-GDP ratios*, strong economic growth, and/or below average inflation. The top 10 included:

·        Greece

·        Portugal

·        Ireland

·        Israel

·        Spain

·        Mexico

·        Canada

·        Japan

·        France

·        Italy

The United States ranked 20^th, although its position may have skewed low. The author opined, “America’s GDP numbers are misleadingly weak: in recent quarters official statisticians have struggled to account for the impact of enormous stimulus packages.”

Last week, major U.S. stock indices delivered mixed results as economic data, created uncertainty reported Nicholas Jasinski of Barron’s. Positive earnings news and strong labor market data were countered by cooling inflation and slower consumer spending. The Standard & Poor’s 500 Index and the Nasdaq Composite moved lower, and the Dow Jones Industrial Average rose. Treasury bond yields generally moved higher.

*Debt as a percent of GDP measures a country’s ability to repay its debt. In addition, research from the World Bank found a high debt-to-GDP ratio may impede economic growth. 

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.

OUT WITH THE OLD. IN WITH THE NEW. Every new year brings new ways of doing things. Here are some of the trends and ideas that may shape 2023 (or not).

Challenging your taste buds. “Flavors that violate [consumers’] expectations are sure to be a hit…unexpected and unique flavor combinations will be in demand going into 2023.” Spoiler alert. If you want to be surprised by 2023’s new flavors stop reading here. If you want to warn your tongue what may be coming, prepare for dragon fruit and Vietnamese-Cajun.

Traveling for inner growth. One of the top travel trends in 2023 will be transformation retreats, according to Sarah Allard of Condé Nast Traveler. “…2023 will be the year we travel for personal betterment. Whether you are seeking to overcome grief, identify your life’s mission, or discover what your body is physically capable of, there will be a transformation retreat that caters to it.” Another anticipated trend is “set-jetting,” visiting countries where your favorite movies and television shows are filmed.

Dowsing for fresh water. 2023 may be the year that water-strapped cities and regions begin harvesting water vapor. That’s the suggestion offered by scientists at the University of Illinois at Urbana-Champaign who have been researching sources of fresh water. “A new study suggests an investment in new infrastructure capable of harvesting oceanic water vapor as a solution to limited supplies of fresh water in various locations around the world,” reported Science Daily.

And now for something completely different. If you’re bored with your current exercise routine, you might consider the Ministry of Silly Walks workout. A tongue-in-cheek study published in the British Medical Journal found that inefficient walking (of the type seen in Monty Python’s Ministry of Silly Walks skit) burns lots of calories. “Adults could achieve 75 minutes of vigorous intensity physical activity per week by walking inefficiently for about 11 min/day. Had an initiative to promote inefficient movement been adopted in the early 1970s, we might now be living among a healthier society.”

We hope you have a safe and happy New Year celebration.

Weekly Focus – Think About It

“Write it on your heart that every day is the best day in the year.”

—Ralph Waldo Emerson, philosopher

Weekly Market Commentary

December 19, 2022

The Markets

Bad news is bad news, once again.

For months, investors have cheered bad economic news. When the United States economy showed signs of weakness, stock markets often reflected investor enthusiasm. The thinking was that bad economic news would persuade the Federal Reserve to slow the pace of rate hikes. Inflation would slide lower, and recession would be avoided.

Last week, there was a shift in attitude.

On Wednesday, the Federal Reserve raised the federal funds rate by half a percent, as expected. Over the course of this year, the fed funds rate has risen from near zero to 4.33 percent. That’s an enormous increase designed to drop inflation by slowing economic growth – and the Fed expects growth to slow.

The dot plot is a chart that reflects the expectations of each member of the Fed’s decision-making committee. It showed that Fed officials expect U.S. economic growth to slow next year. The forecasts indicated gross domestic product (GDP), which is the value of all goods and services produced in the U.S., could grow very slowly or even contract next year (it could contract -0.5 percent or grow to 1.0 percent). Fed officials also anticipated the unemployment rate could rise from a relatively low 3.7 percent to 4.6 percent.

The day after the Fed’s statement, the Commerce Department reported that retail sales declined more than expected in November. That suggests economic growth may be slowing.

The stock market didn’t surge on the bad economic news. It retreated. Vildana Hajric and Lu Wang of Bloomberg reported:

“For the first time in a long time, news that was bad for the economy was bad for the stock market as well, more proof that recession fear has replaced inflation angst as that market’s biggest bugaboo… Rather than rise on speculation that weak data would curb Federal Reserve tightening, the S&P 500 dropped 2.5% on Thursday, while the Nasdaq 100 lost 3.4%. Small-cap stocks lost more than 2.5% and the VIX volatility gauge shot back above 22. The yield on 10-year Treasuries hovered around 3.45%, down from a peak of 3.63% earlier this week.” 

Last week, major U.S. stock indices finished lower, and the Treasury 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.

WHAT DO YOU KNOW ABOUT MONEY AND FINANCES? When Annamaria Lusardi was a graduate student, she noticed something remarkable. People who earned similar amounts during their working years didn’t arrive at retirement with the same amount of wealth. The reason had a lot to do with financial decision-making that resulted from low financial literacy.

A 2022 report from the Global Financial Literacy Excellence Center (GFLEC) found that, on average, American adults answered about 50 percent of financial literacy questions correctly. This quiz has a lot fewer questions than the GFLEC survey, but they may be quite challenging.

1.   You have $1,000 in an account. It earns 4 percent interest each year, and you keep the interest in the account. After two years, will you have:

a.   $1,080

b.   More than $1,080

c.    Less than $1,080

d.   I don’t know

2.   Your account earns 4 percent interest per year and inflation is 5 percent per year. After one year, the money in the account will buy:

a.   Exactly what it buys today

b.   More than it buys today

c.    Less than it buys today

d.   I don’t know

3.   The monthly payments on a variable rate mortgage are not fixed. What happens to those payments when rates increase? 

a.   Payments rise

b.   Payments fall

c.    Payments stay the same

d.   I don’t know

4.   When interest rates move higher, bond prices move:

a.   Higher

b.   Lower

c.    Stay the same

d.   I don’t know

5.   You owe $1,000 on your credit card. The card company charges an interest rate of 25 percent compounded annually. If you make no payments on this credit card, how many years will it take before you owe twice as much?

a.   Two years

b.   Three to four years

c.    Four to five years

d.   Six or more years.

If you have any questions about the answers, let us know.

Weekly Focus – Think About It

“I cannot teach anybody anything. I can only make them think.”

—Socrates, philosopher

Weekly Market Commentary

December 12, 2022

The Markets

What comes next?

The U.S. stock market tends to be a forward-looking vehicle. Investors make decisions today based on what they think may be ahead for the economy, and how economic change may affect the companies they’re considering for investment. Currently, key questions include:

·        Will inflation be lower in 2023?

·        Will Federal Reserve (Fed) policies change? When will they change?

·        Will economic growth remain strong next year? Or will it slow or contract?

Opinions about the answers to these questions vary, and that’s one reason markets have been volatile lately. For example, some think the U.S. economy is headed for:

·        A soft landing. This is the Goldilocks ideal. In December, a large investment bank said there was a 35 percent chance the United States is headed for a soft landing, which the bank defined as inflation falling to 4 percent, the Fed funds rate rising to 5 percent, and economic growth settling at 1 percent.

·        A period of stagflation. A November survey of 272 asset managers with $790 billion under management reported that 92 percent of respondents expected the United States to experience a period of stagflation over the next 12 months, reported Sagarika Jaisinghani of Bloomberg. Stagflation is characterized by above average inflation and slowing economic growth.

·        A recession. There is a diversity of opinion about whether the U.S. will experience a recession in 2023. The Fed put the odds of recession at 50 percent. However, “economists surveyed by Bloomberg [in November] saw a 65% chance of recession in the next year, based on the median estimate. A Bloomberg Economics model puts the probability at 100%,” reported Matthew Boesler of Bloomberg.

It’s important to remember the economy is not the stock market. It is just one of the many factors that influence share prices. Each of the economic possibilities would affect share prices and market sectors differently.

With so much uncertainty, it’s hard to know what will happen. As baseball great Yogi Berra said, “It’s tough to make predictions, especially about the future.” That’s why it’s a good idea to hold a well-allocated and diversified portfolio that targets your financial goals.

Last week, major U.S. stock indices finished lower, and the Treasury 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.

FEELING SOME HOLIDAY STRESS? Holidays can be wonderful, and they can be a lot. If the joy of the season is eclipsed by stress, anxiety or depression, here are some tips that can help.

·        Pet a pup. Find a few minutes to spend with your pets. Loving on animals – dogs, cats, bunnies, guinea pigs, reindeer – engages the social and emotional section of the human brain. As a result, it can help you cope when you feel stressed or depressed.

·        Find the humor. Humor can help, too. When kids find the gifts and unwrap them early, the cat tips the tree over – again, or your parents or in-laws say things they shouldn’t, try to find the ridiculous, over-the-top angle that makes it funny. If you just can’t, try smiling. Even a fake smile will cause endorphins to be released.

·        Reach out. Performing acts of kindness can lift your spirits during the holidays. Set up a food drive. Donate gifts to a homeless shelter. Make a charitable contribution to an animal rescue or another cause. Visit people in a nursing home. Run a race for a good cause. You get the idea.

·        Spend less. One of the biggest holiday stressors is money. Before you start shopping and entertaining, decide what you can afford to spend this year, and then stick to your budget. If you regularly overspend on gifts, decide how much you are going to spend and stick to it. Ways to control costs include making homemade gifts and donating to a good cause in the recipient’s name.

·        Just say “No.” You don’t have to accept every invitation this season. When you’re tired of people and celebrations, make time to do something that you enjoy. Listen to music. Take a walk. Watch funny videos. Read a book. Give yourself an opportunity to rest and recover.

We hope you have happy and healthy holidays!

Weekly Focus – Think About It

“Kindness in words creates confidence. Kindness in thinking creates profoundness. Kindness in giving creates love.”

—Lao Tzu, philosopher

Weekly Market Commentary

December 05, 2022

The Markets

What will it take to slow this economy down?

In 2001, railway workers slowed a runaway train in Ohio by latching a second engine to the back of the locomotive and applying the brakes. In all, the train traveled sixty-six miles over two hours, decelerating from a maximum speed of 47 miles per hour to 10 miles per hour before workers regained control of it, according to CNN.

Throughout 2022, the United States Federal Reserve has been trying to slow inflation by putting the brakes on the U.S. economy. So far, the Fed has raised rates six times, but the economy continues to grow apace. Last week, the Bureau of Economic Analysis reported the economy grew faster than originally thought from July through September 2022. Gross domestic product (GDP), which is the value of all goods and services produced by the U.S., was up 2.9 percent, annualized, rather than 2.6 percent as the advance estimate indicated.

Last week’s unemployment report also suggested the economy remains strong. More jobs were added than economists expected, and the unemployment rate remained at 3.7 percent. Average hourly earnings also increased faster than expected, up 5.1 percent over the last 12 months.

Megan Cassella of Barron’s reported, “The biggest outstanding obstacle to the Federal Reserve’s success in reining in inflation boils down to a numbers problem: There aren’t enough workers in the [United States]. Simply put, labor supply and demand need to come back into balance to contain wage growth and services inflation, which continues to climb…A combination of factors is contributing to the dearth of workers, from Baby Boomer retirements and falling immigration to a low birth rate and long COVID. Together, they suggest that shortages are here to stay.”

Last week, stock and bond markets rallied following Fed Chair Jerome Powell’s mid-week speech, in which he confirmed it was likely December’s rate increase would be smaller than the last few increases have been. Later in the week, the strong employment report checked investors’ enthusiasm. Regardless, major U.S. indices finished higher, reported Nicholas Jasinski of Barron’s, and Treasury yields finished the week mostly 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.

CAN YOU BELIEVE IT’S DECEMBER ALREADY? According to Andy Williams, Garth Brooks and Kylie Minogue, “It’s the Most Wonderful Time of the Year.” During December, holiday enthusiasts don ugly sweaters, wheedle recipes out of relatives, light a wealth of candles, and celebrate a diversity of holidays. See what you know about this magical time of the year by taking our brief quiz.

1.   Which of the following holidays is NOT celebrated in December?

a.   International Ninja Day

b.   Sacher-Torte Day

c.    Dewey-Decimal System Day

d.   National Take Down the Christmas Tree Day

2.   Scientists have studied the psychology of gift giving. They find that the most valued presents are:

a.   Expensive gifts that make others envious

b.   Beautifully wrapped gifts that are pleasing to the eye

c.    Sentimental gifts that bring joy and happiness

d.   Thoughtful gifts that reflect the recipient’s hobbies and interests

3.   Which generation is expected to spend the most ($1,823) on gifts, travel and entertainment this holiday season?

a.   Gen Z (Ages 9 to 24)

b.   Millennials (Ages 25 to 40)

c.    Gen X (Ages 41 to 56)

d.   Boomers (Ages 57 to 75)

4.   When did the New Year’s Eve ball drop first take place in Times Square? (Hint: Teddy Roosevelt was President.)

a.   1893

b.   1907

c.    1920

d.   1945

If you have any questions, get in touch.

Weekly Focus – Think About It

“Gratitude unlocks the fullness of life. It turns what we have into enough, and more. It turns denial into acceptance, chaos to order, confusion to clarity. It can turn a meal into a feast, a house into a home, a stranger into a friend.”

—Melody Beattie, author

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