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Weekly Market Commentary August 1, 2022

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Monday, August 01 2022

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Weekly Market Commentary

August 01, 2022

The Markets

Investors thought they heard a dovish note from the Federal Reserve and markets rallied.

Last week, we learned from the Bureau of Economic Analysis (BEA) that economic growth in the United States slowed for the second consecutive quarter. Economic growth is measured by gross domestic product, or GDP, which is the value of all goods and services produced during a specific period. GDP includes household, business and government spending, as well as exports and imports.

Before inflation, the U.S. economy grew by 6.6 percent in the first quarter of 2022 and by 7.9 percent in the second quarter, according to the FRED Economic Data. After inflation, GDP shrank by 1.6 percent in the first quarter and by 0.9 percent in the second quarter.

Is it a recession or isn’t it?

Two consecutive quarters of negative growth is the popular definition of recession, and there was a lot of debate last week about whether the U.S. is in a recession. One reason for the debate is that the main driver of U.S. economic growth is household spending, which accounts for about 68 percent of GDP. During the first half of the year, household spending continued to increase, although it slowed.

“While a low unemployment rate and still-healthy consumer and corporate balance sheets mean the economy continues to show resilience for now, expectations that the U.S. will enter a formal downturn within the next year continue to rise,” reported Megan Cassella of Barron’s.

Financial markets rallied

In unscripted remarks, Fed Chair Jerome Powell indicated that interest rates had reached a neutral level. When rates are neutral, monetary policy is neither contractionary nor expansionary. Investors took Powell’s comment to mean the Fed might ease rates sooner rather than later, and markets rallied, wrote Economist Mohamed A. El-Erian in a Bloomberg opinion piece.

“The S&P 500 soared 4.3% for the week and 9.1% in July, the best monthly advance since November 2020…Treasury yields dropped across the curve as well…Taken together, the equity and bond rallies helped loosen U.S. financial conditions,” reported Katherine Greifeld and Vildana Hajric of Bloomberg.”

While the rally was welcomed by investors, looser financial conditions are the opposite of what the Fed wants to achieve. It is trying to tighten financial conditions and reduce demand. It appears the Fed has more work to do.

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.

COMPANY SALES AND PROFITS WERE UP IN THE SECOND QUARTER. A perceived dovish tilt at the Fed wasn’t the only reason stocks rallied last week. It’s earnings season – that wonderful time when leaders of publicly traded companies tell investors how they performed during the last quarter and share expectations for the future. Investors review the information and use it to make decisions about whether to buy, sell or hold shares.

More than half of companies in the Standard & Poor’s 500 Index had reported by the end of last week. Earnings (profits) were better than expected for about three out of four of those companies. So far, companies in the energy and industrials sectors are the standouts for the second quarter. Energy sector earnings were up 290.3 percent and industrial sector earnings were up 25.7 percent, reported John Butters of FactSet. The consumer discretionary (down 17.9 percent) and financials (down 25.0 percent) sectors are the weakest performers, to date.

Revenue, which is the value of goods and services sold, was up more than 12 percent among the companies that have reported so far. Every sector of the index reported higher revenue for the second quarter with energy (up 66.4 percent), materials (up 16.1 percent), and real estate (up 14.7 percent) leading the way. The communication services (up 5.8 percent) and financials (up 2.5 percent) sectors lagged.

“Despite worrisome signals from economic proxies like [a big box retailer] and [a shipping and supply chain management company], the earnings season as a whole has turned out to be brighter than expected...That’s fueling speculation that Corporate America will be able to weather the perfect storm of hot inflation, jumbo-sized rate hikes and dwindling growth,” reported Rita Nazareth of Bloomberg.

While a significant number of companies have yet to report, blended second quarter earnings for companies in the Standard & Poor’s 500 index were up 6 percent.

Weekly Focus – Think About It

“Let your dreams outgrow the shoes of your expectations.”

—Ryūnosuke Satoro, author and poet

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Weekly Market Commentary July 25, 2022

mkaadmin

Monday, July 25 2022

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Weekly Market Commentary

July 25, 2022

The Markets

A lot of people are worried that a recession may be in our future. Some think it may already be here.

Unemployment is low (3.6 percent), and inflation is high (9.1 percent). Both tend to occur when an economy is experiencing strong growth. That makes it difficult to believe the United States is in a recession, but some data is pointing that way.

Last week, the Atlanta Federal Reserve’s GDPNow estimated that economic growth in the United States was -1.6 percent for the second quarter of 2022, after adjusting for inflation. They measured economic growth using gross domestic product or GDP, which is the value of all goods and services produced in the United States over a specific period of time. GDPNow is based on a simple, unadjusted mathematical model. It is not an official reading, and the model tends to be a bit volatile. For example:

^·On April 29, when relatively little data was available for the second quarter, it was +1.9 percent.

^·On May 17, as retail trade and industrial production statistics filtered in, it was +2.5 percent.

^·On July 1, when construction spending and manufacturing data came out, it was -2.1 percent.

^·Last week, after housing starts were released, it was -1.6 percent.

The Atlanta Fed’s estimate becomes more accurate as more data is added. It tends to be most accurate near the Bureau of Economic Analysis (BES)’s official GDP release date, reported a source cited by Jeff Cox of CNBC.

Since the United States economy shrank by 1.6 percent in the first quarter of 2022, that would mean the U.S. has experienced two quarters of declining economic growth. Technically, that’s a recession.

Not everyone expects GDP to shrink. Bloomberg surveyed economists and found they anticipate 0.5 percent growth in the second quarter, which would be an improvement on the first quarter.

There is an important distinction between the two quarters. The slowdown in the first quarter was caused by surging imports and slowing exports, which is unusual. The slowdown in the second quarter may be caused by a slowdown in consumer spending, which is the primary driver of U.S. economic growth, and business spending.

The next BEA’s GDP numbers will be released this Thursday, July 28.

Last week, Randall Forsyth of Barron’s reported that major U.S. stock indices gained. Yields on shorter maturity Treasuries rose last week, while yields on Treasuries with maturities of one year or longer 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.

THE CHALLENGES OF DATING. As if the pandemic didn’t create enough dating challenges, inflation is now pushing the cost of dating a lot higher. More than 40 percent of people on the dating app Hinge said they think more about the cost of dating today than they did a year ago, especially members of Gen Z (the oldest Gen Zers are age 25), reported Paulina Cachero of Bloomberg.

Instead of meeting for drinks (the cost of alcoholic beverages was up 4 percent year-over-year in June) or sharing a meal in a restaurant (the cost of full-service dining was up 8.9 percent year-over-year in June) many people are opting for less expensive options, such as meeting for coffee, taking a walk, or cooking a meal at home.

Another challenge is keeping up with ever-evolving dating slang. “When you’re looking for love these days, it’s totally possible you might get breadcrumbed and orbited on your way to the soft launch,” reported Ashley Austrew on Dictionary.com. Here are a few definitions to know.

· Breadcrumbing. This is slang for leading someone on. Usually, breadcrumbing is chatting or flirting online through text or social media.

· Orbiting. When an ex – or someone else – stops communicating completely (i.e., they ghosted you) but they immediately offer a reaction when you post a picture or story on social media, they are orbiting you, reported Sophie Lloyd of Newsweek.

· Soft launching. When a product is soft launched, it goes through testing in limited groups. It’s the same with dating. A soft launch gives a person’s friends and followers the chance to get used to the idea of a significant other. It’s a slow-motion version of the boyfriend or girlfriend reveal, reported Kaitlyn Tiffany of The Atlantic.

The bad news is that it’s never easy to learn a new language. The good news is that the price of gas is dropping so the cost of dating should, too.

Weekly Focus – Think About It

“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.”

—Adam Smith, economist and philosopher

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Weekly Market Commentary July 18, 2022

mkaadmin

Monday, July 18 2022

Blog

Weekly Market Commentary

July 18, 2022

The Markets

Nobody is happy, but Americans are feeling more optimistic.

Last week, headlines blasted the new inflation numbers. Prices were up more than 9% year-over-year in June, according to the Bureau of Labor Statistic’s Consumer Price Index (CPI). When you dig into the numbers, energy prices were up 41.6 percent year-over-year and food prices were up 10.4 percent.

“Prices are rising just about everywhere in the world, in part a consequence of Russia's invasion of Ukraine, which has elevated energy and food prices, and in part because of the supply chain bottlenecks that have driven U.S. prices up,” reported Paul Wiseman of U.S. News & World Report.

The U.S. inflation numbers caused markets to tumble early in the week as investors speculated about whether the Federal Reserve would decide to raise the federal funds rate at a faster pace at its next meeting, reported Ben Levisohn of Barron’s.

Then the retail sales and consumer sentiment data arrived.

After adjusting for inflation, retail sales slowed in June, just as they had in May, reported Megan Cassella of Barron’s. Retail sales data are a leading indicator, meaning they provide information about what may be ahead, while the CPI is a lagging indicator that provides information about what has already happened. Slower retail sales suggest demand is falling and lower prices may be ahead. The news cooled some investors’ rate-hike concerns.

On Friday, the University of Michigan’s Consumer Sentiment Survey showed a modest improvement. Barron’s reported, “…consumer sentiment that had hit an all-time low in June improved slightly in July, likely a reflection of the recent fall in gas prices. And long-term inflation expectations dropped modestly over the month as well. Together, the latest data shows early signs that the Federal Reserve is making progress in its quest to cool the economy.”

Last week, Barron’s reported that major U.S. stock indices declined. Yields on shorter maturity Treasuries rose last week, while yields on longer maturity Treasuries 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.

WHAT’S THE DIFFERENCE BETWEEN MARKET VOLATILITY AND RISK? Smooth sailing isn’t a term anyone would use to describe 2022. So far, it has been a remarkably volatile year. On more than half of the days during the second quarter of 2022, the U.S. stock market moved up or down by 1 percent or more. “The quarter had 10 days where the market moved 2% or more compared to a median of two days between 2019 and 2021,” reported Lauren Solberg of Morningstar.

While volatility is not the same as risk, the chances of incurring a loss may increase during periods of market volatility, in large part, that’s because investors become anxious about falling share prices and sell when they might be better off holding. See what you know about the difference between risk and volatility by taking this brief quiz.

1. What is market volatility?

a. Asset prices rising over a period of time.

b. Asset prices falling over a period of time.

c. The frequency and size of asset price swings, higher and lower.

d. A measure of how easy it is to buy and sell stock.

2. What is risk?

a. The chance of losing some or all of an investment.

b. The chance that actual investment returns will be different from anticipated investment returns.

c. A vulnerability that can be managed through asset allocation and diversification.

d. All of the above.

3. How can the effects of stock market volatility be limited?

a. By timing the market

b. By avoiding bonds

c. Through asset allocation and investment diversification

d. By avoiding stocks

4. Which famous investor said, “When people are desperately trying to sell, I buy. When people are desperately trying to buy, I sell. It has worked out very well over the years.”

a. Warren Buffett

b. Abby Joseph Cohen

c. Sir John Templeton

d. Abigail Johnson

If you’re feeling overwhelmed and uncertain in this volatile market environment, give us a call. One of the most important services we offer is helping people stay calm and make sound decisions during difficult times.

Weekly Focus – Think About It

“Being aware of challenges doesn't make them sting less, but once you see them, you can assess the best way to handle them.”

—Mellody Hobson, CEO and financial educator

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

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Weekly Market Commentary July 11, 2022

mkaadmin

Monday, July 11 2022

Blog

Weekly Market Commentary

July 11, 2022

The Markets

Rising inflation is a bit like a child throwing a temper tantrum in the grocery store.

The red-faced parent, in this case the U.S. Federal Reserve (Fed), tries to calm the child. Sometimes, it works and the child calms down (soft landing). Other times, the child won’t settle, and the parent takes more extreme action, like leaving and coming back for groceries later (recession).

The Fed is laser focused on calming inflation. At a June press conference, Fed Chair Jerome Powell said, “We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past two and a half years and have proved resilient. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.”

To calm inflation, the Fed has tightened monetary policy aggressively, taking steps that include raising the federal funds target rate by 1.5 percent from March through June of this year. Raising the fed funds rate pushes interest rates higher so borrowing costs go up, and consumer and business spending fall. Lower spending slows economic growth and prices fall.

According to data released last week, the United States economy is slowing but remains quite strong. The data showed:

· Service industries and manufacturing continue to grow. The ISM^® Purchasing Manager’s Indexes (PMIs) for manufacturing and services showed continued growth in June, although the pace of growth slowed, reported Karishma Vanjani of Barron’s.

· Jobs growth was stronger than expected in June. More new jobs were created in June than anyone had expected, but the topline number may not tell the whole story. Ben Levisohn of Barron’s explained:

“…the jobs report, in particular, might not have been as good as it looked. While the establishment number was very strong, the household survey showed a loss of 300,000 jobs, while the unemployment rate remained unchanged at 3.6% only because the workforce shrank. At the same time, average hourly earnings increased by a mere 0.3% in June from May’s level, lower than the rate of inflation.”

· The middle of the yield curve flattened. At the end of last week, the yield on the two-year U.S. Treasury was 3.12 percent, slightly above the yield on the benchmark 10-year Treasury. The yield on the three-month Treasury finished the week at 1.98 percent. A flattening yield curve suggests that investors are concerned about what may be ahead for the economy. When the yield curve inverts, it’s a sign recession may be ahead.

Last week, major U.S. stock indices moved higher, according to Barron’s, while Treasury bonds lost value as yields moved higher across 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.

THINKING ABOUT RETIRING OUTSIDE THE U.S.? There are lots of amazing places to retire in the United States but retiring elsewhere can be an attractive alternative. Some countries offer incentives to Americans who retire abroad, reported Laura Kiniry of Condé Nast Traveler (CNT).

“Small towns in countries like France, Spain, and Italy, for example, sell off fixer-upper homes for one euro to attract foreign investments; other places are more directly trying to tempt retirees and pensioners looking to relocate, with visas that promise tax cuts, and steep-discount programs that make U.S. dollars go a long way.”

Every year, the International Living Retirement Index identifies “locations where retirees can spend less money, live happily and healthily, and experience a new country without straying too far from all that is familiar,” reported Caitlin Morton of CNT. For 2022, top destinations include Panama, Costa Rica, Mexico, Portugal and Columbia.

If you’re considering retiring overseas, plan carefully. In addition to visiting and researching your retirement destination, make sure you work with experts who understand:

· Banking options. Anti-money laundering laws can make banking in foreign countries tricky. “It can take several months to open the account and you might still have to explain to the bank each time you transfer money from the U.S.,” reported a source cited by Greg Bartalos of Barron’s.

· International taxes. Depending on where you retire, the tax implications could be significant, reported Sarah Ovaska in the Journal of Accountancy. As long as you’re an American citizen, you have to report – and pay taxes on – the income you earn, no matter where you live. You may also owe taxes in the country where you retire.

· Social Security benefits. More than one-half of a million Americans who receive Social Security benefits live outside the United States. The Social Security Administration has tools that can help you determine whether you’re eligible, but it never hurts to work with someone who understands the nuances.

If you retired overseas, where would you settle?

Weekly Focus – Think About It

“Travel isn’t always pretty. It isn’t always comfortable. Sometimes it hurts, it even breaks your heart. But that’s okay. The journey changes you; it should change you. It leaves marks on your memory, on your consciousness, on your heart, and on your body. You take something with you. Hopefully, you leave something good behind.”

—Anthony Bourdain, Chef and author

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Weekly Market Commentary July 5, 2022

mkaadmin

Tuesday, July 05 2022

Blog

Weekly Market Commentary

July 05, 2022

The Markets

The first six months of 2022 have earned a place in history books.

2022 is likely to become part of the lore passed from generation to generation. Stories will be told about this bear market, as well as the remarkable political and social events that have occurred in the United States and elsewhere. Here is a brief look back at the last three months.

· Will the real inflation please stand up? Prices continued to rise during the second quarter, although there was a significant difference in inflation readings. The Consumer Price Index (CPI), which reflects price changes in cities, showed inflation was up 8.6 percent in May, year-over-year. The Personal Consumption Expenditures (PCE) Price Index (excluding food and energy) which measures price changes in urban and rural areas, showed inflation was up 6.3 percent for the same period.

· The Federal Reserve attacked inflation. The Federal Reserve’s inflation target is 2 percent. With inflation well above that level, the Fed began to tighten monetary policy aggressively. It ended its bond buying program, began to shrink its balance sheet, and raised the fed funds rate by 1.50 percent year-to-date (with 1.25 percent of that increase coming in the second quarter).

· Bond rates rose. Bond rates moved higher during the quarter. Since bond prices move lower when bond rates rise, many investors saw a decline in the value of bond portfolios. By the end of the second quarter, the benchmark 10-year Treasury was at 2.98 percent, up from 2.32 percent at the end of the first quarter.

· Stock prices fell. Evie Liu of Barron’s reported, “Energy stocks were the only ones that posted gains in the first half [of the year] on the back of soaring oil prices, but even that sector has lost its momentum…Although energy companies are still pocketing record profits today, traders are quite aware that a recession would drag down demand, curb oil prices, and cut into their earnings.”

· Consumer sentiment tumbled. The University of Michigan’s Consumer Sentiment Survey showed that consumer pessimism deepened throughout the second quarter, largely due to inflation concerns. The June sentiment reading was 50, which is the lowest on record.

· The yield curve isn’t feeling it – yet. Many people anticipate a recession next year, but bond markets don’t seem to think so. One of the most credible recession-forecasting tools is the U.S. Treasury yield curve. When the yield curve inverts, meaning shorter-term Treasuries yield more than longer-term Treasuries, there is a significant probability that a recession is coming.

More specifically, when a three-month Treasury bill yields more than a 10-year Treasury note a recession is likely in the following six to 18 months, according to a study from the Federal Reserve Bank of New York. At the end of June, the three-month Treasury yielded 1.72 percent and 10-year Treasury yielded 2.98 percent. In other words, the yield curve was not inverted.

Markets are likely to remain volatile until investors are confident the U.S. has avoided a recession, and no one is sure that will be the case.

Last week, major U.S. indices rallied late in the week, but finished lower overall, according to Barron’s. The yield on benchmark 10-year U.S. Treasuries moved lower.

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

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

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

How long does it take you to decide what to watch? We’ve all been there: scrolling through shows – more than 817,000 of them – trying to decide what to watch. Almost half (46 percent) of us find the experience overwhelming, according to Nielsen’s State of Play report. According to a survey conducted in the United Kingdom, the average household spends:

· 12 minutes each day bickering over what to watch,

· 16 minutes channel surfing, and

· 12 minutes trying to find specific shows.

Do the math and 40 minutes a day times 365 days a year is 14,600 minutes. There are 60 minutes in an hour and 24 hours in a day, so we spend about 10 days a year deciding what to watch.

That’s a drop in the bucket compared to the amount of time spent watching video content. The average American spends 4 hours and 49 minutes a day – or 68 days a year – watching video content on TV screens. About three hours are spent watching programming, and almost an hour-and-a-half is spent watching content on devices connected to TV screens.

So, what are we watching? According to Nielsen’s report, “Between January and September of last year, 98% of the most viewed broadcast programs were sports.”

Weekly Focus – Think About It

“History is not everything, but it is a starting point. History is a clock that people use to tell their political and cultural time of day. It is a compass they use to find themselves on the map of human geography. It tells them where they are but, more importantly, what they must be.”

—John Henrik Clarke, writer and historian

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