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Weekly Market Commentary June 27, 2022

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Monday, June 27 2022

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Weekly Market Commentary

June 27, 2022

The Markets

Last week, bad news was good news.

Consumers were feeling blue in June, according to the University of Michigan Consumer Sentiment Survey. The survey scored sentiment at 50, which was the lowest level on record. Surveys of Consumers Director Joanne Hsu reported that 79 percent of consumers anticipate business conditions will decline during the next 12 months, and almost half indicated they are spending less because of inflation.

Consumer pessimism was reflected in the S&P Global Flash US Composite PMI™. The Index measured that manufacturing growth was at the lowest level in almost two years. “Declines in production and new sales were driven by weak client demand, as inflation, material shortages and delivery delays led some customers to pause or lower their purchases of goods,” reported S&P Global. The Index was at 52.4. Any reading above 50 indicates growth.

Unhappy consumers and slower growth in manufacturing made investors very happy. Consumer spending drives the economy. So, if consumers begin to spend less and economic growth slows, then the Federal Reserve may slow its rate hikes or raise rates by less. Last week Fed Chair Jerome Powell told Congress:

“The tightening in financial conditions that we have seen in recent months should continue to temper growth and help bring demand into better balance with supply…Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy.”

Despite their pessimism, consumers’ expectations for inflation moved lower in June. They anticipate inflation will be about 5.3 percent in the year ahead, and in the range of 2.9 percent to 3.1 percent over the longer term.

Last week, major U.S. stock indices rallied, reported Emily McCormick of Yahoo! Finance. Yields on shorter maturity Treasuries moved higher last week, while yields on longer maturity 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.

WHAT DO YOU LIKE ABOUT WHERE YOU LIVE? People choose where to live for a variety of reasons. They may live where they grew up or where their company is located. They may choose a city or town because they like the culture and environment, need accessible healthcare or prefer a certain school district.

Every year, the Economist Intelligence Unit (EIU)’s Global Liveability Index considers 30 factors in five categories – stability, health care, culture and environment, education and infrastructure – to assess living conditions in more than 170 cities around the world. Its goal is to determine which are the most “livable.” For the last two years, COVID-19 issues (demand for healthcare facilities, closures and capacity limits for schools, restaurants and cultural venues) also have been considered.

In 2022, the average global liveability score improved from COVID-19 lows and was closing in on pre-pandemic norms. The top five “most livable” cities were:

1. Vienna, Austria

2. Copenhagen, Denmark

3. Zurich, Switzerland

4. Calgary, Canada

5. Vancouver, Canada

The five “least livable” cities were:

168. Karachi, Pakistan

169. Algiers, Algeria

170. Tripoli, Libya

171. Lagos, Nigeria

172. Damascus, Syria

The War on Ukraine affected some cities’ rankings. “There is no score in 2022 for Kyiv because the EIU’s correspondent had to abandon the survey when fighting broke out. Moscow and St. Petersburg have dropped 15 and 13 places to 80th and 88^th...Other cities affected by the contagion of war, such as Budapest and Warsaw, saw their stability scores slip as geopolitical tensions increased. If the war continues throughout this year, more cities could suffer disruption to food and fuel supplies. The welcome rise in livability this year might be short-lived,” reported The Economist.

Weekly Focus – Think About It

“When you take a flower in your hand and really look at it, it's your world for the moment. I want to give that world to someone else. Most people in the city rush around so, they have no time to look at a flower. I want them to see it whether they want to or not.”

—Georgia O'Keeffe, artist

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Weekly Market Commentary June 20, 2022

mkaadmin

Tuesday, June 21 2022

Blog

Weekly Market Commentary

June 20, 2022

The Markets

The fight against inflation intensified.

Last week, the Federal Reserve (Fed) delivered a message that it is serious about fighting inflation. The Federal Open Market Committee (FOMC) lifted the federal funds target rate by 0.75 percentage points. The fed funds rate is now 1.50 percent to 1.75 percent.

The Fed also has begun to shrink its $9 trillion balance sheet by selling Treasury securities and agency mortgage-backed securities, a process known as quantitative tightening (QT), reported Kate Duguid, Colby Smith, and Tommy Stubbington of Financial Times (FT). The Fed’s balance sheet expanded greatly during the past few years as it engaged in quantitative easing (QE). QE entailed buying Treasury and agency securities to ease financial conditions, strengthen the economy, and support markets during the pandemic.

If QT was a rate hike, it would be “roughly equivalent to raising the policy rate a little more than 50 basis points on a sustained basis,” according to a paper published by the Fed in June. Although, the authors stated there was considerable uncertainty associated with the estimate. It’s hard to be certain about what will happen when the Fed has only attempted QT once before.

Global markets weren’t enthusiastic about the fact that the Fed and other central banks are tightening monetary policy. Harriet Clarfelt and colleagues at FT reported, “US stocks have suffered their heaviest weekly fall since the outbreak of the coronavirus pandemic, after investors were spooked by a series of interest rate increases by big central banks and the threat of an ensuing economic slowdown.”

It’s likely that markets will continue to be volatile, according to the CBOE Volatility (VIX) Index^®, which measures expectations for volatility over the next 30 days. The VIX is known as Wall Street’s fear gauge. Last week, it rose to 31. That’s well above its long-term average of 20.

Last week, major U.S. stock indices tumbled, and yields moved higher across much of the Treasury 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.

IS THE BOND MARKET OR THE STOCK MARKET A BETTER RECESSION PREDICTOR? The stock market has been dropping, but that doesn’t necessarily mean a recession is ahead. The stock market isn’t very accurate when it comes to predicting recessions.

In 1966, following two decades of almost uninterrupted economic growth and stock market gains, a bear market arrived. Stock investors feared a recession might be ahead, and the S&P 500 Index dropped 24 percent over eight months before rebounding and moving higher.

Economist Paul Samuelson, the first person to win a Nobel prize in economics, quipped, “The stock market has predicted nine out of the last five recessions. A factcheck of Samuelson’s off-the-cuff remark in 2016 found that he was right. Bear markets in stocks lead to recessions about 53 percent of the time, reported Steven Liesman of CNBC.

In other words, the stock market has about the same predictive value for recessions as a coin toss. The Treasury bond market has a far better record.

In normal circumstances, yields on Treasuries rise as maturities get longer. So, a two-year Treasury bill will normally yield less than a 10-year Treasury note. On occasion, shorter-maturity Treasuries yield more than longer-maturity Treasuries. This is unusual because investors usually want to earn more when they lend money for a longer period of time. When two-year Treasuries yield more than 10-year Treasuries, we have an inverted yield curve. (The name, “yield curve,” describes how the data looks on a chart.)

An inverted yield curve is a more reliable indicator that a recession is ahead. Alexandra Skaggs of Barron’s explained, “In a recent study of yield curve inversions, BCA Research found that the gap between 2- and 10-year yields has inverted before seven of the past eight recessions...The gap between 3-month and 10-year yields has a better record, calling all 8 recessions without a false signal.”

At the end of last week, the yield curve was not inverted. Three-month and two-year Treasuries were yielding 1.63 percent and 3.17 percent, respectively. The 10-year Treasury was yielding 3.25 percent.

Weekly Focus – Think About It

“My interest is in the future because I am going to spend the rest of my life there."

—Charles Kettering, engineer and inventor

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Weekly Market Commentary June 13, 2022

mkaadmin

Monday, June 13 2022

Blog

Weekly Market Commentary

June 13, 2022

The Markets

Inflation is proving to be far more tenacious than markets had hoped.

The idea that inflation peaked in March was put to rest last week when the Consumer Price Index (CPI) showed that inflation accelerated in May. Overall, prices were up 8.6 percent last month, an increase from April’s 8.3 percent. It was the highest inflation reading we’ve seen since December 1981.

The most significant price increases were in energy (+34.6%) and food (+10.1%). That’s unfortunate because the War in Ukraine has a significant influence on food and energy prices right now, and no one knows how long it will last. In April, the World Bank’s Commodity Markets Outlook reported:

“The war in Ukraine has been a major shock to global commodity markets. The supply of several commodities has been disrupted, leading to sharply higher prices, particularly for energy [natural gas, coal, crude oil], fertilizers, and some grains [wheat, barley, and corn].”

With inflation rising, the Federal Reserve will continue to aggressively raise the federal funds rate. There is a 50-50 chance the Fed will raise rates by 0.75 percent in July (rather than 0.50 percent), and some economists say there could be a 0.75% hike this week when the Fed meets, reported Scott Lanman and Kristin Aquino of Bloomberg.

The inflation news unsettled already volatile stock and bond markets. Major U.S. stock indices declined last week as investors reassessed the potential impact of higher interest rates and inflation on company earnings and share prices, reported Randall W. Forsyth of Barron’s. The Treasury yield curve flattened a bit as the yield on two-year Treasuries rose to a multi-year high, reported Jacob Sonenshine and Jack Denton of Barron’s. The benchmark 10-year Treasury Note finished the week yielding more than 3 percent.

There was a hint of good news in the report. The core CPI, which excludes food and energy prices because they are volatile and can distort pricing trends, is trending lower. It dropped from 6.5 percent in March to 6.2 percent in April and 6.0 percent in May.

The Federal Reserve’s favored inflation gauge is the Personal Consumption Price (PCE) Index, which will be released on June 30.

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.

COPING WITH A BEAR MARKET IS NOT EASY. A bear market occurs when stocks have declined in value by about 20 percent or more. Investing during a bear market can be a lot like playing baseball for a team that’s in a slump. Your teammates are worried, hecklers distract the players’ attention, and the team’s record of wins and losses moves in the wrong direction. You might find yourself beginning to question whether playing baseball is right for you.

Before you decide to exit the game, here are some tips for coping with bear markets:

1. Remember, downturns don’t last forever. The Standard & poor’s 500 Index has experienced 7 bear markets over the last 50 years and recovered from all of them, reported Thomas Franck of CNBC. Here’s a rundown of the duration and returns of bear and bull markets since 1973.

Year Bear market Total return Bull market Total return

1973 21 months -48 percent 74 months +126 percent

1980 20 months -27 percent 60 months +229 percent

1987 3 months -34 percent 31 months + 65 percent

1990 3 months -20 percent 113 months +417 percent

2000 31 months -49 percent 60 months +102 percent

2007 7 months -57 percent 131 months +401 percent

2020 1 month -27 percent TBD TBD

“Bull markets tend to last far longer and generate moves of far greater magnitude than bear markets. Time after time, bear markets have proven to be good buying opportunities for long-term investors,” explained Franck. Remember, past performance does not guarantee future results.

2. Stay diversified. Make sure your portfolio remains well diversified. During bear markets, some segments of the market will outperform while others underperform. A diversified portfolio can provide a cushion. Diversification won’t help you avoid a loss, but it can help minimize it.

3. Talk with us. During market downturns, investors often panic. That causes some to sell investments and incur losses that may be difficult to recover. If you’re tempted to sell, give us a call first. We’ll discuss your concerns, review your portfolio and help you decide on a course of action.

Possibly the most important things you can do during a bear market are to stay calm and resist making any sudden moves.

Weekly Focus – Think About It

“You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."

—Peter Lynch, former portfolio manager

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Weekly Market Commentary June 6, 2022

mkaadmin

Monday, June 06 2022

Blog

Weekly Market Commentary

June 6, 2022

The Markets

How strong is the United States economy?

That’s the question investors were mulling after last week’s jobs report.

More jobs were created in May than economists expected, and the labor force participation rate rose, meaning even more people are returning to work. Overall, the unemployment rate remained at 3.6 percent. However, unemployment rates varied by age, sex and race:

· Adult men: 3.4 percent

· Adult women: 3.4 percent

· Asian: 2.4 percent

· Black: 6.2 percent

· Hispanic: 4.3 percent

· White: 3.2 percent

· Teenagers: 10.4 percent

From an inflation perspective, there was some good news in the employment report as earnings increased at a slower pace than in previous months. Apart from that bit of good news, “More jobs added and higher wages are signs of a strong economy…the concern is that inflation will remain close to its recent peak,” reported Joel Woelfel and Jacob Sonenshine of Barron’s.

Some pointed to layoffs at technology companies as a sign the economy might be weakening. However, as Randall Forsyth of Barron’s reported:

“…16,800 pink slips were handed out last month by 66 technology companies, the most since May 2020 at the depth of the pandemic…Many of those cuts came from outfits with much promise, but no profits, that burned through copious amounts of cash bestowed by a once-ebullient equity market.”

Investors who hoped the Fed would ease up were disappointed by the strength of the employment report. The data reinforced expectations that the Federal Reserve will continue to tighten monetary policy, causing the economy to cool down and inflationary forces to recede, reported Barron’s.

Bond markets appear to agree that the Fed will have to work harder to tame inflation. The U.S. Treasury yield curve moved higher as rates on all maturities of U.S. Treasuries marched higher during the week. That also suggests recession concerns may be overblown, reported Ben Levisohn of Barron’s.

Major U.S. stock indices moved lower last week.

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 WRONG WITH THIS PICTURE? Consumers are feeling more pessimistic than they have in a decade. The University of Michigan Consumer Sentiment Survey shows that sentiment has been sliding lower all year. In May, consumer sentiment was down 10.4 percent from April and 29.6 percent year-over-year. Surveys of Consumers Director Joanne Hsu explained:

“This recent drop [in sentiment] was largely driven by continued negative views on current buying conditions for houses and durables, as well as consumers’ future outlook for the economy, primarily due to concerns over inflation.”

One reason analysts keep an eye on consumer sentiment is that it helps predict what will happen to consumer spending. In theory, when consumers are optimistic, spending should increase and when they are pessimistic, spending should decline.

That’s not what happened this year, though.

Despite high levels of pessimism, inflation-adjusted consumer spending has increased every month in 2022, supported by solid wage gains and abundant savings. Here’s the month-by-month rundown:

· January +1.5 percent from the preceding month

· February +0.1 percent from the preceding month

· March +0.5 percent from the preceding month

· April +0.7 percent from the preceding month

Consumer spending includes everything we buy: furniture, cars, clothing, food, shelter, fuel, healthcare, education – you get the idea. It is the primary driver behind the American economy, comprising about 70 percent of economic growth (as measured by gross domestic product or GDP).

It’s possible that consumers are less pessimistic than the Consumer Sentiment survey suggests. Hsu wrote, “Less than one quarter of consumers expected to be worse off financially a year from now. Looking into the long term, a majority of consumers expected their financial situation to improve over the next five years; this share is essentially unchanged during 2022. A stable outlook for personal finances may currently support consumer spending.”

So, consumers are pessimistic – and they also seem to be optimistic. It’s an interesting conundrum.

Weekly Focus – Think About It

“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”

—F. Scott Fitzgerald, author

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Weekly Market Commentary May 31, 2022

mkaadmin

Tuesday, May 31 2022

Blog

Weekly Market Commentary

May 31, 2022

The Markets

Investors reassessed and markets bounced.

Last week, major U.S. stock indices moved higher for the first time in weeks. The Dow Jones Industrial Average gained 6.2 percent, the Standard & Poor’s 500 Index was up 6.6 percent, and the Nasdaq Composite rose 6.9 percent, reported Ben Levisohn of Barron’s.

The change in investor attitude may have been influenced by a variety of factors, including:

· Strong corporate earnings (profits). Not only were U.S. companies profitable during the first three months of this year, company leaders and market analysts anticipate they will remain profitable throughout 2022. Ninety-seven percent of the companies in the S&P 500 have reported earnings so far, and the blended earnings growth rate is 9.2 percent. Over the full year, analysts anticipate profits will increase by 10.1 percent, reported John Butters of FactSet.

· More attractive share prices. The price-to-earnings (PE) ratio is one way for investors to understand whether a company’s stock is priced fairly. The PE ratio compares a company’s share price to its earnings (profits). At the end of last week, the forward PE ratio for companies in the S&P 500 Index was 17.1. That’s between the five-year average of 18.6 and the 10-year average of 16.9, reported FactSet.

· Optimism about the Fed’s approach to tightening. The minutes for the Federal Reserve Open Market Committee meeting became available last week. Investors were encouraged by the Fed’s policy approach.

“The rally…extended on Wednesday when the Federal Reserve, while acknowledging that it will lift interest rates further in the next couple of meetings, implied that it may slow down the pace of rate hikes if the economy continues to slow down,” reported Jack Denton and Jacob Sonenshine of Barron’s.

· The possibility that inflation may have peaked. The rally continued after the Personal Consumption Expenditure Price Index, which is the Federal Reserve’s favorite inflation measure, showed the pace of inflation slowed in April. Headline inflation was 6.3 percent year-over-year, down from 6.6 percent in March.

While last week’s U.S. stock market rally was appreciated, markets are likely to remain volatile for some time.

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 DID YOU SAY? Idioms are phrases that don’t mean what they say. For example, imagine you hear a person say, “That’s a piece of cake!” The odds are you won’t look around for a slice of German Chocolate because you know they don’t mean it literally. They’re using an idiom to indicate that a task is easy.

There are lots of money and financial idioms. See what you know about financial phrases by taking this brief quiz.

1. When you need a rough estimate of cost, you might ask for:

a. The bottom line

b. Hush money

c. A ballpark figure

d. Two cents

2. From a financial perspective, which is better?

a. To break the bank

b. To take a bath

c. To go Dutch

d. To have a cash cow

3. This idiom originated when American Joe Gans was competing for the championship in his sport. His mom told him to “bring home the bacon.” He won the 1906 event and received $6,000 in prize money. What sport was it?

a. Golf

b. Boxing

c. Cycling

d. Speed skating

4. In Italy, when someone is stingy or cheap, they say that the person:

a. Has short arms

b. Is sitting in salt

c. Has holes in their hands

d. Pares cheese

What money idioms do you use frequently?

Weekly Focus – Think About It

“It's not about what it is, it's about what it can become.”

—Dr. Seuss, The Lorax

Answers:

1) C; 2) d; 3) b; 4) a

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