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Weekly Market Commentary July 18, 2022

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

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

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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Weekly Market Commentary June 27, 2022

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 88th...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

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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