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Weekly Market Commentary June 13, 2022

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

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

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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Weekly Market Commentary May 23, 2022

Weekly Market Commentary
 
May 23, 2022
 
 The Markets
 
On the fear and greed cycle.
 
One of the most challenging times for investors is a market downturn. Whether markets are experiencing a correction or a bear market, it’s really disturbing to watch the value of your savings and investments decline.
 
Last week, the CNN Business Fear & Greed Index showed extreme fear was the emotion driving investment decisions. The Index “is a way to gauge stock market movements and whether stocks are fairly priced. The theory is based on the logic that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect.”
 
During times like these, many investors succumb to fear and take actions that damage their ability to reach their financial goals. The fear and greed cycle works like this:
 
·        Feeling greedy: During bull markets, everyone wants to invest. The market is moving higher, and nobody wants to miss out. As a result, investors become so enthusiastic that they are willing to pay higher share prices than companies may be worth. Former Federal Reserve Chair Alan Greenspan called this “irrational exuberance.”
 
·        Feeling fearful. During corrections and bear markets, when the market is moving lower, no one wants to invest. Some investors become so concerned, they sell, which drives prices even lower. Investors who sell accept a loss of principal; a decision that can negatively affect their ability to reach long- and short-term financial goals.
 
It’s counterintuitive, but many think the time when investors should be greedy is when the market nears a bottom.4 That’s when it may be possible to find shares with strong fundamentals that are selling at attractive prices. Since no one really knows when a turning point will occur, investors who decide to buy low may experience losses before they realize gains.
 
Last week, major U.S. stock indices moved lower.
 
If you’re feeling fearful, let us know. One of our most important roles is helping clients stay focused on financial goals, maintain a disciplined investment approach, and keep a long-term perspective in difficult markets.
 
 
ABOUT LOSS AVERSION, BEAR MARKETS AND RECESSIONS…Here’s something to remember during volatile markets when the desire to sell may be strong: Our brains are hard-wired to avoid loss. Studies have found the pain of loss is far more powerful than the pleasure of gain. This is called loss aversion.
 
Overcoming loss aversion isn’t easy. One thing that may help is understanding a situation more clearly. For example, knowing more about bear markets may help reduce the fear of these market declines. Here are some facts to consider:
 
·        Bear markets are not uncommon. There have been 11 bear markets since 1956, reported Mark Kolakowski of Investopedia. The shortest bear market lasted one month (February 2020) and the longest was 31 months.
 
·        Bear markets are price declines or 20 percent or more from a previous peak, reported Georgina Tzanetos of Bankrate. A major stock index (like the Dow Jones industrial Average, Standard & Poor’s 500 Index or Nasdaq Composite), an asset class (stocks, bonds, etc.), or an individual stock can experience a bear market.
 
·        Bear markets sometimes precede recessions, but not always. Stock markets reflect what investors think may happen in the future. When they drop, it’s often because investors see hard times ahead. Eight of the last 11 bear markets have occurred before a recession.
 
A recession is often defined as an economic slowdown or contraction that persists for two quarters (six months). The United States economy contracted during the first quarter of 2022. Although forecasters say there is a low probability (19.6 percent) the economy will contract again during the second quarter, according to a survey conducted by the Philadelphia Federal Reserve. The probability of a quarterly contraction increases (28.2 percent) in early 2023.
 
It's unclear whether the U.S. will experience a recession. A lot depends on the Federal Reserve’s fight against inflation, which has been made even trickier by the Russia-Ukraine War and lockdowns in China.
 
Weekly Focus – Think About It
“What good is the warmth of summer, without the cold of winter to give it sweetness.”
—John Steinbeck, author
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Weekly Market Commentary May 16, 2022

Weekly Market Commentary
 
May 16, 2022
 
 The Markets
 
Living with a bear.
 
On the survival series “Alone,” the tension ratchets higher whenever participants encounter bears. Some participants live warily alongside bears, while others tap out. A similar thing happens among investors when they encounter a bear market.
 
What is a bear market?
 
People define bear markets in different ways. Some people say a share price decline of 20 percent is bear market territory. Last week, the Standard & Poor’s (S&P) 500 Index was down 19.6 percent before Friday’s rally, according to Ben Levisohn of Barron’s, and the Nasdaq Composite was already down more than 20 percent.
 
Other people say a bear market occurs when more investors are bearish than bullish. That’s certainly the case today. The Association of Independent Investors’ Consumer Sentiment Index found 49 percent of investors were bearish and 24 percent were bullish last week. Other sentiment indicators, including the Consensus Bullish Sentiment Index cited by Barron’s, also show that investors and investment professionals are feeling more bearish than bullish.
 
So, it’s safe to say we’re either in a bear market or quite close to one.
 
The decisions investors make today can affect long-term outcomes
 
While it is never comfortable to watch the value of savings and investments drop, as they do during a bear market, it’s important to remember that the decisions you make today can have a significant effect on the value of your portfolio over the long-term. During bear markets, investors may choose to:
 
1.   Sell. The thinking behind selling is usually something like this: If I sell, I will cut my losses and preserve what I have. These investors are willing accept a loss of principal, which may hurt their ability to reach long-term financial goals.
 
2.   Stay invested. Investors who remain invested recognize that a market decline is not the same as a loss of principal. By remaining invested, they create an opportunity to regain lost value should the market change direction.
 
3.   Look for opportunities. Some investors recognize that bear markets often create buying opportunities. These investors work with their advisors to identify ways to position for gains should the market recover. The goal of investing, after all, is to buy low and sell high.
 
A few words of wisdom
 
If you’re feeling uncertain, this is a good time to revisit the words of Randall Forsyth and Vito Racanelli of Barron’s. In 2008, they wrote, “The good news is that once the decline reaches that arbitrary 20% mark, based on history, the market has suffered most of its losses. The bad news is that the decline typically drags on for some time, and time may be the worst enemy…as the decline wears down investors' psyches, they tend to bail out at the market's nadir, when things look bleakest – and when the greatest opportunities present themselves.”
 
Last week, major U.S. stock indices finished lower. Rates on U.S. Treasuries moved lower, too, as risk-averse investors moved assets into Treasury bonds, reported Samantha Subin and Vicky McKeever of CNBC.
 
 
HERE’S THE MOST IMPORTANT QUESTION: DO YOU THINK THE STOCK MARKET WILL RECOVER?
 
The editors of Business Week once thought the answer was a resounding, “No.” On August 13, 1979, the cover of the magazine declared: The Death of Equities: How Inflation Is Destroying the Stock Market. The S&P 500 Index closed at 107 that day. As it turned out, they were wrong, and equities weren’t dead. The value of the S&P 500 Index rose significantly over the next few decades.
 
Over the last 50 years, there have been other events that caused investors to think the worst. For example:
 
·        Black Monday. At the end of trading on October 19, 1987, stock markets around the world had experienced the biggest one-day decline in history, according to the Federal Reserve. The Dow Jones Industrial Average lost 22.6 percent that day and finished at 1,739. (The Dow had gained 44 percent during the previous seven months.)
 
Last week, the Dow closed at 32,197.
 
·        The Dotcom Bubble. In the 1990s, everyone wanted to participate in the commercialization of the internet by investing in technology companies – even those that weren’t profitable. A speculative bubble formed and popped, reported Adam Hayes of Investopedia. The Nasdaq Composite Index lost almost 77 percent from March 2000 to October 2002, when the Index moved up from a low of 1,114.
 
Last week, the Nasdaq finished at 11,805.
 
·        The Housing Market Crash. The subprime mortgage market grew fast in the early 2000s, following a change in regulations. Lower-quality mortgages were often included in mortgage-backed securities. When home prices fell, borrowers defaulted, and financial markets were disrupted, reported Paul Kosakowski of Investopedia. The S&P 500 fell from 1,565 in October 2007 to about 1,276 in March 2008.
 
Last week the S&P 500 finished at 4,024.
 
The weight of evidence accumulated over time supports the idea that holding a well-allocated and diversified portfolio focused on your financial goals is a sound choice. During periods of volatility, like this one, it’s important to stay focused on your long-term goals.
 
Past performance is no guarantee of future results.
 
Weekly Focus – Think About It
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.
―Warren Buffet, investor and philanthropist
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