Weekly Market Commentary

June 19, 2023

 The Markets

Rebalancing ahead!

There is one decision all investors should make: how to allocate the money they’re investing. Asset allocation decisions are usually based on a myriad of factors: expected returns, potential volatility, and appetite for risk, among others.

Periodically rebalancing a portfolio’s allocation is a critical step, too, because it keeps portfolios from having too much or too little risk. For example, if a portfolio allocation of 60 percent stocks and 40 percent bonds is the goal, and stock market gains increase the portfolio’s exposure to stocks, then it may be time to rebalance the portfolio. Rebalancing means selling assets that have performed well and buying assets that have not performed as well to return the portfolio to the desired allocation.

Asset managers of all sizes rebalance their portfolios – and that could put a stutter in the step of the current market rally, reported Denitsa Tsekova of Bloomberg.

“Equities have outperformed bonds so far this quarter, leaving portfolio managers needing to cut their stocks exposure to meet their long-term targets…The pension and sovereign wealth funds that form the backbone of the investing community typically rebalance their market exposures every quarter to achieve a mix of 60% stocks and 40% bonds or a similar exposure. So far this quarter MSCI’s all-country stock index is up 5% while the Bloomberg global-aggregate bond index is down 1.3%.”

While rebalancing may affect stock markets, the current rally has gained momentum in recent weeks. In May, just 23 percent of the stocks in the Standard & Poor’s 500 Index outperformed the Index, reported Lauren Foster of Barron’s. In June, the rally broadened as companies in more sectors of the S&P 500 posted gains. In addition, the Russell 2000 Index, which reflects the performance of smaller companies, gained seven percent through mid-June, reported Joe Rennison of The New York Times.

Last week, major U.S. stock indices faltered on Friday after Federal Reserve (Fed) officials suggested more rate hikes could be ahead despite the Fed’s decision to pause in June. Regardless, the indices finished the week higher overall, reported Brian Evans and Alex Harring of CNBC. U.S. Treasuries delivered mixed performance.

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.

THERE’S A WAITING LIST… More than a decade ago, a fledgling space flight company began selling tickets for future travel to the edge of space. Early on, tickets were priced at about $200,000 a pop. Today, they’re a bit pricier at $450,000 per seat, although packages for couples and opportunities to reserve entire flights are available. To-date, hundreds of tickets have been sold, reported Michael Sheetz of CNBC.

Some ticketholders may soon be feeling the rumble of powerful engines under their seats. At the end of June, the company’s first spaceplane will launch from Spaceport America in New Mexico, weather allowing. A second commercial light is planned for August, and monthly missions may follow, reported Loren Grush of Bloomberg.

There are other ways for space enthusiasts, who are hoping the price of space flight will fall in the future, to embrace their passion. These include:

• Experiencing weightlessness. Zero-gravity flights aboard a modified Boeing 727 don’t travel into space. The plane flies in parabolic arcs to create a gravity-free experience. For about $9,000 plus tax, participants have the chance to float and flip in lunar and zero gravity.

• Gaining an astronaut’s point-of-view. Next year, space lounges attached to space balloons will carry passengers closer to the cosmos. For $125,000, ticketholders can have drinks and dinner while admiring the curvature of the Earth. Plus, the World Economic Forum reported the flight is carbon neutral.

• Training to survive on Mars. For $175, NASA’s Kennedy Space Center offers guest-explorers, who are at least 10 years old, the chance to train for a trip to the red planet. “Practice your docking skills, navigate the unique Mars terrain and experience the sensation of performing a spacewalk in a microgravity environment.”

Space hotels are in the works, and they will have a hub-and-spoke design that allows the structure to create artificial gravity, reported Nick Mafi and Katherine McLaughlin of Architectural Digest. The first may be operational as soon as 2025.

Weekly Focus – Think About It

“Arching under the night sky inky/ with black expansiveness, we point/ to the planets we know, we/ pin quick wishes on stars. From earth,/ we read the sky as if it is an unerring book/ of the universe, expert and evident.”

—Ada Limón, U.S. Poet Laureate (The full poem, In Praise of Mystery: A Poem for Europa, will travel to space, engraved on NASA’s Europa Clipper spacecraft)

Weekly Market Commentary

June 12, 2023

The Markets

Leaping over the wall of worry.

The “wall of worry” is an obstacle – or set of obstacles – that investors face. This year, the wall reached a considerable height as inflation, the War in Ukraine, United States-China tensions, slower earnings growth, the high cost of residential real estate, low demand for commercial real estate, tightening credit conditions, and other issues weighed on investor confidence and consumer sentiment.

But the wall is not as tall as it once was.

·        The banking crisis calmed.

·        Debt-ceiling negotiations proved fruitful.

·        The Federal Reserve may pause rate hikes.

Last week, investors leaped right over the wall, and the Standard & Poor’s 500 Index headed into a new bull market. Please note, there is no technical definition for a bull market. No regulatory body declares that a bull market has begun. The rule of thumb is this: when an investment or index rises 20 percent from its previous low, then it is in a bull market, reported Chuck Mikolajczak of Reuters.

There is a caveat to this bull market. The bull has not been charging across all sectors. The primary beneficiaries of investors’ enthusiasm have been information technology, communication services, and consumer discretionary stocks, reported Jacob Sonenshine of Barron’s. He wrote:

“It’s a badly kept secret that the S&P 500’s gains have been driven by shares of Big Tech companies...The seven biggest stocks gained 77% this year through the end of May, while the average stock in the index dropped 1.2%. That ‘bad breadth,’ as it’s known on Wall Street, has many investors waiting for the market to collapse when tech finally falters.”

There are a lot of investors sitting on the sidelines, waiting for the right moment to re-enter the market. Barron’s reported that Bank of America’s survey of asset managers found that the average asset manager has about 6 percent of their portfolio in cash right now, up from 4 percent at the end of 2021.

In contrast, bullish sentiment among participants in the AAII Investor Survey, which many view as a contrarian indicator, was way up last week, jumping from 29.1 percent to 44.5 percent. Bearish sentiment dropped from 36.8 percent to 24.3 percent.

Last week, major U.S. stock indices moved higher last week, reported Nicholas Jasinski of Barron’s. Yields on ultra-short U.S. Treasuries fell last week, while yields on longer maturities of Treasuries rose.

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.

 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.

FUTBOL AND THE COST OF LIVING. There was big news for U.S. soccer last week. Argentinian star Lionel Messi announced he won’t be joining Cristiano Ronaldo in the Saudi football league. Instead, he’s headed to Miami FC – the last-place team in the MLS’s Eastern Conference, reported Jessica Golden of CNBC. Needless to say, ticket sales were way up and so were ticket prices. The stadium in Miami has just 18,000 seats.

Miami was also in the news last week because of its cost of living. SmartAsset studied how much a $100,000 salary would buy in 76 U.S. cities, after taxes, based on the cost of living in each city. Among the cities in the study, $100,000 goes the furthest in:

1.   Memphis, Tennessee

2.   El Paso, Texas

3.   Oklahoma City, Oklahoma

4.   Corpus Christi, Texas

5.   Lubbock, Texas

The low cost of living and lack of state income tax elevated seven Texas cities into the top 10, reported Patrick Villanova of SmartAsset. Miami came in at #57. That still made it more economical than many larger and more expensive locales.

Miami is a bargain for the wealthy, reported Natasha Solo-Lyons of Bloomberg, citing another Smart Asset study. People with income of $250,000 who move from New York City to Miami would have 32 percent more to spend, thanks to lower taxes and a lower cost of living. People from San Francisco would gain 24 percent, but those from Chicago would have just one percent more, reported Jaclyn DeJohn of SmartAsset. 

If you’re really looking for a bargain, the least expensive cities in the U.S. are Brownsville, Texas; Dayton, Ohio; Wichita Falls, Texas; South Bend, Indiana; and Toledo, Ohio, according to Niche.com.

Weekly Focus – Think About It

“There is only one kind of shock worse than the totally unexpected: the expected for which one has refused to prepare.”

—Mary Renault, author

Weekly Market Commentary

June 05, 2023

The Markets

As Gomer Pyle used to say, “Surprise, surprise, surprise!”

Gomer Pyle USMC was a popular American sitcom in the 1960s. It focused on a naïve, do-gooding auto mechanic from Mayberry RFD who joined the military. Gomer Pyle, the much-loved main character, was known for catchphrases such as shazam, golly, and surprise, surprise, surprise.

Surprise. Last week, the continued strength and resilience of the labor market was a revelation. The Federal Reserve has raised rates 10 times over the last 14 months, trying to slow economic growth and drive inflation lower, reported Jeff Cox of CNBC. In theory, higher rates should have cooled the labor market and led to higher unemployment rates. So far, that hasn’t happened.

Last week, the Job Openings and Labor Turnover Survey (JOLTS) showed the number of job openings in the United States increased from March to April, while the number of people separating from employers fell. Then, the Bureau of Labor Statistics’ employment report showed that more jobs were created in May than anyone anticipated.

Surprise. It was also surprising that investors took the news about labor markets in stride. Economic data suggesting the economy remains strong could cause the Fed to raise rates again in June rather than taking a pause as many hope it will. Nicholas Jasinski of Barron’s offered a possible explanation.

“While the [labor market] strength might not be what the Federal Reserve wants, it’s great news for investors because there continues to be no sign of a slowing economy – let alone a recession – in the labor market data. That means there’s no impending slowdown to hit corporate earnings and drag down stock prices, and it’s helping to send cyclical sectors higher…”

Surprise. Investors don’t expect the Federal Reserve to increase rates in June, despite strength in the labor market. That may be because the employment report also offered hints that the economy may be softening. For instance, the unemployment rate rose to 3.7 percent as unemployment among women and Black Americans increased. In addition, the average length of the work week shortened slightly, and the pace of average hourly wage increases slowed.

Last week, major U.S. stock indices gained, according to Barron’s.  Yields on U.S. Treasuries with maturities of one-year or longer finished the week lower as policymakers voted to raise the debt ceiling.

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.

 ABOUT THE NATIONAL DEBT…Americans are more concerned about reducing the budget deficit than they have been in the past, according to a Pew Research survey.

When the United States spends more than it receives, there is a budget shortfall (aka, a deficit). Each annual deficit adds to previous annual deficits. The total of all deficits (offset by any surpluses) plus interest owed is the national debt. So far this year, the U.S. Treasury reports the government has:

·        Received $2.7 trillion (less than last year).

·        Spent $3.6 trillion (more than last year).

·        A year-to-date shortfall is $925 billion.

When that shortfall is added to the total already owed, the national debt is about $31.5 trillion. Our national debt includes two types of borrowing:

78 percent is publicly held debt ($24.6 billion). This includes Treasury securities sold to investors at home and abroad. The amount has grown by 106% since 2013. One of the biggest owners of public debt is the Federal Reserve system, which holds almost 20 percent of publicly held national debt, according to Pew Research.

22 percent is intragovernmental debt ($6.9 trillion). The U.S. government owes this money to federal trust funds and accounts. The amount has grown by 40 percent since 2013. One of the government’s biggest creditors is the Social Security system. “…the program’s retirement and disability trust funds together held more than $2.8 trillion in special non-traded Treasury securities, or 9% of the total debt.”

Last week, Congress voted to raise the debt ceiling, which is the limit on the national debt.

Weekly Focus – Think About It

“Things never go the way you expect them to. That’s both the joy and frustration in life. I'm finding as I get older that I don’t mind, though. It’s the surprises that tickle me the most, the things you don’t see coming.”

—Michael Stuhlbarg, actor

Weekly Market Commentary

May 30, 2023

The Markets

It’s a three-ring circus!

For centuries people have embraced the circus. Enjoying the sticky fluff of cotton candy while elephants, clowns and trapeze artists perform in the spotlights. Merriam Webster Dictionary defines the experience as wild, confusing, engrossing and entertaining.

Some aspects of that description apply to recent financial market activity. Last week, we saw:

·        Inflation flying above the Federal Reserve (Fed)’s target. Inflation re-entered the limelight last week. The Personal Consumption Expenditures (PCE) Index, one of the Fed’s favorite inflation gauges, showed that inflation rose in April along with consumer spending. That was unwelcome news for investors who hoped the Fed would leave the federal funds rate unchanged at its June meeting and, possibly, begin to lower rates later this year. By the end of last week, trading suggested there was a strong chance the Fed would raise rates in June, reported Jeff Cox of CNBC.

·        Artificial Intelligence (AI) drawing crowds. The thrill of AI has attracted investors and lifted stock markets higher this year. “Some stocks seen as AI winners – such as semiconductor makers and software developers – have more than doubled in value as traders bet on massive growth in the industry, even as fears mount over waves of job losses as everyday tasks become automated,” reported Graeme Wearden of The Guardian. Opinions vary about whether the rally is sustainable.

·        The debt ceiling barreling toward the center ring. Negotiators have reached a tentative agreement that would prevent a debt-ceiling default. Now, the agreement must be accepted by Congress, reported Steve Holland, Gram Slattery and Katharine Jackson of Reuters. No one is certain what will happen if Congress doesn’t accept the deal. Natalie Sherman of the BBC reported, “[A U.S. default] has never happened before so it is not entirely clear…The government would no longer be able to pay the salaries of federal and military employees, and Social Security [checks] – payments that millions of pensioners in the U.S. rely on – would stop. Companies and charities that count on government funds would be in peril.”

With so many issues vying for attention, what should investors do? The answer is more straightforward than you might imagine: focus on their financial goals. The weight of evidence accumulated over time supports the idea that holding a well-allocated and diversified portfolio built to meet your financial goals is a sound choice. While past performance is no guarantee of future results, financial markets have weathered a variety of calamitous events – including world wars – and come through.

Last week, the Standard & Poor’s 500 Index and Nasdaq Composite gained, while the Dow Jones Industrial Average lost ground, according to Barron’s. Yields on most maturities of U.S. Treasuries finished the week higher.

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

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

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

 WHAT DO YOU KNOW ABOUT INNOVATION? Innovation is powerful. When new technologies take hold, they can revolutionize products, practices and industries, making older technologies obsolete. As a result, companies must adapt to remain competitive or disappear.

In economics, this concept is called creative destruction. It was introduced by economist Joseph Schumpeter in 1942. In his book, Capitalism, Socialism and Democracy, Schumpeter explained that

the cycle of obsolescence and renewal is an essential aspect of capitalism that drives economic growth. See what you know about innovation and creative destruction by taking this brief quiz.

1.   Investors are enthusiastic about an innovation that has helped drive stock market returns higher this year. What is it?

a.   Vertical farming

b.   Air taxis

c.    Artificial intelligence

d.   Quantum computing

2.   One innovation resulting from the COVID-19 pandemic was remote work. How did this affect the economy?

a.   Demand for office space fell

b.   Employment among workers with disabilities rose

c.    Hotel stays lengthened as people combined business and leisure

d.   All of the above

3.   The World Intellectual Property Organization’s Global Innovation Index identifies the most innovative economies in the world. In 2022, which country was the most innovative? (This country has led the pack for a dozen years.)

a.   Switzerland

b.   United States

c.    Sweden

d.   United Kingdom

4.   Which of the following innovations resulted in creative destruction?

a.   Streaming services

b.   Assembly lines

c.    E-commerce

d.   All of the above

Weekly Focus – Think About It

“They say I'm old-fashioned, and live in the past, but sometimes I think progress progresses too fast!”

—Dr. Seuss, author

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

Weekly Market Commentary

May 22, 2023

The Markets

Investors aren’t happy, but stocks are up.

If you ever participated in a fantasy football league, you may have experienced a run on a position during your draft. One person picks a kicker or defense mid-round and, suddenly, almost everyone rushes to follow suit. A similar occurrence may be happening in the United States stock market.

While major U.S. stock indices are in positive territory year-to-date, market gains have been concentrated in just a few companies’ stocks. Al Root of Barron’s explained:

“Today’s five biggest stocks…have a combined market cap of about $8.7 trillion, almost 25% of the S&P 500 [capitalization (cap)] and about 3.2 times the $2.7 trillion Russell cap…What’s more, those top five stocks have returned an average of 50% in 2023, accounting for roughly 80% of the S&P 500’s 8% gain. The median stock in the index has gained less than 2%, and less than half are trading above their 200-day moving averages…The top five stocks are also expensive: They trade for an average of 31 times estimated 2024 earnings, while the index trades at 17.4 times earnings.”

The fact that five stocks have been driving market performance may be hurting investor sentiment, according to sources cited by Barron’s. Sentiment also has been affected by concerns about inflation, tightening credit conditions, the possibility of recession, and the chance the U.S. may default on its debt. Investor sentiment is the way investors feel about an asset or financial market. When investors are feeling pessimistic about stocks, stock markets tend to fall. Similarly, when investors are optimistic, stock markets tend to rise.

Bank of America’s latest survey found that sentiment among global asset managers is the most bearish it has been this year. Almost two-thirds of participants think economic growth will slow this year, although a similar number anticipate a soft landing for the global economy, reported Ksenia Galouchko of Bloomberg.

Last week, the Federal Reserve signaled the end of rate hikes was near, which pushed major U.S. stock indices higher. The indices gave back some gains on Friday after debt-ceiling talks faltered but finished the week higher overall. The yields on most maturities of U.S. Treasuries moved the week higher.

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.

 EL NIÑO IS COMING SOON. The list of items that have the potential to slow economic growth in the U.S. and/or the world is longer than anyone would like it to be. Now, there’s a new item on the list: El Niño.

El Niño is a change in the normal wind and wave patterns of the Pacific Ocean that occurs every few years. The change can significantly alter weather across the nation, according to the National Oceanic and Atmospheric Administration. It also can have a significant influence on economic growth, according to new research published in the journal Science.

Dartmouth scientists Christopher Callahan and Justin Mankin wanted to investigate how climate variability affects economic growth. They decided to quantify the impact previous El Niños have had on the world’s gross domestic product (GDP), which is the value of all goods and services produced. Eric Roston of Bloomberg reported:

“The new analysis uses a model that combines economic growth and climate variability from 1960 to 2019 and compares GDP growth around the world before and after El Niño events. The output suggests a ‘persistent’ impact on countries’ economic growth, especially in Peru, where the dynamic was first discovered, and around the tropics. They found that a powerful episode in 1997 and 1998 set world GDP back $5.7 trillion and a 1982/1983 El Niño reduced growth by $4.1 trillion.”

Scientists at the U.S. Climate Prediction Center say there is a 90 percent chance that an El Niño weather pattern will occur later this year. It remains to be seen whether or how El Niño will alter economic growth.

As an investor, it can be difficult to think of economic slowdowns and recessions as normal parts of the economic cycle, especially when financial markets head lower. If you’re concerned about the future, please let us know. One of our most important roles is helping clients maintain a long-term perspective.

Weekly Focus – Think About It

“You'll never find a rainbow if you're looking down.”

—Charlie Chaplin, comic actor