Weekly Market Commentary

May 15, 2023

The Markets

Brace yourself! The debt ceiling standoff continues.

Consumers aren’t optimistic. The Consumer Sentiment Index fell to a six-month low in May, dropping 9.1 percent month-to-month. Participants in the University of Michigan survey were:

·        Less concerned about current economic conditions (down 5.4 percent, month-to-month), and

·        More concerned about future economic conditions (down 11.7 percent, month-to-month).

They were wary about the outcome of debt ceiling discussions, concerned that policymakers will cause the United States to default on its debt, and apprehensive about how that could impact the economy, according to Director of Surveys Joanne Hsu.

What is the debt ceiling?

The debt ceiling is the amount of money the United States government is allowed to borrow to pay debts it has already incurred. These payments include interest on Treasuries, military salaries, Social Security and Medicare benefits, tax refunds, and other financial obligations. The debt ceiling has been lifted 78 times since 1960.

What happens if policymakers don’t raise the debt ceiling?

No one knows for certain, although many economists, analysts, and the financial press are concerned. Here’s what some have said:

“…the U.S. federal government would face various unpalatable options, ranging from delaying payments to contractors, Social Security recipients, Medicare providers or agencies; to defaults on payments on US government debt.”

—Chris Giles and Colby Smith, Financial Times, May 7, 2023

“A technical failure by the U.S. to meet its obligations would impact those Treasuries coming due most immediately. Bill markets are pricing in some risk of default in early June…A default threatens to spur big moves around the globe, with the prospect of a major economic downturn and a reassessment of Fed monetary policy potentially igniting a perverse bid for Treasury bonds on haven demand. Conversely, a resolution could shift the focus back to the outlook for inflation and the credit cycle for traders betting on whether the era of aggressive Fed interest-rate hikes has peaked.”

—Benjamin Purvis, Michael Mackenzie and Ye Xie, Bloomberg, May 13, 2023

“Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a drop off in consumer confidence that could shock the U.S. financial market and tip the economy into recession.”

—Noah Berman, Council on Foreign Relations, May 2, 2023

Many observers believe a deal will be reached before the June 1 deadline. “If you’re a long-term investor, there’s a strong case to do nothing. If history is a guide, a deal to avoid a default will be struck,” reported Lauren Foster of Barron’s.

Last week, major U.S. stock indices finished the week with mixed performance, reported Barron’s. The Dow Jones Industrial Average and the Standard & Poor’s 500 Index lost value, while the Nasdaq Composite gained. The yield on the one-month Treasury bill finished the week 28 basis points higher than where it started.

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.

 IT’S A GRILL RUSH! Since its post-pandemic re-opening, the Chinese economy has been recovering more slowly than many companies and investors anticipated. But there’s one industry that’s red hot: food tourism. Domestic tourists have been flocking to a small industrial city that has become the epicenter of a national obsession with grilling.

Thousands of tourists have been traveling to the central province of Shandong to experience grilled kebabs and taking pictures of the experience for social media. The skewers are cooked, flattened and dipped in garlic chili paste before being coated in sesame seeds and peanuts. According to The Economist, crowds have been so large that arenas are being remade into temporary dining halls, and banks are issuing low-interest loans to support companies in grilling-related industries.

The great grilling frenzy highlights a social media trend that’s currently popular among young people in China: Special-Forces tourism. The mission of these tourists is the experience – find and eat tasty food while forgoing sleep and spending as little time and money as possible. Some travel to more than 10 locations in a single day. Kebabs and a local beer hit the sweet spot for special-forces tourists. Altogether, the meal and drink cost hungry travelers about $0.40 in US dollars.

Kebabs are a delicious addition to summer grilling recipes.

Weekly Focus – Think About It

“Pull up a chair. Take a taste. Come join us. Life is so endlessly delicious.”

—Ruth Reichl, chef, writer, and editor

Weekly Market Commentary

May 08, 2023

The Markets

The labor market just keeps growing…and growing…

Last week, the April employment report for the United States arrived. It showed that unemployment dropped to the lowest level in more than 50 years – 3.4 percent. Other highlights included:

·        The creation of 253,000 jobs in April. That was well above consensus estimates, according to Catarina Saraiva and Steve Matthews of Bloomberg.

·        The highest workforce participation rate since 2008. This is the percentage of Americans who are either working or looking for a job, reported Megan Cassella of Barron’s.

·        The lowest unemployment rate for black workers ever. By race, the April unemployment rate was 2.8 percent for Asian Americans, 3.1 percent for white Americans, 4.4 percent for Hispanic Americans, and 4.7 percent for Black Americans.

·        Average hourly earnings rose 4.4 percent year-over-year. Wage growth may be one reason inflation remains higher than the Federal Reserve would prefer, according to a source cited by Bloomberg.

There were signs that the labor market growth might be slowing down. The number of jobs created in February and March were both revised lower.

The Federal Reserve will be weighing the strengths and weaknesses of the labor market, as well as other data, as it makes future rate hike determinations. Last week, the Fed raised the federal funds rate from 4.83 percent to 5.08 percent, and Chair Powell suggested it could be the end of the tightening cycle, reported Jeff Cox of CNBC.

“As the Federal Reserve works to rein in inflation, the labor market’s confounding durability has given central-bank officials space so far to keep interest rates in restrictive territory without having to worry about widespread layoffs or acute economic pain,” reported Barron’s.

Last week, major U.S. stock indices finished the week with mixed performance, reported Barron’s. Yields on most U.S. Treasuries moved lower over the 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.

TRAVEL IS BACK! After three years of COVID-19 lockdowns, airline staffing shortages, last-minute flight cancellations and high car rental costs, Americans are returning to the roadways and airways this year. An AARP survey found that 62 percent of Americans, ages 50 and older, plan to take at least one trip this year and some plan to take three or four.

It’s a boon to the travel industry as Americans are expected to spend more on travel in 2023 than they did before the pandemic, according to a source cited by Becky Pokora of Forbes. In April, the U.S. Travel Association reported that spending is up 4 percent, although it may be leveling out as spending on airfares and hotels retreated a bit in April.

Americans plan to spend about $6,600 on travel this year, and many are cost conscious and wary of inflation, according to the AARP. Nevertheless, most people aren’t putting their vacation plans on hold. In fact, with the strong U.S. dollar working in Americans’ favor, heading overseas just might be the way savvy travelers can get the most for their money. The dollar and euro have been nearly equal in value, and currency exchange rates are making a host of other countries – across the Americas, Asia and Europe – attractive destinations.

Where does the U.S. dollar go the farthest? According to Quincy Williamson of Kiplinger:

·        In Europe, the answer may be Greece and Portugal.

·        In the Americas, look to Mexico, Costa Rica, Peru, Argentina and Chile.  

·        In Asia, Japan, Thailand and Vietnam are the most affordable countries to visit.

While traveling abroad may be attractive from a financial point of view, the AARP survey found that just 40 percent of survey respondents plan to head overseas this year. That could prove to be a benefit if popular destinations are less crowded. Whether you prefer cities, beaches or rainforests, international travel could be just the ticket this year.

Weekly Focus – Think About It

“Why do you go away? So that you can come back. So that you can see the place you came from with new eyes and extra colors. And the people there see you differently, too. Coming back to where you started is not the same as never leaving.”

—Terry Pratchett, author

Weekly Market Commentary

May 01, 2023

The Markets

Get real!

Despite more than a year of aggressive Federal Reserve rate increases, the United States economy is still growing, albeit more slowly. U.S. gross domestic product (GDP) – the value of all goods and services produced in the U.S. economy – grew by 5.1 percent over the first quarter.

You may have read or heard that real GDP increased by 1.1 percent over the first quarter. That is also true. In economics, “real” means the value of something after inflation (inflation is the rate at which prices are increasing). For example:

·        A real return on an investment is the return after inflation has been subtracted. So, if an investment earns 7 percent and inflation is 4 percent, the real return in 3 percent.

·        Real growth in personal income is income after changes in the cost of goods and services are considered. For example, if personal income increases by 5 percent, from $50,000 to $52,500, and inflation is 4 percent, the real increase in income is 1 percent.

·        In the first quarter, real GDP was lower than GDP because real GDP reflects price changes – and prices have been moving higher.

Last week, the Personal Consumption Expenditures (PCE) Index, which is one of the Federal Reserve’s preferred measures of price increases, showed that inflation generally continued to trend lower.

·        Headline inflation was 4.2 percent in March, year-over-year, down from February when it was 5.1 percent.

·        Core inflation, which excludes food and energy prices, was up 4.6 percent, year-over-year, down slightly from February when it was 4.7 percent. However, month-over-month, core inflation remained unchanged.

Inflation and Fed rate hikes have had less impact on company earnings than analysts anticipated. To date, 53 percent of companies in the Standard & Poor’s 500 Index have reported results for the first quarter and almost 8 of 10 have reported that earnings per share was higher than expected. Overall, S&P 500 earnings are expected to dip in the first quarter before increasing later in 2023, reported John Butters of FactSet.

Last week, major U.S. stock indices finished the week higher, according to ­­­­Nicholas Jasinski of Barron’s. Yields on U.S. Treasury notes and bonds 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.

WHY IS INFLATION SO STUBBORN? Inflation is proving to be almost as stubborn as an angry two-year-old determined to eat popsicles for breakfast. Many have pointed to the tight labor market as the reason prices continue to rise. While labor costs are an important factor, there are other issues at play, too.

When the national news reports on a shock – the war in Ukraine affecting food supplies, the pandemic affecting supply chains, bird flu producing an egg shortage, or a dairy farm explosion affecting the price of milk – companies may take the opportunity to raise prices because customers are less likely to complain about the increase, reported Tracy Alloway and Joe Weisenthal of Bloomberg.

Companies in an industry, such as soft drink makers or chicken wing restaurants, may raise prices in tandem, giving consumers little choice but to pay the higher price. When the shock is resolved and wholesale prices move lower, companies often don’t lower retail prices. Instead, they simply keep prices high.

Isabella Weber and Evan Wasner at UMass Amherst listened to earnings calls, compiled data on companies, and reviewed literature about corporate price-setting. Their research paper reported that overlapping emergencies in recent years have allowed companies to increase prices and profits. They dubbed the phenomenon “sellers’ inflation”. They wrote:

“Sellers’ inflation is not possible in a perfectly competitive economy, but in a highly concentrated economy in which large firms are price makers, it is a real possibility – as we are witnessing again today.”

Sellers’ inflation may be another reason inflation has been sticky.

In theory, a recession and falling consumer demand should cause companies to lower prices. However, as Weber and Wasner pointed out, recessions have the potential to hurt smaller businesses, if they have difficulty finding funding, and increase the power of larger ones. 

Weekly Focus – Think About It

“Character is like a tree and reputation like a shadow. The shadow is what we think of it; the tree is the real thing.”

—Abraham Lincoln, former U.S. President

Weekly Market Commentary

April 24, 2023

The Markets

Better than expected.

It’s earnings season – the time when publicly traded companies report on how profitable they were during the first quarter of 2023. So far, reports suggest that companies listed on United States stock exchanges did better than many had anticipated. Almost 20 percent of companies in the Standard & Poor’s 500 Index have reported and three-out-of-four have exceeded earnings expectations, reported John Butters of FactSet.

“At any given moment, earnings expectations reflect everything that’s happening in the world, from the economy and the Federal Reserve to interest rates and geopolitics. Right now, most of the fear stems from expectations about the economy. The Fed has lifted interest rates to tamp down inflation by reducing economic demand, and so far, that seems to be working. The rate of inflation has been cut almost in half from its post-COVID peak, but growth is slowing with it...And since higher rates operate with a lag, the full effects of the rate hikes probably haven’t been felt yet, raising the possibility of a recession,” reported Jacob Sonenshine of Barron’s.

Banks were among the first companies to report on earnings, and the news reassured investors who were concerned about financial stability after the collapse of three regional banks. Despite contributing $30 billion to bailout a regional bank, big U.S. banks generally reported healthy results and higher interest income in the first quarter, reported Max Reyes of Bloomberg.

The banks still face significant challenges. Loan delinquencies have been rising from historic lows as the pandemic policies have come to an end. The four largest lenders in the United States saw a 73 percent increase in consumer loan defaults and have significantly increased the assets set aside to cover loan losses.

Last week, many major U.S. stock indices finished the week close to where they started it, according to Barron’s. Yields on U.S. Treasuries generally moved higher before retreating a bit.

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.

POWER OUTAGE? THERE’S A HYBRID FOR THAT. In recent years, storms have led to lengthy power outages in many parts of the United States. When ice storms knocked out the Texas power grid in the winter of 2021, some people relied on generators to supply their energy needs. Others turned to hybrid trucks, reported Paul Eisenstein of NBC News.

One hybrid truck owner in Texas purchased the optional generator feature, thinking he would use it when camping or to fire up power tools in remote areas. Instead, after the storm hit, he hooked the vehicle up to his house. For three days, it “provided enough energy to handle a refrigerator, a freezer, lights, the cable and internet box and a television.”

When the supply of generators ran low, one U.S. truck manufacturer asked its Texas dealerships to lend any hybrid trucks they had in stock to people who needed power.

Hybrid trucks that double as generators is just one example of innovation in the auto industry.

“The $4 trillion automotive industry is going through three big transformational changes at once. Two of those – the rise of electric vehicles and the gradual emergence of autonomous driving – have attracted most of the attention. But the third one could be more powerful still: Cars are becoming computers on wheels,” explained Eric Savitz of Barron’s.

There are more lines of code in automobiles than there are in jumbo jets, according to a C-suite executive at a semiconductor firm who was cited by Barron’s. In fact, automakers have been scooping up workers laid off by technology companies to help develop branded software.

Not too far in the future, it’s possible that drivers will be loyal to vehicle brands in the way they are to mobile phone brands. When drivers change brands, they’ll have to learn a new system – and that could give industry leaders a competitive advantage.

Weekly Focus – Think About It

“There are not more than five musical notes, yet the combinations of these five give rise to more melodies than can ever be heard. There are not more than five primary colors, yet in combination they produce more hues than can ever been seen. There are not more than five cardinal tastes, yet combinations of them yield more flavors than can ever be tasted.”

—Sun Tzu, philosopher

Weekly Market Commentary

April 17, 2023

The Markets

Keep your eye on the big picture.

Last week, there was nothing too surprising in economic and financial news.

Inflation eased, as expected, although it remained above the Federal Reserve (Fed)’s target rate. The Treasury yield curve remained inverted with three-month Treasury bills yielding more than 10-year Treasury notes, as they have been since November 2022. Also, we may be nearing an end to rate hikes around the world. Bloomberg News reported:

“With the first signs of dents in economic growth now visible, and fallout from financial-market tensions lingering, any pause by the Federal Reserve after at least one more increase in May could cement a turn in what has been the most aggressive global tightening cycle in decades.”

Recession predictions for the United States continue to be prominent and varied, ranging from no recession to mild recession to deep recession over the next three to 18 months, reported Rafael Nam and Greg Rosalsky of NPR.

Minutes from the Fed’s March meeting were released last week, and they show that Federal Open Market Committee members think tightening credit conditions could result in a mild recession later this year with recovery following in 2024 and 2025. 

While the idea of an economic downturn can be unnerving, recessions are part of every economic cycle. In times of uncertainty, it can help to step back and look at the big picture: the United States is quite remarkable.

“Nearly four-fifths of Americans tell pollsters that their children will be worse off than they are. In fact, America has sustained its decades-long record as the world’s richest, most productive and most innovative big economy. Indeed, it is leaving its peers ever further in the dust…American firms own more than a fifth of patents registered abroad, more than China and Germany put together,” noted Zanny Minton Beddoes of The Economist.

Economic and market uncertainty persists in the United States and elsewhere. We may experience a recession this year. We may not. Either way, it’s important to keep the big picture in mind. Recessions are one part of the economic cycle – expansions are another.

Last week, major U.S. stock indices finished ­­­­­­higher, reported ­­­­­Nicholas Jasinski of Barron’s. In the Treasury market, yields on many maturities moved higher over the 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.

WOOLLY MAMMOTH MEATBALLS, ANYONE? In late March, the Nemo Science Museum in Amsterdam unveiled a remarkable exhibit, featuring a prehistoric alternative to beef, reported Helen Chandler-Wilde of Bloomberg. The not-for-consumption, lab-cultured display featured:

“…a cantaloupe-size globe of overcooked meat perspiring under a bell jar. This was no ordinary spaghetti topper: It was a woolly-mammoth meatball, created by an Australian lab-grown-meat company...using real mammoth DNA,” reported Yasmin Tayag of The Atlantic.

The meatball was made by combining genetic material found in mammoths with elephant DNA, reported Bloomberg. It’s not the first time a food product has been made from a long extinct species. In 2018, a company produced mastodon gummy bears using gelatin made with mastodon DNA.

The mammoth meatball is intended to draw attention to cultured meat. That’s the most palatable marketing term for cellular protein farming. The meat “is grown in anything from a test tube to a stainless-steel bioreactor. The process is borrowed from research into regenerative medicine, and in fact [Professor] Mark Post of Maastricht University, who cultured the world’s first burger in 2013, was previously working on repairing human heart tissue,” reported Amy Fleming of BBC Science Focus Magazine.

Cultured chicken is already being served in Singapore, and the company that produces it has applied for approval in the United States.

It’s unclear whether cultivating meat in labs will be more environmentally friendly than traditional farming, but it’s a growing segment of the biotechnology industry.

Weekly Focus – Think About It

“Whenever you do a thing, act as if all the world were watching.”

—Thomas Jefferson, founding father