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Weekly Market Commentary August 8, 2022

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Weekly Market Commentary
August 08, 2022
 
The Markets
 
The strength of the United States economy continues to surprise.
 
If you have ever been camping, you may have banked your campfire by covering the hot coals with ash. It’s a process that keeps the coals burning low so the fire can be easily rekindled. The U.S. Federal Reserve has been trying to bank the fire of U.S. economic growth – and it’s proving to be challenging.
 
There are signs that U.S. economic activity is burning less brightly. For example, economic growth declined during the last two quarters, the U.S. housing market appears to be cooling, and consumer sentiment is low, reported Colby Smith of Financial Times. However, last week’s data suggested some parts of the economy are still ablaze.
 
·        Unemployment fell to 3.5 percent, tying a five-decade low. The U.S. labor market was on fire in July, adding more than twice the number of jobs economists had expected, reported Jeffry Bartash of MarketWatch. The primary driver behind the gains was women returning to work, reported Catarina Saraiva and Maria Paula Mijares Torres of Bloomberg.
 
The jobs numbers added fuel to the debate about whether the U.S. is in a recession. “The labor market in the first seven months of 2022 looks nothing like the labor market in most recessions. Friday’s jobs report was unambiguous. Far from losing steam, the labor market recovery has been firing on all cylinders,” wrote labor economist Julia Pollak in a Barron’s opinion piece.
 
·        Corporate profits grew in the second quarter. So far, 87 percent of the companies in the Standard & Poor’s 500 Index have reported on second quarter earnings. While the pace of growth is slower than the five-year average, three-out-of-four companies have reported higher than expected profits, reported John Butters of FactSet.
 
“The blended…earnings growth rate for the second quarter is 6.7% today,” reported FactSet. “Six of the 11 sectors are reporting year-over-year earnings growth, led by the Energy, Industrials, and Materials sectors. On the other hand, five sectors are reporting a year-over-year decline in earnings, led by the Financials, Consumer Discretionary, and Communication Services sectors.”
 
·        The services sector continued to recover. Economic activity in the services sector grew for the 26th month in a row. It was up 1.4 percentage points in July, according to the latest Services ISM® Report On Business®. “Growth in the U.S. services sector unexpectedly strengthened to a three-month high in July on firmer business activity and orders, easing concerns of a broader economic slowdown,” reported Jordan Yadoo of Bloomberg.
 
Last week, major U.S. stock indices delivered mixed performance, while U.S. Treasury yields rose, reported Jack Denton of Barron’s.
 
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 DO WHEN IT’S REALLY HOT OUTSIDE? In the United Kingdom, they’re cooling off by eating ice cream. It has been hot in England this summer. Temperatures reached 104 degrees Fahrenheit for the first time ever. Asphalt buckled at airports and on roads, and the British government recommended that people stay home, reported Becky Sullivan of NPR.
 
Those who ventured out could visit a pop-up store offering a unique treat: ice cream flavored to taste like savory sauces, condiments, breakfast cereals, and other foods that might be found in a British pantry. The adventurous could pick up pints of ice cream flavored to taste like:
 
·        Tomato ketchup
·        Rolled oats
·        Coco pops
·        Soy sauce
·        Black tea
·        Mayonnaise
·        Salad cream
·        Golden syrup
·        Worcestershire sauce
·        Baked beans
 
“’There's lots of weird flavors and...me and my sister were very excited to try lots of them," one nine-year-old customer told Natalie Thomas of Reuters.
 
What’s do you like to do when it’s hot outside?
 
Weekly Focus – Think About It
“So long as you have food in your mouth, you have solved all questions for the time being.”
—Franz Kafka, novelist
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Weekly Market Commentary August 1, 2022

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Weekly Market Commentary
August 01, 2022
 
The Markets
 
Investors thought they heard a dovish note from the Federal Reserve and markets rallied.
 
Last week, we learned from the Bureau of Economic Analysis (BEA) that economic growth in the United States slowed for the second consecutive quarter. Economic growth is measured by gross domestic product, or GDP, which is the value of all goods and services produced during a specific period. GDP includes household, business and government spending, as well as exports and imports.
 
Before inflation, the U.S. economy grew by 6.6 percent in the first quarter of 2022 and by 7.9 percent in the second quarter, according to the FRED Economic Data. After inflation, GDP shrank by 1.6 percent in the first quarter and by 0.9 percent in the second quarter.
 
Is it a recession or isn’t it?
 
Two consecutive quarters of negative growth is the popular definition of recession, and there was a lot of debate last week about whether the U.S. is in a recession. One reason for the debate is that the main driver of U.S. economic growth is household spending, which accounts for about 68 percent of GDP. During the first half of the year, household spending continued to increase, although it slowed.
 
“While a low unemployment rate and still-healthy consumer and corporate balance sheets mean the economy continues to show resilience for now, expectations that the U.S. will enter a formal downturn within the next year continue to rise,” reported Megan Cassella of Barron’s.
 
Financial markets rallied
 
In unscripted remarks, Fed Chair Jerome Powell indicated that interest rates had reached a neutral level. When rates are neutral, monetary policy is neither contractionary nor expansionary. Investors took Powell’s comment to mean the Fed might ease rates sooner rather than later, and markets rallied, wrote Economist Mohamed A. El-Erian in a Bloomberg opinion piece.
 
“The S&P 500 soared 4.3% for the week and 9.1% in July, the best monthly advance since November 2020…Treasury yields dropped across the curve as well…Taken together, the equity and bond rallies helped loosen U.S. financial conditions,” reported Katherine Greifeld and Vildana Hajric of Bloomberg.”
 
While the rally was welcomed by investors, looser financial conditions are the opposite of what the Fed wants to achieve. It is trying to tighten financial conditions and reduce demand. It appears the Fed has more work to do.
 
 
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.
 
COMPANY SALES AND PROFITS WERE UP IN THE SECOND QUARTER. A perceived dovish tilt at the Fed wasn’t the only reason stocks rallied last week. It’s earnings season – that wonderful time when leaders of publicly traded companies tell investors how they performed during the last quarter and share expectations for the future. Investors review the information and use it to make decisions about whether to buy, sell or hold shares.
 
More than half of companies in the Standard & Poor’s 500 Index had reported by the end of last week. Earnings (profits) were better than expected for about three out of four of those companies. So far, companies in the energy and industrials sectors are the standouts for the second quarter. Energy sector earnings were up 290.3 percent and industrial sector earnings were up 25.7 percent, reported John Butters of FactSet. The consumer discretionary (down 17.9 percent) and financials (down 25.0 percent) sectors are the weakest performers, to date.
 
Revenue, which is the value of goods and services sold, was up more than 12 percent among the companies that have reported so far. Every sector of the index reported higher revenue for the second quarter with energy (up 66.4 percent), materials (up 16.1 percent), and real estate (up 14.7 percent) leading the way. The communication services (up 5.8 percent) and financials (up 2.5 percent) sectors lagged.
 
“Despite worrisome signals from economic proxies like [a big box retailer] and [a shipping and supply chain management company], the earnings season as a whole has turned out to be brighter than expected...That’s fueling speculation that Corporate America will be able to weather the perfect storm of hot inflation, jumbo-sized rate hikes and dwindling growth,” reported Rita Nazareth of Bloomberg.
 
While a significant number of companies have yet to report, blended second quarter earnings for companies in the Standard & Poor’s 500 index were up 6 percent.
 
Weekly Focus – Think About It
“Let your dreams outgrow the shoes of your expectations.”
—Ryūnosuke Satoro, author and poet
 
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Weekly Market Commentary July 25, 2022

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Weekly Market Commentary
July 25, 2022
 
The Markets
 
A lot of people are worried that a recession may be in our future. Some think it may already be here.
 
Unemployment is low (3.6 percent), and inflation is high (9.1 percent). Both tend to occur when an economy is experiencing strong growth. That makes it difficult to believe the United States is in a recession, but some data is pointing that way.
 
Last week, the Atlanta Federal Reserve’s GDPNow estimated that economic growth in the United States was -1.6 percent for the second quarter of 2022, after adjusting for inflation. They measured economic growth using gross domestic product or GDP, which is the value of all goods and services produced in the United States over a specific period of time. GDPNow is based on a simple, unadjusted mathematical model. It is not an official reading, and the model tends to be a bit volatile. For example:
 
·         On April 29, when relatively little data was available for the second quarter, it was +1.9 percent.
·         On May 17, as retail trade and industrial production statistics filtered in, it was +2.5 percent.
·         On July 1, when construction spending and manufacturing data came out, it was -2.1 percent.
·         Last week, after housing starts were released, it was -1.6 percent.
 
The Atlanta Fed’s estimate becomes more accurate as more data is added. It tends to be most accurate near the Bureau of Economic Analysis (BES)’s official GDP release date, reported a source cited by Jeff Cox of CNBC.
 
Since the United States economy shrank by 1.6 percent in the first quarter of 2022, that would mean the U.S. has experienced two quarters of declining economic growth. Technically, that’s a recession.
 
Not everyone expects GDP to shrink. Bloomberg surveyed economists and found they anticipate 0.5 percent growth in the second quarter, which would be an improvement on the first quarter.
 
There is an important distinction between the two quarters. The slowdown in the first quarter was caused by surging imports and slowing exports, which is unusual. The slowdown in the second quarter may be caused by a slowdown in consumer spending, which is the primary driver of U.S. economic growth, and business spending.   
 
The next BEA’s GDP numbers will be released this Thursday, July 28.
 
Last week, Randall Forsyth of Barron’s reported that major U.S. stock indices ­­­­gained. Yields on shorter maturity Treasuries rose last week, while yields on Treasuries with maturities of one year or longer 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.
 
THE CHALLENGES OF DATING. As if the pandemic didn’t create enough dating challenges, inflation is now pushing the cost of dating a lot higher. More than 40 percent of people on the dating app Hinge said they think more about the cost of dating today than they did a year ago, especially members of Gen Z (the oldest Gen Zers are age 25), reported Paulina Cachero of Bloomberg.
 
Instead of meeting for drinks (the cost of alcoholic beverages was up 4 percent year-over-year in June) or sharing a meal in a restaurant (the cost of full-service dining was up 8.9 percent year-over-year in June) many people are opting for less expensive options, such as meeting for coffee, taking a walk, or cooking a meal at home.
 
Another challenge is keeping up with ever-evolving dating slang. “When you’re looking for love these days, it’s totally possible you might get breadcrumbed and orbited on your way to the soft launch,” reported Ashley Austrew on Dictionary.com. Here are a few definitions to know.
 
·        Breadcrumbing. This is slang for leading someone on. Usually, breadcrumbing is chatting or flirting online through text or social media.
 
·        Orbiting. When an ex – or someone else – stops communicating completely (i.e., they ghosted you) but they immediately offer a reaction when you post a picture or story on social media, they are orbiting you, reported Sophie Lloyd of Newsweek.
 
·        Soft launching. When a product is soft launched, it goes through testing in limited groups. It’s the same with dating. A soft launch gives a person’s friends and followers the chance to get used to the idea of a significant other. It’s a slow-motion version of the boyfriend or girlfriend reveal, reported Kaitlyn Tiffany of The Atlantic.
 
The bad news is that it’s never easy to learn a new language. The good news is that the price of gas is dropping so the cost of dating should, too.
 
Weekly Focus – Think About It
“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.”
—Adam Smith, economist and philosopher

 
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Weekly Market Commentary July 18, 2022

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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

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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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