Weekly Market Commentary

September 05, 2023

The Markets

Lowering inflation.

If you’ve ever waited in traffic while the center section of a bridge lifts to allow ships and sailboats to pass underneath, you may have noticed the enormous counterweight that lowers as the bridge moves higher. When the boats have passed, the counterweight rises, and the bridge lowers back into place.  

The Federal Reserve (Fed) often acts as a counterweight to the economy; raising and lowering interest rates to achieve its goals. Recently, the Fed has been raising rates to bring inflation down. Higher rates make borrowing more expensive, slowing economic growth and reducing demand for goods.

Over the past 18 months, the Fed has raised the effective federal funds rate from near zero to 5.33 percent. Last week, data suggested its efforts were working. The Personal Consumption Expenditures Price Index showed that headline inflation has dropped from a peak of 6.8 percent in June of 2022 to 3.3 percent in July 2023.

In addition, last week’s employment report showed jobs growth slowed in August. In an interesting twist, despite more jobs being created, the unemployment rate rose from 3.5 percent to 3.8 percent. It rose because the labor force participation rate increased as more people returned to the workforce and looked for jobs.

“This was a more complicated report than recent months’ with lots of cross-currents. Overall, it supports the soft-landing thesis for the economy, as the labor market is easing without major layoffs and wage dips…This seems like an ideal report for the Federal Reserve. Wage gains are coming down and payrolls are rising but at a much slower pace,” reported Katia Dmitrieva of Bloomberg.

Last week’s data left many believing the Fed will leave rates unchanged in September; however, there was disagreement about whether the Fed will remain on pause, resume rate hikes, or lower rates in the months ahead.

Markets embraced the idea of a Fed pause in September, and major U.S. stock indices moved higher last week, according to Barron’s. In addition, the yield on the one-year U.S. Treasury bill finished the week at 5.4 percent.

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.

DON’T TRUST YOUR EARS. There are pros and cons to artificial intelligence (AI). On the pro side, many people have found AI-powered digital assistants helpful. The assistants schedule events and offer reminders. They relay timely information about weather and traffic, help manage lights, thermostats, ovens, and other smart devices in homes.

On the con side, they’ve become a valuable tool for scammers. Recently, criminals have been using AI-generated voices to scam family members, friends and financial institutions.

The potential for vocal deception was demonstrated at a recent Senate hearing, which featured “a faked voice recording that was written by ChatGPT and vocalized by an audio application trained on [a U.S. Senator’s] Senate floor speeches,” reported Matt Berg of Politico. “’If you closed your eyes at the beginning of the hearing, you couldn’t have told that we were playing a voice clone of myself,’” commented the Senator.

Deepfake audio also has been used to mimic the voices of friends and family members. In another hearing, a mother who was targeted shared the story of receiving a phone call from her terrified teenage daughter and her kidnapper, who demanded a ransom. Only, it wasn’t the daughter – it was an AI-generated voice that sounded just like her, “reported Carter Evans and Analisa Novak of CBS News. 

There are ways for families and friends to protect against voice scams. These include:

·        Choosing a code word. Then, if a suspicious call is received, they can ask the caller for the code word.

·        Calling or texting the person who is making the emergency call (or someone with them). In the example above, the mother called her husband who confirmed their daughter was safe.

Since voice cloning often relies on publicly available audio, it can be a wise choice to make social media accounts private, and only accept followers who you know.

Weekly Focus – Think About It

“And nowadays, the idea of AI is not really science fiction anymore – it’s just science fact.”

—Lisa Joy, screenwriter and director

Weekly Market Commentary

August 28, 2023

The Markets

Becalmed.

The Chinese government’s zero-COVID policy took the wind from the sails of its economy. When the government finally ended the policy earlier this year, many economists anticipated that pent-up consumer demand would refill China’s economic sails, lifting the global economy, reported Malcolm Scott of Bloomberg. Instead, China’s economy is in an economic doldrum, recovering far more slowly than anyone anticipated. As a result, economists have steadily lowered 2023 growth forecasts for the country, reported Yahoo Finance and Diane King Hall.

The economy isn’t well-positioned to move ahead. From April through June, it advanced a desultory 0.8 percent. Unemployment among young people is so high that China stopped releasing the data in July, reported Minxin Pei of Bloomberg. In addition, a banking crisis may be on the horizon as China’s real estate sector, which comprises about 20 percent of the country’s economic growth, is experiencing a downturn. Also, government stimulus may be limited as China’s debt-to-GDP ratio is about 300 percent; the highest among emerging markets, reported economist Tao Wang in an interview with Vincent Ni of National Public Radio.

Recently, China attempted to stimulate growth and restore confidence by cutting a key interest rate, but investors were not impressed. The benchmark CSI 300 Index, which tracks the performance of 300 A-share stocks traded on the Shanghai Stock Exchange or the Shenzhen Stock Exchange, has fallen by 9 percent in recent weeks as overseas investors moved more than $10 billion away from Chinese stocks, reported Xie Yu and Yoruk Bahceli of Reuters.

Meanwhile, the U.S. economy continues to grow faster than anticipated. “Despite umpteen predictions of a slowdown, it keeps going and going. Recent data suggest it may even be on track for annualized growth of nearly 6% in the third quarter, a pace it has hit only a few times since 2000,” reported The Economist via Yahoo Finance.

The strong U.S. economy has impeded efforts to lower inflation. Last week, Federal Reserve Chair Jerome Powell confirmed that U.S. inflation remains too high. “As is often the case, we are navigating by the stars under cloudy skies…At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks…we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data,” Powell said.

His comments were generally well-received. The Standard & Poor’s 500 and Nasdaq Composite Indices finished the week higher, while the Dow Jones Industrial Average moved lower, according to Barron’s. Yields on shorter-maturity U.S. Treasuries generally 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.

POP ECONOMICS. Taylor Swift’s Eras Tour, Beyoncé’s Renaissance World Tour, and movie blockbusters Oppenheimer and Barbie have created an economic juggernaut. Together, they’re expected to pump $8.5 billion into the U.S. economy. One consequence is that economists have increased forecasts for U.S. gross domestic product (GDP) growth this quarter.

See what you know about pop culture trends that are boosting economic growth by taking this brief quiz.

1.   Queen Bey tour kickoff had an unexpected impact on the Swedish economy. What was the “Beyoncé effect”?

a.   A record number of workers called in sick, exacerbating labor shortages.

b.   A Beyoncé-inspired tourism boom boosted inflation in May.

c.    Consumer sentiment rose and everyone was humming “Single Ladies (Put A Ring On It)”.

d.   All of the above

2.   When Taylor Swift’s tour arrived in Glendale, Arizona, the town temporarily changed its name. What was it called?

a.   Never-ever-ville

b.   Taylorville

c.    Swift City

d.   Tay Tay Town

3.   A recently released movie earned an odd accolade. It became the top-grossing film of all time to never have been number one at the domestic box office. Which movie was it?

a.   Barbie

b.   Mission Impossible: Dead Reckoning

c.    The Super Mario Brothers Movie

d.   Oppenheimer

4.   Barbie is the highest grossing film of 2023. It has earned more than $575 million in North America. How much has it made worldwide?

a.   $750 million

b.   $1.1 billion

c.    $1.3 billion

d.   $1.7 billion

Weekly Focus – Think About It

“When you combine ignorance and leverage, you get some pretty interesting results.”

—Warren Buffett, The Oracle of Omaha

Answers: 1) B. An $1,800 difference in U.S. and Swedish ticket prices inspired fans to travel. The rise in tourism may have resulted in higher-than-expected inflation in May, according to Dansk Bank’s chief economist. 2) C 3) D 4) C

 Weekly Market Commentary

August 21, 2023

The Markets

Higher bond yields may be good for income investors – and not so good for stock markets.

After more than a decade of near-zero interest rates, the “free money” era – a time when people and businesses could borrow money and repay it with very low (or no) interest – may be over.

Last year, rising inflation caused the Fed to begin raising the federal funds rate aggressively. Yields on bonds moved higher, too. At the end of last week, the yield on a one-year U.S. Treasury bill was 5.35 percent, up from only 0.40 percent at the start of 2022.

Many people thought rates and bond yields would come back down relatively quickly, but that school of thought is changing, reported Michael Mackenzie and Liz Capo McCormick of Bloomberg.

“All around the world, bond traders are finally coming to the realization that the rock-bottom yields of recent history might be gone for good…The surprisingly resilient US economy, ballooning debt and deficits, and escalating concerns that the Federal Reserve will hold interest rates high are driving yields on the longest-dated Treasuries back to the highest levels in over a decade. That’s prompted a rethink of what ‘normal’ in the Treasury market will look like…strategists are warning investors to brace for the return of the ‘5% world’ that prevailed before the global financial crisis.”

Higher bond yields may be good news for income-oriented investors who turned to dividend-paying stocks for income when bond yields were low. Now, those investors may be able to earn attractive yields with lower-risk Treasuries, reported Al Root of Barron’s.

It’s not such great news for stock markets, though. “…rising Treasury yields are a problem for stocks because investors will rotate out of riskier equities and into less-risky bonds because the additional return in stocks isn’t worth the volatility,” stated a source cited by Teresa Rivas of Barron’s.

Last week, major U.S. stock indices finished lower, while yields on longer-term U.S. Treasuries moved 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.

JUST OUT OF REACH. If you’ve ever stretched on tippy-toe trying to pluck an apple from a tree or pull a bowl from the highest kitchen shelf – and haven’t been able reach it – then you’ve experienced a version of the frustration prospective homeowners are feeling.

In the United States, homeownership is an important means of accumulating wealth. Last week, Emily Peck of Axios wrote, “With home prices going up — and mortgage rates at a stunning 22-year-high — the situation is looking increasingly bleak for Americans looking to buy a house…Prognosticators had believed that rising mortgage rates would force home prices lower — and they did fall by 13% from their 2022 peak. But prices are still 26% higher than they were in the first quarter of 2020”

Americans who were eager to buy homes in the 1980s may have felt similarly bleak. While home prices were significantly lower 40 years ago – the median price was about $69,000 in 1981 versus $420,000 in the first half of 2023 – mortgage rates were considerably higher.

The highest ever 30-year fixed mortgage rate was 18.53 percent in October 1981. Last week, the average 30-year fixed mortgage rate was 7.09 percent, which is below the 52-year average of 7.74 percent, according to data from the Federal Home Loan Mortgage Corporation (aka Freddie Mac). Regardless, in tandem with higher home prices, it’s high enough to put owning a home out of reach for many Americans, right now.

In times like these, it’s important to remember that the economy is cyclical. We are in a period of expansion. Eventually, we will experience a recession. During recessions, rates tend to drop as the Fed tries to stimulate the economic growth. Home values can move lower, too, reported AJ Dellinger of Bankrate.com.

“Decreased demand and fewer buyers mean that fewer people are competing for the same inventory of homes. When that competition dries up, sellers lose the upper hand they enjoy in a roaring seller’s market like we’ve seen in recent years.”

Weekly Focus – Think About It

“My mama always said, life was like a box a chocolates. You never know what you’re gonna get.”

—Forrest Gump, movie character

Weekly Market Commentary

August 14, 2023

The Markets

Consumer sentiment is a lagging indicator. It’s also a contrarian indicator.

After rising sharply in June and July, consumer sentiment leveled off this month. The preliminary August reading for the University of Michigan Consumer Sentiment Index was 71.2. That’s slightly below July’s reading, although it’s up 22.3 percent year-over-year, and up 42 percent from its all-time low of 50 (June 2022). The historic average for the Index is 86.

“In general, consumers perceived few material differences in the economic environment from last month, but they saw substantial improvements relative to just three months ago. Year-ahead inflation expectations edged down from 3.4% last month to 3.3% this month, showing remarkable stability for three consecutive months,” wrote Surveys of Consumers Director Joanne Hsu.

The University of Michigan Consumer Sentiment survey provides information related to:

·        Current economic conditions by asking consumers about the current state of their personal finances, as well as business and buying conditions. In early August, this component of the survey was up 32.1 percent, year-over-year.

·        Expectations for future conditions by asking consumers about expectations for their personal finances, as well as business and buying conditions. In early August, this component was up 16.0 percent, year-over-year.

Consumer sentiment is a lagging indicator because it can take several months for changes in economic activity to be felt by consumers. This type of sentiment also is considered a contrarian indicator. John Rekenthaler of Morningstar explained, “When people are deeply unhappy, stocks are likely to thrive, because the economic damage that bothers them has already occurred. A contented populace, on the other hand, is the investment equivalent of red sky at morning. Equity shareholders, take warning.”

Mixed inflation data caused markets to stumble last week. The Standard & Poor’s 500 and Nasdaq Composite indices finished lower, while the Dow Jones Industrial Average moved slightly higher, reported Barron’s. Yields on U.S. Treasury notes and bonds 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.

IS IT A SCAM? OR ISN’T IT? You may receive a request asking for contributions to a fund that helps families who’ve been devastated by Hawaiian wildfires, storms and flooding in New York, wind and tornadoes in Oklahoma, or another disaster. Before you send money, make sure it’s not a scam. In 2022, consumers in the United States lost almost $8.8 billion to fraud, according to the Federal Trade Commission (FTC).

Scammers often target people through email, text messages and phone calls. See what you know about protecting yourself from scams by taking this brief quiz.

1.   An email arrives with the logo of the U.S. Postal Service. It says your package could not be delivered because of an incomplete address. The email includes a link that you can click on to confirm your address. Which of the following actions can help you determine whether this is a scam? (Choose all that apply.)

a.   Look at the email address of the sender to see if matches the company name.

b.   Find the company’s phone number online, then call and ask about the package.

c.    Get excited about the unexpected gift, click on the link, and see where it takes you.

d.   Check the message for misspelled words and grammatical errors.

2.   Ding! It’s a text from an unknown number that reads, “Can you please get us in today? Muffers is really sick! She’s been laying on her side panting for four hours.” What do you do?

a.   Don’t respond.

b.   Respond by texting, “I think you have the wrong number.”

c.    Respond by texting, “This isn’t the veterinarian’s office.”

d.   Block the number.

3.   You’re looking online for off-campus student housing, but you know rental scams are common. What should you do if a listing is just what you’re hoping to find, but seems almost too good to be true?

a.   Look up the management company’s phone number/email online and call/send a message to confirm the availability of the listing, the listing agent’s name, and the rental address.

b.   Schedule an in-person walk-through (or have a trusted friend walk through for you).

c.    Offer to pay the deposit or application fee with a credit card. If the listing agent insists you wire money or pay with cryptocurrency, refuse to do it.

d.   All of the above

Fraud comes in all shapes and sizes – from adoption fraud to elder fraud, business fraud to consumer fraud, and imposter fraud to unemployment fraud. You can learn more about scams and ways to avoid them on the FTC.gov and USA.gov websites.

Weekly Focus – Think About It

“Good judgment comes from experience, and a lot of that comes from bad judgment.”

—Will Rogers, actor

Weekly Market Commentary

August 07, 2023

The Markets

An unwelcome surprise.

Last week, Fitch Ratings startled markets by lowering the credit rating of United States Treasuries from AAA to AA+. It was the second rating agency to downgrade U.S. Treasuries; Standard & Poor’s cut its rating to AA+ in 2011, reported Benjamin Purvis and Simon Kennedy of Bloomberg.

The decision to lower the rating was not a comment on the strength of the U.S. economy, which expanded faster than expected in the second quarter on the strength of business investment in equipment, particularly transportation equipment, reported Erik Lundh of The Conference Board. 

While many were baffled by the decision, as well as its timing, Fitch had warned it was considering a rating downgrade in May when lawmakers were haggling over the debt ceiling while the possibility of default loomed, reported of Bloomberg.

Last week, Fitch Senior Director Richard Francis told Davide Barbuscia of Reuters, “Fitch downgraded the U.S. credit rating due to fiscal concerns, a deterioration in U.S governance, as well as political polarization reflected partly by the Jan. 6 insurrection.”

There are now 10 countries with government bonds that are rated AAA by at least two rating agencies: Germany, Denmark, Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore, Australia, and Canada, reported Tania Chen of Bloomberg.

Markets did not take the downgrade well. Stocks sold off and Treasury rates rose mid-week. Jacob Sonenshine of Barron’s reported:

“Of course, the [stock] market always needs a reason to fall, and this past week it found one in surging Treasury yields. It’s hard to tell exactly what made them pop. Though some blamed Fitch’s downgrade of the U.S. credit rating to AA+ from AAA, it’s more likely a combination of massive issuance—the Treasury said it plans to issue more debt than had been expected—and solid economic data that forced market participants to reconsider their growth targets. Higher yields make stocks worth less, all else being equal.”

Markets briefly reversed course later in the week when the U.S. employment report showed jobs growth easing. Overall, employment data supported the idea that a recession may be avoided. The number of new jobs created remained above the pre-pandemic monthly average, and average hourly earnings were up 4.4 percent year-over-year, according to Barron’s Megan Leonhardt.

At the end of the week, major U.S. stock indices were lower, reported Barron’s. Yields on longer U.S. Treasuries rose more than yields on most shorter Treasuries, steepening 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.

WHAT ARE BONDS? Bonds are loans that investors make to governments, companies and other entities. When an investor buys a bond, they agree to lend their money for a specific period of time. In return, the issuer of the bond agrees to pay interest and return the investors’ principal when the bond matures.

Bonds are a part of many investment portfolios because they:

1)   Offer a source of income, and

2)   Help manage overall portfolio risk.

Generally, bonds are thought to be safer than stocks; however, they are not risk-free. Bonds have interest rate risk, which means the value of a bond changes over time, depending on how attractive its interest rate is to investors. For example:

Bond values fall when rates rise. If interest rates move from 3 percent to 5 percent, and new investors will earn a 5 percent interest, then the value of bonds offering 3 percent are likely to drop. The opposite is also true.

Bond values rise when rates fall. If interest rates move from 5 percent to 3 percent, and new investors will earn a 3 percent rate of interest, the value of older bonds offering a 5 percent return are likely to increase.

The risk and reward profile of a specific bond depends on a variety of factors, including:

The length of time until the bond matures. When a bond “matures,” the issuer is expected to repay the money it borrowed. Maturities may range from one month to 30 years. Bonds with shorter maturities tend to pay less interest because the chance that interest rates will change significantly is lower.

The creditworthiness of the borrower. Creditworthiness reflects whether the borrower is expected to pay interest and return principal in a timely way. Independent rating agencies – Fitch, Standard & Poor’s and Moody’s – review the financial and credit histories of governments and companies that are issuing bonds, and then assign ratings. There are two broad rating categories:

·        Investment grade (AAA/highest quality, AA/high quality, A/strong quality and BBB/medium investment grade), and

·        Below-investment grade (BB/low investment grade, B/highly speculative, CCC/substantial risk, CC/high probability of default, C/default in process and D in default).

There are many nuances to bond investing. If you have questions, please get in touch.

Weekly Focus – Think About It

“There is nothing either good or bad but thinking makes it so.”

—William Shakespeare, playwright