Weekly Market Commentary

July 3, 2023

The Markets

Showing remarkable resilience.

Throughout the first half of 2023, the U.S. economy and financial markets proved to be resilient – and so did investors. U.S. stock markets moved higher amid enthusiasm for artificial intelligence and expectations that the Federal Reserve’s tightening cycle might be near an end. The Standard & Poor’s 500 Index entered a bull market and the Nasdaq Composite Index delivered its best first-half performance in 40 years, gaining more than 30 percent over the period, reported Barron’s.

So far this year, many investors have remained optimistic amid significant uncertainty that included:

·        A banking crisis and tighter credit. In March, three U.S. regional banks failed, creating concern about the health of mid-sized banks. While the situation has stabilized, banks have become more cautious about lending, making it more challenging for businesses and individuals to find funding, reported Nicole Goodkind of CNNBusiness.

·        Debt-ceiling turmoil. Before Congress passed legislation raising the debt ceiling, some pundits were predicting a calamitous outcome for financial markets, featuring falling stock prices and rapidly rising bond yields. Fortunately, Congress reached an agreement, and we didn’t need to find out.

·        A rate-cycle-expectations gap. During the first six months of this year, the bond market expected the Federal Reserve (Fed) to pivot and begin lowering rates during the second half of the year, reported John Authers of Bloomberg. However, in late June, Fed Chair Jerome Powell stated the Fed was likely to raise rates two or more times during 2023.

·        Stubbornly high inflation. Prices are rising more slowly; however, inflation is still well above the Fed’s two percent target. Last week, the Personal Consumption Expenditures (PCE) Price Index showed headline inflation was 3.8 percent year-over-year, while core inflation, which excludes food and energy, was 4.6 percent.

·        Mixed economic messages. The post-pandemic economy has been full of surprises. The economy has generally been stronger than many anticipated, although some parts of the economy suffered. “The U.S. is experiencing a ‘rolling recession’ that may be followed by a ‘rolling expansion’ as the parts of the economy that weakened first start to recover,” according to a source cited by Lauren Foster of Barron’s. One example is the single-family housing market, which fell into recession as borrowing costs rose and has begun to improve.

·        A new bull market. In June, the Standard & Poor’s 500 Index reached a bull-market marker. The Index was 20 percent higher than its previous low, which occurred in October 2022. Initially, gains were driven by a relatively small number of stocks; however, a broader swath of stocks gained as the month progressed, reported Jack Pitcher of The Wall Street Journal.

It's likely that uncertainty and volatility will continue. Last week, major U.S. stock indices finished higher, reported Barron’s Data.1¹ Yields on most 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.

AND THE HAPPIEST COUNTRIES ARE…The World Happiness Report is published by the United Nations General Assembly. The creators of the report “believe that our success as countries should be judged by the happiness of our people.” The authors measure happiness by interviewing a nationally representative sample of people in the countries that participate.

The ranking considers happiness and misery. “A population will only experience high levels of overall life satisfaction if its people are also pro-social, healthy, and prosperous. In other words, its people must have high levels of what Aristotle called ‘eudaimonia’…When we assess a society, a situation, or a policy, we should not look only at the average happiness it brings (including for future generations). We should look especially at the scale of misery (i.e., low life satisfaction) that results.”

This year, the Index was presented in a slightly different way. It consolidated results from 2020 through 2022. The countries with the highest Happiness Index scores over that period were:

1.   Finland

2.   Denmark

3.   Iceland

4.   Israel

5.   Netherlands

The countries with the lowest scores were:

137. Afghanistan

136. Lebanon

135. Sierra Leone

134. Zimbabwe

133. Democratic Republic of Congo

The United States was the fifteenth happiest country in the world.

Weekly Focus – Think About It

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

—The United States Declaration of Independence (Happy Fourth of July!)

Weekly Market Commentary

June 26, 2023

 The Markets

The Artificial Intelligence (AI) Express is traveling fast.

Investors are enthusiastic about AI. Late last year, an AI research lab introduced a chatbot that could answer questions – and people were enthralled. Within two months of its introduction, more than 100 million people had engaged with the technology, reported David Curry of Business of Apps. It wasn’t long before AI platforms that could generate images and audio, and help with coding were released.

It’s difficult to know whether investor enthusiasm influenced companies, but more firms mentioned artificial intelligence on recent quarterly earnings calls than ever before. AI mentions were up 77 percent during fourth quarter calls (after the chatbot was released) and reached an all-time high on the most recent round of calls, reported Jennifer Ryan of Bloomberg.

Between March 15 and May 25, AI was mentioned on the earnings calls of 110 companies in the Standard & Poor’s (S&P) 500 index, reported John Butters of FactSet. The sectors where AI was mentioned the most were:

·        Information technology (IT), which includes industries like semiconductors, software, and IT services;

·        Industrials, which includes industries like aerospace and defense, air freight and logistics, transportation, and construction and engineering; and

·        Communication services, which includes industries like telecommunications services, entertainment, and interactive media and services.

Recent stock market gains have been attributable, primarily, to seven large stocks, five of which are in the IT and communication services sectors. Last week, as major U.S. stock indices gave back some gains, three of the companies finished the week higher and two outperformed the index, reported Al Root of Barron’s.

U.S. stocks dropped last week largely because investors didn’t like what Federal Reserve Chair Jerome Powell had to say. He suggested there could be more rate hikes this year, and that revived recession concerns, reported Stephen Culp of Reuters. Yields on most U.S. Treasuries finished the week unchanged or 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 AI’s LIMITATIONS? As you read about AI, you are likely to encounter some confusing terminology. The U.S. General Accounting Office (GAO) explained that generative AI is “a technology that can create content, including text, images, audio, or video, when prompted by a user. Generative AI systems create responses using algorithms that are trained often on open-source information, such as text and images from the internet. However, generative AI systems are not cognitive and lack human judgment.”

The last sentence in the GAO’s definition is quite important. See what you know about AI’s limitations by taking this brief quiz.

1. Research scientist Janelle Shane, who writes AI Weirdness, trained a neural network with data from 30,000 cookbooks and asked it to suggest new recipes. Which of the following recipes did it NOT suggest?
2. “Chocolate Baked and Serves” – a brownie recipe featuring a cup of horseradish
3. “Ethan’s Eggs” – made with pancakes, sugar, and Skittles
4. “Small sandwiches” – everything but the cheese spends an hour in a food processor
5. “Good Wine Drained Chili” – a chicken dish made with milk, garlic and chocolate chips

1. An attorney asked a generative AI chatbot to help him draft a legal brief. What did the chatbot do?
2. Referenced fictional past court cases that were fabricated by the chatbot
3. Created a deepfake video showing the client being injured
4. Created a deepfake audio file of flight attendants discussing the client’s alleged injury
5. Wrote the brief in the style of Shakespeare

1. The bellhop robots at a Japanese hotel were “let go” after they:
2. Consistently left skis and snowboards in the elevators
3. Delivered luggage to the wrong rooms
4. Ran into walls and tripped over curbs
5. Kept delivering toothbrushes when guests requested phone chargers

1. A Scottish soccer team opted for AI-operated cameras that would track the ball and provide better television footage than human camera operators. The choice infuriated fans because:
2. The fans didn’t want people to lose their jobs
3. The AI mistook a ref’s bald head for the soccer ball and kept zooming in on him
4. The AI confused the stand entrances with the goals, causing fans to miss the action
5. The AI kept zooming in on the goal whenever it anticipated a player would score

Weekly Focus – Think About It

“It is change, continuing change, inevitable change, that is the dominant factor in society today. No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.”

—Isaac Asimov, biochemistry professor and author

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

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