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Weekly Market Commentary April 24, 2023

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

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Weekly Market Commentary April 17, 2023

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

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Weekly Market Commentary April 10, 2023

Weekly Market Commentary

April 10, 2023

 

The Markets

 

Ambiguous images.

 

Some illustrations are optical illusions. When two people view the picture, they may see completely different images. A good example is Rubin’s Vase. One viewer may see a vase, while another sees two faces.

 

Current economic conditions can be interpreted in different ways, too. Recent economic data and a possible credit crunch, resulting from upheaval in the banking sector, suggest growth is slowing. After viewing the data, some say we’re heading for a soft landing, and others say a recession is coming. Here is the recent data:

 

  • Consumer spending. This is the main driver of economic growth in the United States. While Americans are still buying, the pace of spending slowed in February, according to a late-March report from the Bureau of Economic Analysis. Less spending means lower demand for goods and services – and that effects production.

 

  • Production of goods and services. Last week, the Institute for Supply Management reported that activity in the manufacturing sector – automakers, food producers, pharmaceutical companies and other companies that make products – shrank for the fifth consecutive month. Activity in the services sector – airlines, banks, building maintenance and other companies that provide services – continued to expand but at a slower pace.

 

  • Employment. The employment report indicated the labor market in the U.S. remained resilient and jobs growth was solid in March. It’s notable that there were fewer job openings and more Americans returned to the workforce. The unemployment rate remained steady at 3.5 percent. In addition, average hourly earnings edged higher, according to the U.S. Bureau of Labor Statistics.

 

Randall Forsyth of Barron’s reported, “The solid employment report for March further raises the odds that the U.S. economy is headed for a proverbial soft landing.” Not everyone agrees.

 

Economist and former Treasury Secretary Lawrence Summers gives more weight to manufacturing and services data than employment data. He also pointed to the Dallas Federal Reserve’s Banking Conditions Survey, which showed lending volumes declined sharply in March. Summers told Bloomberg’s Wall Street Week with David Westin:

 

“Employment and unemployment are lagging indicators of what’s happening in the real economy…There is some substantial amount of constriction in credit. If you looked at the forward-looking numbers this week from the PMI surveys, those numbers were quite weak…Recession probabilities are going up at this point. The Fed has a very, very difficult decision ahead of it.”

 

Major U.S. stock indices finished the week with mixed results, reported Carleton English of Barron’s. In the Treasury market, yields on many shorter-maturity increased, while yields on longer-maturities 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.

 

INVESTORS VS. THE FEDERAL RESERVE. In the 1970s, Martin Zweig cautioned investors: Don’t fight the Fed. He believed there was a correlation between Federal Reserve monetary policy and the direction of stock markets, reported Steve Sosnick of Barron’s. Here’s generally how it worked:

 

  • The Fed makes more money available – pursuing loose or expansionary monetary policy – during economic downturns or recessions. It adjusts the money supply by moving the federal funds rate lower so companies can borrow inexpensively and hire workers. In turn, workers spend more, and the economy grows. Stock markets tend to rise when the Fed is pursuing loose monetary policy.

 

  • The Fed makes less money available – pursuing tight or restrictive monetary policy – during periods when the economy is overheating, and inflation swings higher. It adjusts the money supply by moving the federal funds rate higher, making borrowing more expensive for companies, which can lead to layoffs. Workers have less to spend, and the economy slows or enters a recession. Stock markets tend to fall when the Fed is pursuing tight monetary policy.

 

Ultimately, Zweig’s advice meant that investors should be more aggressive when the Fed was pursuing loose monetary policy, and more conservative when it was pursuing tight monetary policy. Will Daniel of Fortune reported:

 

“Investors understood this dynamic during the recovery from the bursting of the U.S. housing bubble, buying stocks in droves while the Fed held interest rates near zero…The central bank’s loose policies helped bring about the second longest bull market in the S&P 500’s history, between Mar. 9, 2009, and the COVID-19–induced bear market of 2020…”

 

Today, the Federal Reserve is pursuing tight monetary policy, and has indicated that lower rates are not on the table for 2023. Investors seem to think otherwise, though. The Fed raised the federal funds rate in March, but not all Treasury yields followed suit. Yields on longer-dated Treasuries moved lower, suggesting investors think rate cuts are ahead.

 

Who’s right? Stay tuned. (And remember that many factors influence financial market performance. Fed policy is just one of them.)

 

Weekly Focus – Think About It

“One of my fondest sayings is fail, fast, forward. Recognize you’ve failed, try to do it fast, learn from it, build on it, and move forward. Embrace failure, have it be part of your persona.”

—Carol Bartz, former CEO and president

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Weekly Market Commentary April 3, 2023

Weekly Market Commentary

April 03, 2023

 

The Markets

 

Perhaps we should call this a pushmi-pullyu market.

 

The first quarter of 2023 brought Dr. Dolittle’s pushmi-pullyu – the rarest animal of all – to mind. It is the offspring of goat-antelopes and unicorns, and has a head at each end of its body. The pushmi-pullyu’s unusual anatomy allows it to easily and rapidly change direction, making it difficult to catch.

 

So far this year, the direction of the economy and financial markets has been elusive, too.

 

Is inflation headed in the right direction? Inflation changed course late in 2022. The monthly change in the rate of inflation, as measured by the PCE Core Price Index (one of the Federal Reserve’s preferred inflation gauges) accelerated late in 2022 and continued to move higher in January 2023. Then, it slowed in February, creating uncertainty about the state of inflation.

 

The latest University of Michigan Consumer Sentiment Survey indicated that Americans expect inflation to fall over the coming year and over the longer term. That’s important because there is a psychological aspect to inflation. When people expect inflation to rise, they spend more, which can push inflation higher.

 

If inflation is trending lower, then it gives weight to the opinion of investors who are optimistic the Fed will reverse course this year.

 

Will rate hikes continue or pause? Amid persistent inflation, the Federal Reserve delivered the message that rates might go higher than expected and stay there longer than expected. Then three banks failed, and speculation that the Fed would slow the pace of rate increases began. “The challenge for the Fed is figuring out how to buttress banks and cool inflation at the same time, without triggering a recession,” reported Megan Cassella of Barron’s.

 

The Fed raised rates in March, despite turmoil in the banking sector. Treasury yields fell across much of the yield curve following the rate hike. Yields moved higher last week, which suggests that bond investors may anticipate further rate hikes.

 

While many investors appear to be optimistic that the Fed will take a breather on rate hikes, Fed projections suggest it will continue to raise rates in 2023, although it may ease in 2024.

 

Are we headed for a recession? It’s a question that economists and analysts have been trying to answer for more than a year as central banks in the U.S., Europe, and elsewhere raised rates aggressively. Last week, Bloomberg’s survey of economists found the probability of a recession over the next 12 months was 65 percent, up from 60 percent in February.

 

“After the Fed last week raised rates a quarter percentage point to the highest since 2007, economists worry not only about the impact on demand but the effect on the banking system…Financial institutions risk becoming more guarded in their lending approach, restricting access to capital needed by businesses to expand and consumers to buy homes, cars and other big-ticket items,” reported Augusta Saraiva and Kyungjin Yoo of Bloomberg.

 

While the odds of recession crept higher last week, not everyone agrees that a recession is ahead.

 

Is the economy weakening or strengthening? We’ve seen strong jobs growth, yet the unemployment rate has risen as labor force participation increased. In addition, business activity was up sharply in March 2023.

 

“U.S. companies signaled a renewed expansion in business activity in March...Output grew at a solid pace that was the fastest since May 2022 as demand conditions improved and new order growth returned. Manufacturers and service providers alike registered upturns in output, with service sector firms driving the increase,” reported the S&P Global Flash US Composite PMI™ report.

 

The economic tea leaves have not provided a definitive answer about the strength and direction of the economy.

 

Despite all of the uncertainty, stock investors were optimistic last week, and major U.S. stock indices rose, reported Nicholas Jasinski of Barron’s. The Treasury market headed in the other direction as rates across most maturities of Treasuries rose and bond prices fell.

 

In a pushmi-pullyu market, it’s important to stay focused on your long-term financial goals. Basic principles of investing such as asset allocation, diversification and portfolio rebalancing remain sound. If you are feeling unsettled by market volatility, get in touch. We can review your goals and allocations to make sure they’re aligned.

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.

 

IF YOU’RE WONDERING ABOUT TAXES AND RETIREMENT… Tax Day is almost here – it’s April 18 this year. If you’re retired or planning for retirement, it’s important to know that some states are more tax-friendly for retirees than others. Typically, in tax-friendly states, Social Security benefits are exempt from state tax and pension payments and/or IRA withdrawals may receive more favorable state tax treatment, reported David Muhlbaum and Rocky Mengle of Kiplinger.

 

“Our results are based on the estimated state and local tax burden in each state for two hypothetical retired couples with a mixture of income from wages, Social Security, traditional IRAs, Roth IRAs, private pensions, 401(k) plans, interest, dividends, and capital gains. One couple had $50,000 in total income and a $250,000 home, while the other had $100,000 in income and a $350,000 home.”

 

The most tax-friendly states were:

 

1.   Delaware

2.   Hawaii

3.   Colorado

4.   Wyoming

5.   Nevada

 

The least tax-friendly were:

 

1.   New Jersey

2.   Illinois

3.   Kansas

4.   Vermont

5.   Connecticut

 

When you’re deciding where to settle in retirement, there’s a lot more to consider than taxes. Family, friends, cost of living and weather also are key considerations. Weather is becoming more important as the number and intensity of natural disasters has been increasing, raising the cost of insurance significantly in some places, reported Kate Dore of CNBC.

 

Weekly Focus – Think About It

“Il n'est pas certain que tout soit incertain.” (It is not certain that everything is uncertain.)

—Blaise Pascal, mathematician and philosopher

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Weekly Market Commentary March 27, 2023

Weekly Market Commentary

March 27, 2023

 

The Markets

 

What’s your jam?

 

When you think of fun, are you running an Arctic marathon? Biking to your favorite burger place? Gaming with friends online? Each has inherent risk: Polar bears and hypothermia, traffic and flat tires, and viruses and identity theft. Those who enjoy these activities, understand the possible risks and manage them.  

 

Investing is similar. Investors are willing to take on risk to achieve their long-term financial goals, but not everyone manages it in the same way. Some people are willing to embrace risk, and others prefer a less adventurous option. While it’s not possible to completely eliminate the risks associated with investing, it is possible to manage investment risk with asset allocation, diversification, and other strategies.

 

Last week, investors responded to the uncertainty created by bank closures in a variety of ways. Some sold assets they felt had too much risk for the current market environment, opting for sectors and industries that have historically shown resilience during economic slowdowns. Others snapped up investments at discounted prices, reported Ryan Ermey of CNBC. Some investors did nothing.

 

“The smartest thing to do when you have a lot of uncertainty is to sit back and gather information and do your analysis and not jump trying to make big changes,” stated a source cited by Lu Wang and Isabelle Lee of Bloomberg.

 

Uncertainty is likely to persist as economists and analysts assess how the American economy may be affected. “Banking panics aren’t something to be trifled with. As Fed Chairman Jerome Powell acknowledged on Wednesday, the latest one is sure to slow the economy…The problem, however, isn’t the possibility of more bank failures. It’s that banks are likely to curtail lending—lending they had already started to limit,” reported Ben Levisohn of Barron’s.

 

As bank lending tightens, economic growth in the United States will probably slow. When it becomes more difficult for households and businesses to get credit, consumer spending tends to fall. Since consumer spending is the primary driver of economic growth in the U.S., the economy is likely to be affected and we may enter a recession, reported Rich Miller of Bloomberg.

 

Major U.S. indices finished the week higher, while U.S. Treasury yields rose before retreating again.

 

If you are feeling unsettled by market volatility, get in touch. We can review your goals and allocations to make sure they’re aligned.

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 THERE A NO-VENTING ZONE? When the dangers of secondhand smoke were confirmed, an early solution in many restaurants was the no-smoking section. Now, researchers report that emotions may be contagious. When an expressive friend, family member or stranger shows emotion, it can influence the mood of those around them.

 

In other words, exposure to positive emotions can invoke happiness and goodwill in others, while negative emotions may spread stress and anxiety.

 

“Over the past decade, we have learned how our brains are hardwired for emotional contagion. Emotions spread via a wireless network of mirror neurons, which are tiny parts of the brain that allow us to empathize with others and understand what they’re feeling…if someone in your visual field is anxious and highly expressive — either verbally or non-verbally — there’s a high likelihood you’ll experience those emotions as well, negatively impacting your brain’s performance,” wrote Shawn Achor and Michelle Gielan in the Harvard Business Review.

 

Here's an interesting sidenote: stress can spread by scent, too.

 

No matter how stress is triggered, there are actions you can take to keep from being overwhelmed by secondhand stress and anxiety. These include:

 

·        Identifying three things you are grateful for,

·        Writing a brief email praising someone else,

·        Discussing or writing about a positive experience,

·        Exercising for half an hour, or

·        Meditating for a few minutes.

 

The research has important implications for the workplace and the home.

 

Weekly Focus – Think About It

“For every minute you are angry you lose sixty seconds of happiness.”

—Ralph Waldo Emerson, Philosopher

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