Weekly Market Commentary

November 14, 2022

The Markets

Last week was remarkable for many reasons.

One reason is that sky watchers around the world had an opportunity to see a total lunar eclipse. The moon, Earth and sun aligned, causing the moon to appear crimson. We won’t see another total lunar eclipse for three years, reported Denise Chow of NBC News.

Another reason, and one that’s far more important to consumers and investors, is that data suggested inflation may be waning. The Consumer Price Index, which is a measure of inflation, was released last week. It showed that prices rose more slowly than expected in October. On an annual basis:

·        Headline inflation fell to 7.7 percent in October from 8.2 percent in September.

·        Core inflation, which excludes food and energy prices, fell to 6.3 percent in October from 6.6 percent in September.

Investors were enthusiastic, hoping the Federal Reserve (Fed) might begin to take a more measured approach to monetary policy tightening. Fed officials were probably happy, too, although inflation remains well above their two percent target. “Central bank officials have emphasized they will need to see several months of deceleration in price gains before they will be convinced they have made progress in their fight against inflation,” reported Megan Cassella of Barron’s. 

The inflation news may lift consumers’ spirits, too. Last week, the University of Michigan Consumer Sentiment Survey reported that sentiment dropped sharply in October, erasing about half of recent gains. “Instability in sentiment is likely to continue, a reflection of uncertainty over both global factors and the eventual outcomes of the election,” reported Surveys of Consumers Director Joanne W. Hsu.

Last week, the Standard & Poor’s 500 Index finished the week up 5.9 percent, the Dow Jones Industrial Average gained 4.1 percent, and the Nasdaq Composite rose 8.1 percent, reported Avi Salzman of Barron’s. Treasury yields declined although the yield curve remained inverted.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. 

Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

IT WAS A DIFFICULT WEEK FOR MARKET GENIUSES. Last week, there was extraordinary drama in financial markets. It made the ups and downs of stock and bond markets seem almost mundane. Here’s what happened:

Tales from cryptocurrency. The world’s third largest cryptocurrency exchange declared bankruptcy after suffering the 21^st century equivalent of a bank run. It was similar to the townspeople crowding into the Bailey Building and Loan in Frank Capra’s It’s a Wonderful Life. In the film, George Bailey uses his honeymoon money to avoid a collapse. The founder of the cryptocurrency exchange had a shortfall of about $8 billion, reported Philip van Doorn of MarketWatch.

When asked about the bankruptcy, U.S. Treasury secretary Janet Yellen said that cryptocurrencies require careful regulation, reported Christopher Condon of Bloomberg. “In other regulated exchanges, you would have segregation of customer assets,” Yellen said. “The notion you could use the deposits of customers of an exchange and lend them to a separate enterprise that you control to do leveraged, risky investments – that wouldn’t be something that’s allowed.” 

It's not easy. A popular social media company was recently privatized, which means that all shares of its stock were purchased by a new owner, and it no longer trades on a stock exchange. In this case, the purchaser was one of the world’s wealthiest individuals, who used his own money along with $13 billion in financing from large investors and private banks, reported Reuters.

The owners of privately held companies are not constrained by regulation or boards of directors, which can be advantageous, although that hasn’t proven out in this case, so far. The company’s new leader implemented a subscription service that produced undesirable results. “Once the option was available, users started creating accounts pretending to be major brands and politicians, fooling users and potentially jeopardizing [the social media company’s] now-shaky reputation with top advertisers,” reported Davey Alba and Kurt Wagner of Bloomberg.

“Companies led by lone geniuses need strong governance first and foremost,” said Yale School of Management’s Jeffrey Sonnenfeld in an interview with CNBC. “Having built-in checks and balances and a board that has field expertise as well as the ability to watch out for mission creep is critical to allowing these businesses to function with less risk of costly blunders.”

Weekly Focus – Think About It

“These are the times in which a genius would wish to live. It is not in the still calm of life, or the repose of a pacific station, that great characters are formed. The habits of a vigorous mind are formed in contending with difficulties. Great necessities call out great virtues. When a mind is raised, and animated by scenes that engage the heart, then those qualities which would otherwise lay dormant, wake into life and form the character of the hero and the statesman.”

—Abigail Adams, Founding Mother

Weekly Market Commentary

November 07, 2022

The Markets

It’s the lag time.

To no one’s surprise, the Federal Reserve continued to battle inflation last week, raising the federal funds rate for the fourth time this year, reported Claire Ballentine of Bloomberg. The Fed is making borrowing more expensive to dampen demand for goods, which should lower inflation – but it’s not a quick fix.

Rate hikes are kind of like winter planting. In cold weather areas, people sometimes spread grass seed in November with the expectation that it will germinate the next spring. It’s similar for rate hikes. The Fed lifts rates with the expectation that the increases will work their way through the economy over the next 12 to 18 months and bring inflation down, reported Matt Levin of MarketPlace.

That lag time can make it difficult for the Fed to know when it has done enough.

Over the last eight months, the Fed’s benchmark rate has increased from near zero to 3.75 percent, reported Nicholas Jasinski of Barron’s. Over that period, inflation, as measured by the Personal Consumption Expenditures (PCE) Price Index, has moved slightly lower. In March, the headline PCE Price Index was 6.6 percent, year-over-year. In September, it was 6.2 percent. The core PCE Price Index, which excludes food and energy prices, was 5.2 percent in March, year-over-year, and 5.1 percent in September.

Last week’s unemployment report showed the economy remains strong, but there were signs that Fed rate hikes are beginning to have an effect. The rate of new jobs growth slowed even as U.S. businesses reported stronger-than-expected hiring increases, reported Jeff Cox of CNBC. Jobs gains were spread across industries, and average hourly earnings increased. In addition, the number of layoffs rose, although the number remained at historically low levels, according to Augusta Saraiva and Reade Pickert of Bloomberg.

Last week, major U.S. stock indices finished lower. Treasury yields rose across all maturities as investors priced in the expectation that the Fed will keep raising rates into 2023.

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.

BASEBALL PLAYERS ARE SUPERSTITIOUS AND SO ARE INVESTORS. The sport of baseball is steeped in superstition. Many players, managers and announcers follow routines and unspoken rules. For example, some say that mentioning the possibility of a no-hitter while it is in progress can jinx the outcome.

In 2020, ESPN’s Tim Kurkjian reported on the routines of retired pitcher Edward Mujica. “He always has to be in the same spot of the bullpen with two outs in the fourth inning of every game. Then, in the fifth inning, he always digs a hole at the front end of the bullpen mound. Then he spits a half cup of red Gatorade into the hole…”

Mujica is not alone. It was rumored that outfielder Torii Hunter cleaned his spikes at exactly 6:40 p.m. before every 7:05 p.m. game, reliever Sean Burnett had a poker chip in his pocket whenever he pitched, and infielder Ryan Zimmerman always used the same shower stall.

Throughout this year’s World Series, we’ve been hearing about another superstition: When the Philadelphia Phillies win the World Series, the U.S. economy tends to slide into recession or the market falls. The Phillies lost over the weekend, and the Astros took home the pennant. Before you breathe a sigh of relief, thinking the Phillies loss will spare the economy and stock markets, check out the data.

From 20,000 feet, the data made for some great clickbait headlines, but when you look closer the facts don’t support the supposition. The Phillies won titles in 1929, 1980 and 2008.

·        In 1929, the World Series game was played in early October. The recession had begun two months before, in August 1929. That’s when the stock market began to decline, too.

·        In 1980, the World Series was played in mid-October. The recession had begun in January 1980, and the stock market decline started in February.

·        In 2008, the World Series was played in late October. The recession had begun the previous year, in December. The stock market decline also began in 2007.

Then, of course, there is the fact that there have been many recessions and market downturns during years the Phillies weren’t in the World Series. It looks like this superstition will have to be benched alongside the Hemline Indicator (the stock market rises and falls with the women’s hemlines), the Pigskin Predictor (when an original NFL team wins the Super Bowl, stocks go up), and the Triple Crown Corollary (when one horse wins the Triple Crown, the Dow drops).

Weekly Focus – Think About It

“If a black cat crosses your path, it signifies that the animal is going somewhere.”

—Groucho Marx, comedian

Weekly Market Commentary

October 31, 2022

The Markets

Some companies are doing better than others – a lot better.

It’s earnings season; the time when companies share how well they performed during the previous quarter. Earnings reports are important because they provide information about a company’s financial health. Shareholders pay particular attention to earnings, which are company profits after expenses have been subtracted.

At the end of last week, slightly more than half of the companies in the Standard & Poor’s (S&P) 500 Index had reported results for the third quarter of 2022. The blended earnings growth rate^* for the S&P 500 was 4.1 percent, year-over-year, according to I/B/E/S data from Refinitiv.

The worst performing sector was communication services, which includes some big technology names. Earnings for the sector were down 20.9 percent for the third quarter. At the other end of the spectrum was the energy sector with year-over-year earnings growth of about 136 percent. The sector was led by big oil companies, some of which posted record profits, reported Sabrina Valle and Ron Bousso of Reuters.

The weaker performance of technology companies helps explain why the Dow Jones Industrial Average (Dow), an index that includes some of the nation’s large blue-chip companies, has outperformed the Nasdaq Composite Index, which reflects the performance of the technology sector, recently, reported Ben Levisohn of Barron’s.

“And what a four weeks it has been. The Dow has jumped 14.4% in October and is on pace for its best month since January 1976, when the blue-chip benchmark surged 14.41%. The other indexes have fallen short of those gains: The Russell 2000…has climbed 11%, the S&P 500 has gained 8.8%, and the Nasdaq Composite has risen a paltry 5%.”

Investors were also encouraged by last week’s economic data. The Personal Consumption Expenditure Price Index (PCE), which is the Federal Reserve’s favored measure of inflation, “…increased 4.2 percent [in the third quarter], compared with an increase of 7.3 percent [in the second quarter]. Excluding food and energy prices, the PCE price index increased 4.5 percent [in the third quarter], compared with an increase of 4.7 percent [in the second quarter].”

Investors hope evidence that price increases are not accelerating will cause the Fed to reevaluate the pace of rate hikes, reported Jacob Sonenshine and Jack Denton of Barron’s.

While recent stock market gains have been a respite for investors, corporate earnings are not as strong as the top line numbers suggest. When the energy sector is excluded, the blended corporate earnings rate was down 3.5 percent for the third quarter.

Last week, major U.S. stock indices rose, and yields for many maturities of U.S. Treasury moved lower.

*The blended rate combines actual earnings/profits for companies that have reported with consensus estimates for companies that haven’t yet reported.

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 ECONOMICS? Adam Smith defined economics as “an inquiry into the nature and causes of the wealth of nations.” Alfred Marshall offered an alternative option: Economics is the study of humans “in the ordinary business of life.” No matter how you define it, economics shapes and influences our lives. Test your knowledge of all things economic by taking this brief quiz.

1.   The first version of the board game Monopoly was created to help people understand the:

a.   Harm done by monopolies

b.   Advantages of monopolies

c.    How family members think and collaborate

d.   None of the above

2.   What is the paradox of thrift?

a.   Saving more can lead to economic growth

b.   Shoppers can find valuable items in thrift stores

c.    Saving more can lead to economic slowdown

d.   Spending less today could mean having more in retirement

3.   Which of the following is not thought to cause prices to increase?

a.   The Fed raising rates

b.   Consumer spending

c.    Demand for goods increasing

d.   People thinking prices will move higher

4.   Generally, macroeconomics considers the role of governments in a market economy. What historical event led to the study of macroeconomics?

a.   The Credit Crisis of 1772

b.   World War II

c.    The Great Depression

d.   The Oil Crisis of 1973

The answers can be found below.

Weekly Focus – Think About It

“Economics is extremely useful as a form of employment for economists.”

—John Kenneth Galbraith, economist

Answers:

1)   A. Originally called “The Landlord’s Game”, Monopoly was created by Elizabeth Magie to demonstrate what she considered to be the destructive effect of monopolies.

2)   C. While saving is good for the individual, it can be detrimental to a nation’s economy. When people save more and spend less, national economic growth tends to slow.

3)   A. The Fed raises rates to reduce demand, which can help bring prices down, lowering inflation.

4)   C. The Great Depression led to the study of macroeconomics.

Weekly Market Commentary

October 24, 2022

The Markets

Markets turned – again.

Markets continue to be volatile. Last week, stocks headed north. Nicholas Jasinski of Barron’s reported the change of direction reflected investors’ desire for the market to finally hit bottom. He may be right, but corporate earnings suggest we are not there yet, according to Bob Pisani of CNBC.

Corporate earnings season is underway. It’s the time when management tells shareholders how their companies performed during the previous quarter. With 20 percent of S&P 500 companies reporting actual results for the three-month period that ended September 30, the blended* earnings growth rate was 1.5 percent. That’s a slower pace of growth than we saw during the previous quarter, but earnings are still growing. The blended net profit margin was 12 percent, which is above the five-year average, reported John Butters of FactSet. 

Yields for United States Treasury bonds rose several times last week, too, although they moved a bit lower on Friday. The yield on a two-year U.S. Treasury note was 4.49 percent at week’s end. In fact, yields for many maturities of U.S. Treasuries were above four percent last week.

That’s important for investors who need their savings and investments to deliver income. During the past decade, with bond yields hovering at very low rates, some income investors added higher-risk bonds and dividend stocks to their portfolios to meet their income goals. Now, those investors may be able to find the income they need in investments with less risk – and that could push the stock market lower as investors move money out of stocks and into bonds.

“Stocks are certainly cheaper than they were at the start of the year, when the S&P 500 traded at 21 times forward earnings. It has since seen its multiple contract to less than 16 times [forward earnings]. But relative to bonds, equities are more expensive than at the start of the year,” reported Barron’s. “The equity-risk premium – stocks’ earnings yields minus Treasury yields – is around 3.5% today. It was 4% in January and nearly 7% during the 2007-09 financial crisis,” reported Nicholas Jasinski of Barron’s

An equity risk premium is the additional return an investor receives for taking on the higher risk of investing in stocks.

Last week, major U.S. stock indices finished 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.

Looking for the perfect holiday gift for a child or young adult? Here’s an idea: Give them a great education. Parents and family members are already educators. One way older generations help educate younger generations is by sharing wisdom and offering guidance and emotional support. Another way to provide education is by funding a 529 Education Savings Plans to help with the expense of K-12 school tuition, college expenses and some types of apprenticeship costs, reported savingforcollege.com.

529 Education Savings Plans have been an attractive way to fund education for a long time. Typically, after-tax contributions to the plans are invested and any earnings grow tax-deferred. If distributions are used to pay qualified education expenses, they may be tax-free.

There was a drawback to these plans: qualified distributions from non-parent-owned 529 plans were treated as untaxed income of the beneficiary. Since a student’s income plays an important role in determining financial aid eligibility, a distribution from a non-parent-owned 529 plan had the potential to reduce the amount of financial aid a student received by 50 percent, reported Kiplinger.

However, the Consolidated Appropriations Act included a simplification of the Free Application for Federal Student Aid (FAFSA). Beginning with the 2024-25 school year, distributions from 529 plans owned by third parties will no longer be treated as untaxed income, so a student’s financial aid eligibility remains unaffected.

529 plans also can be effective estate and gift planning tools. From a planning perspective, contributions to 529 accounts are gifts to the beneficiary. In 2022, the annual gift tax exclusion, per donee, is $16,000. So, a 529 plan account owner could contribute up to that amount without triggering gift taxes. Alternatively, the IRS allows larger contributions to be made up front and treats them as though the amount was contributed over a five-year period, without incurring gift tax.

If you would like to learn more or gift an education to a child, get in touch.

Weekly Focus – Think About It

“Every child deserves a champion – an adult who will never give up on them, who understands the power of connection and insists that they become the best that they can possibly be.”

—Dr. Rita Pierson, educator

Weekly Market Commentary

October 17, 2022

The Markets

We’re not there yet.

Investors are understandably eager for the stock market to hit bottom. Some hoped it happened last week, but it did not. 

Despite the Fed’s rate hikes, last week the Consumer Price Index showed the annual rate for headline inflation was 8.2 percent in September. That’s down from June when the annual inflation rate was 9.1%, but a long way from the Federal Reserve’s two percent target. The core inflation numbers, which exclude food and energy, hit at a 40-year high last month.

The news rocked the markets. “A lot of investors are looking at inflation to get guidance on what the Fed is going to do, to find the bottom in the market once the Fed pivots…But looking at CPI, unemployment, there’s obviously a lot of heat in the economy. Inflation is going to take some time to come down,” said a source cited by Stephen Kirkland and Lu Wang of Bloomberg.

After the news broke on Thursday, the Standard & Poor’s (S&P) 500 Index fell 2.4 percent. The sharp drop made some investors wonder whether the bear market had finally bottomed. The Index reversed course and finished the day up 2.6 percent, reported Ben Levisohn of Barron’s. That’s a big swing.

Then, on Friday, the University of Michigan’s Consumer Sentiment Survey was released. The good news was consumers were feeling slightly more optimistic in September. The bad news was expectations for inflation over the coming year rose slightly. Survey participants anticipated inflation would average 2.9% over the year ahead.

Inflation expectations are important because inflation has a psychological component. If people expect inflation to be higher – and behave that way – then they could cause inflation to move higher. For example, if a company expects higher inflation, it may increase prices at a faster rate than it would otherwise. If workers expect inflation to move higher, they may ask for larger wage increases than they would otherwise. These types of actions push inflation higher.

The S&P 500 headed down again on Friday and finished the week lower. The Nasdaq Composite Index also finished down, but the Dow Jones Industrial Index moved higher as some of the companies in the Index reported solid earnings. Treasury rates rose last week, with the 2-year Treasury yielding 4.48 percent and the 30-year Treasury yielding 3.99 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.

FOOD FOR THOUGHT…When markets are volatile, it is difficult to be an investor. Headlines shout about losses. Quarterly statements show a significant drop in the value of savings and investments. It becomes all too easy to focus on short-term market movements and lose sight of long-term financial goals.

When market volatility produces anxiety, it may help to consider the words of people who have spent decades investing successfully through bull and bear markets.

“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”

—Charlie Munger, Warren Buffett’s right-hand

“Investing isn't a game to be won. At the end of the day, it's a way to achieve your big goals, like buying that home, starting that business, and retiring on your own terms.”

—Sallie Krawcheck, investment company CEO

“The stock market is a giant distraction from the business of investing.”

—John C. Bogle, the father of index funds

“The most important thing is to stay the course – not to get shaken out of the market during a difficult time.”

—John W. Rogers, Jr., investment company Chair and CEO

“Never is there a better time to buy a stock than when a basically sound company, for whatever reason, temporarily falls out of favor with the investment community. When bad things happen to good companies, it must be viewed as a buying opportunity rather than a bailout,”

—Geraldine Weiss, the blue chip stock guru

If recent market activity has left you questioning whether investing is a good idea, please get in touch. We’re happy to listen and discuss your experience, concerns, and financial goals.

Weekly Focus – Think About It

“Our latest survey finds 40% of money managers bullish about the outlook for stocks over the next 12 months, and 30% bearish. The bullish cohort has increased from 33% since the spring edition of the poll, which found a plurality of managers neutral, but the bearish contingent has also grown from 22%...In interviews, many Big Money managers sound more bullish than survey results suggest. Markets might stay volatile and challenging for the next year, but opportunities abound to scoop up quality stocks at cheap valuations. For investors whose time horizon extends well beyond a year, the current environment looks to be a gift.”

—Barron’s Big Money Poll, October 13, 2022