Weekly Market Commentary

January 22, 2024

The Markets

Are you feeling optimistic or pessimistic?

Consumers are a force to be reckoned with – and we’re all consumers. We buy coats and tweezers, electricity and bread, screens and fishing poles. We download apps and games and educational materials. As consumers, we are vital to the American economy. In fact, consumer spending accounts for about two-thirds of the U.S. economy when it’s measured using gross domestic product or GDP.

Many consumers are feeling more optimistic than they have in a while. Last week, the University of Michigan (UM) reported that consumer sentiment is soaring. After a double-digit rise in December 2023, the UM Consumer Sentiment Index rose an additional 13 percent in January 2024. Surveys of Consumers Director Joanne Hsu reported:

“Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as a recession ended. For the second straight month, all five index components rose, with a 27% surge in the short-run outlook for business conditions and a 14% gain in current personal finances. Like December, there was a broad consensus of improved sentiment across age, income, education, and geography.”

Investors are feeling pretty good, too. Throughout January, the weekly AAII Investor Sentiment survey found that a higher percentage of investors than usual expected stocks to move higher over the next six months. Last week, though, that percentage dropped lower as uncertainty increased around the depth and timing of possible Federal Reserve rate cuts.

“…the median projection from all Fed officials [is] for three rate cuts in 2024. That is a more conservative outlook than the one shared by investors, who expect six cuts starting in March,” according to a source cited by Jennifer Schonberger of Yahoo! Finance.

Last week, a rally in technology stocks helped the Standard & Poor’s 500 Index close at an all-time high. Yields on many maturities of Treasuries 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.

IT’S THE BIGGEST ELECTION YEAR IN HISTORY. This year almost 80 countries will hold elections in which all people of voting age will have the opportunity to cast a vote, reported NPR citing The Economist. While the nations are not all democratic countries, more than 40 are expected to hold free and fair elections, reported Astha Rajvanshi and Yasmeen Serhan of Time. These nations encompass about:

·        41 percent of the world’s population (more than 3 billion people), and

·        42 percent of the global economy (more than $44 trillion).

How many people will actually vote?

The voter turnout is likely to be higher in some countries than it is in others. Here is the average turnout among the voting-age population in a sampling of countries that will hold elections in 2024. (The data was collected from recent election years by Pew Research Center.)

Turkey:                       89 percent

Indonesia:                  82 percent

Sweden:                     80 percent

Belgium:                     78 percent

South Korea:              77 percent

Denmark:                   76 percent

Brazil:                         74 percent

Taiwan:                      74 percent

India:                          69 percent

Mexico:                      66 percent

Austria:                       64 percent

United States:            63 percent

Britain:                        62 percent

Czech Republic:        62 percent

South Africa:              47 percent

The U.S. League of Women Voters explains the importance of voting like this, “The right to vote is one of the most basic promises of our democracy. In a democratic government, every person is considered equal and is empowered to both participate in their government and speak on the issues that impact their daily lives. Through our votes, we’re able to express our values around concerns like health care, climate change, criminal justice, taxes, and so much more.”

Weekly Focus – Think About It

“Indecision may or may not be my problem.”

—Jimmy Buffett, singer

Weekly Market Commentary

January 16, 2024

The Markets

Is inflation retreating?

Last week, we received a lot of information about inflation. Some seemed to support the idea that inflation was sticky, meaning it wasn’t moving lower, while other data suggested inflation was in retreat. Here’s what we learned:

• Headline inflation, as measured by the Consumer Price Index, suggested inflation was headed in the wrong direction last month – higher. It showed prices rising more than expected (0.3 percent, month-to-month) in December 2023. In November, prices rose less (0.1 percent, month-to-month).

• Core inflation, which excludes volatile food and energy prices, showed inflation was steady. Prices rose by the same amount (0.3 percent, month-to-month) in November and December.

• Producer prices are the prices producers received for goods and services. Last week, the Producer Price Index showed inflation was headed in the right direction – lower. Producer prices fell (-0.1 percent, month-to-month) in November and December.

• Conflict in the Middle East could stoke inflation by sending the prices of oil and shipping higher.

The Federal Reserve (Fed) has been working to bring inflation down since March of 2022. Over that time, it has lifted the federal funds rate from zero to 0.25 percent to 5.25 percent to 5.50 percent, and inflation has dropped from a peak of 8.9 percent in June 2022 to 3.4 percent in December 2023. The Fed’s goal is to lower inflation to two percent.

Markets are keeping a close eye on the Fed’s success, because they want to see rates move lower. Lower rates put more money in the pockets of businesses and consumers, which supports economic growth and higher stock prices.

Last week, few investors expected the Fed to begin lowering the federal funds rate this month; however, about three-fourths of them anticipated rates would begin to drop in March, according to data from the CME FedWatch Tool.

Major U.S. stock indices finished the week higher. Yields on most maturities of Treasuries moved lower from last Friday to this Friday. 

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 RISING PRICES? When it comes to inflation, the United States is doing better than many countries around the world. In the U.S., prices were up 3.4 percent in 2023. In Argentina, prices rose 25.5 percent in December and were up 211 percent for the full year. See what you know about global inflation by taking this brief quiz.

1.   Since the 1950s, the highest U.S. inflation rate was 14.6 percent. In what year, did inflation rise that high?

a.   1951

b.   1974

c.    1980

d.   2022

2.   Hyperinflation occurs when prices rise so fast that the cost of a cup of coffee could double from one morning to the next. Hyperinflation tends to result from wars and poor central bank policy decisions. Which of these places experienced a monthly inflation rate of 79,600,000,000 percent (causing prices to double about every 25 hours)?

a.   Zimbabwe

b.   Yugoslavia

c.    Germany

d.   Greece

3.   Companies sometimes try to hide rising costs by holding prices steady while making packages or serving sizes smaller. Consumers pay the same price and receive less for their money. What is this practice called?

a.   Miniaturization

b.   Shrinkflation

c.    Downsizing

d.   Camouflage sales

4.   In the United States, the price of eggs more than doubled from 2022 to 2023. Which of the following caused the eggs to become more expensive?

a.   Omelets were in high demand.

b.   8.1 million people became vegetarians.

c.    An outbreak of the bird flu killed 5 million egg-laying hens.

d.   Videos of parents cracking eggs on their children’s heads became popular on social media.

Weekly Focus – Think About It

“How much good inside a day? Depends how good you live ’em. How much love inside a friend? Depends how much you give ’em.”

—Shel Silverstein, A Light in The Attic

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

Weekly Market Commentary

January 08, 2024

The Markets

And we’re off…to a slow start.

Last week, investors appeared to suffer from a New Year’s hangover. The culprit was too much optimism.

After its December meeting, with inflation easing and the U.S. economy remaining resilient, the United States Federal Reserve (Fed) indicated that three rate cuts were possible in 2024. Assuming the Fed drops rates by 0.25 percentage points each time, the effective federal funds rate would fall by 0.75 percentage points to about 4.5 percent by the end of this year.

That was welcome news. Lower rates make borrowing less expensive for businesses and consumers. As a result, rate cuts could lead to lower interest rates on home and auto loans, as well as credit cards. In addition, lower rates could boost corporate profits and push stock prices higher.

Ebullient investors saw the inch and took a mile, extrapolating the possibility of three Fed rate cuts in 2024 to six rate cuts. Jeff Cox of CNBC explained. “Markets…followed up the meeting and Chair Jerome Powell’s press conference by pricing in an even more aggressive rate-cut path, anticipating 1.5 percentage points in reductions next year, double the [Fed’s] indicated pace.”

Investors’ buoyant outlook supported strong third-quarter performance and double-digit returns for major U.S. stock indices in 2023. However, investors recognized they may have taken things too far, and the U.S. stock market retreated for much of last week.

Friday’s employment report didn’t help matters. It confirmed the continued strength of the U.S. economy. Employers added 216,000 jobs in December, surpassing economists’ estimates, according to Megan Leonhardt of Barron’s. The unemployment rate remained at 3.7 percent and average hourly earnings were up 4.1 percent over the 12 months through December 2023.

The strong report lowered expectations that the Fed will cut the federal fund rate at its March meeting, reported Karishma Vanjani of Barron’s.

Last week, major U.S. stock indices finished the week lower, and the yield on the benchmark 10-year U.S. Treasury note 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.

THE POWER OF STORIES. Nobel-prize-winning economist Robert Shiller and his colleagues researched what they call “Narrative Economics” and found that popular stories affect our decision-making. In 2023, we witnessed the phenomenon firsthand as the story of the “Magnificent Seven” gathered steam.

For movie buffs (and people of a certain age), the name brings to mind the star-studded 1960s film with a reputation as one of the greatest Westerns of all time. The seven gunmen of the film are the reason pundits adopted the moniker to describe seven technology-related stocks that delivered double-digit returns in 2023.

“Shares of the so-called Magnificent Seven…individually soared between around 50% and 240% in 2023, making them among the market's most rewarding bets… Because of their heavy weightings in the S&P 500…the seven were responsible for nearly two-thirds of the benchmark index’s 24% gain this year,” reported Lewis Krauskopf of Reuters.

If the goal of investing is to buy low and sell high, investors would have been better off investing in the Magnificent Seven in 2022 when they delivered a less-than-magnificent performance. Combined, they lost 39 percent that year, according to Joseph Adinolfi of Morningstar, and all seven finished 2022 with double-digit losses.

When the narrative focuses on a broader time horizon and individual share price performance, the story looks quite different. Three of the Magnificent Seven stocks have a negative average annual return over the last two years, three have a positive return, and one delivered a flat performance, reported Matt Krantz of Investor's Business Daily.

The Magnificent Seven narrative offered investors an invigorating story. When reading stories about stocks or other investments that are performing well, it’s tempting to jump on the bandwagon. If an investment narrative captures your interest, give us a call. We can discuss the pros and cons of the opportunity.

Weekly Focus – Think About It

“Some narratives go viral because they contain real truth and knowledge and are useful. I’m more concerned with the other kinds of narratives that are story-quality, interesting, stimulating, fun—and travel person to person. They have a high contagion rate. Changes in public thinking are revealed by them and changes in public thinking are important causes of major economic events.”

—Robert Shiller, economist

Weekly Market Commentary

December 04, 2023

The Markets

We’re cycling along.

It’s easy to forget that economic activity tends to move in cycles. A full cycle, known as the business cycle, typically includes four stages:

·        Contraction occurs when economic growth slows as an economy produces fewer goods and services. Economic contractions often include recessions. As productivity contracts, it can negatively affect the profitability of companies, as well as the number of jobs available and the income security of workers. The United States economy contracted during the first two quarters of 2022.

·        Trough is the stage at which economic growth hits bottom for the cycle. It occurs before an expansion begins. The month following a trough is the first month of an expansion.  

·        Expansion occurs when an economy produces more goods and services. The United States economy has been expanding since mid-year 2022. Productivity, as measured by gross domestic product, grew 5.2 percent year-over-year in the third quarter of this year.

·        Peak is the stage at which economic growth reaches its highest point for the cycle, just before a contraction begins. The month following a peak is the first month of a contraction.  

“It might be tempting to think the stages of the business cycle are like the cycles on your dishwasher – regular cycles that occur in predictable patterns: The rinse cycle always begins after the wash cycle has completed, and each rinse always lasts the same length of time…But there is nothing ‘regular’ about the business cycle,” wrote Scott A. Wolla in the St. Louis Federal Reserve’s Page One Economics^® blog.

At the start of the fourth quarter, the United States was in the late cycle stage of expansion, according to Fidelity Insights. That doesn’t necessarily mean we’re heading into a contraction, though. Expansions usually end when the economy experiences a shock of some kind, reported Wolla.

“Economists suggest that shocks that cause recessions might include financial market disruptions, international disturbances, technology shocks, energy price shocks, and actions taken by monetary policymakers to restrain inflation.”

Major U.S. stock indices finished last week higher, reported Barron’s, and U.S. Treasury yields moved lower as investors embraced the idea that rate cuts may be ahead in 2024.

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

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

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

THE WORD OF THE YEAR IS HERE! Last week, the Merriam Webster Dictionary unveiled its 2023 Word of the Year, as well as other words that gained attention as the dictionary’s 2023 data was analyzed. Some of the words that stood out were:

·        Rizz was the most frequently looked up word after it was added to the dictionary in September. It’s slang that describes someone’s ability to flirt with, or charm, a person they are romantically interested in. Rizz can be a noun or a verb, and it might be derived from “charisma.”

·        Deepfake also gained interest from the public in 2023. A deepfake is “an image or recording that has been convincingly altered and manipulated to misrepresent someone as doing or saying something that was not actually done or said,” explained Merriam Webster.

·        EGOT came to the fore after Viola Davis won a Grammy for the audiobook of her memoir. EGOT describes a person who has won an Emmy, a Grammy, an Oscar and a Tony. The word has been in the dictionary as a noun since 2019, although it may also become a verb after Davis exclaimed, “I just EGOT!”

·        Doppelgänger, which means two people who look extremely similar, gained notoriety for several reasons in 2023. In one case, two minor league baseball players, who share the same name, also resemble each other. The pair are mistaken for one another so often, they took a DNA test to find out whether they’re related. They’re not. They’re just doppelgängers.

While all of these words gained attention in 2023, the editors at Merriam Webster chose authentic as the word of the year. “A high-volume lookup most years, authentic saw a substantial increase in 2023, driven by stories and conversations about AI, celebrity culture, identity, and social media. Authentic has a number of meanings including ‘not false or imitation,’ a synonym of real and actual; and also ‘true to one’s own personality, spirit, or character.’ Although clearly a desirable quality, authentic is hard to define and subject to debate – two reasons it sends many people to the dictionary.”

Weekly Focus – Think About It

“I would define, in brief, the poetry of words as The Rhythmical Creation of Beauty.”

—Edgar Allan Poe, author

Weekly Market Commentary

November 27, 2023

The Markets

In November, investors were more optimistic than consumers.

At the start of November, investors were decidedly bearish. During the week of November 1, the AAII Investor Sentiment Survey found that about 50 percent of respondents were pessimistic about the prospects for stocks over the next six months, and about 24 percent were bullish. The current historic averages are 31 percent bearish and 37.5 percent bullish. (The remainder are neutral.)

Many believe the survey is a contrarian indicator, meaning that stocks are likely to rise when investors are bearish and fall when investors are bullish. November offered some data to support the theory as United States stocks trended higher during the month.

As stock markets gained, participants in the AAII survey became more bullish. The Thanksgiving week survey found that more than 45 percent of respondents were feeling bullish, and as we already mentioned, just 24 percent were feeling bearish. Quite a reversal from four weeks earlier.

Consumers were considerably less optimistic. While sentiment improved from last year, it dropped almost 4 percent from October to November, according to the University of Michigan Consumer Sentiment Survey. It was the fourth consecutive month of declining sentiment.

“November’s reading reflects a balance of factors, some of which improved while others worsened. More-favorable current assessments and expectations of personal finances were offset by a notable deterioration in expected business conditions…Younger and middle-aged consumers exhibited strong declines in economic attitudes this month, while sentiment of those age 55 and older improved from October,” wrote Surveys of Consumers Director Joanne Hsu.

The survey found consumers expect inflation to average 4.5 percent over the next 12 months, and 3.2 percent over the longer term even though inflation has slowed significantly and was just 3.2 percent over the last 12 months. Despite recent declines, consumers are worried inflation could change course.

Stocks moved higher last week as many investors remained confident the Federal Reserve was done raising rates. Some anticipate rate cuts early next year, reported Barron’s. Bond markets weren’t so sure, though, and U.S. Treasury yields moved broadly higher during 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.

DRIP. DRIP. DRIP. As inflation recedes, fees and charges may continue to affect the cost of some goods and services. Last summer, NPR’s Stacey Vanek Smith reported on the phenomenon after having lunch delivered.

“I decided to splurge and order a burger and fries for delivery. Subtotal for my meal? $14.07. A little pricey, but it’s a good burger and $14 seemed like a totally acceptable price for dinner, especially when it's delivered to my door. Then came the fees: Delivery fee: $5.49; Service fee: $3; Tip: $4; Tax: $1.25. Grand total for my delivery burger: $27.81. My lazy Monday went from costing me $14 to almost $30. The price had doubled. What was going on?”

The answer is drip pricing. It happens when the price of a good or service is broken into multiple components that the buyer becomes aware of as the purchase proceeds, according to an article published by Alexander Rasch, Miriam Thöne and Tobias Wenzel in the Journal of Economic Behavior and Organization. 

Many industries employ this pricing strategy. For example, travelers may purchase airline tickets by choosing the lowest base price and then find themselves paying additional fees to check bags, select desirable seats or sit in seats adjacent to younger family members.

One luxury automobile company added a new twist to car buying. It asked buyers in the United Kingdom, Germany, New Zealand and South Africa to pay a subscription fee to activate its factory-installed seat warmers. The automaker eventually abandoned the subscription, but it plans to expand pay-on-demand services. In an interview with James Attwood of Autocar, a company board member explained:

“We actually are now focusing with those ‘functions on demand’ on software and service-related products, like driving assistance and parking assistance, which you can add later after purchasing the car, or for certain functions that require data transmission that customers are used to paying for in other areas.”

Inflation and rising prices are critical aspects of retirement planning. If you would like to talk about how inflation may affect your savings and investments over time, please get in touch.

Weekly Focus – Think About It

“It isn't what we don’t know that gives us trouble, it’s what we know that ain’t so.”

—Will Rogers, comedian