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Weekly Market Commentary May 31, 2022

Weekly Market Commentary
May 31, 2022
 
The Markets
 
Investors reassessed and markets bounced.
 
Last week, major U.S. stock indices moved higher for the first time in weeks. The Dow Jones Industrial Average gained 6.2 percent, the Standard & Poor’s 500 Index was up 6.6 percent, and the Nasdaq Composite rose 6.9 percent, reported Ben Levisohn of Barron’s.
 
The change in investor attitude may have been influenced by a variety of factors, including:
 
·        Strong corporate earnings (profits). Not only were U.S. companies profitable during the first three months of this year, company leaders and market analysts anticipate they will remain profitable throughout 2022. Ninety-seven percent of the companies in the S&P 500 have reported earnings so far, and the blended earnings growth rate is 9.2 percent. Over the full year, analysts anticipate profits will increase by 10.1 percent, reported John Butters of FactSet.
 
·        More attractive share prices. The price-to-earnings (PE) ratio is one way for investors to understand whether a company’s stock is priced fairly. The PE ratio compares a company’s share price to its earnings (profits). At the end of last week, the forward PE ratio for companies in the S&P 500 Index was 17.1. That’s between the five-year average of 18.6 and the 10-year average of 16.9, reported FactSet.
 
·        Optimism about the Fed’s approach to tightening. The minutes for the Federal Reserve Open Market Committee meeting became available last week. Investors were encouraged by the Fed’s policy approach.
 
“The rally…extended on Wednesday when the Federal Reserve, while acknowledging that it will lift interest rates further in the next couple of meetings, implied that it may slow down the pace of rate hikes if the economy continues to slow down,” reported Jack Denton and Jacob Sonenshine of Barron’s.
 
·        The possibility that inflation may have peaked. The rally continued after the Personal Consumption Expenditure Price Index, which is the Federal Reserve’s favorite inflation measure, showed the pace of inflation slowed in April. Headline inflation was 6.3 percent year-over-year, down from 6.6 percent in March.
 
While last week’s U.S. stock market rally was appreciated, markets are likely to remain volatile for some time.
 
 
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 DID YOU SAY? Idioms are phrases that don’t mean what they say. For example, imagine you hear a person say, “That’s a piece of cake!” The odds are you won’t look around for a slice of German Chocolate because you know they don’t mean it literally. They’re using an idiom to indicate that a task is easy.
 
There are lots of money and financial idioms. See what you know about financial phrases by taking this brief quiz.
 
1.   When you need a rough estimate of cost, you might ask for:
a.   The bottom line
b.   Hush money
c.    A ballpark figure
d.   Two cents
 
2.   From a financial perspective, which is better?
a.   To break the bank
b.   To take a bath
c.    To go Dutch
d.   To have a cash cow
 
3.   This idiom originated when American Joe Gans was competing for the championship in his sport. His mom told him to “bring home the bacon.” He won the 1906 event and received $6,000 in prize money. What sport was it?
a.   Golf
b.   Boxing
c.    Cycling
d.   Speed skating
 
4.   In Italy, when someone is stingy or cheap, they say that the person:
a.   Has short arms
b.   Is sitting in salt
c.    Has holes in their hands
d.   Pares cheese
 
What money idioms do you use frequently?
 
Weekly Focus – Think About It
“It's not about what it is, it's about what it can become.”
Dr. Seuss, The Lorax
 
Answers:
1)   C; 2) d; 3) b; 4) a
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Weekly Market Commentary May 23, 2022

Weekly Market Commentary
 
May 23, 2022
 
 The Markets
 
On the fear and greed cycle.
 
One of the most challenging times for investors is a market downturn. Whether markets are experiencing a correction or a bear market, it’s really disturbing to watch the value of your savings and investments decline.
 
Last week, the CNN Business Fear & Greed Index showed extreme fear was the emotion driving investment decisions. The Index “is a way to gauge stock market movements and whether stocks are fairly priced. The theory is based on the logic that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect.”
 
During times like these, many investors succumb to fear and take actions that damage their ability to reach their financial goals. The fear and greed cycle works like this:
 
·        Feeling greedy: During bull markets, everyone wants to invest. The market is moving higher, and nobody wants to miss out. As a result, investors become so enthusiastic that they are willing to pay higher share prices than companies may be worth. Former Federal Reserve Chair Alan Greenspan called this “irrational exuberance.”
 
·        Feeling fearful. During corrections and bear markets, when the market is moving lower, no one wants to invest. Some investors become so concerned, they sell, which drives prices even lower. Investors who sell accept a loss of principal; a decision that can negatively affect their ability to reach long- and short-term financial goals.
 
It’s counterintuitive, but many think the time when investors should be greedy is when the market nears a bottom.4 That’s when it may be possible to find shares with strong fundamentals that are selling at attractive prices. Since no one really knows when a turning point will occur, investors who decide to buy low may experience losses before they realize gains.
 
Last week, major U.S. stock indices moved lower.
 
If you’re feeling fearful, let us know. One of our most important roles is helping clients stay focused on financial goals, maintain a disciplined investment approach, and keep a long-term perspective in difficult markets.
 
 
ABOUT LOSS AVERSION, BEAR MARKETS AND RECESSIONS…Here’s something to remember during volatile markets when the desire to sell may be strong: Our brains are hard-wired to avoid loss. Studies have found the pain of loss is far more powerful than the pleasure of gain. This is called loss aversion.
 
Overcoming loss aversion isn’t easy. One thing that may help is understanding a situation more clearly. For example, knowing more about bear markets may help reduce the fear of these market declines. Here are some facts to consider:
 
·        Bear markets are not uncommon. There have been 11 bear markets since 1956, reported Mark Kolakowski of Investopedia. The shortest bear market lasted one month (February 2020) and the longest was 31 months.
 
·        Bear markets are price declines or 20 percent or more from a previous peak, reported Georgina Tzanetos of Bankrate. A major stock index (like the Dow Jones industrial Average, Standard & Poor’s 500 Index or Nasdaq Composite), an asset class (stocks, bonds, etc.), or an individual stock can experience a bear market.
 
·        Bear markets sometimes precede recessions, but not always. Stock markets reflect what investors think may happen in the future. When they drop, it’s often because investors see hard times ahead. Eight of the last 11 bear markets have occurred before a recession.
 
A recession is often defined as an economic slowdown or contraction that persists for two quarters (six months). The United States economy contracted during the first quarter of 2022. Although forecasters say there is a low probability (19.6 percent) the economy will contract again during the second quarter, according to a survey conducted by the Philadelphia Federal Reserve. The probability of a quarterly contraction increases (28.2 percent) in early 2023.
 
It's unclear whether the U.S. will experience a recession. A lot depends on the Federal Reserve’s fight against inflation, which has been made even trickier by the Russia-Ukraine War and lockdowns in China.
 
Weekly Focus – Think About It
“What good is the warmth of summer, without the cold of winter to give it sweetness.”
—John Steinbeck, author
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Weekly Market Commentary May 16, 2022

Weekly Market Commentary
 
May 16, 2022
 
 The Markets
 
Living with a bear.
 
On the survival series “Alone,” the tension ratchets higher whenever participants encounter bears. Some participants live warily alongside bears, while others tap out. A similar thing happens among investors when they encounter a bear market.
 
What is a bear market?
 
People define bear markets in different ways. Some people say a share price decline of 20 percent is bear market territory. Last week, the Standard & Poor’s (S&P) 500 Index was down 19.6 percent before Friday’s rally, according to Ben Levisohn of Barron’s, and the Nasdaq Composite was already down more than 20 percent.
 
Other people say a bear market occurs when more investors are bearish than bullish. That’s certainly the case today. The Association of Independent Investors’ Consumer Sentiment Index found 49 percent of investors were bearish and 24 percent were bullish last week. Other sentiment indicators, including the Consensus Bullish Sentiment Index cited by Barron’s, also show that investors and investment professionals are feeling more bearish than bullish.
 
So, it’s safe to say we’re either in a bear market or quite close to one.
 
The decisions investors make today can affect long-term outcomes
 
While it is never comfortable to watch the value of savings and investments drop, as they do during a bear market, it’s important to remember that the decisions you make today can have a significant effect on the value of your portfolio over the long-term. During bear markets, investors may choose to:
 
1.   Sell. The thinking behind selling is usually something like this: If I sell, I will cut my losses and preserve what I have. These investors are willing accept a loss of principal, which may hurt their ability to reach long-term financial goals.
 
2.   Stay invested. Investors who remain invested recognize that a market decline is not the same as a loss of principal. By remaining invested, they create an opportunity to regain lost value should the market change direction.
 
3.   Look for opportunities. Some investors recognize that bear markets often create buying opportunities. These investors work with their advisors to identify ways to position for gains should the market recover. The goal of investing, after all, is to buy low and sell high.
 
A few words of wisdom
 
If you’re feeling uncertain, this is a good time to revisit the words of Randall Forsyth and Vito Racanelli of Barron’s. In 2008, they wrote, “The good news is that once the decline reaches that arbitrary 20% mark, based on history, the market has suffered most of its losses. The bad news is that the decline typically drags on for some time, and time may be the worst enemy…as the decline wears down investors' psyches, they tend to bail out at the market's nadir, when things look bleakest – and when the greatest opportunities present themselves.”
 
Last week, major U.S. stock indices finished lower. Rates on U.S. Treasuries moved lower, too, as risk-averse investors moved assets into Treasury bonds, reported Samantha Subin and Vicky McKeever of CNBC.
 
 
HERE’S THE MOST IMPORTANT QUESTION: DO YOU THINK THE STOCK MARKET WILL RECOVER?
 
The editors of Business Week once thought the answer was a resounding, “No.” On August 13, 1979, the cover of the magazine declared: The Death of Equities: How Inflation Is Destroying the Stock Market. The S&P 500 Index closed at 107 that day. As it turned out, they were wrong, and equities weren’t dead. The value of the S&P 500 Index rose significantly over the next few decades.
 
Over the last 50 years, there have been other events that caused investors to think the worst. For example:
 
·        Black Monday. At the end of trading on October 19, 1987, stock markets around the world had experienced the biggest one-day decline in history, according to the Federal Reserve. The Dow Jones Industrial Average lost 22.6 percent that day and finished at 1,739. (The Dow had gained 44 percent during the previous seven months.)
 
Last week, the Dow closed at 32,197.
 
·        The Dotcom Bubble. In the 1990s, everyone wanted to participate in the commercialization of the internet by investing in technology companies – even those that weren’t profitable. A speculative bubble formed and popped, reported Adam Hayes of Investopedia. The Nasdaq Composite Index lost almost 77 percent from March 2000 to October 2002, when the Index moved up from a low of 1,114.
 
Last week, the Nasdaq finished at 11,805.
 
·        The Housing Market Crash. The subprime mortgage market grew fast in the early 2000s, following a change in regulations. Lower-quality mortgages were often included in mortgage-backed securities. When home prices fell, borrowers defaulted, and financial markets were disrupted, reported Paul Kosakowski of Investopedia. The S&P 500 fell from 1,565 in October 2007 to about 1,276 in March 2008.
 
Last week the S&P 500 finished at 4,024.
 
The weight of evidence accumulated over time supports the idea that holding a well-allocated and diversified portfolio focused on your financial goals is a sound choice. During periods of volatility, like this one, it’s important to stay focused on your long-term goals.
 
Past performance is no guarantee of future results.
 
Weekly Focus – Think About It
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.
―Warren Buffet, investor and philanthropist
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Weekly Market Commentary May 9, 2022

Weekly Market Commentary
 
May 9, 2022
 
 The Markets
 
There is a lot of uncertainty in financial markets – and markets hate uncertainty.
 
In recent weeks, economic and financial market data have been telling different stories – and that makes it tough for investors to know where the United States economy is headed. Since stock markets move up and down based on what investors think will happen in the future, markets have been volatile. Here are some of the issues that have contributed to recent uncertainty.
 
·        Is economic growth slowing? At the end of April, the advance estimate for gross domestic product (GDP), which is a measure of economic growth, showed the U.S. economy contracted (-1.4 percent, annualized) during the first quarter of 2022. It was a puzzling piece of information because consumer spending, which accounts for more than two-thirds of economic activity rose by 2.7 percent during the period – after being adjusted for inflation – which suggests the economy is strong. A discrepancy between imports (up) and exports (down) appeared to be the driver behind the decline in GDP. A contraction can be a sign that the economy is weakening.
 
·        Is economic growth continuing? Right now, workers are in demand, which can be a sign of economic growth. Last week’s unemployment report showed stronger-than-expected jobs growth in April. The unemployment rate was 3.6 percent, and average hourly earnings rose by 5.5 percent, annualized. However, the labor force participation rate – the percentage of people who are working or actively looking for work – ticked lower. This could be due to the latest wave of COVID-19, reported Patti Domm of CNBC.
 
·        Will the Federal Reserve make a mistake? The U.S. economy recovered from the pandemic quicker than expected. One consequence was that high demand and limited supply pushed prices higher. Then inflation was exacerbated by the Russia-Ukraine war and China’s COVID-19-related lockdowns, reported Jack Denton and Jacob Sonenshine of Barron’s.
 
Last week, the Fed continued its fight against inflation by raising the fed-funds target rate by 0.50 percent. On Wednesday, investors welcomed the move and U.S. stock indices moved higher. On Thursday, they changed their minds and markets dropped lower. “US stocks appear to be on a permanent rollercoaster ride as investors debate continued signs of a strong economy alongside rising rates,” stated a source cited by Barron’s.
 
Bond yields have risen along with interest rates. At the end of last week, the 2-year U.S. Treasury note yielded 2.72 percent and the benchmark 10-year U.S. Treasury yielded more than 3 percent. Higher bond yields are likely to affect stock markets, too, as investors can now find opportunities to invest for income with less risk.
 
Last week, major U.S. stocks indices moved lower. The Nasdaq Composite Index is in bear market territory (down 20 percent or more), and the Standard & Poor’s 500 Index is down 14 percent year-to-date with almost half of the stocks in the Index down 20 percent or more, reported Ben Levisohn of Barron’s.
 
 
ARE YOU LIVING THE AMERICAN DREAM? In a late March survey, conducted by an accounting technology firm, small business owners were asked if they were living the American Dream. Two-out-of-three small business owners said they were, although they thought the “American Dream” was changing. Small business owners said their American dream includes:
 
·        Being self-made,
·        Owning a business,
·        Being financially comfortable, and
·        Providing for their families.
 
They also want to:
 
·        Provide for the future,
·        Pay off a mortgage,
·        Push for good causes,
·        Give employees health and retirement benefits, and
·        Pay employees higher wages.
 
According to the IRS Small Business and Self-Employed Division, there are 57 million small business owners and self-employed taxpayers that have businesses with less than $10 million in assets.9 Over the past 25 years, small businesses have accounted for two of every three jobs created in the United States, reported the Small Business Administration.
 
If you’re a small business owner and you would like some help with spending, saving, tax, or retirement strategies, let us know. We’re happy to help.
 
Weekly Focus – Think About It
“There are no forms in nature. Nature is a vast, chaotic collection of shapes. You as an artist create configurations out of chaos. You make a formal statement where there was none to begin with. All art is a combination of an external event and an internal event…I make a photograph to give you the equivalent of what I felt. Equivalent is still the best word.”
―Ansel Adams, photographer
 
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Weekly Market Commentary May 2, 2022

Weekly Market Commentary
 
May 2, 2022
 
 The Markets
 
Correction and contraction....
 
Investing during 2022 has been like running a forest trail and having unexpected obstacles appear every so often – a fallen tree, a swarm of biting flies, a bear with cubs – you get the idea. To-date, economic, coronavirus-related, and geopolitical events have taken a toll from stock and bond markets, as well as the U.S. economy. For example:
 
·        Prices were high as we entered the year and have continued to rise. Last week, the Personal Consumption Expenditures Price Index, a broad gauge of inflation across the United States, reported that inflation was 6.6 percent in March 2022, up from 5.8 percent in December 2021.
·        The Russia-Ukraine War is pushing inflation higher. Russia and Ukraine are major exporters of energy and agriculture products, and exports have been limited by the war. Consequently, the World Bank’s Commodity Market Outlook forecasts that energy prices will rise by 50.5 percent and non-energy prices by 19.2 percent this year before moving lower again in 2023.
·        China is locking down cities to fight a surge of COVID-19 and snarling supply chains. “Ships have been piling up outside Shanghai, the world’s largest port, and other container docks across China as authorities have forced multiple cities into lockdown to counter the country’s worst COVID outbreak since the pandemic began,” reported Eamon Barrett of Fortune. Cross-border restrictions on trucking have also created issues.
·        The Federal Reserve began raising the fed funds rate to address inflation. The Fed is expected to raise rates significantly this year as it works to reduce demand and lower inflation. When interest rates move higher, the cost of borrowing increases, and economic activity slows. As a result, some investors are concerned about the possibility of recession.
 
Recession fears were top-of-mind last week when the Bureau of Economic Analysis reported that U.S. gross domestic product (GDP) – the value of all goods and services produced in the country – contracted 1.4 percent during the first quarter of 2022. Greg Daco, chief economist of EY-Parthenon, wrote in Barron’s:
 
“To the untrained eye, such a GDP contraction would raise concern that the economy is headed toward a recession…paradoxically, the main reason GDP contracted in Q1 is that the U.S. economy grew faster than its peers. Robust private sector activity driven by solid consumer outlays, accelerating business investment, and inventory restocking pulled in imports at an extremely rapid pace while a sluggish global economy meant exports fell back.”
 
Major U.S. stock indices fell last week. The Standard & Poor’s 500 and Nasdaq Composite Indices are in correction territory, down more than 10 percent for the year, and the Dow Jones Industrial Average is close to a correction, reported Ben Levisohn of Barron’s
 
 
 
 
VALUE STOCKS MAY BE CYCLING INTO FAVOR. For more than a decade, interest rates in the United States have been very low. During this time, growth stocks, which benefit from low rates, have outperformed value stocks. As of last Friday, the MSCI All-Country World Index (ACWI) Growth, which measures the performance of growth stocks, was up 9.51 percent for the last decade. The MSCI ACWI Value, which measures the performance of value stocks, returned 4.47 percent, over the same period.
 
It looks as though that may be beginning to change.
 
Growth stocks are shares of companies that are expected to grow more quickly than other companies. These companies often do not pay dividends. Instead, they reinvest any profits to grow the company quickly. The valuation of growth stocks may seem expensive; however, if the company grows fast the valuation may seem low and the company’s share price may rise. Many technology companies fall into this category.
 
In 2022, growth stocks have languished. “High-growth technology stocks that sparkled in the coronavirus crisis have entered a bear market as shifting consumer habits and the prospect of sharp U.S. interest rate rises force investors out of one of the most lucrative trades of recent years…the prospect of rate rises has hurt low-profit, high-growth technology stocks because those companies’ future cash flows look relatively less attractive,” reported Laurence Fletcher of the Financial Times.
 
Value stocks are shares of companies which trade at valuations that are lower than company fundamentals – earnings, dividends, sales, cash flow, and other metrics – suggest they should trade at. Often these are mature companies that pay dividends. Some might even have been growth companies at one time.
 
Historically, there have been periods when value has outperformed growth. For example, this year, through last Friday, value stocks (MSCI ACWI Value, -6.69 percent) delivered better returns than growth stocks (MSCI ACWI Growth, -20.03 percent).
 
Recent performance doesn’t mean it’s better to value shares than growth shares or vice versa, as Saira Malik of FT explained. “Of course there have been times when value has beaten growth and vice versa – sometimes by wide margins and for extended periods. But betting on one style over the other based on the magnitude or duration of its past outperformance in any given timeframe is not a sound strategy for maximizing returns. The reason is simple: performance drivers are period-specific, hard to predict and unlikely to be repeated.”
 
A good choice is diversification. Holding a well-allocated and diversified portfolio won’t eliminate losses, but it can help investors manage risk during periods of market volatility.
 
Weekly Focus – Think About It
“In the long run, we shape our lives, and we shape ourselves. The process never ends until we die. And the choices we make are ultimately our own responsibility.”
—Eleanor Roosevelt, former First Lady
 
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