Market In A Snap! June 20th – June 24th, 2022

By: Jeff Anderson, CFA

 Close Weekly return YTD return 
    
S&P 500 3,911.74 6.45% -17.93% 
Nasdaq Composite 1,1607.62 7.49% -25.81% 
Russell 2,000  1,765.71 6.0% -21.36% 
Crude Oil $107.54 -2.68% 42.5% 
US Treasury 10yr Yield 3.13% -10.3% 160.5% 

Source: Wall St. Journal 

Market Wrap: 

The major US equity markets posted strong gains this week, notching gains of 6% or more. The yield on the US 10-Year Treasury Note subsided, dropping 35 basis points from its peak last week (the day before the Fed hiked interest rates). It’s been a nice reprieve from the drubbing investors have endure this year. 

The University of Michigan Consumer Sentiment Index posted its lowest level on record, dropping to 50. That is lower than 2009 and 1980, when inflation was near its zenith (see chart). We’re in a dour mood for sure. Yet, the university revised its inflation expectations down over the next five to ten years from 3.3% to 3.1%. This revision, according to the Wall St Journal, “fueled some optimism that the Fed wouldn’t be as aggressive about hiking interest rates.”  So, last week, the Fed hiked rates by 75 basis points vs their original intention to raise it by 50 basis points. The market didn’t love it last week. This week, the market corrected that pessimism. There are hints of optimism that inflation may come down faster. We’ll likely experience more of this flip-flopping in expectations in the coming months. Supply chain constraints and the Russian invasion of Ukraine have kept inflation stubbornly high longer than most people feared and there is no consensus when either will be resolved. 

Historically, consumer sentiment peaks with market peaks and bottoms around market bottoms. It doesn’t really lead, nor lag the market. It’s more of a coincident indicator. Nonetheless, a reading of 50 is low. Very low. Having to endure a global pandemic and 40-year highs in inflation are enough to make anyone pessimistic.  

So, here we are, seven plus months from the US stock market highs, and the drumbeat of a looming recession is growing louder. The first quarter’s earnings were strong, yet the market was declining. Why? The market is always 6 to 9 months ahead of the economy. We are likely in a cyclical market correction that could last the year, or longer. Earnings may have peaked. If we do in fact fall into a recession, earnings will fall. The equity markets will start moving higher 6 to 9 months ahead of the bottom in earnings. So, let’s remember to separate the two. Let’s not be confused by the market’s direction and the economy.  Fixed income is starting to act rationally again. As bonds mature, they can be reinvested into higher yielding equivalent securities. And, when bear markets end, it creates higher expected returns going forward. It is nearly impossible to avoid temporary losses when investing in risk assets. Diversification is key, even when periods like now test the very definition of it.  

https://www.wsj.com/articles/global-stocks-markets-dow-update-06-24-2022-11656055923?mod=hp_lead_pos1

Facebook, Netflix, and PayPal are Value Stocks: 

These three companies, long the darlings of the growth / momentum bull market of the past decade have been tossed into the value camp.  Netflix, the company that put Blockbuster out of business and disrupted the way we consume video content, may have run out of their ability to grow. They are no longer a disruptor. Competition is fierce and the consumer is looking for ways to cut spending. PayPal, also a disruptor in the payment space has suffered the same fate. Facebook, now Meta, the OG of social media is also under intense competition. These companies aren’t dead, but the decades long growth trajectory is likely over. Not long ago, Facebook was part of the top 10 holdings in the Nasdaq 100 Index.  Now it is being added to a Value Index and politely told to leave the Growth Index. That is creative destruction. Companies can’t dominate forever. That’s how capitalism works.  Do something really well, and competitors will come in droves.   

So, now they trade for much lower valuations and fall into the value camp. If you own the Nasdaq 100 ETF, what does that mean? It means other companies that fit the growth definition will replace them. If you only owned Netflix, for example, its fall from its peak would have absolutely devastated your portfolio. If it was part of an ETF, it would not be nearly as bad. The underlying holdings of an ETF or Mutual Fund will change over time. Their time in the sun likely helped generate the returns of those funds but the future return of those funds will be dominated by new companies. That’s capitalism at work. 

Here is a visual showing the size of Facebook and Netflix in 2020 relative to the average S&P 500 company. 

Source: VisualCapitalist. 

Facebook’s market value currently is $460 billion while Netflix is $84 billion. 

https://www.wsj.com/articles/facebook-netflix-and-paypal-are-value-stocks-now-11655956472

Market In A Snap! June 13th – June 17th, 2022

By: Jeff Anderson, CFA

CloseWeekly returnYTD return
S&P 5003,674.84-5.79%-22.9%
Nasdaq Composite1,0798.35-4.78%-30.98%
Russell 2,000 1,802.33-4.29%-19.73%
Crude Oil$110.24-8.57%46.02%
US Treasury 10yr Yield3.24%7.8%172.7%

Source: Wall St. Journal

Market Wrap:

The S&P 500 is down 10.5% over past 2 weeks. The Volatility Index (“VIX”) is up over 30% again which is basically fear territory. During the summer doldrums, the VIX is typically around 10%. Times are different for sure. Bear markets stink. They are a buzz kill.

School is out and those who are planning a summer vacation away from home, buckle up; it’s going to cost a lot more than last year. Inflation is running rampant, and because of that, Fed Governor Jay Powell and his merry team of regional Fed governors agreed to raise the overnight rate by 75 basis points rather than the 50 that was expected as recently as last week. Why the change of heart Jay? Friday’s CPI reading of 8.6% was enough to change his mind. They are committed to bringing inflation under control. When the rumor surfaced Monday afternoon that team Powell was leaning towards 75 basis points, the yield on the 10-year US treasury spiked 25 basis points immediately. I mean immediately. In my 22 years of investing, I can’t remember such a move. But guess what? It was necessary, AND prudent. Best we tame the inflation beast now vs letting it grow and devour everything in its path. Believe it or not, the cost of food and gasoline will come down at some point.  

Is there any good news when discussing inflation? Yes. Most of us own homes, and most have mortgages below the prevailing rate of roughly 6%. As inflation eats away at your purchasing power, it also reduces the real cost of future mortgage payments.  The US, unlike many western economies, has a banking system that allows investors to lock in mortgage rates for 30 years. Let’s say, for example that you refinanced or purchased a home with mortgage rates at 4% and your monthly mortgage amounts to $4,000.  Inflation settles down to 6% next year, and 3.5% in year 5 and stays there. In year 10, your mortgage payment drops dramatically. And, house prices typically rise with the rate of inflation, so you end up with a real asset that increases with inflation AND your monthly payment decreases in real terms. It’s just math (granted, on the back of cocktail napkin). The point is, any debt you owe that has a fixed interest rate, inflation will be a tailwind. Since housing takes up anywhere from 25% to 40% of your take home pay, it goes a long way in helping you absorb higher costs for other expenditures. This is not to say that we welcome inflation, but merely to point out that certain assets in your total asset base are a natural hedge against it. Equities can also be an inflation hedge. Companies that can’t pass on rising costs will wither and die. Those that can get their costs down to be the lowest cost producer in an industry will survive. Equities, have over time, generated returns greater than the rate of inflation. 

Recessions and bear markets are an ugly, but unavoidable, part of a capitalist system. We have booms and busts. Until we can find a better alternative, it will continue to be so. How we act during these times will have long-lasting effects. Choose to allow your emotions (i.e., fear)  to take over and you could make decisions that may alter your path to retirement (or the lifestyle you expected in retirement). Remember, when making investing decisions, we don’t compare to nothing, and we don’t buy high and sell low. I’ve witnessed 4 market crashed in my lifetime. Each one had its own catalyst for that crash, and each one was unsettling. They happen. Let’s accept that. Keeping a level head and having a roadmap are the two most important things you can do right now. 

Market In A Snap! June 6th – June 12th, 2022

By: Jeff Anderson, CFA

CloseWeekly returnYTD return
S&P 5003,900.86-5.05%-18.16%
Nasdaq Composite1,1340.02-5.6%-27.52%
Russell 2,000 1,802.33-4.29%-19.73%
Crude Oil$120.670.32%59.91%
US Treasury 10yr Yield3.161%7.54%108.85%

Source: Wall St. Journal

Market Wrap:

The bear market in equities continued this week, with the major indexes falling 4.3% to 5.6%. Bond yields rose. As with last week, economic data continues to point to further tightening from the Federal Reserve. Inflation spiked again (more on that below) which weighed on stocks. Bonds, which had been returning to its normal role of providing a ballast to equities sold off as well, as prices dropped to reflect the increase in interest rates that are coming. There is no crystal ball out there that can tell us when this will end. The good news is that it will end at some point. As a reminder, bonds are yielding more (that’s good news), equities are cheaper (also good news). The consumer is still spending. Company earnings are still growing. Unfortunately, the multiple on those growing earnings is declining faster than the rate of earnings growth. The sooner we all wean ourselves of the notion that companies should trade for multiples well above their historical averages, the better we’ll all be. 

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If you look at the attached bar chart, you’ll see data for the S&P 500 over various time frames. Since 1927, over a 5-year rolling return period, the S&P 500 was positive 89% of the time. Over a 20-year period, it was positive 100% of the time. Given today’s market environment, it is important to keep things in context. “Time-in” the market is extremely important when saving for retirement. “Timing” the market is almost impossible. 

Talking Inflation; Again:

The consensus estimate for US inflation for May was 8.1% (the monthly figure is annualized to reach this number) which would have signaled that inflation had peaked in March of this year. Unfortunately, it was not to be. May clocked in at 8.6%. As an aside, it is a good lesson for all of us. Nobody has a crystal ball. Consensus estimates were off. Way off.

The May number was the largest 12-month increase since December 1981.

Food increased 10.1%. Energy was up a whopping 34.6% (gasoline alone was up 48.7%). New vehicles were up 12% while used vehicles cost 16.1% more than last year. Shelter (i.e., “rents”) were only up 5%. Rents tend to lag home prices, so it is fair to say that rents will rise faster than 5% given last year’s run up in house prices.

So, how is the Consumer Price Index Calculated? The Bureau of Labor Statistics (“BLS”) creates a basket of goods and services based on consumption behavior. In the first 50 years of producing the CPI, the BLS updated the spending weights every 10 years. Back in January of 2002, the BLS started updating the CPI spending weights every 2 years to make the survey more relevant. Then came Covid-19. Spending habits were immeasurably altered. So, today’s calculations are not apples-to-apples with the historical data that is pasted all over the news. Nonetheless, costs are rising quickly. Below is a breakdown of the CPI basket:

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Food 13.421% | Energy 8.255% | All items less Food & Energy 78.324%. In the last category, you have shelter making up 32.4% of the total CPI basket and autos at 6.5%. You can see from the table attached, that the largest component of CPI had the smallest increase. Shelter, being the largest overall weighting, will increase, but rents don’t go up like the price of food and gasoline, so the overall effect that it may have on CPI will likely be more than offset by the declines in energy prices (& food – fingers crossed) in the future.  

Market In A Snap! May 30th – June 2nd, 2022

By: Jeff Anderson, CFA

CloseWeekly returnYTD return
S&P 5004,108.54-1.20%-13.8%
Nasdaq Composite1,2012.73-0.98%-23.22%
Russell 2,000 1,883.05-0.26%-16.13%
Crude Oil$120.364.55%59.48%
US Treasury 10yr Yield2.949%7.42%94.82%

Source: Wall St. Journal

Market Wrap:

The markets were poised for another positive week, but Friday’s action thwarted that. A host of economic data this week put investors (or shall we say, “traders”) in a sour mood as the data signaled that the economy was still strong enough for the Fed to keep its foot on the rate-hike pedal. Tesla’s CEO, Elon Musk told his senior executives to reduce salaried headcount by 10%. However, he did go on to say (which many news outlets did not report) that the “hourly headcount will increase.” In that same directive, Musk said that he had a “super bad feeling” about the economy (1). That was enough to knock off 9.3% of Tesla’s market value on Friday. The future of the US economy is, for the short term, uncertain. We have very smart people predicting an imminent recession while others believe a recession won’t occur until the back half of next year. It seems someone’s crystal ball is broken. 

  1. https://www.reuters.com/technology/exclusive-musk-says-tesla-needs-cut-staff-by-10-pauses-all-hiring-2022-06-03/ 

Gasoline Prices Continue to Climb:

In a previous weekly update, we highlighted the breakdown of the costs for a gallon of gasoline in California. Given the steep rise in prices at the pump, we thought we’d revisit. According to AAA, the current national average for regular gasoline prices is $4.761, which represents a $0.56 increase from March and a whopping $1.74 at this time last year.  In California, the current average is $6.246 vs $4.20 a year ago giving us the dubious distinction of being the most expensive state, by far, to top up the tank. (1)

Crude oil prices accounted for 61% of the price for a gallon of gas in February of this year, while 14% went to refining, and the remaining balance went to distribution, marketing, and taxes (2). When you compare the change in oil prices and gasoline prices, the 10-year correlation is a whopping 0.944 (a reading of 1.0 would mean that they have a perfect relationship) (3).

With the Russia-Ukraine conflict still going on and China coming out of lockdown, oil prices are likely to stay elevated. That means these high gas prices aren’t going away anytime soon.

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  1. www.aaa.com
  2. https://www.thebalance.com/how-crude-oil-prices-affect-gas-prices-3306230
  3. Ycharts

Employers Added 390,000 jobs in May:

US job growth for May was down approximately 46,000 from April and was below the monthly average pace of growth in 2021, according to the Labor Department. The unemployment rate stood at 3.6%, close to the 50 year low we experienced in early 2020 just before the global pandemic grinded everything to a halt. By most accounts, the economy remains strong, but its momentum is weakening, with wage gains slowing, a 6% drop in existing home sales, and the services sector rose at a slower pace month over month (1). The ISI Manufacturing sector rose in May vs April, albeit at a slow pace (2). But that was enough to signal to investors that the Fed will continue with rate hikes of 50 basis points in each of the next two meetings as they try to bring down inflation. As you can see from the chart below, employment has almost clawed its way back to pre-pandemic levels, but the world we live in today is vastly different from what it was two years ago. 

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Back in January, Fed Governor Jerome Powell said that “most FOMC participants agree that labor market conditions are consistent with maximum employment” (3). At the end of December, the Unemployment rate stood at nearly 4%. That means, at least to me, that Chairman Powell would be comfortable if unemployment ticked back up to 4%. To the markets, a move back up in unemployment would scream recession, but that may not be how Powell and his team look at it. As we’ve written about previously, the Fed is trying to slow the economy down to bring down inflation. The unemployment rate may tick up as a result of the Fed’s actions.  It’s a delicate balancing act. Next week, we’ll explain inflation “expectations” as seen through the lens of traders. The inflation number is not as bleak as the current CPI readings would lead us all to believe.

  1. https://www.wsj.com/articles/may-jobs-report-unemployment-rate-2022-11654195243
  2. Ycharts
  3. https://www.brookings.edu/blog/up-front/2022/02/23/how-does-the-fed-define-maximum-employment/

Market In A Snap! May 23rd – May 27th, 2022

By: Jeff Anderson, CFA

CloseWeekly returnYTD return
S&P 5004,158.246.58%-12.76%
Nasdaq Composite1,2131.136.84%-22.46%
Russell 2,000 1,883.956.24%-16.09%
Crude Oil$115.052.11%52.52%
US Treasury 10yr Yield2.745%-10.9%123.1%

Source: Wall St. Journal

Market Wrap – “Stocks Notch Their Best Week Since November 2020” (1)

As we approach the May long weekend and the unofficial kick-off of summer, the markets decided a little reprieve from the constant declines was in order. US indices were up over 6% on average for the week. The volatility in the bond market finally settled down a little, leaving the US 10-year Treasury Note solidly below 3%. Heck, even mortgage rates declined for two straight weeks. 

Last week’s “retail Armageddon” was followed by good news coming out of retailers who reported this week. Per Bloomberg.com (2), consumers are dipping into their savings to keep spending. It’s hard to know if that’s good or bad.  It’s good in the sense that it may signal confidence in in the strong labor market and ability to keep their jobs, and possibly even get a raise. On the other hand, it could be bad because inflation has pushed prices to levels where people need to dip into savings to pay bills and purchase goods. That’s economics. It is not a hard science. 

There are often counter arguments to almost anything. So, what does this all mean? Inflation, interest rates, consumer sentiment, retail sales, bond yields, energy prices, the price of avocados or a new car. You likely know the answer to this. When there is too much money chasing too few goods, prices rise (that’s inflation in a nutshell).  Too much money can come from money printing, or it can simply come from a lack of supply for a good or service that’s in demand. If, for example, ten people want to buy a car and there are only six cars, the price for those cars will rise. Eventually, car companies will look at this excess demand and build enough cars to meet this demand and prices will moderate. The Federal Reserve raises interest rates to slow demand and balance supply. The wrinkle is the supply chain issues that still plague many industries. Raise rates too fast and decrease demand too quickly as the supply chain corrects itself and you end up with too much supply and not enough demand. The Fed still thinks that, as covid lockdowns ease, supply will increase and meet the slowing (not declining) demand to get to that magical point where they equal each other. Again, it’s not really an exact science. It’s part art. People’s emotions are always at play. Only time will tell if the Fed gets the balance right.

  1. www.bloomberg.com 5.27.22
  2. https://www.bloomberg.com/news/articles/2022-05-27/firmer-us-inflation-adjusted-spending-underscores-solid-consumer?srnd=premium

Our CEO is Featured in this Month’s Morningstar Magazine:

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Our CEO and founder, Dustin Tenbroeck is featured in this month’s Morningstar Magazine. For those who know Dustin, you’ve likely heard his pearls of wisdom before. For most of us who only know the “Presidio Capital” Dustin, the article provides some great insight into who he is away from the office and how he got to where is today. He also lays out his investment and retirement philosophies, which, given the current climate we’re in, is worth the read alone. Enjoy

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Market In A Snap! May 16th – May 20th, 2022

By: Jeff Anderson, CFA

CloseWeekly returnYTD return
S&P 5003,901.90-3.05%-18.14%
Nasdaq Composite1,1354.62-3.82%–27.42%
Russell 2,000 1,773.27-1.08%-21.02%
Crude Oil$112.702.29%49.37%
US Treasury 10yr Yield2.785%-13.3%127.1%

Source: Wall St. Journal

Market Wrap – “It’s Like Déjà vu All Over Again”(1):

Eight weeks and counting. That’s how many consecutive negative return weeks the Dow Jones Industrial Average has posted. That hasn’t happened since 1923 (2). It’s been a constant grind lower for equity markets.  Walmart and Target both reported disappointing earnings this week. Consumer buying patterns changed and both retailers were caught with the wrong inventory. Add on material increases in fuel costs for the year, and the outlook didn’t give investors any comfort, sending their share prices down approximately 20% and 28% respectively. Nothing seems to be going right for many companies. On a positive note, bonds started to behave a little better. The US Aggregate Bond ETF (“AGG”) has been roughly flat for the past month. That’s a far better result than the previous three and a half months, where the bond ETF had lost nearly 10% (3).  

The recession debate keeps raging. First Trust’s Brian Wesbury thinks a recession is unlikely until late 2023 or 2024, but he did bring down his price target for the S&P 500 to around 4,100 given the dramatic rise in yield on the US 10 Year Treasury Note (Late last year, his price target for the S&P 500 was 5,250 for 2022). Economists are pricing in a 30% chance of a recession this year. Who knows? We already had a negative GDP quarter in Q1. We might already be in one. Whenever a recession happens, and they do…. it’s part of the economic cycle, and the market will have already priced it in. Consumer Sentiment is also at decade lows, reaching the lows set back in 2009. It is a 180 degree from just prior to the onset of the pandemic. But the economy was actually decelerating at that point. Consumer Sentiment tends to be higher during economic expansionary periods and low during recessionary periods. 

Domestic equity markets are now officially in a bear market and it has us feeling glum.  Nobody likes to see their nest egg shrink, but markets don’t go up in a straight line.  As markets continue to trend lower, the good news is that equities are getting cheaper. The cheaper they get, the higher the future expected returns. Market corrections offer other opportunities as well. It can be a good time to consider Roth Conversions, or tax loss harvesting.  These are things you should discuss with your advisor.

Remember, investing is a marathon not a sprint.

  1. – Yogi Berra quote
  2. – CNBC
  3. – YCharts

Changes in Spending:

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The New York Fed has some interesting data on its site. One that caught our attention, was the change in household spending on essential and non-essential items over the next twelve months. You can see from the chart below, that changes in spending on essential items has moved up materially. We all know that prices are rising and from the NY Fed’s survey, it looks like we think price increases won’t stop this year.

Market In A Snap! May 9th – May 13th, 2022

By: Jeff Anderson, CFA

CloseWeekly returnYTD return
S&P 5004,023.89-2.41%-15.57%
Nasdaq Composite11,805.00-2.80%-24.54%
Russell 2,000 1,1792.67-2.55%-20.16%
Crude Oil$110.186.20%46.57%
US Treasury 10yr Yield2.82%-19.8%141.8%

Source: Wall St. Journal

Market Wrap:

If it weren’t for Friday’s rally, the major US stock market indices would have been down over 5% for the week. Why did stocks rally Friday? In a radio interview Thursday evening, Fed Governor Jay Powell said they will not simply raise rates without concern for its effects on the economy. They are making decisions based on data that is changing quickly. To me, this is a breath of fresh air. Previous Fed Governors were purely “model-driven.”  Powell seems to be more flexible and, frankly, more up to the task than previous governors. We have had academics at the helm for decades.  Powell is not an academic. He’s pragmatic, not dogmatic. In the same interview, Mr. Powell admitted that they should have raised rates sooner. This admission is a breath of fresh air. No one has all the answers. We view economics as a hard science, but it is not. It is part science and part psychology.  When investors get increasingly confident in their views on the future, markets tend to tilt that way. Warren Buffet is credited with saying, back in 1973, that, in the short term, the stock market is a voting machine. In the long run, it’s a weighing machine.  What does that mean? Basically, in the short term, stocks (& bonds, real estate, etc.) are driven by investor sentiment, but in the long run they are driven by value.  Today’s economic climate is uncertain and investor sentiment is in the gutter. This happens repeatedly. When times are good, we tend to extrapolate those good times well into the future and asset prices get expensive. When times are bad (or uncertain), the opposite happens. We tend not to question things when times are great, but we get extremely focused on what “isn’t working” during bear markets.  Making emotional decisions during times like this can be harmful to retirement goals.

We know that having a diversified portfolio is necessary to building wealth over time. The reason diversification works is that certain asset classes work better at different times. They all have some expected return profile. For example, Small Cap stocks tend to outperform Large Cap stocks over the long-term, but they tend to be more volatile and move a little differently than Large Cap stocks depending on the economic cycle. Small Cap stocks tend to underperform heading into a recession but do much better than Large Caps coming out of a recession. Predicting recessions is just plain hard. We can see the direction the economy is taking but guessing how or when the economy will tip into a recession is difficult. Over the long-term, it’s meaningless anyway.

One last note on diversification. The Walton family is the wealthiest family in the US. Their net worth is about $240 Billion. Most of that is their ownership stake in Walmart. They also have a family office that invests their other money. Their largest holding is an international equity ETF.

May 2, 2022

You May Have Equity in your Leased Automobile.

For those of you who leased a car and are coming up on the end of the lease period, you may want to review your contract. As you can see from the chart below (the “Manheim Used Vehicle Index), used car values have soared. Every wonder why the dealership is being so nice to you by offering you the ability to turn your leased vehicle in before the contract has expired, even if you are over on your mileage?

If you have the typical 36-month lease, you likely leased your vehicle in 2019. The monthly lease payment is calculated by the finance department, or finance partner, of the dealership. The length of the lease, miles driven, interest rates, and an estimate of the residual value of the vehicle are all part of that monthly car payment calculation. If you look at your contract, you can find the residual value. You can look online for your model’s value from Kelley blue book, or any number of used car dealerships like AutoNation or CarMax. Your model is likely selling for a higher price than what your residual value is. From there, you have a few options. You can purchase the vehicle outright and sell it privately or to a used car dealer. Dealerships are starved for inventory. Often, they will take over the last few lease payments AND pay you most of that remaining equity which you can use to purchase a car through them. You can also negotiate with the dealership that leased you the vehicle to use that equity towards a new lease, or you can ask them to pay you some percentage of the equity value without having to buy the car out (this is what I did back in 2017). 

Knowing what your car is worth (even if it’s not “technically” yours) might be worth the effort.

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Truly,

Jeff Anderson, CFA

Presidio Capital Management

Market In A Snap! May 2nd – May 6th, 2022

By: Jeff Anderson, CFA

CloseWeekly returnYTD return
S&P 5004,123.34-0.21%-13.49%
Nasdaq Composite12,144.66-1.54%-22.37%
Russell 2,000 1,839.56-1.32%-18.07%
Crude Oil$110.506.20%46.57%
US Treasury 10yr Yield3.14%15.9%107.56%

Source: Wall St. Journal

Market Wrap:

Volatility was the name of game this week as equity markets gyrated wildly after the Federal Reserve hiked the overnight rate by 50 bps on Wednesday. The markets spiked higher after the announcement but quickly reversed course the following day, with the major US equity markets falling roughly 5%. Yet, despite this, the S&P 500 barely moved over the week. The Nasdaq Composite closed down less than 2%, but it sure felt like it was much worse. The yield on the US Government 10 Year Note rose above 3% as the Fed laid out plans for 50 bps rate hikes over each of the next two meetings. By the end of 2022, the overnight rate will likely be closer to 2.5% vs it’s current range of 0.75% to 1.00%. Fed Governor Powell is dead set on bringing down inflation. The Fed also stated that they will begin winding down their balance sheet with purchases of $47.5 billion of treasuries and mortgage-backed bonds in June, July, and August, followed by $95 billion of bond purchases thereafter. That is quite a reversal from late last year when the Fed was “buying” $90 billion worth of bonds. Many economists and strategists believe Mr. Powell and his team are “behind the curve,” meaning they aren’t doing enough now to bring down inflation.  However, when the war in the Ukraine ends (yes, it will end at some point), and lockdowns in Asia expire, inflationary pressures from supply chain challenges should help bring down inflation.  CPI has been near 8.5% but that should come down below 5% by next year. With the US Treasury yield around 3%, real rates will still be negative, but not nearly as negative as they are today. Remember, rates have been negativing in real terms for years. 

The recession debate is twofold. The first debate is when we will see a recession. The other is how severe will it be. Will we have a “soft landing” and experience a mild recession or will it be a severe one. That is impossible to know. There is no crystal ball. And, importantly, for a long-term investor, it is irrelevant. The economic cycle includes recessions. They are inevitable, but they aren’t bringing on the end of the world. Never bet on the end of the world.

Times Like this Can Make you Lose Faith…. If you Let it:

We are emotionally programmed to feel losses more acutely than gains. We need $20 of gains to feel the same as losing $10. We don’t like to lose. It’s that area in the brain called the amygdala that is also responsible for processing fear.  That’s a cruel trick played on the human mind. Fear can be suffocating. Fear of being hit by a bus and fear of losing money are all packaged in the same brain tissue. So, what can investors do? Are we condemned to a pattern of rushing out of investments when the seas get choppy? No, we aren’t. Understanding risk is vitally important. That is why holding a diversified portfolio of equities and bonds will, over the long-term, help investors reach their financial goals. Then why do we start to focus on one stock or fund that is doing worse than others during a market correction? Asset classes all have different risk and return characteristics. When put into a portfolio, their unique attributes tend to balance each other. Yet, in times like this, when stocks and bonds go down at the same time, what are investors to do? Is Modern Portfolio Theory dead? Is this the new normal? It likely is not. Equity markets are upward sloping over the long term. The S&P 500 has averaged around 9% annually over the long-term. But that’s the average. To earn that average, investors will experience periods of higher returns as well as periods of lower, or negative returns. Market corrections are an unavoidable part of your financial journey. Sometimes, the road is wide, smooth and the scenery is breathtaking. Other times, it’s full of potholes, sharp turns, and lousy weather. But, in the end, you’ll get to your destination.

A statue of a bull and a bull on a street

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Source: Google Images (Sculpture by Arturo Di Modica)

Market In A Snap! April 25th – April 29th, 2022

By: Jeff Anderson, CFA

CloseWeekly returnYTD return
S&P 5004,131.93-3.27%-13.31
Nasdaq Composite12,334.64-3.93%-21.16%
Russell 2,000 1,940.66-4.06%–17.07%
Crude Oil$104.232.55%38.37%
US Treasury 10yr Yield2.9%1.4%92.15%

Source: Wall St. Journal

Market Wrap:

It was another down week for the major indices (Nasdaq had its worst month since 2008!) as investors digested weak economic data and a mixed bag of corporate earnings. Google and Amazon disappointed investors while Microsoft, Visa, and Facebook (now “Meta”) exceeded estimates. If you look under the hood at the major indices, plenty of stocks are down well over 40% year-to-date. Stock prices of companies like Teledoc, Zoom Video Communications and Netflix are now below their pre-covid levels. All those gains, which were significant, have disappeared. It goes to show you that only owning one or two stocks in your portfolio can do considerable damage to your financial health. Those companies are all part of at least one index. The indexes themselves (which consist of many companies) are down a fraction of that. 

With continued lockdowns in mainland China, and the ongoing Ukrainian conflict, prices for goods and services are likely to remain elevated for the foreseeable future. That puts pressure on the Federal Reserve to continue raising interest rates and this is weighing heavily on investors (or should we say “traders”) minds. The probability of a recession in 2023 has increased as well. Recessions are part of the economic cycle. They come, and thankfully, they go. It’s never fun when it happens but it does pass. Mr. Powell and his team at the Fed are likely to be aggressive at the next two Fed meetings. Whether that tips the US economy is anyone’s guess. It bears reminding that when coming to investing, taking a long-term view is paramount. Warren Buffet never makes investment decisions based on whether the economy is headed into a recession. He simply buys good companies with great long-term prospects. An important caveat is that many of his most famous investments were made during tough economic times. That is typically when the best bargains can be had. That’s how retirement investing should be viewed. Own good companies let time be your friend.

GDP Growth was Negative in Q1:

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That’s right, the economy went backwards. All this talk about when the economy might tip into a recession later this year or next and we just discovered that the economy was already slowing dramatically. I don’t recall reading anyone predicting this. It takes two consecutive quarters of negative GDP growth. So, technically we’re halfway there. As we’ve said before, the market is a discounting machine. The major indices peaked in late 2021. Maybe we are headed into one. It takes time for the economy to respond to changes, sometimes by as much as 12 months. The end of the government’s stimulative measures and persistent high prices for just about everything are weighing on the economy.  That’s one explanation.  On the other hand, when you look under the hood, the reason for the decline in GDP was due to a widening trade deficit (imports surged and exports didn’t keep pace). The US consumer is still in very good shape.  Americans are sitting on plenty of cash, are employed, and living in homes with considerable equity. Retail sales continue to chug along. Demand for durable goods (like washing machines and cars) are still strong, but many are pushing out purchasing decisions because supply shortages are driving up prices in the short term. Call it pent-up demand. Check out the chart on GDP growth from the Wall Street Journal. Growth in the economy is still expected, even considering the dramatic jump in prices for all kinds of things as seen chart from our friends at First Trust Advisors. 

Source: Wall Street Journal

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Source: First Trust Advisors, L.P.