Market In A Snap! October 17th – October 21st, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,752.754.74%-21.26%
Nasdaq Composite10,859.725.22%-30.59%
Russell 2,0001,742.243.56%-22.41%
Crude Oil$85.13-0.49%12.83%
US Treasury 10yr Yield4.224%  

Source: Wall St. Journal

Market Recap

Equity markets capped off a strong week Friday by rallying immediately after the Wall Street Journal reported that there might be some deliberation amongst Fed officials about the path of interest rates after the expected 75 basis point hike at the next Federal Reserve Open Market Committee decision on November 2nd.  This kind of information must be taken with a huge grain of salt. For one, the Journal was quoting one governor’s comments that was made weeks ago. It just kind of smells. Yes, Fed officials are always being asked for a comment. And yes, they all have egos. They all want to be heard. The media will put all these sound bites, and hand-picked data points into their pretzel-making machine and spit out its own twisted narrative. I’m not saying it isn’t factual. It’s just misplaced. In the end, it’s just conjecture. Guessing. Hoping. Maybe even praying. However, there will come a time when the Fed stops raising interest rates, and possibly even cuts rates. Today’s action shows how eager the market is for a Fed pivot.

https://www.wsj.com/articles/fed-set-to-raise-rates-by-0-75-point-and-debate-size-of-future-hikes-11666356757?mod=hp_lead_pos2

The IRS Makes Changes, Thanks to Inflation:

Look for meaningful changes to tax rates in 2023, thanks to a four-decade-high inflation rate. Income tax brackets, standard deductions, annual gift tax exclusions, and even estate tax thresholds are all moving up. All of them are increasing by 7%. Individual taxpayers in the 22% federal tax bracket will see that limit increase from just over $89,000 to $95,375. The standard deduction for married couples will jump to almost $28,000. The annual gift tax exclusion increases $1,000 to $17,000. The estate tax limit jumps to $12.92 million from $12.06 million per person, and nearly $26 million for a married couple.

 For us working stiffs, we should see lower tax withholdings as soon as this coming January.  

photo: wsj.com (Chip Somodevilla/Getty Images)

https://www.wsj.com/articles/inflation-causes-irs-to-raise-tax-brackets-standard-deduction-by-7-11666116021?mod=article_inline

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! October 10th – October 14th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,583.07-1.55%-24.82%
Nasdaq Composite10,321.39-3.11%-34.03%
Russell 2,0001,682.4-1.16%-25.07%
Crude Oil$86.08-8.21%%13.39%
US Treasury 10yr Yield4.008%  

Source: Wall St. Journal

Market Recap

To say it was another volatile week for equity markets must seem like a bout of déjà vu. Stocks fell to start the week, fell even harder Thursday morning when disappointing CPI data was released, only to completely reverse course and finish higher. In fact, the Dow Jones Industrial average fell 500 points in the morning and rose a whopping 800 points later in the day to mark the largest single day swing (in points, not %) on record. The week finished with the broader markets finishing lower Friday. Given the stickiness of inflation and the increased probability of a more aggressive rate hike in December, it wasn’t a surprise. The Fed is 100% committed to getting inflation under control and that means getting as aggressive as possible with rate hikes. With CPI coming at 8.2% for September, it was in line with the previous month but higher than the markets wanted. The good news was that supply chain issues have eased, sending core inflation across the goods sector down to 6.2% or so. Unfortunately, inflation in the services sector more than made up for that decline. You can chalk it up to wages. Service sector jobs have seen steady wage growth. The Fed is aimed at increasing unemployment. The neutral rate of unemployment is about 4%, meaning that is what the Fed sees as “normal”. Anything lower means the economy is running a little too hot. Chairman Powell and his team take out their blunt instrument called “interest rate policy” and try to bludgeon it. Raising rates should slow economic activity. Slower economic growth should slow job growth. Slow job growth and you hope you can dampen the upward pressure on wages. Which, in turn, should slow inflation. That’s the playbook. The Fed is willing to accept higher unemployment and even a recession.

Over the next 30 days, we’ll have a pretty good handle on corporate earnings for the third quarter as well as guidance for the fourth quarter in addition to the mid-term elections.  Earnings are still expected to grow, albeit at a much slower rate that projected three months ago. The Republicans are expected to take the House and possibly the Senate. That would likely spell gridlock the remainder of President Biden’s term. Gridlock is actually good for markets.

https://www.wsj.com/articles/global-stocks-markets-dow-update-10-14-2022-11665745241

The San Diego Padres Roster – an Analogy for Your Investment Portfolio:

The Padres’ pitching staff is stellar. No doubt. Their closer, Josh Hader has, in my mind, the most stressful job on the team. He sits around all game until, if they’re winning, gets the call in the 9th inning to preserve the victory. Eight innings of baseball determines whether he’ll be needed or not. In total, He only pitched 50 innings during the regular season. The entire regular season has 1,458 innings, not including any extra innings. So, Hader is used less than 4% of the time yet his role is as important, if not more, than most of his teammates. And what did it cost the organization to have a pitcher take the mound for 4% of the time? $11 million this year. Seems like a lot, but it’s only 4.6% of the entire payroll. I guess you could say his playing time vs his salary is somewhat in-line. Interesting you might say, but what does it have to do with an investment portfolio? Plenty.

Baseball, like investing, is dependent on statistical analysis. Building a team is like building a portfolio. You can’t play without a pitcher, or a catcher, or first basemen. You need 9 players on the field. From there, you need the best player for that position that offers the best risk/reward in addition to how well he fits into the team’s game by game strategy. The manager is playing a live game of chess. He starts with a gameplan but has a set of alternate moves he can make when conditions change. For example, if the game is close and the opponent’s best hitter is up next, it might require a pitching change. That kind of thing.

It’s not dissimilar to investing. To do it correctly, you need a starting lineup. Stocks, Bonds, Real Estate etc. The next task is to figure out how much of each? Too much of one asset class causes a hole in your lineup. If your investment opponent is inflation, the kind of stocks and bonds you need are slightly different than when your opponent is an economic recovery. You need a long-term game plan as well as the ability to make changes when conditions necessitate it.

Like the importance of Josh Hader’s 4% contribution to the team is, so might your 4% withdrawal rate be as equally important. Some changes required might seem small, but they can have a meaningful impact. It’s all a balance.

https://baseballsavant.mlb.com/savant-player/josh-hader-623352?stats=statcast-r-pitching-mlb

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! October 3rd – October 7th

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,639.661.51%-23.64%
Nasdaq Composite10,652.40.73%-31.91%
Russell 2,0001,702.152.25%-24.19%
Crude Oil$92.7616.33%22.94%
US Treasury 10yr Yield3.891%  

Source: Wall St. Journal

Market Recap

It was another Yogi Berra week. Yogi was famous for his one-liners. “It’s like déjà vu all over again” is one his most quoted. It’s an appropriate quote for this week’s market behavior. The market keeps trying to front-run economic data that would support a Fed pivot. Pivot? Yeah, pivot, meaning the Fed would see fit to stop aggressively raising rates. Lower rates should be good for risk assets. Or at least a stop to the rate hike path they’re on. Today’s employment data hit traders overt head again, showing resilience in the face of a tough economic environment. The labor market isn’t slowing enough, and people are leaving the job market, decreasing the labor participation rate again. Its just not what traders wanted. As a result, the dramatic rise in markets on Monday and Tuesday were almost erased. We’ve witnessed this whipsaw action for months now.

We are close to kicking off 3rd quarter earnings season. Traders are waiting with bated breath for the results. Earnings are slowing…at least that’s the prediction. How much slower might be one question. An even more important question would be what does the fourth quarter look like? What kind of guidance might the over-paid corporate CEOs give? It would be a stretch to think they’ll be upbeat. Cautiously optimistic maybe? Possibly. If you’re an energy executive, earnings should be good, and the message should be positive. If you’re a consumer discretionary CEO, the mood may not be so rosy. CEOs in different industries will have their own set of challenges and opportunities to deal with, and more importantly, communicate with investors. How the market respond is really a matter of what expectations are going into earnings versus what expectations are after earnings. At a high level, it isn’t a stretch to think there’s at least a hint of pessimism heading into earnings.  If things are even less pessimistic, the markets could rally. If investors can adjust their lens to look at the bigger, long-term picture, one quarter will look rather blurry and unimportant relative to the long-term view.

Comparing Personal Finance to Oil Companies?

Oil tycoons of the past never turned down the opportunity (& risk) of digging a dry hole, so the saying goes. How can the behavior of oil companies teach us about personal finance? Plenty apparently. Years ago (specifically – 2011 to 2014) oil prices remained steady at $100 to $110 per barrel, just as we’ve observed this year.  Despite those prices, oil companies bled money. Free cash flow was negative. Free Cash Flow for oil companies is really the same as a household calculating how much money was saved over the year when comparing income to expenses. Households may have been making good money, and even received a raise or two along the way yet this bump in income was more than offset by an even higher level of spending. Hence free cash flow negative.

Great, but where is this going? Things changed….for the better. And it didn’t take a raise. It just took financial discipline. Oil companies got religion. Financial discipline was forced on them. The capital markets (the people who have the money to invest or lend to energy companies) were tired of handing over cash to spend-a-holics. Taking all that cash from drilling and buying more land, digging dry holes, and applying a rinse and repeat behavior became too much to take.

The message was clear. “We are demanding that you get your financial house in order.”  Take that cash flow and do a few things with it. One, pay down your high-cost debt and get your debt levels to an appropriate level. Two, start paying a higher dividend. Three, buy back some of your shares. And then, and only then, go and invest some of that excess cash into replenishing your reserves. And that’s exactly what has happened. Financial discipline, whether forced upon you or from a change of behavior stemming from the stark realization that the current path is unsustainable is what the doctor ordered. See the parallels?

If you look at the chart, there are three pieces of data. The grey area shows the production of oil over the past 12 years. The blue line is the hypothetical growth of investment in the S&P 500 Index. The orange line is the hypothetical growth of investing in the energy sector of the S&P 500. See how the blue and orange lines diverged around 2014? Consistent negative free cash flows from energy companies had a material effect on your money if you invested in those companies. Only after they got religion and started behaving like the stewards of capital they should have been all along, did that sector start to earn decent returns. Getting a household to employ the same game plan will create the same thing. More money left over to invest or save for a rainy day in addition to not depleting your assets so they can compound will get households looking more like the right side of the chart.

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! September 26th – September 30th

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,585.62-2.91%-24.77%
Nasdaq Composite10,575.62-2.69%-32.40%
Russell 2,000 1,664.72-0.89%-25.86%
Crude Oil$79.670.3%5.61%
US Treasury 10yr Yield3.813%  

Source: Wall St. Journal

Market Recap 

It was another down week for markets.  September has been, historically, one the worst months, if not the worst month, for stocks, and the last week, in particular, being the worst week of the year.  When you couple that with rising mortgage rates, Hurricane Ian, rising bond yields, you have a recipe for rough waters.  On top of that, unemployment claims came in lower than forecast, signaling to investors that the Fed will keep its foot pressed to the floor on its rate hike pedal. 

As we like to preach to our clients, it’s just math.  When markets are expensive, future expected returns are lower. When markets correct, the math flips. Future expected returns increase. Over the medium to long term that has always been the case. 

Hurricane Ian and Your Investments:

In no way are we minimizing the devastation that Hurricane Ian caused in Florida, but this photo is probably what the stock market feels like.

Hurricane Ian made landfall on the west coast of Florida this week causing massive damage to the state.  The storm surge and ensuing rainfall from Ian as it made its way across central Florida caused upwards of $40 billion in insured losses according to early estimates reported in the Wall St. Journal.  It could shave off 0.3 percentage points off the country’s Q3 economic growth.  As someone who lived in Florida, the dearth of major hurricanes over the past decade had really created a lot of complacency amongst residents. Too many false alarms.  The boy who cried wolf syndrome.  

In reality, the long-term economic effects are really not that much.  Everything gets rebuilt, newer and (hopefully) better. This is not intended to downplay the emotional damage inflicted on those affected Floridians.  Natural disasters leave indelible marks on the psyche.

All that aside, there are important investing lessons that can be learned from Hurricane Ian.  The two that come to mind are preparedness and diversification.  Many residents weren’t equipped to weather the storm. They didn’t have proper storm shutters, or back-up power sources and even decided to stay put, not understanding the impending risks barreling across the Gulf of Mexico.  What about diversification?  I know firsthand of someone who had a home in Ft Myers along with three investment properties that he relied on as income in retirement. All in the same location. Parts, if not all, of those properties are scattered across the state in various forms of sticks and twisted metal. Prime residence gone.  Income gone.  Do you see the parallels?  In investing, you need to prepare for market crashes like you’d prepare for natural disasters that will happen when you live at sea level along the coast. You need cash on a monthly from your investment portfolio?  Make sure your withdrawal rate is conservative. Make sure you have shorter-term, safer investments that you can draw from over the next year or two.  Lastly, know that owning a bunch of investments doesn’t mean you hare diversified.  Make sure those investments are providing you with exposures to various risks and offer different return characteristics, so you don’t end up losing a significant portion of your nest egg because it was all concentrated in the wrong asset class.

https://www.wsj.com/livecoverage/hurricane-ian-florida-updates-live-2022-09-29?mod=hp_lead_pos7

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! September 19th – September 23rd

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,693.23-4.65%-22.51%
Nasdaq Composite10,867.93-5.07%-30.53%
Russell 2,0001,679.59-6.60%-25.20%
Crude Oil$79.43-6.99%5.28%
US Treasury 10yr Yield3.69%  

Source: Wall St. Journal

Market Recap – The First Week of Fall”ing”:

Major US equity indices sold off hard this week, with the Dow Jones Industrial Average putting in a new low for the year. It hasn’t been just the US. Global growth fears that have roiled markets across the globe. Unfortunately, the only two things not falling are mortgage rates and inflation (well, not falling fast enough). Mortgage rates are nearing 7%. That ain’t a misprint. Blame it on inflation. Blame it on Powell. Blame it on Rio. Whatever the reason, stuff’s getting expensive.

Fed Governor Powell has a simple message for the consumer. Stop buying stuff! The sooner we bring down inflation the sooner we can get out of this mess. Every time the market rallies, I can just picture Mr. Powell in front of his Bloomberg terminal thinking, “Oh yeah?!  You think I’m bluffin’?!.”   He’s told us we’re going to feel pain. He’s told us inflation is enemy number one. He’s told us he’ll accept a recession. He’s told us he’d accept higher unemployment! And yet, we are bewildered! About what? How much clearer can he be? INFLATION HAS TO COME DOWN. AND, UNTIL THEN HE’S GOING TO ADMINSTER THE MEDICINE WE ALL KNOW WE NEED BUT DON’T LIKE UNTIL WE’VE RID OURSELVES OF THE INFLATION DISEASE. Like any Doctor, he doesn’t know when it’ll take effect, but he knows it will eventually cure the disease.

Given current mortgage rates, homes are expensive. Prices don’t yet reflect 6.5% to 7% rates. Yet, stocks and bonds, relative to where they were priced a year ago, are cheaper. However, we all see the two differently. If homes were priced daily on an index like stocks and bonds, they would seem riskier. Conversely, if stocks and bonds were priced like homes, they’d look less risky. Do you see the ambiguity here? Buying a home may be an emotional experience, but it isn’t much different than buying stocks and bonds. The only real difference is that there is a daily TV channel dedicated to reporting the ebbs and flows of stocks and bonds and experts opining on the next calamity around the corner. We all know that renting a home and putting all your savings under your mattress is not a financial plan. Owning a home that you can afford, spending less than you earn, and investing in stocks and bonds over a long-time horizon, and not buying high and selling low will get you to financial independence, yet we seem to face some existential crisis that challenges this fundamental understanding at precisely the worst time.

Source:  The New Yorker:  Artist: David Sipress

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! September 12th – September 16th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,873.33-4.77%-18.73%
Nasdaq Composite11,448.4-5.48%-26.82%
Russell 2,0001,846.98-4.50%-19.91%
Crude Oil$85.34-0.91%13.08%
US Treasury 10yr Yield3.456%  

Source: Wall St. Journal

Market Recap:

It was a rough week for investors, as the major indices gave back all their gains from the prior week. Why? Traders (not investors) front ran this week’s inflation data, hoping for a much softer number that would take the Fed’s foot off the rate hike pedal. The August inflation print came in around 8.3%, all but ensuring that the Fed would raise rates by another 75 basis points next week. What’s interesting is that more than one Fed official had commented that they would need to see more than a month or two of declining inflation before considering changing course. The inflation number wasn’t a surprise really. We are, however, getting more comfortable with the fact that inflation has likely peaked, but the path back to the Fed’s 2% target will likely take longer. If/when the Fed raises next week, the Fed Funds rate with be 2.75% to 3% and likely on a path to 4% next year. Traders had priced in moderate rate hikes after this coming September meeting and even factored in a cut in rates by mid-2023. So, as we sit here today, we know rates are not coming down anytime soon. We know the economy is slowing. We know the Fed is hell-bent on bringing down inflation, and we know that it doesn’t feel good. However, it is far better that the economy feels the pain now vs letting inflation get away from us and repeating the late ‘70s and early ‘80s. It is the medicine we don’t want to take but know we need it.

Mortgage Rates Surpass 6% – Stocks and Bonds are on Sale but Homes are not:

Not since 2008 have homebuyers faced 6% mortgage rates. Heck, we were sitting below 3% last year. The move up in rates has been sudden and dramatic. Yet, keeping things in perspective, 6% is a far cry from the 18% rates homeowners had to pay in the 1980’s.  Regardless, such a dramatic increase has all but stunted the housing market. Sales are way down. Prices (yet) are not. Mortgage originations this year are expected to be half of what they were last year. We are in this phase of adjustment where sellers are clinging to last year’s home values and not being realistic about the current environment. They are emotionally anchored to a value that is not grounded in reality. Buyers, on the other hand, are very timid. Those that are looking are hoping for a “deal.”  The spread between the two is large. As we discussed during our recent podcast, one of three things needs to happen. One, we need a 40% pay raise to justify these prices. Two; mortgage rates need to go back to 3% or three; home prices need to decline 30%. I wouldn’t bet on the first one. And, frankly, I wouldn’t put much stock in the second option either. At least for now.

When inflation gets under control, rates will come back down, but that may be months from now. Fortunately, most potential sellers are sitting on a lot of equity and carrying a mortgage rate well below the current 6%. So, for those that were considering trading down (or up), they can sit tight. Those that must move may have a tough time wrapping their head around the new environment. Something must give.

https://www.wsj.com/articles/mortgage-rates-hit-6-02-highest-since-the-financial-crisis-11663250402?mod=Searchresults_pos4&page=1

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! August 29th – September 2nd, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,924.26-3.29%-17.66%
Nasdaq Composite11,630.86-4.21%-25.66%
Russell 2,0001,846.98-4.74%-19.4%
Crude Oil$87.25-6.15%15.64%
US Treasury 10yr Yield3.2%  

Source: Wall St. Journal

Market Recap:

Investors are engaged in a game of tug-of-war. What are they fighting about? Fear. Inflation fears and recession fears. Each piece of economic data seems like the bell starting the next round. Employment data for August was released Friday, showing 315,000 jobs being added, down from a revised 526,000 jobs in July. The labor participation rate ticked higher (meaning more people decided to get a job or committed to looking for one). So, slower job growth and more people looking for work means less wage pressures and possibly a slowing economy and therefore lower inflation expectations. Or inflation is eating away everyone’s wallet forcing them to go look for work because everything costs more, and they can’t keep going on like that. So, good economic data means the Fed will have to keep raising interest rates because good economic data means demand hasn’t’ softened and it makes the Fed’s job harder to combat inflation. Bad economic data means we could be heading into a recession which will cause inflation to fall, and the Fed will be able to stop hiking rates and even consider cutting rates at some point next year.

Are you confused yet? Bad economic data is good for interest rates (& potentially the markets) and good economic data is bad for interest rates and markets) It’s a bizarro world we are living in right now.

So, what are we supposed to make of all this? First. Take a breath. Second, consider the future. We have had recessions at the end of every economic cycle, and we are batting 1,000 when it comes to surviving them. The US economy has never fallen into a recession and stayed there. Recessions aren’t black holes. They are part of the economic cycle. Think of recessions like trips to the dentist. No one likes those appointments, but they are necessary.

https://www.wsj.com/articles/august-jobs-report-unemployment-rate-economy-growth-2022-11662062706?mod=hp_lead_pos2

It Might be Time to take that European Vacation:

The Euro is less expensive than the US Dollar for the first time since 2002. Well, it’s barely less. 0.999 to be exact. It was above 1.5 in 2008. Europe is suffering from sluggish economic growth, partly due to extremely high energy prices brought on by the Russian-Ukraine conflict. The continent is heavily dependent on Russian gas. Tight supplies have driven costs through the roof, dampening consumer demand and business’ ability to remain profitable. And for that, Europe can be enjoyed on the cheap.

While you’re there, you may consider buying some real estate. Depressed prices coupled with a strong US dollar make for some great deals on apartments in Paris! “Laetitia Laurent, a South Florida interior designer, has long had her heart set on a Parisian pied-à-terre. This summer, with the dollar soaring and Parisian real-estate prices holding steady, she took the leap. The 42-year-old, who lives in Boca Raton, paid 758,000 euros, or $758,606, for a 460-square-foot, one-bedroom in the Golden Triangle—the prime residential and commercial area between the Seine and the Champs-Élysées, in the French capital’s pricey 8th arrondissement. Ms. Laurent said, “I had been looking for a place for a long time.” (1)

Market In A Snap! August 22th – August 26th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5004,057.66-4.04%-14.87%
Nasdaq Composite12,141.7-4.4%-22.39%
Russell 2,000 1,901.01-2.88%-15.33%
Crude Oil$92.863.24%23.09%
US Treasury 10yr Yield3.02%  

Source: Wall St. Journal

Market Recap:

The markets took an abrupt change Friday morning after Fed Governor Jay Powell delivered his speech at the Jackson Hole, Wyoming economic symposium. Consensus coming into the meeting was that the heavy lifting on rate hikes was behind us and the old dovish tone would return from Mr. Powell. It was not to be. “While the central bank’s steps to slow the rate of investment, spending and hiring ‘will bring down inflation, they will also bring some pain to households and businesses. Those are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain’” (emphasis added). One month of declining inflation isn’t enough for the Fed to slow down. He went on to say that bringing down inflation was likely to “require maintaining a restrictive policy stance for some time.”

So, what does this all mean? Simply put, the economy (& the consumer) should expect more pain now to avoid greater pain later if inflation were to become endemic. It’s important to keep in mind that we’ll get through this.

https://www.wsj.com/articles/feds-jerome-powell-set-to-speak-on-economic-outlook-at-jackson-hole-11661476059?mod=hp_lead_pos1&mod=hp_lead_pos1

The Drought in the West has Company:

Corn yields across the major farmlands in the west and mid-west are declining, sparking fears this year’s lower harvest will “exacerbate the food inflation that’s already been gripping the world” says Bloomberg.com. Europe is in a severe drought as is China. If you’ve been watching the national evening news lately you’ve likely seen images of dried-up rivers or bridges extending over what look like streams rather than rivers across Europe. It’s bad. China is also dealing with severe drought conditions. In fact, parts of China are facing the worst drought since the 1960’s along tow major river basins that are responsible for nearly half of the nation’s rice production. China also relies on water for electricity as well. Yet, in the northeastern region, heavy rains have flooded areas that could reduce corn output by a meaningful amount. So, no rains in some regions and too much in others. The global farmland can’t catch a break. To use the adage, “when it rains it pours,” we just can’t catch a break. When things are bad, they just seem to get worse. Inflation can’t be completely controlled by simply raising interest rates. Mother nature has a to cooperate as well. Oh, and to add insult to injury, we have a fertilizer shortage because of war in Ukraine. Don’t expect inflation to come down anytime soon.

https://www.bloomberg.com/news/articles/2022-08-25/-no-way-around-it-us-crop-tour-stokes-fears-of-corn-shortage

https://www.bloomberg.com/news/articles/2022-08-24/drought-threatens-china-s-harvest-when-world-can-least-afford-it

https://www.cnbc.com/2022/04/06/a-fertilizer-shortage-worsened-by-war-in-ukraine-is-driving-up-global-food-prices-and-scarcity.html

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! August 15th – August 19th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5004,228.48-1.21%-11.28%
Nasdaq Composite12,705.22-2.62%-18.79%
Russell 2,0001,957.35-2.94%-12.83%
Crude Oil$90.03-2.01%19.32%
US Treasury 10yr Yield2.975%  

Source: Wall St. Journal

Market Recap:

The Federal Reserve doesn’t hold its monthly meetings during the month of August. It’s vacation time. However, the Kansas City Fed hosts an economic symposium in beautiful Jackson Hole, Wyoming at the end of August (the 25th – 27th). That served up an opportunity for a few Fed officials to comment that rates are going to have to keep rising and investors shouldn’t get too comfortable with the idea that they’ll start cutting rates next year. Those comments were enough to put a damper on equities (and fixed income) Friday, sending the major indices down 1 to 2%. The recent recovery in equity markets has been on the belief that rate hikes wouldn’t be as aggressive as predicted in the earlier part of the year.

The Fed wants investors to know one thing.: Inflation must come down, and rate hikes will continue until that happens, even if it leads to a softening economy.

Where interest rates have had a major effect is in real estate. Mortgage originations have declined precipitously, and refinancings (which is where the bulk of activity has been) has ground to a halt. Sales have plummeted and a recent survey has found that people are favoring renting over buying. That is understandable given that the dramatic rise in mortgage rates is making home even less affordable.

To make matters worse, housing affordability has plummeted. The US composite is around 100, down from nearly 180 at the end of 2020. That’s the composite (see chart). When you break it out by region, the West is below 70. To put things in context, the median priced existing single-family home was $357,000 at the end of 2021. In 2020, it was $300,200. At the end of June this year, it was $423,000. Staggering gains that ran right into a rate rise tsunami that seems to have paralyzed buyers and sellers alike. In our beautiful neck of the woods, the median price is a whopping $642,200! (1)

Yet, there is still relatively low inventory of homes for sale, and household formation is still providing natural demand for housing. We haven’t really built enough homes since the housing crisis in 2008. These factors are vastly different from the 2008 housing crisis. Too many homes, and loose lending created havoc that spilled over to the global economy. Those issues don’t exist today, but house prices may have trouble increasing amidst the backdrop of current mortgage rates. Either prices must come down, or rates must come down.

(1) https://www.nar.realtor/research-and-statistics/housing-statistics/housing-affordability-index

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! August 8th – August 12th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5004,280.153.26%-10.2%
Nasdaq Composite13,047.193.08%-16.6%
Russell 2,0002,016.614.93%-10.19%
Crude Oil$91.963.87%21.90%
US Treasury 10yr Yield2.893%0.6%132.6%

Source: Wall St. Journal

Market Recap:

Imagine you hopped into a time machine and landed in 2015. Now, imagine someone telling you that the inflation rate in August of 2022 was 8.5%! And then, someone told you the market went “up” after the news. IF you could comprehend what you just heard you certainly wouldn’t believe it. How can that be? I’ve written ad nauseum about inflation. I’m sure you’re tired of hearing the word. Heck, I’m tired of writing about it. Regardless, the point is to hammer home the fact that equity markets are always forward looking. What was it last month? Is it getting worse or better? Oh, it’s getting better? Great! Now, how the market reacted is partly a function of the trend in inflation but also, just as important, a function of where the market was leading up to Wednesday’s inflation data. It wasn’t long ago……call it late 2021, when the drumbeat of inflation was a dull roar. All hell broke loose in early 2022 when the Federal Reserve realized that inflation wasn’t as transitory as it had once thought. Equity and Fixed Income markets don’t like negative surprises. Capital markets are always uncertain, but when shocks to the system occur, the level of uncertainty (and emotional stress) intensifies, leaving investors uneasy about the future because they are projecting today’s problems with some sort of future permanency. Pessimism was in full bloom, and to some extent, hasn’t completely abated. When markets reach 2009-type pessimistic levels, markets are almost sure to turn around. To be fair, there are things to worry about. But, if you can adjust your lens to focus on the long-term, you can see a scenario where this just becomes another page in the history books. One to reflect on, and hopefully learn from.

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.