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Market In A Snap! November 1st-November 5th, 2021

By: Jeff Anderson, CFA

This Week: The strength of the S&P 500 continued this week, closing at 4,697 which amounts to a weekly gain of 2%.  The yield on the 10-Yr US Treasury note closed at 1.45%, retreating from above 1.6% a couple of weeks ago.  Crude oil softened a bit, closing at $81.37 per barrel, off 2.2% for the week but still 68% higher for the year.  Employment numbers today showed continued strength in the US economy, with the unemployment rate falling to 4.8%.  However, the labor participation rate, for workers aged 25 to 54 stood at 81.7%, down 1.2% from its February 2020 level. 

This Issue:

  • Market Update
  • Higher Rates on the Horizon?
  • Flying High
  • Taxes on Polluting Goods-Steel, Chemicals and Cement

Higher Rates on the Horizon?

Economists are pricing in higher interest rates for the US, with rate hikes coming as early as next year.  Inflation pressures have proven to be “transitory for longer” and the Fed has telegraphed its playbook. First comes tapering, where they will reduce their asset purchases by $15 billion per month starting this month until they wind it down entirely by mid to late next year. At that point, if the economy is healthy enough, and inflation is still elevated, they will begin tightening.  The chart provided by Bloomberg shows the magnitude and timing of these expected rate hikes.  The other chart shows the Fed’s Asset Holdings.  Remember, rate hikes are not necessarily negative.  It typically signals a growing economy where the demand for credit is healthy.  If the economy weakens materially during the taper, they may pause and consider different measures.  The one thing the Fed doesn’t want to do is surprise the market.  The market hates surprises.

Flying High

This week, Bloomberg put out an interesting article on the airlines.  As oil prices continue its torrid pace, airlines are increasingly hedging their fuel exposure.  Typically, airlines lock-in future fuel purchases to avoid having to pay higher prices if oil prices go higher.  Unfortunately, this backfired last year when the pandemic shut down the economy.  Oil prices crashed, leaving the airlines on the hook for billions of dollars.  Now that the economy is healthier, more people are flying, and demand is rising.  They are hedging a smaller percentage of their fuel bills, “meaning they are less insured against a surge, but equally less at risk of another demand implosion.”

Taxes on Polluting Goods – Steel, Chemicals and Cement

Whatever your position is on climate change there is no denying that the world’s economy is going green.  Capital, once easily available for the fossil fuel industry has been increasingly diverted to renewable energy projects.  Unfortunately, this has become an increasingly tense political debate.  States where fossil fuels are a large part of their economies are pushing back, as this shift puts downward pressure on employment.  Wind and solar projects are being constructed in other states, leaving those states with a challenge: how to grow while their major industries are retreating.

George David Banks, a veteran Republican environmental policy official who worked in the Trump White House and is now promoting carbon tariffs, said, “Once Republican voters recognize that this is the way of getting our supply chain back to the U.S., I think people are going to see the climate agenda very differently.”

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Market In A Snap! October 25th – October 29th, 2021

By: Jeff Anderson, CFA

This Week: The S&P 500 gained 1.3% for the week, closing at all-time high of 4,605.  For the month, gains were just shy of 6%, clawing back the losses sustained in September.  Year-to-date, the S&P is up nearly 23%.

The yield on the 10-year US Treasury Note finished the week at 1.55% down slightly from the prior week despite consumer prices rising at the fastest pace in 30 years and increases in employment compensation not seen in at least 20 years. Crude Oil closed at $83.26 per barrel, down a little under 21% on the week. 

This Issue:

  • Market Update
  • Market News
  • The US Economy
  • Electric Vehicles vs the Gasoline Tax

Market News:

Google and Microsoft reported strong 3rd quarter earnings this week, showing investors the strength of their businesses.  Shares for both companies gained roughly 7% for the week and are up significanty for the year.

Tesla and Hertz made news Monday.  Hertz agreed to purchase 100,000 vehicles from Tesla, which carries a $4 billion price tag.  Deliveries to take place towards the end of next year and early 2023.   Typically, rental car companies are able to make large fleet purchases at a discount.  Not so with Tesla.  Demand is strong. Hetz paid retail like the rest of us.   50,000 of those Teslas will be rented to Uber drivers, where Hertz will charge as much as $337 per week.  Tesla and Hertz will also invest in installing charging stations at Hertz Locations.  When the vehicles are ready to be replaced, Hertz will partner with Carvana to sell the used vehicles.  The entire agreement is fascinating. Four companies all with skin in the game moving towards a new era of transportation.  If you have paid any attention to General Motors, you’ll know that the Auto Industry is moving towards autonomous, electric vehicles that will be aviable to consumers on a subscription model, where consumers can pay a monthly fee to access a fleet of cars instead of having to own their own.  Cars sit idle the majority of the time.  Adding in the cost of insurance, repairs, and gasoline, the car is an awfully inefficient and costly thing to own.  Transportation as a Service, or “TaaS” is the future.  It may be hard to get or heads around this concept, but rest-assured, the auto manufacturers, rental fleet providers, and Fleet managers (like Uber and Lyft) are all betting on it.  Tecnology is moving rapidly.  The world will be vastly different in 10 years.  Strap on your seatbelt and enjoy the ride.

The US Economy:

The economy grew at the slowest pace since the pandemic recovery in the third quarter, ending September 30th.  The economy grew at a 2% annualized rate, down from nearly 6.7% rate in the second quarter.

The economy could not continue at its previous torrid pace.  The Delta variant, supply-bottlenecks for goods, and the end of major unemployment benefits all weighed in.  Despite this slowing, US consumers still increased their spending and drew down their elevated savings to do so.  Services saw the largest increase in spending, as consumers spent more of their discretionary income dining out and going to movies.  It will be at least another year until the major supply shortages are alleviated.

Electric Vehicles vs the Gasoline Tax:

Many of you have watched the movie, “Finding Nemo” with your children or grandchildren.  In one scene, Nemo’s father and Dory are drawn to a light in the dark. At first it captivates them. Nemo’s father says, “I feel happy”.  Soon enough they discover it is an Angler Fish out hunting prey.  We can draw a parallel to California’s push for clean energy and its need for tax dollars.  We highlighted in a previous weekly update the taxes levied on gasoline.  California was one of the first, if not the first, states to offer sizeable tax rebates on Electric Vehicle (“EV”) purchases.  EV owners enjoy low (& sometimes no) cost charging designed to help adoption of EVs.  If/when California highways are dominated by EVs how will the state recoup the lost gas-tax revenues?  EV owners currently pay an annual fee as part of their annual vehicle registration, but this will not be enough to recoup the potential lost gas tax revenues.  Californians could be subject to a “Road Charge”, that charges drivers a fee for miles driven on California roads (“fee-for-use”).  Whatever legislation is enacted, it will be intended to make up the shortfall in lost gasoline taxes.

Source: dot.ca.gov

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Market In A Snap! October 18th-October 22nd,2021

By Jeff Anderseron, CFA

This Week: The S&P 500 closed the week at 4,544.90, and the Dow climbed to all-time highs.  The S&P 500 is up 1.64% this week and 21% year-to-date.  The US 10 Yr Treasury Bond yield drifted higher, settling in at 1.64%.  Crude Oil continued its strength, closing at $84.18 per barrel, notching gains of nearly 2% on the week and gaining 74% year-to-date reminding us that near-term inflation is real.

This Issue:

  • Market Update
  • Fed Chairman Jerome Powell Says Supply-Side Constraints Are Creating Inflation Risk
  • The Chips That Make The World Go Round
  • There’s Money in The Banana Stand

Fed Chairman Jerome Powell Says Supply-Side Constraints Are Creating More Inflation Risk:

On Friday, Fed Governor Jay Powell stated that the “Supply-side constraints have gotten worse”.  The Fed had previously predicted that much of these constraints to have lessened by year-end.  Mr. Powell went on to add that the central bank will “need to make sure that our policy is positioned to stay flexible in the months ahead”.  We are witnessing the negative effects of shutting down a global economy.  Is the Fed moving away from its “inflation-is-transitory” stance?  Despite these constraints, the breakeven inflation rate going out 5 years is around 2.75% vs 2.5% for the 10-year rate, both well below the current inflation run rate.  Bond yields remain low and the velocity of money (which is a key gauge of inflation – higher velocity implies higher inflation) is yet to move higher, implying that long-term inflation is still not a foregone conclusion.  Looking at the chart from the St Louis Federal Reserve, despite the amount of liquidity provided by the Fed, velocity remains anemic.  Money has not flowed out into the real economy to support the belief that inflation is purely a monetary phenomenon.  Arguments can be made about the trajectory of inflation, but what we can be certain of is that money in the future will be worth less than it is worth today.

The Chips that make the world Go Round:

Taiwan has 63% market share of the global semiconductor industry.  Semiconductors are the new oil of the 21st century, a vital component in almost every product.  Martijn Rasser, a senior fellow at the Center for a New American Security was quoted saying, “Whoever controls the design and production of these microchips, they will set the course for the 21st century.”  Approximately 90% of the semiconductors used by US technology companies rely on Taiwanese manufacturing.   This concentration is likely to issue #1 when it comes to American and Chinese relations.

There’s Money in the Banana Stand:

There is no argument that the Pandemic has widened the wealth gap.  The stimulus provided by Governments around the world was necessary for many, and a boon for others.  American and European households are sitting on record amounts of savings.  Some of it will be used as security for future uncertainties, but much of it is just waiting to be spent.  This cash hoard is likely one reason by supply constraints is an issue as there is a lot of deferred consumption.

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Market In A Snap! October 11th-October 15th, 2021

By Jeff Anderson, CFA

Social Security Benefits Increase 5.9% for 2022

American retirees will see the largest increase in social security benefits in over 40 years.  Next year’s cost of living adjustment (“COLA”) reflects the recent rise in inflation.  The increase amounts to $92 per month, on average, bringing the average monthly check to $1,657.

For American workers, social security taxes will be applied to earnings up to $147,000 next year vs $142,800 this year, a 2.9% increase.

Source- WSJ Social Security Cola Increase 2022

How the US Government Earns and Spends

For those of us curious, and sometimes frustrated, with the level of government spending, the Wall St. Journal put out a piece on Revenues and expenditures at the Federal, state, and local levels.  Steve Ballmer, former CEO of Microsoft, and current owner of the NBA’s LA Clippers franchise started USAFacts to better understand government by the numbers.

The numbers provided are for 2018, but they are a good reflection of today’s revenue and expenditure categories, percentage-wise.

37% of revenues came from individual income taxes; 21% from payroll taxes, 12% from sales and excise taxes, 10% from property taxes, and 5% from corporate income taxes.  An additional 12% came from earnings on investments, federal reserve earnings, and other non-tax revenue.  The remaining 3% came from an estate and gift taxes, licenses, customs and duties, and others.

As for expenditures, see the graphic below.

Source- WSJ Social Security Cola Increase 2022

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index.*******

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Market In A Snap! September 28th-October 1st, 2021

By Jeff Anderson, CFA

US equities were lower in September, with the S&P 500 logging its first decline since January and its worst month since September 2020.  The S&P 500 declined 4.76% for the month.  The yield on the US Treasury 10-year note climbed 19.8% to 1.487% and is back to where it was just prior to the onset of the Global pandemic in early 2020.  Oil rallied 7.65% for the month to close at $75.12 per barrel. Bonds can perform well in a rising interest rate, low growth environment if the bond portfolio is laddered – portfolios of bonds with a fixed duration target.  Most bond mutual funds and ETFs construct their portfolios to maintain a fairly constant average duration which is accomplished by constantly reinvesting in longer-dated bonds from the proceeds of matured bonds.  The higher yields of those newly purchased bonds eventually will make up for the capital losses incurred by previously owned bonds.

Employment Data Delayed (no need to be alarmed)

The US monthly employment report typically comes out the first Friday of the month.  For October, it won’t be released until the 8th (next Friday).  Consensus for non-farm payrolls is looking for growth of 513,000 in September, while the unemployment rate will drop to 5.0% from 5.2%.  First Trust’s economists believe that the consensus may be overlooking the fact that the national system of overly generous unemployment benefits due to COVID-19 ran out on Labor Day weekend.  “Many unemployed who had previously been getting payments in excess of what they could have earned while working are no longer able to do so”.   Couple that with kids going back to in-school learning, the motivation for people to get back to work are the strongest in months.  With employers struggling to hire employees and/or pay more in wages, this may come as a nice surprise.

Prices to The Moon

Much of the increase in rents is attributable to the pandemic and the rental vacancy spike and eviction moratorium enacted by the federal government.  Regardless, the Dallas Federal Reserve predicts that the official rent index from the Bureau of Labor Statistics will increase 6.9% by year-end 20-23, which would be the highest in more than 30 years.  Despite the ongoing debate surrounding an increase in inflation being permanent or transitory, certain sectors of the economy continue to eat into the wallets of the US household.

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Market In A Snap! September 20th – September 24th, 2021

By Jeff Anderson, CFA

FedEx Delivers an Inflation Message

FedEx reported earnings this week that disappointed analysts, sending shares down over 10% for the week.  The earnings miss was attributable to a higher cost of labor and overall labor shortages. Packages were re-routed to distribution hubs that had sufficient labor availability.  The company stated, “The current labor environment is driving inefficiencies in the operation of our network and significantly impacting our financial results”.  FedEx’s President and COO also announced that shipping rates will increase 6 to 8% in January 2022 in addition to a fuel surcharge increase starting November 1, 2021.

The FOMC met this week

Fed Governor Jay Powell held his quarterly press conference Wednesday, where he delivered the Fed’s message re: the state of the economy, inflation expectations, interest rates and tapering.  The economy is continuing to grow and is still coping with the effects of the global pandemic economic shutdown in 2020.  Even though inflation expectations have been raised multiple times by the FOMC (now at 2.2%), the current pace of inflation is running much higher (see chart), yet the Fed is standing firm on their belief that it is still transitory.  Mr. Powell stated that the Fed will begin tapering their bond purchases later in the year by $10 billion per month. At the current pace of $120 billion per month, tapering should be completed within 12 months, at which time we can expect the Fed to begin raising interest rates.  Interestingly, the 5-year US inflation breakeven expectation is still below 2.5%, slightly above the FOMC’s upper range but well below the current run rate.  The UST 10-year note bumped up is a week from 1.3% to roughly 1.4%, still firmly in the negative real yield zone.

August Housing Starts increased 3.9% to a 1.615 million annual rate.

The gain was entirely due to multi-family starts.  Single-family starts declined 2.8% for the month.  First Trust’s senior economist wrote this week that, “While it’s too early to know for sure, there are signs developers may be shifting resources away from single-family home construction and toward larger apartment buildings in response to rapidly rising rents as some people move back into big cities and the eviction moratorium ends”.  First Trust’s Brian Wesbury went on to say “While the monthly pace of activity will ebb and flow as the recovery continues, we expect housing starts to remain in an upward trend.  A big reason for our confidence is that builders have a huge number of permitted projects sitting in the pipeline waiting to be started.  In fact, the backlog of projects that have been authorized but not yet started is currently the highest since the series began back in 1999” (emphasis added).

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index.*******

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Market In A Snap! September 13th-September 17th, 2021

By Jeff Anderson, CFA

Retail Sales for August rose 0.7%

Retail sales numbers for August came out this week, surprising many economists and showing the resilience of the American consumer.  Consumption accounts for approximately 2/3rds of GDP.  Even though most of the stimulus checks are behind us, coupled with concerns surrounding the delta variant, Americans continue to spend (see chart).  However, according to the Wall Street Journal, “Americans in recent weeks have cut spending on travel, and multiple artists have canceled concerts. Such spending isn’t captured in retail sales”.  With the US consumption responsible for roughly 2/3rds of GDP, it will be interesting to see how mask mandates, capacity restrictions and overall consumer fears play into retail sales in the fall as we enter the Thanksgiving through Christmas shopping (& travel) season.

Rates and the Fed’s Asset Purchases

The Federal Reserve will begin to taper their bond purchases towards the end of the year.   The common perception is that US Government bond yields rise when the Fed stops or slows, bond purchases and yields decrease when they buy (think Quantitative Easing or “QE”).  From the chart below you can see that opposite is true.  The light great vertical bars indicate periods of bond purchases. The blue line shows the yield on the 10-Yr US Treasury note.  Yields rise during QE.  Why is that? One explanation is that asset purchases lead to investor confidence which in turn supports investors’ risk appetite, driving investors out of safe havens and into risk assets.

Source: Natixis Investment Managers – Solutions

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index.*******

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Market In A Snap! August 31st- September 3rd, 2021

By Jeff Anderson, CFA

Record Highs

“U.S. Hiring Slowed Sharply in August. The economy added 235,00 jobs as the Delta variant appears to be weighing on consumer confidence”, was the title in Friday’s Wall Street Journal.  Economists’ estimates were for 720,000.  A big miss to put it bluntly. Payrolls are still 500,000 below the levels prior to the onset of the pandemic in Q1 of 2020.  Despite this, employer demand for workers is still strong.  We are still muddling our way back to normal and this is just another example of how disruptive this past 18 month has been. The S&P 500 shrugged this off and closed essentially flat on the day.  The market continues to march higher despite these challenges. Many leading economic indicators have weakened and it’s clear, to some, that the economy is decelerating.

As Labor Day is finally upon us, money managers will be back from vacation and digesting the recent economic data. Couple that with September being historically one of the tougher months for the market, it will be interesting to see if the US equity markets can continue to march higher.

Gas Prices Soaring

Californians vacationing out of state are always pleasantly surprised at the cost of filling up their rental cars. Arizona, Florida, South Carolina, and Texas all have prices that are roughly 33% cheaper.  California gas prices are even more expensive than Hawaii.  How can that be? Taxes.  Total taxes per gallon amount to $1.18 or 42% of the average price for a gallon of fuel in Texas.  See the picture for the breakdown, compliments of the Western States Petroleum Industry.

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Market In A Snap! August 16th-August 20th, 2021

By Jeff Anderson, CFA

The S&P 500 opened down on Monday after news of a strained exit for American armed forces from Afghanistan as well as more news of increased cases of COVID-19’s delta variant.  By Tuesday afternoon, the index was making all-time highs. By Friday’s close, it was down 0.6% for the week.

On Thursday, the Labor Department reported jobless claims of 348,000 for the week ending August 14th which is a new pandemic low but well above the approximate 200,000 level that existed prior to the pandemic.

The Fed will be holding its annual Economic Policy Symposium in Jackson Hole, Wyoming August 26th.  Fed Governor Jay Powell will deliver his remarks on the 27th and Fed watchers will be looking for any signals about tapering its asset purchases as well as the economic outlook.  Inflation will likely be a key topic.

While on the topic of inflation, Krispy Kreme announced this week that they will consider increasing prices in September in response to rising costs for key commodities like sugar and edible oils that go into making their delicious donuts.  Whether the inflation in commodities is transitory or not, it’s a good reminder that prices for food, energy, clothing etc., will continue to rise and eat away (no pun intended) at your retirement savings.  

When Krispy Kreme opened in 1937 a dozen donuts cost $0.80.  Today, that same dozen costs $8.00. (1) Over time, prices rise. Period.  Add that to the other two certainties in life.

Yet despite this example of food inflation, the debate remains whether this sudden increase in inflation (“CPI”) is transitory. The 10- and 20-year US government treasury yields are still below 1.5% and 2% respectively.  If inflation truly takes hold, the bond market will send a clear signal in rising long-term yields.

Enjoy the weekend!

Jeff Anderson, CFA

Portfolio Manager.

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