Market In A Snap! January 3rd-January 7th, 2021

By: Jeff Anderson, CFA

This Week: The US Equity Markets got off to a rocky start in 2022, with the S&P 500 declining nearly 2%, while the tech-heavy Nasdaq Index fell ~ 4.5%. Financials and Energy stocks returned more than 9% this week, while Home Construction, Biotech and Tech-Software sectors were down 4.5% to 8%. Rates moved higher, with the 10-year US Treasury Note yield climbing to 1.77% from 1.5% at the end of 2021. US unemployment rate fell below the Fed’s 4% longer-run estimate (partly due to a lower labor participation rate), signaling to traders that the first interest rate hike may come as soon as March. The futures market is predicting 3 rate hikes in 2022.  

Crude Oil was up 3.3% for the week, closing at $79 per barrel, still below its high of $84 in late October 2021.

Our 2021 Annual letter will be out shortly.

 CloseWeekly returnYTD return
    
S&P 5004,677.03-1.87%-1.87%
Nasdaq14,935.90-4.53%-4.53%
Russell 2,0002,180.98-2.87%-2.87%
US Treasury 10yr Yield1.77%  

Source: Wall St. Journal

This Issue:

  • Market Update
  • Americans Borrowed More Than Ever in 2021 to Buy Homes in 2021?
  • The Great Resignation

Americans Borrowed More Than Ever in 2021 to Buy Homes in 2021?

Mortgage Lenders issued close to $1.6 trillion in mortgages in 2021, aided by historically low interest rates. With the shortage of housing inventory and rising prices, many homebuyers snapped up homes for fear of waiting too long before home prices became unaffordable. Despite slowing home-price growth in the back half of the year, prices still rose 19.1% by the end of October. A Strong labor market and increased wages also supported the strong demand for housing.

The Great Resignation:

Last month’s payroll gains created 6.4 million more jobs than at the end of 2020, the largest increase on record. However, the country is still 3.6 million jobs short of pre-pandemic levels.

There were 12 million job openings in the U.S. at the end of the month according to the Wall St Journal. The low-wage sectors are the main source, aided by Government stimulus and COVID-19 fears. Employment numbers continue to strengthen but have yet to get back to pre-Covid levels. Labor participation is also at a low point, with eligible workers seeking early retirement while others are taking a break as they contemplate career changes. With wages growing, employers are finding it harder to hire enough workers. If or when people start coming back to the workforce, wage increases may slow.

Market In A Snap! December 20th-December 24th, 2021

By: Jeff Anderson, CFA

This Week: Markets finished ahead during this shortened holiday week. As you know, markets are closed today for Christmas. The market digested last week’s Federal Reserve Chairman Powell’s comments and resumed their upward trajectory for the year. Bond yields remain benign keeping a lid on mortgage rates. Housing starts have slowed but, overall, residential real estate construction demand is strong. Inventory is still relatively low, pushing prices higher. With all the stock market news focused on technology companies, you might be surprised to note that the best performing companies in December have been from defensive sectors, such as Utilities, Consumer Staples, and Healthcare. Year-To-Date, the best performing sectors have been Energy (up 66.6%), Home Construction (up over 50%), Semiconductors (up ~42%) and Financials (up over 33%).

Crude Oil finished up 2.6% through Thursday, closing at $73.83 per barrel. Happy Holidays!

 CloseWeekly returnYTD return
    
S&P 5004,725.721.22%25.82%
Nasdaq15,653.373.12%21.45%
Russell 2,0002,243.714.24%13.61%
US Treasury 10yr Yield1.495%  

Source: Wall St. Journal

This Issue:

  • Market Update
  • Consumer Spending Cooled off in November
  • Bloomberg: New Study Shows Omicron Has 80% Lower Risk of Hospitalization
  • Build-Back-Better Act Derailed Again

Consumer Spending Cooled off in November:

The Wall Street Journal reported personal spending rose 0.6% in November compared with 1.4% in October. Many consumers purchased holiday gifts earlier this year because of fears of shortages. Overall, the consumer is still in good shape, with unemployment around 4.2% and personal savings of over $2.5 trillion.  However, the labor participation rate is still lower than in the past (see chart) and the personal savings rate, albeit still relatively high, is back to around pre-pandemic levels. As we have written in previous updates, economists were unsure how much demand was pulled forward because of certain product shortages on top spending down of the stimulus checks in 2020 and early 2021.

Bloomberg: New Study Shows Omicron Has 80% Lower Risk of Hospitalization:

The Omicron variant spreads much faster than the previous variants. However, these infections are 80% less likely to be hospitalized if they catch it. Unfortunately, if admitted to the hospital, the risk of severe disease is like the previous two. As many of us are somewhat numb or tired of hearing about Covid-19, the risks of illness for many still exist. The US reported nearly 240,000 new cases yesterday. Dr. Fauci said earlier in the week that the peak wave for Omicron would come much faster and the risk of infections are much higher for the unvaccinated. There have been many vaccinated people contracting Omicron, but the symptoms have been much milder on balance.

Build-Back-Better Act Derailed Again:

West Virginia Democratic Senator Joe Manchin has put a wrench in the legislation, citing concerns over the spending bill’s effects on inflation and debt levels. Senator Manchin has rejected certain provisions like extended paid leave plan, and a program aimed at pushing utilities to use more clean energy. President Biden has publicly stated that a deal will get done.  The bill has already come down from $3.5 trillion to around $2 trillion. Senator Manchin has publicly stated that he would only support up to $1.5 trillion in spending.  With the Fed accelerating bond purchases and signaling rate increases in 2022, this fiscal stimulus could be even more important for the economy in 2021.

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

By: Jeff Anderson, CFA

This Week: Markets closed lower for the week, as investors digested news surrounding the spread of Omicron variant, the Fed’s announcement of accelerating its bond tapering program, and inflation numbers. Despite consensus indicating multiple interest rate hikes next year, the 10- and 20-year US treasury bond yields declined. That has left more than a few strategists scratching their heads. The yield curve has been flattening which typically indicates lower economic growth in the future. GDP will likely stay elevated for the first half of 2022, but as the Fed tightens monetary policy, GDP will likely settle back down to its long-term average of 2 to 3 percent.

Crude oil lost 2.16% for the week yet is till up over 45% for the year. Inflation fears were outweighed by fears that the Omicron variant will slow global growth in addition to OPEC agreeing to boost supply.

 CloseWeekly returnYTD return
    
S&P 5004,631.54-1.94%23.02%
Nasdaq15,169.68-2.95%17.70%
Russell 2,0002,175.93-1.62%10.18%
US Treasury 10yr Yield1.41%  

Source: Wall St. Journal

This Issue:

  • Market Update
  • The Federal Reserve to Taper More Aggressively
  • Buying High and Selling Low. One of the 4 Defects in our Financial DNA
  • Putting the IPO Market in Perspective

The Federal Reserve to Taper More Aggressively:

During Wednesday’s FOMC meeting, Fed Governor Jay Powell said the Fed is likely to increase the pace of tapering bond purchases and could be complete by March 2022. This puts the March meeting as a potential timeframe for the first interest rate hike in years. The futures markets are pricing in roughly three rate increases next year.   With unemployment rates low, the focus is inflation. The US economy had been unable to generate inflation above 2% for over a decade. The Fed has been willing to let inflation run a little hotter than normal as the threat of deflation outweighed inflationary fears. Now, inflation is running hot, and the Fed is signaling a policy shift towards tighter monetary conditions. The Fed governor, despite the criticisms, has been willing to change direction much quicker than previous governors. However, according to Powell, the criteria for rate hikes is different than for accelerated bond purchase tapering.

Buying High and Selling Low. One of the 4 Defects in our Financial DNA:

Morningstar’s Amy Arnott, CFA wrote an interesting piece on how not to invest (link at bottom of paragraph). Despite the poor performance of famed investor Cathie Wood’s ARK flagship ETF, ARK Innovation ETF, investors have fared worse.  Much worse. Why? They chased performance. Buying the ETF “after” the fund generated exceptionally strong, multi-year returns. To compound matters, these recent investors turned around and sold as the fund started generating negative returns. In Morningstar’s “Mind the Gap” annual study, they found that for the most recent 10-year period ended December 31, 2020, investors earned almost 2% less per year compared to the returns of the funds they invested in. This is not a knock against ARK or Ms. Wood. It is simply an example of how many investors behave, which can have material consequences to building wealth.

Putting the IPO Market in Perspective:

To say 2021 was a good year for companies going public would be an understatement. Including SPACs and Secondary Offerings, as of October 31, 2021, 755 deals were completed valued at $214 billion. From the attached chart, these figures were above the previous peak period of 1999-2000. Companies (and their Investment Bankers) like to go public when markets are rising, and sentiment is high. Interestingly, over a two-year period, 2020-2021 total deals were not that much higher than the 1999-2000 period.  Historically, market returns after big deal years tend to be lower, or even negative. Having a well-diversified portfolio of domestic and international equities as well as fixed income securities with a long-term horizon can mitigate the effects of market corrections.

Market In A Snap! December 6th-December 10th, 2021

By: Jeff Anderson, CFA

This Week: It was a rather volatile week for many companies.  A number of high-flying technology stocks fell on hard times, sending some shares down 40% or more.  You wouldn’t know it from looking at the returns of the major indices.  The S&P 500 and Nasdaq indexes are dominated by a handful of large companies, and they have held up well.  Apple’s market value is approaching $3 Trillion, essentially drowning out the noise from the smaller companies in theses indexes. 

 CloseWeekly returnYTD return
    
S&P 5004,712.983.82%25.45%
Nasdaq15,630.63.61%21.28%
Russell 2,0002,210.662.38%11.93%
US Treasury 10yr Yield1.488%  

Source: Wall St. Journal

Crude oil had a decent week, gaining nearly 9% to $72 per barrel, but well off its highs in October where it hovered around $82.  Oil traded down to nearly $10 in April 2020 when the economy was shut down due to the pandemic.  The dramatic increase in oil prices is more a function of return-to-normal price ranges. 

This Issue:

  • Market Update
  • US Jobless Claims Fell to Lowest Level in Half a Century
  • US Inflation Hits a Multi-Decade High in November

U.S. Jobless Claims Fell to Lowest Level in Half a Century

There’s a shortage of labor.  The labor participation rate is almost 2% lower than pre-Covid.  Economists have coined this period as “The Great Resignation”.  People are leaving the workforce.  Some are retiring, while others are taking time off in hopes of recharging their batteries and finding a better paying, more fulfilling career path.  We could also call this post-Covid world “The Great Mobility” as many US workers were able to move thousands of miles away from their offices where they can reduce their cost of living or seek a more balanced lifestyle.  Whatever the reasoning, it is increasingly harder for employers to find good employees, and when they do, it usually costs more.

US Inflation Hits a Multi-Decade High in November

The economic headlines have been dominated by inflation numbers for several months now.  Despite the high reading, it was to be expected.  Bond yields actually moved lower.  Why is that? It’s all about expectations.  Since the 6.8% print was not a surprise, there was nothing to spook the bond markets.

The broader indexes took this all-in stride, with the large cap indices all finishing higher on the day.  Consumers are flush with cash and willing to spend.  Unemployment is low.  Wage gains are helping.  Corporate profits, so far, are growing, meaning that they can pass along price increases.  How much of consumer purchases is pulling forward future demand as people rush to buy goods that may cost more later remains to be seen. 

Market In A Snap! November 29th-December 3rd, 2021

By: Jeff Anderson, CFA

This Week: The S&P 500 closed on Friday at 4,538, posting a loss of 1.2% for the week.  Despite the recent market weakness, the S&P 500 is still up over 20% for the year.  The market correction drove Treasury bond yields lower, with the 10-yr Treasury Bond yield settling below 1.36%.  Crude oil, on the other hand, has been very weak, settling 2.6% lower for the week but down a whopping 18% since Wednesday.  OPEC’s decision to hike output, the Omicron variant’s effects on economic activity and President Joe Biden’s announcement that the government will release supply from the Strategic Petroleum Reserve all contributed to the fall in the price of oil.   Overall, inflationary pressures subsided this week, despite Fed Governor Jerome Powell acknowledging that certain supply-chain pressures are taking longer to work through.  He even went so far as to remove the word “transitory” stating that the term means different things to different people.   Transitory doesn’t have a definite timeline; it simply means that certain costs pressures are not expected to reach a higher, permanent plateau.

This Issue:

  • Market Update
  • Investors Poured Record Amounts of Money Into Equities in 2021
  • The U.S. Added “Just” 210,000 Jobs in November
  • U.S. Businesses Posted Their Highest Profit Margins Since 1950

Investors Poured Record Amounts of money into equities in 2021

Bloomberg reported on November 25th that this year’s inflows into equities are the largest rolling 12-month amount over the past 19 years, amounting to almost $900 billion. Bonds took in a little over half that amount.    

U.S. Added “Just” 210,000 Jobs in November

Friday’s unemployment numbers were somewhat disappointing, but that doesn’t tell the whole story. Prior month’s numbers are always adjusted, making each report somewhat inaccurate.  Nonetheless, economists had predicted over 500,000.  We are not back to pre-pandemic employment numbers, but the economy is continuing to add jobs.  Unemployment is down to 4.2%.  the Labor Participation rate is slightly higher, meaning more people are in or actively looking for work.  The chart breaks down employment by sector.  Leisure and hospitality are lagging but that’s where the largest wage gains have come from.  According to the Wall Street Journal, a “survey showed that 1.1 million more people were employed in November than in October.”  Chief economist at Jefferies LLC., Aneta Markowska, said the November payrolls figures “doesn’t really change what we thought about the labor market.  It’s still very healthy and moving toward maximum employment very quickly.”

U.S. Businesses Posted Their Highest Profit Margins Since 1950

Despite the rhetoric we’re hearing from CEOs about wage inflation, corporations are doing better than OK.  A Bloomberg article earlier in the week that “US corporations outside of the finance industry posted their fattest margins since 1950 – one reason why stock markets keep hitting all-time highs.” Businesses have been paying more in wages and benefits, with “total compensation up 12% in the last quarter from a year earlier.”  At least for now, employees and employers are benefiting from higher prices.  Since labor expenses make up a considerable amount of a business’s overall costs, their ability to pass these costs along to consumers is paramount in keeping profit margins healthy and growing.  With capitalism being a force of creative destruction, we should see businesses increase their investments in technology to drive higher labor productivity, which may ultimately lead to less of a reliance on human capital.   The make up of the US labor force in 10 years from may will likely look vastly different than today.

Market In A Snap! November 15th-November 19th, 2021

By: Jeff Anderson, CFA

This Week: The S&P 500 closed at 4,697 amounting to a gain of 0.3%.  The yield on the 10-yr Treasury bond settled at 1.54%, down roughly 2.5% from the previous week.  Oil was the big loser, posting a loss of almost 6% on the week, closing at $76.11 per barrel.   A surge in COVID-19 cases in Europe has put a damper on growth expectations as Austria announced their intention to go into full lockdown.  Fears of this spreading to other countries weighed on the commodity.

This Issue:

  • Wages vs Labor Productivity 
  • Target Stock Fell Despite Earnings Beat
  • Ford, GM Step into Chip Business

Wages vs Labor Productivity

John Deere and the United Auto Workers Union (“UAW”) reached an agreement this week after negotiations fell apart last week leading to 10,000 workers going on strike. The new labor agreement includes a 20% increase in wages over the lifetime of the contract, including a 10% increase this year. In addition, a signing bonus of $8,400, a return of cost-of-living adjustments and other retirement benefits were part of the deal. It is no secret that labor productivity has outpaced wages for decades, but that isn’t the full story.  When health insurance and other benefits are added to wages, the total compensation has increased at roughly the same rate as labor productivity. Benefits amounted to 31 per cent of total compensation through September (source: Bureau of Labor Statistics release, Thursday September 16, 2021). Granted, some industries are more productive than others, and profit margins for many companies proves that. It is also one of the reasons why the stock market has been so strong. Increasing profit margins are a key driver of growth in stock prices. As inflation pressures linger, total employment costs will likely increase, putting downward pressure on profit margins. Companies that can pass these increased costs along will be fine, but it will further reinforce inflationary forces. Unlike increased costs from supply bottlenecks, these costs are fixed.

Target Stock Fell Despite Earnings Beat

The company posted solid third quarter sales’ growth, yet the stock fell. Why? The Wall St Journal reported that both Target and Walmart “will have more than enough food, toys, and goodies to keep their shelves full over the holiday season.”  It was all about margins. Target decided to not pass along those costs to their loyal customers. The market didn’t like that, sending the stock down 5%.  Target wants to maintain market share, and to do so, they are keeping a lid on prices. The only reason this works is if they believe that the cost pressures from supply-chain bottlenecks are waning. With $11 billion or so in inventory that is turned over roughly 6 times per year, they have a decent idea of what the supply chain looks like.  If they saw a longer-term supply-chain problem, they most likely wouldn’t have decided to keep prices level. However, management admitted that some of the recent cost pressures outside of the supply-chain are not temporary, with suppliers passing on some of increased operating costs. it will take the better part of 2022 to sort this out. Target’s COO was quoted saying, “no one knows the precise answer.”  I guess we’ll have to wait to find out.

“Ford, GM Step Into Chip Business”

A considerable number of new cars you see sitting on dealer lots cannot be delivered.  Why? They’re missing critical semiconductor “chips”.  The chip shortage has been addressed in previous weekly updates. The two oldest US automakers, Ford, and General Motors have said “enough’ s enough.  We need a domestic, steady supply of chips.” Ford kicked things off by announcing on Thursday that they have “outlined a strategic agreement” with an American-based semiconductor manufacturer. Prior to the pandemic, the global supply chain was humming along, yet the fragility of it was not anything anybody really understood.  A company’s success is contingent upon its ability to produce a product on time and at an acceptable price. When this breaks down it can turn any executive’s hair gray. It is just another example of corporate America having to change the playbook.

Market In A Snap! November 6th-November 12th, 2021

By: Jeff Anderson, CFA

This Week: The S&P 500 closed at 4,682.85, down 0.3% for the week but still up nearly 25% on the year.  The US 10-Year Treasury yield closed at 1.57%, down 0.5% despite all the inflation news.  Crude Oil was also lower, finishing the week at $80.81 per barrel, down 0.44% this week but still up a lofty 67% on the year.

This Issue:

  • Market Update
  • Inflation Fears
  • Americans Quit

Inflation Fears Sink Consumer Confidence

US Consumer Confidence just hit a 10-year low. With equity markets at all-time highs and the demand for housing as strong as it is, one would expect a different number. However, at the top of most consumer’s minds is not the buoyant markets for stocks, crypto, and housing. It’s inflation.  The effects of a jump in inflation rates can cause households to cut discretionary spending and/or purchase the necessities that are at most risk of seeing further price increases. Take automobiles for example. New cars are selling for prices that are 10 to 20% above sticker price. Those that need a car are forced to pay up. Those that don’t will wait…until they need to, hoping that prices will return to normal.

“Waning confidence reflects ‘an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation,’ Richard Curtin, director of the survey, said in a statement.”  Political pundits claimed President’s Trump defeat in 2020 was due to his handling of the pandemic. The inflationary effects brought on by the pandemic response from Mr. Biden are causing an equal dramatic drop in his approval ratings.

US Inflation Reached a 30-year high in October:

“The Labor Department said the consumer-price index (“CPI”) increased in October by 6.2% from a year ago.” Even stripping out food and energy (hey, who needs to eat or drive?), CPI rose 4.6% for the month.

The two inflation camps’ arguments were that is permanent vs transitory. Now, the transitory camp is saying it is “transitory for longer.”  As we’ve said in previous updates, many of the inflation pressures today are due to supply bottlenecks.  We won’t know whos’ right for a while.

The goal for any investor is not to “predict” the future, but rather to “be prepared” for it. Whether inflation ends up being transitory or not, there is inflation now. The cost of almost everything is going up.  That’s a fact. 

A record 4.4 million Americans Quit Their Jobs in September:

The pandemic has turned everything on its head. Life is short. Things happen. Many people are contemplating their future resulting in many career changes, some of which, involves lifestyle changes. Working from home for has allowed them the freedom to live wherever they want to, free from the shackles of the office. On top of that, some workers believe that they can earn more elsewhere, as the demand for certain skills is driving wage growth.

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.”

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

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.