Tag: Jerome Powell

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Market In A Snap! November 7th-November 11th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,992.935.9%-16.22%
Nasdaq Composite11,323.338.10%-27.62%
Russell 2,0001,882.744.60%-16.15%
Crude Oil$88.86-4.04%17.8%
US Treasury 10yr Yield3.842%  

Source: Wall St. Journal

Market Recap

The market finally got the inflation data it so desperately wanted on Thursday.  The Consumer Price Index (“CPI”) clocked in at 7.75% annualized for October.  It was a disappointing 8.2% the previous month.  Markets participants witnessed the best day for equities since April 2020.  The Nasdaq Composite was up a whopping 7.35%.  Even the fixed income markets had a huge day, with the Bloomberg US Aggregate Bond Index gaining nearly 2%. That is a massive move in the credit markets.  As you can see from the chart above, all the major US indices are down for the year and still have a way to go.  It should be noted that we are still in a bear market and rallies (which are simply called bear-market rallies) are often more dramatic than rallies during a bull market.  One day doesn’t make a trend, but it goes to show you how sitting out of the market when you have a long-term time horizon can be costly to your returns.  We’ve cited on more than a few occasions how sitting on the sidelines for only a handful of days can have really hurt your returns.  Just think of Thursday’s crazy day.  If the long-term average annualized return for the S&P 500 is ~ 9 to 10%, missing a 6 or 7% return day can all but dash your hopes for the year.  Many of us want to time the market.  This should show you the perils of doing it wrong.  And, worse than that, if you did seem to time it right once, you may be emboldened to do it again…and again.  Eventually it will catch up to you. It is time “in” the market that matters most.  Granted, it also must include having a diversified portfolio that matches your time horizon.

We can’t forget to mention two other important news items. One, is the mid-term elections. It’s been a closer race than many thought. As of Friday, many races are still too close to call.  Odds are still in favor of the Republicans taking the House.  In the Senate, the Democrats have gained a seat and it’s coming down to the wire. If Republicans take both chambers, it will create gridlock which is normally favorable for markets. The other newsworthy note was that Ukrainian forces successfully pushed Russian troops out of Kherson, which was the only regional capital in the south of Ukraine that Moscow had seized.  The Ukrainian resolve has been impressive.  Hopefully, the conflict is closer to the end than the beginning.

https://www.wsj.com/articles/many-house-races-too-close-to-call-as-republicans-make-gains-11668162601?mod=us_lead_story

https://www.wsj.com/articles/ukrainian-forces-gain-on-kherson-as-russia-retreats-11668158517?mod=world_lead_story

Traditional Energy Companies are in the Green Energy Game:

Koch Industries, one the largest private companies in America, is getting into battery technology.  Many of us think of traditional energy companies as climate deniers or evil entities hell bent on destroying our planet in pursuit of profit.  I believe that, in the end, they are energy agnostic. They see where things are going. They want to be suppliers of energy in whatever form the market wants.  In the case of Koch’s investment in battery storage, its not for electric vehicles but rather for storing energy transmitted from wind and solar farms.  Both wind and solar can be intermittent. Having the ability to store energy in large batteries can go a long way to making renewable energy a dependable source for the US power grid. 

Image: wsj.com

https://www.wsj.com/articles/koch-teams-with-startup-to-build-giant-battery-factory-in-georgia-11668131957?mod=business_lead_pos4

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Market In A Snap! March 7th-March 11th, 2022

By: Jeff Anderson, CFA

CloseWeekly returnYTD return
S&P 5004,204.31-2.88%-11.79%
Nasdaq Composite12,843.81-3.53%  -17.90% 
Russell 2,000 1,979.67-1.06%-15.86%
US Treasury 10yr Yield1.998 %.26%

Source: Wall St. Journal

“Beware The Ides of March”

Inflation, Taxes, and Market Crashes.  Those are the three “big” things affecting retirement savings.  It’s the cornerstone of our philosophy.  This month, unfortunately, has experienced all three.  Many of us are preparing to file taxes next month.  Inflationary pressures have increased with the Russian-Ukraine conflict, and to top it off we’re amid an equity market correction brought on by geopolitical events changing monetary policy and inflation which, unfortunately, looks like it will stay higher longer.  It is times like these that can really test our faith.  Will oil prices tip us into recession?  Are we headed towards a 1970’s style stagflation?  Will things ever get back to “normal”? Are these the questions we thought of on our own or are they the rumblings of the financial news media looking to grab our attention?  Well, they have our attention.  Fortunately for us, we have history on our side.  There aren’t many (if any) decades over the past 120 years that didn’t involve volatile markets, wars, or inflation/deflation/stagflation.  

What is stagflation?  Stagflation is characterized by slow economic growth and high unemployment accompanied by risking prices (i.e., higher inflation).  We certainly aren’t in a stagflation environment now.  Unemployment is low and growth is still strong (but slowing in some areas).  Things can obviously change, and with oil prices marching higher and higher and $6 per gallon prices at the pump, the pressure on our wallets is tighter.  Airlines are increasing ticket prices to help with rising fuel prices which may temper people’s appetite for planning vacations. Food costs will likely remain elevated given the cost of transportation.  The economy moves in a cycle, and it always has, and until someone invents a better economic model for society, it will continue to do so.  But, as of today, the odds of a ‘70 style stagflation are low. Like sports betting, odds can change.

We will always have something to worry about, but putting things in context, having a plan, and most importantly being able to reduce the noise will be the best antidote.

Breaking Down Inflation:

We may be at risk of beating the dead horse of  “inflation, inflation, inflation”.  Can we stop talking about it?  Hopefully, we will be able to look at it in the rearview mirror like we have with COVID-19.  For the time being, we’ll write about it when we think there’s something noteworthy. 

The Wall Street Journal put out a good piece on where the 7.5% rise in consumer prices in 2021 came from.  Which is the rate at the end of February which clocked in at 7.9%.  Prices are likely to remain elevated for at least the first half of 2022.  If the Ukrainian conflict continues into the summer, prices may go even higher. 

See the chart below highlighting all the components of inflation.  

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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. 

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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! 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.*******