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.  

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 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! 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.