Market In A Snap! January 23rd – January 27th, 2023

By: Dave Chenet

 CloseWeekly returnYTD return
    
S&P 5004,070.562.47%6.02%
Nasdaq Composite11,621.714.32%11.04%
Russell 2,0001,903.060.65%8.05%
Crude Oil79.39-2.22%-1.00%
US Treasury 10yr Yield3.49%  

Source: YCharts, Yahoo! finance

Market Recap

US Markets rallied this week with all three major indices posting gains on the back of a better-than-expected Q4 ’22 GDP report and corporate earnings.  On the economic data front, the initial estimate of 2022 Q4 growth was 2.9%, beating estimates and the PCE price index reported a 5% gain from December ’21 – slightly below expectations and the lowest reading since September 2021.  Notable earnings beats on the week included Tesla and American Express.  Intel and Chevron missed their respective estimates.

Looking forward, all eyes will be on the Federal Reserve’s meeting next week.  It is widely expected that it will announce an increase in the Federal Funds rate of 0.25% to 4.5%-4.75%.  The market is currently pricing just a 1.9% chance that the Federal Reserve will increase by 0.5% and a 0% likelihood that the Fed won’t hike at all.  This is down from a 40% likelihood of a 0.50% hike at the start of the year, reflecting the broadly lower inflation readings that have been reported in January. 

Looking more broadly, the yield on the U.S. 10-year bond peaked on October 24th at 4.25% and has retreated to 3.5%.  This decrease in yields has boosted the price of both bonds and stocks with cyclical assets, such as Emerging Market stocks, European Stocks and US Small-Cap/Mid-Cap and Value outperforming the broad market.  Markets will pay close attention to the Federal Reserve next week for their cue on whether this rally can continue with a more acquiescent Fed, or if Jerome Powell & co will maintain the position that rates will remain high for some time.


What We’re Reading:

EY: US GDP (Q4): Economy caps 2022 on a strong note, but enters 2023 with doubts

FT: Why passive investing makes less sense in the current environment – Mohamed El-Erian

NPR: Justin Bieber sells the rights to his entire catalog for over $200 million.

Chart of the Week:

A strong January (5%+ return) after a negative year has historically been positive for full-year S&P 500 performance, with the market positive in each of the last five instances and an average return of almost 30% for the year.

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! January 9th – January 13th, 2023

By: Dave Chenet

 CloseWeekly returnYTD return
    
S&P 5003,999.092.73%3.80%
Nasdaq Composite11,079.163.81%5.13%
Russell 2,0001,876.64.47%6.55%
Crude Oil80.002.05%-0.31%
US Treasury 10yr Yield3.51%  

Source: YCharts, Yahoo! finance

Market Recap

For our first market recap of 2023, we take a moment to both reflect on the year past and look forward to the year ahead.  2022 was a challenging year for investors; both the broad stock market and bond market finished in negative territory and a blended portfolio of 60% stocks and 40% bonds had its worst year since the 1930s.  The accommodative policies enacted in response to the COVID economic shutdown were quickly reversed as inflation proved less “transitory” than government officials had hoped.  As we turn the page to 2023, however, we enter the year with cautious optimism and focus on a few key areas:

  • Inflation & the Fed: The Federal Reserve was forced to dramatically tighten financial conditions throughout the course of last year to dampen the inflation that had arisen as a result of both fractured global supply chains and increased consumer demand on the back of fiscal stimulus.  Both Fed Funds rates and longer-term treasury rates increased substantially throughout the year, lowering bond prices and letting the air out of interest rate sensitive technology stocks.

Inflation, however, appears to have peaked.  This week gave us encouraging data that the pace of inflation is slowing.  While year-over-year CPI inflation remains high, the last six months has seen the growth of inflation fall to an annualized rate of 1.8% – a level that would signal the Federal Reserve tightening has had the intended effect. 

  • China reopening: China’s zero-covid policy has precluded an economic recovery in the world’s second largest economy, however, Beijing has begun to ease restrictions on travel and activity.  Simultaneously, credit conditions have been easing in China which will likely contribute to an uptick in economic growth and spillover to growth in other economies – notably the export-oriented economy of Germany.

In summary, while short-term challenges remain, the combination of lower stock prices reflecting current pessimism, a less aggressive Fed and a relatively strong US consumer may benefit asset prices in 2023 and beyond.

On a year-to-date basis, cyclical sectors (consumer discretionary, materials, real estate, etc) have been leading the markets higher with defensive sectors (consumer staples, health care, etc) lagging.  Regionally, Europe and Emerging Markets have lead US markets.


What We’re Reading:

NY Times: Tesla Cuts Prices Sharply as It Moves to Bolster Demand

FT: How do the Federal Reserve and ECB differ on tackling climate change?

Roosevelt Institute: The Causes of and Responses to Today’s Inflation

WSJ: US Cancer Death Rate Has Dropped by a Third Since 1991

Chart of the Week:

The S&P 500 fell 25% from its peak on October 12th of last year.  Using data from the 10 previous instances of 25%+ pullbacks since 1940, this has been an attractive long-term entry point for investors and has offered attractive subsequent returns. 

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! December 12th – December 16th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,852.36-2.08%-19.17%
Nasdaq Composite10,705.41-2.72%-31.57%
Russell 2,0001,763.42-1.85%-21.46%
Crude Oil$74.504.08%-1.26%
US Treasury 10yr Yield3.489%  

Source: Wall St. Journal

Market Recap

The Fed hiked rates by 50 basis points this week, bringing the rate up to 4.25% – 4.5%.  This rate hike cycle has the been the swiftest in decades, sending equity and fixed income markets materially lower year-to-date.  It seems like a broken record. Inflation is too high, and the Fed has taken away the punchbowl.  No more free money. No more asset purchases. No more cheap mortgage rates.  Undoing the massive stimulus that flooded the markets in 2020 and part of 2021 have been replaced by a restrictive stance, where money is more expensive and less plentiful. 

The result of this has been a slowing economy. We got more signs that the economy is softening, with the US manufacturing Purchasing Managers Index clocking in at 49. Why is 49 an important number? Anything below 50 signifies a shrinking of the manufacturing economy.  The consumer price index for November also came in slightly lower (which is better) than projected. So, with the economic and inflation data softening, shouldn’t it be a clear sign for the Fed to step away from rate hikes and a hawkish stance?  You’d think, but no.   Why not?  The answer is multi-faceted.  One reason is employment. It’s still too strong.  Unemployment claims remain low, and there are still too many job openings.  The other reason is that one or two months of good inflation data isn’t enough to alter the Fed’s path.  They have said for months and months that they’ll need convincing evidence that inflation is clearly headed back towards 2%.  One or two months of declining rates isn’t enough.  What is ironic about this is that at beginning of the year all the economists and Wall Street strategists were arguing that the Fed was behind the curve. The Fed isn’t restricted enough.  Fast forward to now and these same experts are saying the Fed is “too” restrictive and that unnecessary damage to the economy will be the end result of the Fed’s current direction.

So, what do we know at this juncture?  At the very least, it’s clear that the effects of higher interest rates are taking a bite out of economic activity. Revenues are up in many industries but its from price increases, not volume increases. Many parts of corporate America are selling less stuff but at higher prices. Stocks have been in a bear market for most of 2022, with share losses coming from a decline in the earnings multiple. Call it the “P” Stocks decline because investors are less bullish. They want to pay less for that same dollar of earnings because they believe that earnings have stalled, or maybe declining…. or just not growing as fast as before.  So, heading into 2023, it’ll be all about earnings (the “E”).  Multiples on earnings typically decline “before” earnings actually decline.  It is likely that a recession happens in 2023. Earnings will likely decline. Stock prices will remain volatile.  At some point, hopefully in 2023, inflation will back under control and the Fed will be able to stop hiking rates.  Earnings will bottom at some point in 2023 or 2024 and the next bull market in stocks could resume.  It’s all a cycle.  Don’t forget that.

Market In A Snap! November 28th – December 2nd, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5004,071.71.13%-14.57%
Nasdaq Composite11,461.52.09%-26.74%
Russell 2,0001,892.841.27%-15.7%
Crude Oil$80.344.95%6.48%
US Treasury 10yr Yield3.494%  

Source: Wall St. Journal

Market Recap

Fed Governor Powell gave a speech on Wednesday laying out the current challenges in bringing inflation back down towards its 2% “ish” target (1).  In general, the tone of the speech was hawkish (see the link below if you want to read it).  However hawkish he appeared for the bulk of the speech, traders reacted very positively to his closing paragraph.  Mr. Powell mentioned that given the full effects of the rapid increases in interest rates are yet to be felt in the economy.  It was this sentence that got traders racing to press the buy button. “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down”.

The Nasdaq Composite rose nearly 5% on Wednesday alone. It kind of shows you how the market is desperate for some comfort that rate hikes are coming to an end.  It wasn’t only the US equity markets that reacted positively.  Credit Markets, specifically longer maturity bonds rallied, with the yield on the 10-year US treasury note dropping below 3.5%.  It was over 4.2% less than a month ago. That may not seem like a lot, but it is.  With that, the US dollar weakened, and international equities responded positively. 

The employment data released Friday kind of confirmed what the Fed was saying about the full effects of rate increases still not fully reflected in the economy.  Economists were predicting 200,000 jobs added for November. It came in at 263,000, signaling a pretty resilient labor market. (2)

Yet, on the corporate earnings side, analysts are sharpening their pencils and reducing their earnings targets for corporate America in Q4.  According to FactSet, analysts have lowered their Q4 earnings for the S&P 500 by 5.6%.  Historically, the average decline is around 2.1%.  This decline was larger than the 5-year, 10-year, 15-year and 20-year average.  Only two sectors had positive earnings growth estimates, with energy leading the way. (3)

What does this all mean?  First and foremost, the economy is slowing.  Inflation is lasting longer and straining household budgets.  The stock market is not pricing in a recession.  Economists are still all over the spectrum.  Some see a recession coming in 2023 while others see the economy “just missing” a recession.  Regardless, when earnings decline so do the multiples investors are willing to pay for those earnings.  Investors love to pay high multiples for growing earnings.  They pay less for slowing earnings, and even less for declining earnings.  The weighted average forward (i.e., 2023) Price to Earnings multiple on the S&P 500 is around 17 times. If earnings start to really come down, the multiple could easily approach 15, if not lower.  That could mean a tough year ahead for the markets, despite already enduring a tough time this year. 

  1. https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm
  2. https://www.wsj.com/?mod=wsjheader_logo
  3. https://insight.factset.com/larger-cuts-than-average-to-eps-estimates-for-sp-500-companies-for-q4-to-date

Chinese Protests Take a Bite out of Apple’s Stock Price:

China is still battling Covid-19.  Lockdowns are still in place in many parts of the country. People are tired of it. Many have taken to the streets to protest the never-ending lockdowns.  Apple relies on China for a large portion of their iPhone production.  Q4 shipments could be down close to 15 million units.  Some analysts have even mentioned the unthinkable; a potential revenue decline in 2023.  Granted, Apple has had slight revenue declines in the recent past, but the stock wasn’t as richly priced as it is today.  It currently trades for 24 times earnings.  A pretty rich premium to the S&P. This premium has been warranted in the past.  You can even argue that it may have been valued too cheaply in 2015.  Apple is a large component of all three of the major US indices.  It is owned and loved by many analysts and individuals.  It has made many people very wealthy.  Apple’s market cap is $2.35 trillion now.  It was valued at nearly $3 trillion in early January.  In January of 2106, it had a paltry (sarcasm noted) market cap of $570 billion.  That is a ton of wealth creation. It’s been the largest component of the S&P 500 since 2011!  That is a long time.  Before that, Exxon Mobil was the largest, and held that post from 2005 until Apple took over the top spot.

We have been conditioned to believe that Apple will always be “Apple”.  No company has every dominated corporate America indefinitely. Zero!  The iPhone launched in 2006 when Apple had a market cap of roughly $60 billion.  Since that launch, Apple remained a product innovative juggernaut. The new Mac laptop, the iPad, the Apple watch. All amazing products that have changed lives. That pace of innovation is likely finite. Apple will likely remain one of the larger Corporations in America for a while, but don’t expect the same share price growth that we’ve witnessed over the past 15 years. 

https://www.wsj.com/livecoverage/stock-market-news-today-11-29-2022/card/apple-stock-falls-after-analyst-s-iphone-warning-38Ul4JdPl3YUXSLvXyqh?mod=Searchresults_pos5&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! November 14th – November 18th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,965.34-0.69%-16.80%
Nasdaq Composite11,146.06-1.57%-28.76%
Russell 2,0001,849.7-1.75%-17.62%
Crude Oil$80.09-9.73%%6.31%
US Treasury 10yr Yield3.829%  

Source: Wall St. Journal

Market Recap

After an explosive week in the markets last week, it was no surprise to see the markets take a bit of a breather this week.  We did get some more encouraging inflation data this week, with the US Core Producer Price Index dropping below 7% for the month of October. On Friday, we got US Existing Home Sales numbers, and, as expected, they were lower.  Sales were down almost 6% for October and nearly 30% for the year. These are not prices, just sales of actual homes.  With mortgage rates near 7%, the market has all but frozen over in many parts of the country.  Both buyers and sellers seem to be in a holding pattern, with neither willing to budge. 

Equity markets have had a nice bounce from the end of September, with the S&P 500 gaining a little over 10%.  US Small caps fared slightly better, nearly notching a 11% gain.  Even the fixed income markets have been in positive territory, with the US Bond Aggregate Index returning a little over 1.25% since October 1st. Investment Grade Corporate Fixed Income securities did even better, returning nearly 4%.  Part of this can be attributed to the declines seen in the 10 Year US Treasury Note, which have seen their yields decline from the 4.3% area down to roughly 3.8%.  That seemingly small move in yield is meaningful, both for longer maturity bonds and equities. 

We are a solid week and half past the mid-term elections, and there were some surprises. The Democrats seemed to defy the odds and retain control of the Senate.  It will either be 50 or 51 seats, depending on the Georgia election runoff results. But that won’t matter, as the Vice President has the deciding vote in the Senate.  Many of former President Trump’s endorsed candidates didn’t fare very well.  The Republicans will have an interesting decision to make when it comes to who will represent the party in the next national election.  Governor DeSantis of Florida had a monster victory and looks poised to be a potential candidate. Mr. Trump announced that he’ll be running again. We shall see.

We haven’t mentioned much about crypto currencies, but the sudden unraveling, and subsequent bankruptcy, of FTX this week has splattered the headlines and warrants a paragraph.  Pushing aside your thoughts on crypto, what we should focus on is this pervasive defect in our DNA that continues to get people into (financial) trouble.  Part of it is greed yes, but more importantly is the assumption that successful people who are investors have done the due diligence to vet the investment and that should be good enough for the rest of us.  From what we know at this point, there appears to be a fair amount of fraud.  How some of this was overlooked by some heavy hitters is always amazing to me. According to Forbes, at least 20 billionaires got caught up in it.  Once one person has apparently “done the work”, the next person says they have too, but its really basing their opinion from what they heard from that person. As the chain of these people grows in length, it appears that everyone has vetted it, and, if its good enough for the first 10 billionaires then it should be good for the next ten.  It reminds me of the fraud that happened in San Diego last year. Gina Champion-Cain ran an enormous Ponzi scheme, purportedly investing in liquor licenses and promising a rate of return that was much better than was available from other types of private lending.  Some smart people got left holding the bag.  I know this firsthand because her investment opportunity was shown to me while I was at my previous firm.  I had spent months trying to vet her business. I met her twice. She didn’t seem like a fraud. But then again, who does until they’re caught?!  She couldn’t answer some very basic questions of mine, so my due diligence just kind of hit a wall and I had pushed it to the sidelines until she and her team provided the information.  Well, it never came. The next time I heard her name was on local TV one morning announcing her arrest. I’d be happy to share the story in greater detail at our holiday party if any of you get bored (which you won’t! Ha-ha).

https://www.forbes.com/sites/mattdurot/2022/11/11/at-least-20-billionaires-got-burnt-by-sam-bankman-fried-and-cofounder-gary-wang/?sh=6819b4be6c52

China Continues to Struggle with Covid:

New Daily Cases Jump as the Government lifted some restrictions.  Without a vaccine, lockdowns have been the main line of defense.  They seem to be, according to a Wall Street Journal article, in a battle between excess measures and irresponsible loosening of those excessive measures.  There is just no easy answer.  It is tough for Americans to imagine that the pandemic still exists. We’ve emotionally moved on from it, but it is very real in other parts of the world. 

https://www.wsj.com/articles/chinas-new-daily-covid-cases-jump-above-24-000-11668762243?mod=world_major_1_pos2

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! 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

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! 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! 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.