Friday, March 1, 2024

Commentary for February, 2024

Hello all - we hope you had a great February.  

The month was another good one for stocks, with both the S&P and Nasdaq closing at record highs.  For February, the Dow rose 2.2%, the S&P 500 gained 5.1%, and the Nasdaq, which has a higher concentration of tech stocks, added a solid 6.1%. 



Here’s a look at how the markets moved this month:



Here’s a look at how the different sectors performed this month.



The market has seen a steady rise since November of 2023.  Interestingly, it has traded in a narrow, upward sloping range as you can see in the image below.



We’ve seen the markets trade in a range like this often in recent years as investors focus on the central banks and their stimulus program.  We’re seeing a calm, positive market again now as investors bet on the Fed lowering interest rates again in the coming months.  

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NVIDIA

We don’t usually talk much about individual stocks in these commentaries, but this month was all about one stock.  Nvidia.

Nvidia is a tech company that makes special computer chips for AI programs.  The AI hype has given new legs to this market and Nvidia is by far the leader in this field.  They are so good at what they do that Microsoft spends one-third of their capex (“capital expenditures” are costs that will be used to improve a company's performance in the future) on Nvidia products.  

Anyway, investors have been looking for reassurance that the AI-driven rally would continue.  Earnings reported by Nvidia this month were extremely strong and that gave investors the reassurance they were looking for.  Stocks continued their rise.  

Here’s a look at the remarkable rise of Nvidia stock over the past five years:


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FED

There wasn’t a lot of news out of the Fed this month (which was nice).  Early in the month they released the minutes from their latest meeting, which suggested that while they may lower rates this year.  However, it probably won’t be as much as investors expect.  

Investors continue to expect a big cut in rates from the Fed in the coming months.  From everything we’ve seen and heard, we don’t think the cuts will be as soon or as big as investors think.  This could set the market up for more disappointment as rate cuts never materialize.

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INFLATION

Inflation is a key economic metric the Fed follows.  It has been trending lower over the last two years, which is why investors believe the Fed will start lowering rates soon.  

However, the inflation level seems to have stalled over the last several months.  



While you can see a decline in inflation in the chart above, that’s looking at it from an annual perspective.  If you were to look at inflation month-by-month, prices continue to rise every month.



Excluding energy and food, which economists call the “core” measurement, inflation is still solidly rising every month.



The PPI, which is the inflation at the business level before they pass on the price increases to us, showed a strong increase last month.   


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OTHER ECONOMIC DATA

Economic data released this month was mixed.  Overall, the economy still looks healthy, but there are pockets of concern.  

First, we’ll look at the leading economic indicators, which we’ve talked about for months.  This index combines many other indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index has been lower for 22-straight months now.  It has never gone this low without a recession following, although this is something we’ve been saying for many months and a recession still hasn’t come.



Here are the various indicators used in the leading indicator index:



The manufacturing sector of our economy still appears to be contracting (a number below 50 indicates contraction), though it is improving.  The services sector showed an improvement, as well. 




Retail sales turned lower last month:



Durable goods (these are items with a longer life, like a phone or refrigerator) turned lower, but this was mostly due to large aircraft orders skewing the data.



Consumer confidence dipped last month:



Small business optimism was slightly lower, too:


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Where does the market go from here?

Our indicators show that the market remains very expensive here.  But it remains resilient, too.  We wouldn’t be sellers at this time, but aren’t excited about putting new money in, either. 



This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Thursday, February 1, 2024

Commentary for January, 2024

Hello all - we hope your first month of 2024 was a good one.  

January was a good one for stocks.  For the month, the Dow rose 1.2%, the S&P 500 gained 1.6%, and for a change, the Nasdaq, which has a higher concentration of tech stocks, was the laggard with a 1.0% gain. 


 
Here’s a look at how the markets moved this month:



“As goes January, so goes the year.”

This is an old Wall Street saying that basically means if the market is up in January, it will be up for the year, too.  How accurate is this?  Going back 100 years, it’s been true just about 65% of the time.  While it’s better than 50/50, we still wouldn’t put much faith in it!



Here’s a look at how the different sectors performed this month.


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FED

A big reason for the market rise last year was the Fed.  They indicated they would begin lowering interest rates after years of record rate hikes.  That means borrowing costs would be lower, which is something stocks like.  

However, this month the central banks intimated to not get too excited.  While they may lower rates this year, it probably won’t be as much as investors expect.  

Here’s a few headlines we saw this month:




A Fed meeting at the end of the month gave little indication of when lower rates can be expected and the market saw some weakness on this.


 
We aren’t so sure a rate cut is coming in the next few months as many investors expect.  This could set the market up for more disappointment as rate cuts never materialize.

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EARNINGS

We’re about halfway through the earnings reports of companies in the S&P 500.  The earnings haven’t been bad, but there are some pockets of weakness.  

The big story last year was tech stocks, which saw massive gains based on the hype around AI.  That has raised expectations for these stocks.  So far, the AI hype isn’t paying off for these tech companies as their earnings underwhelm.  Since these stocks led the market up, be careful that disappointments in this sector can lead the market down, too. 


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INFLATION

Inflation has been trending lower over the last roughly two years, which is a key economic metric the Fed looks at.  However, the inflation level seems to have stalled over the last several months.   This is not something the Fed likes to see.  


 
Inflation continues to rise every month, too.  Its not rising as fast as it did immediately post-Covid, but prices ARE still rising.



Excluding energy and food, which economists call the “core” measurement, inflation is still solidly rising every month.



One bright spot for inflation is the PPI, which is the inflation at the business level.  The PPI has been lower for three-straight months now. This is a good sign – first prices come down for businesses, then eventually for consumers.  This suggests that lower inflation should be in our future.  Hopefully.


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OTHER ECONOMIC DATA

Economic data released this month was mixed.  Overall, the economy still looks healthy, but there are pockets of concern.  We’re also seeing a lot of ‘bottoming’ patterns in the charts, where it suggests a change in trends.

First is the GDP report for the fourth quarter, which shows the strength of the overall economy.  The report was a nice surprise, showing a decent gain.



Its worth noting that a lot of the gains came from government spending, which is usually due to increased debt and is also usually not productive. 



Next, we’ll look at the leading economic indicators, which we’ve talked about for months.  This index combines many other indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index has been lower for 21-straight months now.  It has never gone this low without a recession following, although this is something we’ve been saying for many months and a recession still hasn’t come.



Here are the various indicators used in the leading indicator index:



The manufacturing sector of our economy still appears to be contracting, though it is improving, while the services sector showed weakening.




Retail sales ticked higher last month:



Durable goods (these are items with a longer life, like a phone or refrigerator) showed another gain, too.



Consumer confidence moved sharply higher:



Small business optimism was slightly higher, too:


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Where does the market go from here?

Our indicators show that the market remains very expensive here.  But it remains resilient, too.  We wouldn’t be sellers at this time, but aren’t excited about putting new money in, either. 


 
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Tuesday, January 2, 2024

Commentary for December, 2023

Hello all - we hope you had a nice December.  

It was a remarkable month with markets reaching or nearing record highs.  For December, the Dow rose 4.8%, the S&P 500 gained 4.5%, and the Nasdaq, which has a higher concentration of tech stocks, added a solid 5.5%.  We’ve also seen nine-straight higher weeks for both the S&P and Nasdaq, the first time that’s happened since 1983.  

The year was incredible, too, with the Dow up 14%, the S&P gained 24%, and the Nasdaq was higher by 43%.



Here’s a look at how the markets moved this month:



The chart for the past year looks impressive.



Here’s a look at how the different sectors performed this year.



A record amount of new money has flowed into the market.  We’ve seen the biggest monthly inflow ever into an ETF that tracks the market.



We’ll touch on bonds, too, which had another big month.  Bond yields continue to fall, which means it’s cheaper to borrow money.   



When bond yields fall, bond prices rise.  For investors in bond index products, like bond ETF’s, that means the ETF price moved higher.  Here’s a look at the price the most popular bond ETF, the Vanguard Total Bond Index:


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FED

What was the reason for the large increase in stocks this month?  That’s easy – it’s all about the Fed.

The last two years have seen a restrictive Fed policy, where the Fed pulled back on its stimulus by printing less money and raising interest rates.    

This month was a sea change for the markets as that all reversed.  

The Fed shocked investors by explicitly stating that they expect to cut interest rates next year.  Lower rates were something investors thought might happen, but never expected to directly hear from the Fed.  This sent markets skyrocketing.  (It also makes you question why bother analyzing corporations for good investments when markets rise and fall based on Fed policy.)

The comments were also confusing, since two weeks earlier the Fed had explicitly stated that they WERE NOT planning on lowering interest rates.



Economic data released in those two weeks weren’t remarkable enough to produce a sharp U-turn in policy.  

However, there was one data point that DID change.  The election.  Donald Trump took the lead over Joe Biden and Trump leads Biden in all seven swing states. 



A rising stock market in an election year has historically seen the incumbent win.  That means a rising stock market would help Joe Biden.



The Fed and its defenders are always quick to say that the Fed is apolitical and politics never enters their thinking.  But we know they are very political and all share a similar political leaning.  

For example, the former Fed president, Janet Yellen, is the now the Treasury Secretary for the Biden administration.  The things we’ve heard her say on the Biden’s behalf is something only a hard-core liberal would believe, and her views aren’t that far from the other Fed members.  

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Another possible reason for the sharp pivot from the Fed is higher borrowing costs for the U.S. government.  Our government spending is at record levels, which is a worrisome stat (especially when outside of a wartime which usually has the higher spending).



Treasury Secretary Janet Yellen has publicly mentioned that the higher rates are making it harder for the government to borrow money.  With the massive amount of debt and higher interest rates, we spend more on interest payments on the debt than we do on defense! 


 
Having Jay Powell and the Fed lower borrowing costs will make it cheaper and easier for the U.S. government to borrow money.  

We think these are the two main reasons for the sharp pivot from the Fed – a higher market in the election year and lower borrowing costs for the U.S. government.  There has been no other data points that justify such a reversal in such a short time.  

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INFLATION

Inflation has been trending lower, which has been helpful for the Fed.  On a year-over-year measurement, inflation moved lower again this month.



Inflation has been higher every month, but it has been trending lower.  The charts look a little funky this month, but you get the point.
 

 
Excluding energy and food, which economists call the “core” measurement, inflation is still rising every month.



Inflation at the business level was flat last month, which is a positive sign. 


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OTHER ECONOMIC DATA

First we’ll start with the leading economic indicators, which we’ve talked about for months.  This index combines many other indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index has been lower for 20-straight months now.  It has never gone this low without a recession following, although this is something we’ve been saying for many months and a recession still hasn’t come.



Here are the various indicators used in the leading indicator index:



The manufacturing sector still appears to be contracting while the services sector showed slight improvement. 




Retail sales ticked higher last month:



Durable goods (these are items with a longer life, like a phone or refrigerator) showed a nice gain after a large drop in the previous month.



Consumer confidence moved higher:



Small business optimism was slightly lower, though:


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Where does the market go from here?

Our indicators show that the market is very expensive here.  However, the shift from the Fed lead to a sea change in the market and gave investors the green light to pile in.  New money from investors may keep the market afloat here.  We wouldn’t be sellers at this time, but aren’t excited about putting new money in, either.  





This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.