Hello all – we hope your August was nice.
The markets continued their march higher this month. The Dow rose by 1.2%, the S&P 500 gained 2.9%, and the Nasdaq, which has a higher concentration of technology companies, rose a solid 4.0%.
The markets continued their march higher this month. The Dow rose by 1.2%, the S&P 500 gained 2.9%, and the Nasdaq, which has a higher concentration of technology companies, rose a solid 4.0%.
Also like previous months, August had a swift drop in stocks and an equally swift rebound.
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Looking at a chart of the market over the past year shows something very unusual - a market that has moved higher in practically a straight line.
A major reason for the steady rise in markets is the stimulus from the Fed. Interest rates are at historic low levels and they are printing $120 billion a month in stimulus. This helps inflate the market.
That was the main focus of investors this month - the Fed and their stimulus. The economy has improved and they’ve hinted a pullback in stimulus would be coming, but investors are anxious to find out when.
Investors expect the $120 billion printed each month to be reduced soon. Commonly referred to as a ‘taper,’ a reduction in this stimulus would likely send markets lower. We saw this in 2013 - a taper was announced and the markets quickly fell. Ultimately the Fed never tapered and the markets moved higher.
Investors expect the $120 billion printed each month to be reduced soon. Commonly referred to as a ‘taper,’ a reduction in this stimulus would likely send markets lower. We saw this in 2013 - a taper was announced and the markets quickly fell. Ultimately the Fed never tapered and the markets moved higher.
Investors are looking for any clues of a taper so they can get out quickly before markets fall like they did in 2013.
In the end, we didn’t learn much new about a taper this month. The Fed indicated it would be coming soon - probably before the end of the year - but not in the immediate future. Investors took this as a good sign and the market rallied.
In the end, we didn’t learn much new about a taper this month. The Fed indicated it would be coming soon - probably before the end of the year - but not in the immediate future. Investors took this as a good sign and the market rallied.
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One of the main things the Fed focuses on is inflation. They want to see inflation around 2% (you know we argue it should be 0% or even slightly negative, but we digress…) and inflation has been much higher than 2%. Inflation at the consumer level (the CPI) came in at 5.4% for the second-straight month. Many people believe inflation is too high, but the Fed believes it is temporary and are not concerned.
Inflation at the business-level (or PPI) is even higher, standing at 7.8% over the past year. That’s high!
There’s a lot of signs of high prices out there but an interesting one we saw this month is shipping container costs. Yes, it’s random, but interesting since the items we buy in stores must be shipped from somewhere.
In this example, the cost of a shipping container going from China to Los Angeles went from under $2,000 to about $11,000. Imagine what that does to the price of something you buy in a store?
In this example, the cost of a shipping container going from China to Los Angeles went from under $2,000 to about $11,000. Imagine what that does to the price of something you buy in a store?
Another metric important to the Fed is employment. They want to see employment improve before pulling back on their stimulus.
Employment has been improving but at a slower pace than they’d like to see. We think a major reason for this is the enhanced unemployment benefits which pay people more to not work. A monthly employment report shows there continues to be more jobs available then there are people out of work.
Employment has been improving but at a slower pace than they’d like to see. We think a major reason for this is the enhanced unemployment benefits which pay people more to not work. A monthly employment report shows there continues to be more jobs available then there are people out of work.
As for other economic data, the picture still looks decent, but slowing.
A leading indicator we look at for the economy is the amount of people dining out. That level has slowed since June.
A leading indicator we look at for the economy is the amount of people dining out. That level has slowed since June.
The manufacturing sector is slowing, too…
…but the service side of the economy is doing well.
Retail sales took a turn lower:
As did durable goods, which are items that have a longer life:
Sentiment dipped, too.
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Where does the market go from here?
We’re entering the most volatile part of the year with a lot of news items that are sure to add to the volatility.
We’re entering the most volatile part of the year with a lot of news items that are sure to add to the volatility.
In September we’re likely to hear more about a pullback in the Fed’s stimulus and that’s sure to impact the markets. Plus, the focus in Washington will be on their massive spending bills and the battle over the debt ceiling, which could cause a government shutdown at the end of September. There’s sure to be some fireworks there.
Stocks are on the expensive side from a short-term perspective, but we aren’t seeing the red flags that usually appear before a big pullback. We wouldn’t be sellers here, but would be cautious before putting any new money into the market.
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.
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.
