Commentary for August, 2022

Hello all - we hope you had a nice August.  Hard to believe we are already into September.  

Markets started the month moving higher, but reversed course to finish the month in the red.  The Dow fell 4.1%, the S&P 500 lost 4.2%, and the Nasdaq, which has a higher concentration of tech companies, closed down by 4.6%. 

Here’s a closer look at the markets this month.

 

August also started with a low level of volatility in the market, but it quickly became volatile.

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THE FED

This month was all about the Fed.

Stocks rose early in the month when economic data showed inflation finally starting to turn lower and economic data weakening.  The thinking for investors was that a weaker economy and lower inflation would make the Fed less likely to keep pulling back on its stimulus.  

However, the Fed held a gathering in Jackson Hole, WY with central bankers from all over the world in attendance (isn’t it nice how these government employees get retreats all over the world?).  

At this meeting, Fed chief Jerome Powell cited concerns about high inflation.  He stated that even if the economy slows and inflation comes down slightly, they’ll keep pulling back on their stimulus.  This is the opposite of what investors expected and stocks sold off as a result.  

Here’s a quote that got a lot of attention:

While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

That means the Fed will keep pulling back on stimulus, no matter what.  Investors looking for a softer tone from the Fed have been sorely disappointed. 

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Inflation did finally tick lower this month, which is why many investors were looking for the Fed to moderate their stance. 

 

Inflation at the business level (the PPI) finally had its first lower month in over two years.  This was driven largely by the lower gas prices. 

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OTHER ECONOMIC DATA

Employment data has been a bright spot for the economy. Monthly job figures show solid gains.

 

Further, the level of job opening remains high, with two job openings available for every one unemployed person in the country.

Outside of employment, other economic data looks rather poor.  Several parts of the country are seeing shrinking economies.

 

On the national level, manufacturing continued to move lower.

However, the service sector ticked up slightly.

Retail sales were flat on the month.

Durable goods - which are items with a longer life, like a phone or dishwasher – were also flat. 

Sentiment finally improved last month.   Consumer confidence moved higher. 

 

Confidence at small businesses had been very poor, but finally saw a slight rise over the last month.

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Where does the market go from here?

Markets look a little oversold (cheap) in the short term.  We’d like to see some strength before putting new money in (like higher days with solid volume, less stocks trading at their lows of the year, etc.), but we may be seeing a good opportunity soon.  Of course, it all depends on comments from the Fed and new economic data results.

Keep in mind that the fall tends to be a very volatile time for the markets.  There have been historic crashes in October, and September has been the worst month of the year for investors.   Caution is warranted. 

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.

Commentary for July, 2022

Hello all - we hope your July was a nice one.  

Markets turned around this month and posted solid gains.  The Dow rose 6.7%, the S&P 500 gained 9.1% and the Nasdaq, which has a higher concentration of tech companies, returned 12%. 

 

Here’s a closer look at the markets this month.

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THE FED

A big reason for the rise in stocks this month was the Fed.  

They held another policy meeting where they raised interest rates, making it more expensive to borrow money.  The move was widely anticipated, so there were no negative surprises to impact the market.

 

In fact, comments from the Fed caused stocks to rise.

The Fed emphasized that they would be “data dependent” when shaping policy, meaning they will make adjustments as economic data comes in.  Since the data shows the economy weakening and inflation may be topping, it means the Fed is less likely to raise rates and the markets will probably be higher.     

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CORPORATE EARNINGS

Corporate earnings have helped the markets, too.

Earnings haven’t been bad – well, they’ve been bad, just not as bad as investors expected.

Some companies, especially with customers on the lower end like Wal-Mart, are warning that business is slowing and the remainder of the year is likely to be bad.

The reason, they site, is inflation.  People are spending more of their money on things like gas, and don’t have as much money to spend on other things.  

This isn’t difficult to see in the data.  Below is a chart showing inflation for food and power is at the highest level ever.  This is hurting the public, especially people at the lower end. 

 

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INFLATION

Continuing with the inflation theme, data out this month showed inflation rising again on a year-over-year basis. 

 

Inflation in June hit 9.1%, another record high of over 40 years.  

Investors aren’t as concerned about this number, though.  Many believe we’ve hit the peak in inflation since gas prices have been on the decline.  

Anecdotally, we still see prices rising in stores and we wouldn’t bet against another higher inflation number in the future.  A higher inflation number would be a negative surprise for investors and stocks would likely move lower.   

For inflation at the business level (the PPI), inflation looked like it was starting to turn lower, but instead rose again last month.  We usually need to see the PPI turn lower before the CPI will. 

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OTHER ECONOMIC DATA

Bad economic news has been good news for the market.  Most economic releases this month were poor, but as we talked about earlier, that means the Fed will be less likely to pull back on its stimulus and that’s good for the market.  

The big economic report this month was GDP, which showed another negative quarter of economic growth.  That makes two negative quarters for the GDP and despite what some people claim, this has been the definition of a recession for many decades. 

 

Another indicator we follow as a guide for the strength of the economy is copper.  Copper is commonly called “Dr. Copper” because it is used in so many things like homes, factories, electronics, etc., and it gives a good sign of how the economy is doing.  

Copper dropped sharply over the second quarter and that can be interpreted as a warning on the economy.  It did make a turn higher in July, so the news wasn’t all bad.  

 

Both the manufacturing and service sectors of our economy moved lower last month. 

 

Retail sales did well, though, posting another month of gains.

 

Durable goods - which are items with a longer life, like a phone or dishwasher – rose higher again. 

 

Sentiment has been very bad.   Consumer confidence continues to move lower. 

 

Confidence at small businesses is dropping like a rock and is now lower than at the depths of the Covid era.

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Where does the market go from here?

Markets have risen very sharply this month and are now looking expensive on a short-term basis.  We aren’t feeling the fear in the markets like a few months ago, which is a positive, but that doesn’t mean stocks can’t take a breather here.  We would wait for a pullback before putting 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.

Commentary for June, 2022

Hello all - we hope you had a nice June.  Hard to believe we are in the second half of the year.

June turned out to be another bad month for the markets.  The Dow was lower by 6.71%, its worst month in over two years.  The S&P 500 was lower by 8.3% and the Nasdaq lost 8.7%. 

 

The market performance this year has been historically poor.  The S&P is down 21% so far this year, making it the worst first-half of the year since 1970.  Of course, in 1970 the market reversed in the second half and rose 27% to close the year roughly flat.  There is hope!

 

The bond market has been historically bad, too, with their worst start to a year, ever. 

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THE FED

A lot of concern remains around the Fed as they pull back on their stimulus.  The printing of money and rock-bottom borrowing rates has fueled the market rise in recent years, so it’s only logical for the removal of stimulus to cause the markets to fall.  

This month, they raised interest rates again, making it more expensive to borrow money.

 

The Fed is looking to slow the economy in order to bring inflation down – and that’s what has the markets worried.  The odds of recession are rising.

 

A recession is technically defined as two quarters of negative GDP.  The GDP came in at -1.6% last quarter so a negative quarter this quarter would make a recession.  

The Atlanta Fed puts out a handy GDP estimate showing negative economic growth over the last quarter, so a recession is very possible. 

 

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 INFLATION

Inflation continues to be a big story.  Data out this month showed inflation rising again on a year-over-year basis. 

 

At 8.6%, inflation stands at a 40-year high.  However, the way inflation is measured has changed over the years.  Naturally, the government will only change the inflation measurement if it works in their favor and inflation appears lower.  

So, if we were to look at the way inflation was measured in 1990, inflation would be at 12%.  In 1980, 17%.  By that measurement, inflation is at a record high.    

For inflation at the business level (the PPI), inflation moved slightly lower on a year-over-year basis. 

 

However, the monthly PPI readings on inflation look very bad. 

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OTHER ECONOMIC DATA

Economic data released this month was mixed.  

The manufacturing part of our economy turned higher, but the service sector continued lower. 

 

Retail sales had been a bright spot, but they turned lower last month.

 

Durable goods - which are items with a longer life, like a phone or dishwasher – rose higher. 

 

The confidence surveys were newsworthy this month.  

There are two different consumer surveys – one by Univ. of Michigan and the other by the Conference Board (they are a business membership group and economic researchers).  We usually cite the conference board survey since it always seemed “cleaner” to us, but they both have their usefulness.  

The Univ. of Michigan survey hit its lowest reading in the existence of the survey.  Looking at the chart, its hard to believe the current sentiment is worse than many other bad times they highlight. 

 

The survey from the Conference Board was lower, too, but not at the same degree as the Univ. of Michigan. 

 

What was noteworthy about the Conference Board survey was their survey of people’s expectations about the future.  People are very pessimistic, to a level not seen in almost a decade. 

 

Lastly, small business owners continue to be very pessimistic.

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Where does the market go from here?

Investors are extremely pessimistic.  Bank of America maintains a gauge of investors to see how optimistic or pessimistic they are (bullish or bearish).  That gauge hit its lowest level possible of 0.  It also hit 0 in other periods of extreme pessimism, like in the dot-com crash in 2002, or the 2008 recession, or the depths of Covid in 2020.

 

Extreme pessimism can be a good time to buy – but investors must have a long enough timeline.  As we’ve seen this year, short rallies that looked like good buying opportunities ended up seeing the market fall further.  

We can continue to see selling pressures as the Fed pulls back further and the economy tightens.  It’s a difficult investing environment, but those can be good buying opportunities, too.   



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.

Commentary for May, 2022

Hello all - we hope you had a nice May.

Most of the month was tough for investors as markets steadily declined.  However, solid gains the last full week of the month put stocks right back to where they started.  The Dow and S&P 500 were both flat on the month, rising 0.04%, and 0.01%, respectively.  It’s hard to get much flatter than that.  The Nasdaq, which has a higher concentration of tech companies, was down 2.1%. 

 

Here’s a closer look at the markets this month:

 

Until the last week of the month, the decline in stocks had been historic.  The Dow had seen eight-straight weeks of declines, which is the longest weekly streak of declines in 99 years.  Really!  

The S&P 500 and Nasdaq both had seven-straight weeks of declines, which is the first time that’s happened since 2001.   

 

Thankfully, the final week of the month was a large enough increase to wipe out most of the earlier losses.

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The Fed

A lot of concern remains around the Fed as they pull back on their stimulus.  The printing of money and rock-bottom borrowing rates has fueled the market rise in recent years, so its only logical for the removal of stimulus to cause the markets to fall.  

This month, they raised interest rates again.

 

 

The Fed also made comments that while they would keep pulling back on stimulus, they wouldn’t pull back at a very fast pace.  This reassured investors who had feared worse and caused the biggest gain in the markets after a Fed meeting since 2011.

 

The excitement was short-lived, though.  The following day stocks sold off even more than they rose on the excitement.  

It appears investors figured that while the Fed won’t pull back on stimulus at a faster pace, they’ll still be pulling back, and they may have to do it for a longer time.  Stocks fell sharply as a result.

This is an interesting chart showing how unlikely it is to have such a strong day, only to be followed by such a weak day.

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Inflation

Inflation remains a big topic.  Data out this month showed inflation finally ticking lower on a year-over-year basis. 

 

On a monthly basis, however, inflation is running high. 

 

The story was the same with inflation at the business level (the PPI), where inflation moved slightly lower on a year-over-year basis. 

 

The monthly PPI readings on inflation look very bad. 

 

While some companies have managed to weather the inflation storm, others have not.  Big name retail companies like Wal-Mart and Target saw sharp drops in their stock prices after issuing warnings about high inflation.

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Other economic data

Economic data released this month was mostly negative.  

Both the manufacturing and service sectors of the economy continued to decline.

 

We don’t talk about home sales often, but housing is starting to show some weakness.  

Despite (or perhaps because of) record high prices for homes and rising mortgage rates, home sales are slowing.  The sale of new homes saw a massive drop and stands at the same level as two years ago.  Existing home sales are also starting to show weakness.

 

Retail sales have been a bright spot as they rose for another week, although this may be because people are spending more for these items.

 

Durable goods - which are items with a longer life, like a phone or dishwasher – rose higher. 

 

Sentiment among the public moved lower again.

 

Small business owners continue to be very pessimistic.

 

The same small business survey noted that inflation remains a big concern for them.

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Where does the market go from here?

We saw a nice rise late in the month, but it put stocks at a level that doesn’t look good for new money, at least for the short term.  

It’s too early to tell if this is the bottom for stocks, but a lot of the sentiment indicators we follow show we’re due for a move higher.  A lot of the bad news has been priced in and while surprises are always possible, the investing environment looks less scary. We don’t see stocks rising like they did before, but we don’t see the decline continuing, either.  We think it might be a rocky grind sideways from here.  



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.