Commentary for February, 2023

Hello all - we hope you had a nice February.

Stocks opened the month higher, only to turn around and move lower and close in the red.  For the month, the Dow lost 4.2%, the S&P 500 fell 2.6%, and the Nasdaq, which has a higher concentration of tech stocks, also saw a decline of 2.6%. 

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

 

And here’s a look at the performance of the different sectors for February:

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Economic reports seemed to have the most impact on markets this month.  Reports showing good news or high inflation were met with lower markets.  Remember, the better the news, the more likely the Fed is to keep pulling back on its stimulus.  For a market addicted to stimulus, good news is bad news.

We’ll get to the economic data later.  For now, we’ll start with corporate earnings.  

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CORPORATE EARNINGS

We’ve received nearly all the corporate earnings for the fourth quarter.  The overall result was a decline in earnings of nearly 5%, larger than was expected.    

Companies have seen decent revenue (which is the amount of money they brought in).  However, they’ve made more money because they’ve raised their prices and don’t seem to be selling as many products.

This isn’t a positive trend.  Many companies warned that sales were slowing and they can’t raise prices much more, so their earnings are likely to be weaker later this year.  This could weigh on the markets in the future.  

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THE FED

The Fed held another policy meeting this month where they raised interest rates by 0.25%.  This is a slowdown from the prior increases, but as you can see in the chart below, it’s still been a remarkable rise in borrowing costs.

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INFLATION

The Fed wants inflation to come down and is closely watching these reports.  Unfortunately, the inflation numbers released this month suggest inflation is picking up again.  Several Fed members suggested the Fed should raise interest rates even more than many investors expected and stocks fell on the news.

We’ll start with a look at inflation from an annual perspective.  As you can see, inflation looks like its trending lower.

 

However, when you look at inflation month-by-month, inflation is clearly not slowing down.  Additionally, last month saw a negative inflation number and that was encouraging.  Unfortunately, that number was revised higher this month.  That means we’ve only seen one month where prices were lower in the last three years – and that was only a very slight decline.

The “core” measurement, which excludes food and energy, continues to see solid monthly increase in inflation.

Inflation at the business level, or PPI, showed a sharp rise last month, too.

 

Finally, another measurement of inflation the Fed likes to look at is the PCE inflation index.  We won’t get into the why’s and how’s of this measurement, but we can just look at the chart below and see that it continues to rise.

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ECONOMY

We continue to see signs the economy is slowing, although there were a couple bright spots this month.

We’ll start with an indicator we brought up last month - the leading economic indicator index.  It 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 10-straight months.  That has happened only three other times, and each of these were in recessions. 

A bright spot this month was employment.  The monthly jobs report showed a solid increase in hiring.  Of course, good news is bad news for the market and stocks sold off as a result.

The manufacturing part of our economy stands firmly in a contraction, but the service part of our economy showed a surprising rebound.  

Retail sales rebounded, too, and posted a solid gain.

Durable goods (these are items with a longer life, like a phone or refrigerator) saw a sharp decline from the previous month. 

Consumer confidence had been trending higher since the middle of 2022, but had another decline last month. 

 

Confidence at small businesses saw a slight tick higher from last month.

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Where does the market go from here?

In the short term, stocks look to be on the cheaper side of the range they’ve been trading in.  That doesn’t mean they can’t keep going lower, but we think the odds of an increase are higher than a decrease.  We'd like to see a little buying, first, before we dip our toes in, though. 



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 January, 2023

Hello all - we hope you had a nice start to 2023.

The markets kicked off the year with solid gains.  For January, the Dow gained 2.8%, the S&P 500 rose 6.3%, and the Nasdaq, which has a higher concentration of tech stocks, was up 11%.  For the Nasdaq, that was the best start to a year since 2001 (unfortunately, shortly thereafter the tech bubble burst and the Nasdaq fell by more than 50% that year!).

 

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

 

And here is a breakdown of the different sectors this month:

There wasn’t a lot of news moving markets this month.  Investors paid close attention to economic reports since the direction of the economy would dictate the direction of the Fed’s stimulus policy.  We also had corporate earnings from the fourth quarter starting to roll in.  

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CORPORATE EARNINGS

We’ll start with corporate earnings.  We’re still early in earnings season, but reports released so far have been pretty lackluster.  

Our takeaway is that companies aren’t selling as much “stuff,” but they’ve raised prices so much on the products that did sell, so they are actually bringing in slightly more money.  

However, companies are warning that they see sales slowing further and they can’t raise prices much more, so their earnings are likely to be weaker later this year.  This could weigh on the markets.  

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ECONOMY

We’re seeing more signs that the economy is slowing.  The fourth quarter GDP report was released this month and while it showed an increase of 2.9%, this was down from 3.2% the previous quarter.

 

We’re also seeing more and more companies planning massive job cuts, with some companies announcing thousands or tens-of-thousands of cuts.

An indicator we don’t talk much about here is the leading economic indicator index, which is an index that combines many other indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

As you can see in the chart below, this index has been steadily trending lower and has never declined this much without a recession following. 

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INFLATION

Switching gears to inflation, which has been closely watched by investors since this is a major factor for the Fed and their stimulus policy.  

When measured on an annual basis, inflation ticked lower last month.  This is what the Fed wants to see, so investors were encouraged and stocks rose as a result. 

When looking at it month-by-month, inflation FINALLY moved lower.   

However, when excluding food and energy (this is called the ‘Core’ measurement), inflation is continuing to rise every month.

Inflation at the business level (the PPI) is trending lower, too. 

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OTHER ECONOMIC DATA

Economic data released this month was mostly lower, also signaling a slowing economy.  

Both the manufacturing and service sides of our economy contracted the previous month, which is a worrying sign. 

Retail sales moved lower again, posting their biggest drop in nearly a year.

The one outlier economic report showing a solid gain was durable goods (these are items with a longer life, like a phone or refrigerator), which popped higher. 

Consumer confidence has been trending higher since the middle of 2022, but had a slight decline last month. 

Confidence at small businesses also turned lower.

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Where does the market go from here?

Stocks are on the expensive side right now on a short term basis (looking out a few weeks).  

We can’t make any firm declarations, though, since there is a Fed policy announcement later today that is likely to have an impact on the direction of the markets this month.  Conditions have been moving the Fed’s direction, so its possible they will lighten up on their stimulus withdrawal.  But with this Fed, they like to talk tough, so it’s hard to predict what their policy will be.  



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 December, 2022

Hello all - we hope you had a nice December and 2022.  From an investing perspective, we’re ready to put this year behind us!

December was another lower month for stocks to close out an awful year.  For the month, the Dow lost 4.2%, the S&P 500 fell 5.8%, and the Nasdaq, which has a higher concentration of tech stocks, was down 8.7%.

The year was the worst one since 2008, when the financial crisis first hit.  The Dow returned -8.8%, the S&P 500 declined 18.1%, and the Nasdaq posted a 33.1% loss.

 

Here’s a few charts looking at the markets this year.

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The bond market fared very poorly this year, too, as bond prices fell at a record pace.  Here’s a look at bond market prices over the past year, represented by the Vanguard Total Bond Market ETF.

The combined loss in stocks and bonds this year has been historic.  Take a look at this chart plotting out the returns of stocks vs. bonds. 

All investment portfolios have stock and bond allocations, and the amount varies by risk levels.  Riskier portfolios have more stocks, less bonds, and less-risky portfolios have the opposite.  

For the basic 60% stock / 40% bond portfolio, the loss this year was the worst ever. 

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Here’s a look at some of the other markets this year.

Volatility of the stock market is currently on the lower end of the range it has traded in this year.

 

Oil is currently well below the levels it reached earlier this year, too.

Finally, the U.S. dollar was an important story this year as it reached record highs against other currencies.  The dollar and the stock market moved opposite of each other – when the dollar was higher, stocks were lower.  The dollar is now well off its highs of the year, too.

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THE FED

We believe the Fed had the most impact on the markets this year.  They raised interest rates at the fastest pace ever, which increases the cost of borrowing money. 

The Fed had lowered interest rates as a way to stimulate the economy, and this stimulus has continued since the financial crisis nearly 15 years ago.  Its like using pain killers for 15 years to treat a broken arm – eventually serious problems will arise.  This is the year the problems arose.  

As for the Fed this month, they held another policy meeting where they continued pulling back on their stimulus by raising interest rates.  The increase in rates was lower than the last several meetings, but he indicated they will continue raising rates for a long time.  The market didn’t take the news well and fell sharply on the news. 

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INFLATION

The Fed is very focused on inflation, so investors have been paying close attention to it, too.  

When measured on an annual basis, inflation ticked lower last month. 

When looking at it month-by-month, however, inflation continues to rise.   

Inflation at the business level (the PPI) again moved lower on an annualized basis, but it still rises month-to-month. 

Here’s a look at the monthly measurement:

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OTHER ECONOMIC DATA

Economic data released this month was mostly lower, showing the economy is slowing.  

The manufacturing portion of our economy contracted, but the service part showed an improvement.

Retail sales moved lower from the previous month.

Consumer confidence ticked higher. 

Confidence at small businesses also rose.

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Where does the market go from here?

It’s a tough guess right now.  Stocks are slightly on the oversold, or cheap side, as we close out the year.  Here’s a look at some of the indicators we follow:

 

An interesting chart is the put-call ratio.  Without getting too far into what the put-call ratio is, basically, the higher the level, the more worried investors are.  

As you can see in the chart below, investors have been extremely worried (the stock market is on the top, the put-call ratio on the bottom).  When this indicator spiked to a high level in the past, the stock market rallied.  Will this happen again this time?

It’s possible that buyers reemerge in the new year after putting a bad year behind us, but only time will tell.  Now is a time to stay nimble.  



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.