Commentary for November, 2022

Hello all - we hope you had a nice November.  Hard to believe it’s already December!

Stocks were up again this month, making it two months in a row of gains.  That’s the first time that’s happened all year.  The Dow was higher by 5.7%, the S&P 500 rose 5.4%, and the Nasdaq, which has a higher concentration of tech stocks, gained 4.4%. 

 

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

 

 

 

A trend we’ve seen this year is when the U.S. Dollar moves lower, stocks move higher.  That held true again in November. The dollar actually had its worst month since 2009. 

 

There wasn’t a lot of news affecting the markets this month.  Investors continue to look to the Fed for clues on their stimulus withdrawal, and news out of China had an impact, too.  

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CHINA

We’ll start with China, where news from the country impacted markets.

China has been in and out of lockdowns ever since Covid began. Currently, financial company Nomura estimates at least 25% of the population is under some form of lockdown. This has made it difficult to get certain products made and it’s meant less “stuff” getting bought by the Chinese people.  

Rumors increased this month that the strict lockdowns would be reduced or removed, which caused markets around the world to rally.  The rumors were then denied by the government and markets pulled back.  This back-and-forth happened a couple times during the month.  

Its unclear where the Chinese currently stand with their lockdowns, but one thing can be sure is that the people are near their breaking point.  Protests are appearing around the country and are being swiftly tamped out by the police.  We’re not sure if this will lead to any meaningful change, but the markets seem optimistic.  

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THE FED

The Fed kept the market on its toes this month.  

November opened with a Fed policy meeting where they continued pulling back on their stimulus by raising interest rates.  Investors figured the Fed will start slowing their pullback of stimulus, but comments from Fed chief Powell suggested otherwise.  Stocks dropped sharply on the news.

As the month progressed, many regional Fed presidents made comments in the press – some said the Fed should be more aggressive, some said less aggressive, and the market fluctuated each time.  

On the last day of November, Fed chief Powell made comments suggesting they will be less aggressive in their stimulus withdrawal – inte3rpreted as the opposite of what he said at the beginning of the month – and the markets soared on the news. 

 

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INFLATION

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

Investors were looking for inflation to come down over the past month, but the CPI report showed inflation increasing again when looking at it month-by-month. 

 

On a yearly basis the inflation level is lower, which investors were happy to see. 

 

Here’s a look at the “core” metric - which excludes food and energy - on a monthly basis:

 

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

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OTHER ECONOMIC DATA

Economic data released this month was mixed.  

An indicator that has accurately predicted recessions is the relationship of bond yields at different maturities.  We’re not going to go into what any of that means – its far beyond the scope of this commentary.  Just notice in the chart below that when the gold line dips below zero, a recession has always followed (a recession is indicated by the gray shading).

Right now, this indicator is strongly signaling that a recession is coming.

 

On the positive side, retailers are still showing tremendous growth.  That isn’t something you see when a recession is looming.  Amazon, for example, saw its best Thanksgiving shopping period ever.  This is a positive sign.

 

Getting into economic releases this month, both the manufacturing and service parts of our economy showed weakness.

 

We don’t talk about housing often, but home prices continue to turn lower.  

Home prices traditionally rose at the same rate as people’s incomes.  In the chart below, you can see just how disconnected they have become in recent years. 

 

Retail sales were slightly higher from the previous month.

 

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

 

Consumer confidence kept moving lower. 

 

Confidence at small businesses turned lower after three months of improvements.

 

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Where does the market go from here?

Its tough to tell right now.  Stocks are a little on the expensive side, but do have room to run a little bit higher before we start to worry.  Comments from the Fed as the month ended helped give the markets a tailwind and this is historically the strongest part of the year.  We could see a rise here, but don’t think there is too much upside left.  



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 October, 2022

Hello all - we hope you had a nice October.

It was finally a nice month for the markets.  The Dow did extremely well and had its best month since 1976 on a gain of 14.1%. 

 

The S&P and Nasdaq had their best month since July with gains of 8.1% and 3.9%, respectively. 

 

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

 

 

While the overall markets were higher, the performance of the different sectors varied widely.

Tech stocks did very poorly this month.  

On the other hand, the energy, financial, and other “old economy” sectors did well.  These old economy sectors include industrials, which are stocks like Union Pacific, Honeywell and Caterpillar.  The other sector is consumer staples, which has names like Proctor and Gamble, Coca-Cola, and Colgate-Palmolive.  

 

Also helping the market was a lower U.S. dollar.  A trend we’ve seen lately is as the dollar strengthens, the market goes lower.  This month, the dollar was weaker and the stock market rose. 

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 EARNINGS

While the Fed had been the main driver of the direction of the market over the last few months, corporate earnings finally took the spotlight in the latter part of October.  

Actually, some of the attention to earnings may have been because the Fed was in a “blackout period” before their policy meeting this week.  The blackout period meant no speeches or press appearances for the Fed members, so its possible the lack of visibility caused the market and press to focus their attention elsewhere.  

Regardless, we’re about halfway through the corporate earnings results for the third quarter and results haven’t been that great.

Tech companies, in particular, have not fared well and are warning of a slower economy in the coming months.  

Other sectors are doing fairly well, though.  Like we mentioned in the intro to this commentary, sectors like energy, financials, industrials, and consumer staples have held up nicely.  Travel and luxury companies have done well, too.  The good returns in these stocks and sectors helped the overall markets this month.  

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THE FED

A lot of the optimism in the markets this month was due to the Fed, too.  

The Fed has been sharply pulling back on their stimulus (by raising borrowing costs) in recent months.  However, many investors believe the Fed is now at a point where they won’t pull back on stimulus as much.  This has given a tailwind to the markets. 

 

The Fed meets later this week and we’ll find out their plans for the stimulus program.  It’s very likely we’ll see a lot of volatility - either higher or lower - depending on what they announce.

 

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INFLATION

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

Investors were looking for inflation to come down over the past month, but the CPI report showed inflation increasing again when looking at it month-by-month. 

 

On a yearly basis the inflation level is lower, but the “core” metric, which excludes food and energy, was higher.  This is a bad sign for inflation. 

 

Here’s a look at the “core” metric on a monthly basis:

 

Inflation at the business level (the PPI) moved higher on a monthly basis again.  Investors were hoping to see this number lower. 

 

 On an annualized basis, though, PPI is lower.

 

We’re seeing evidence of more costs coming down, too.  Shipping prices keep coming down and this will translate into lower CPI and PPI prints in the future.

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OTHER ECONOMIC DATA

Economic data released this month was almost all negative.  The one bright spot was the GDP report showing the strength of the economy over the past quarter.  Following two down quarters, the GDP growth was a decent 2.6%. 

 

As for the bad news, the manufacturing and service parts of our economy moved lower over the most recent month. 

 

Job openings were sharply lower.

 

We don’t talk about housing often, but home prices look like they are starting to make the turn lower.  

Home prices traditionally rose at the same rate as people’s incomes.  In the chart below, you can see just how disconnected they have become in recent years. 

 

Retail sales were flat from the previous month.

 

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

 

Consumer confidence also turned lower. 

 

Confidence at small businesses rose slightly, for its third higher month.

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Where does the market go from here?

A lot depends on the news later this week.  

First, we have the Fed meeting which will give us more clarity on their stimulus plans.  

The monthly employment report will be released on Friday.  The Fed believes more employment results in more inflation, so they want to see less employment (although they are completely wrong in this belief).  A bad employment report will likely be good for the stock market.  

Next week we have the midterm elections and the inflation reports, all certain to impact the markets.  

Helping the markets right now is seasonality.  The last three months of the year are usually the best time of the year for the market.  This is especially true in an election year, like this year, so this gives the market a tailwind.

The market indicators we follow show stocks being somewhat expensive in the short term and the odds of a pullback are greater than a rise.  Like we mentioned above, though, a lot of news is coming that will impact the direction of 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 September, 2022

Hello all - we hope you had a nice September.

While we hope you had a nice September, it wasn’t a nice month for the markets.  In fact, it was the worst month in over two years. Stocks actually started out on a strong note, but a higher-than-expected inflation report pricked the bubble and the market fell sharply for the rest of the month.

The Dow fell 8.8%, the S&P 500 lost 9.3%, and the Nasdaq, which has a higher concentration of tech companies, closed down by 10.5%.  

We also closed out a dismal third quarter, for three negative quarters in a row.  That hasn’t happened since 2009.  For the quarter, the Dow was off 6.7%, the S&P was off 5.3%. and the Nasdaq dropped 4.1%.   

 

 

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

 

Every sector was lower, which is uncommon.

 

Market volatility started rising in August and continued to rise sharply in September. 

 

 

It wasn’t just stocks, but bonds have fared very poorly.  Bond yields are reaching their highest levels in over a decade, which means the bond prices have fallen by a similar amount. 

 

Investment portfolios typically have two main asset classes: stocks and bonds. Bonds are seen as safer than stocks, and riskier portfolios have less bonds and more stocks.  

An average diversified portfolio might have around 60% stocks and 40% bonds.  Since bonds have done so poorly this year, that 60/40 portfolio has had its worst year since 1931. 

 

 This shows how unusual the drop in bonds has been this year.  

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THE FED

This market behavior is still all due to the Fed.  

For several months now, the Fed has expressed their worry over high inflation.  Their cure for high inflation is to slow down the economy by raising borrowing costs (interest rates).  This month they raised interest rates by another 0.75%.

 

The pace at which they are raising interest rates is the fastest on record.

 

We think the Fed is making a mistake here.  

The Fed has undertaken the biggest stimulus program in the history of the world (it’s true), and they do need to pull back from that stimulus.  And we knew getting out of the stimulus would be a problem.  But the argument the Fed is using to justify its rate increases is just flat out wrong.  

The Fed believes inflation and employment are related – they think inflation is caused when employment is good (more are people working and spending money) and vice-versa.  

Therefore, their solution to bringing inflation down is to reduce employment (less people working, so more people fired).  This is their justification for slowing down the economy.

However, it is not true that more employment results in more inflation, especially at this time.  

The current inflation is actually caused by a couple factors, like high energy prices, problems with the supply chain coming out of Covid shutdowns, and by too few people working.  

Coming out of Covid, businesses were pleading for more workers and had to pay higher wages to entice workers back.  Wages have remained high ever since and have even continued climbing.  Businesses have raised their prices as a result of paying higher wages.  Its this lack of employment that has caused inflation.

The real solution to inflation is to boost employment, not reduce it.  This is the exact opposite of what the Fed believes.  

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INFLATION

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

Investors were looking for inflation to come down over the past month, but the CPI report showed inflation increasing again when looking at it month-by-month. 

 

On a yearly basis the inflation level is lower, but still higher than investors were expecting.

 

 

The higher inflation report sparked a strong market sell-off that continued until the end of the month. 

 

On a positive note, inflation at the business level (the PPI) had its second month lower.  This was driven largely by the lower gas prices. 

 

We’re seeing evidence of more costs coming down, too, and this will translate into lower CPI and PPI prints in the future.

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OTHER ECONOMIC DATA

We’ll start with a positive report.  Economists forecast for GDP this quarter are rising as economic data hasn’t been too bad. 

 

Over the past month, the strength of the manufacturing and service sectors were both roughly flat.

 

Retail sales were up slightly.

 

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

 

Sentiment continues to improve.   Consumer confidence moved higher for the second month. 

 

Confidence at small businesses had been very poor, but saw its second higher month.

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Where does the market go from here?

Last month we stated the markets looked cheap in the short run and were likely to rise – and markets did rise.  Only to later sell-off strongly.  

Based on the indicators we watch, stocks again look very oversold (cheap) in the short-term.  At the end of the month, only 3% of stocks in the S&P 500 were above their average of the last 50 days.  Only 12% of stocks are above their 200-day average.  These are numbers usually seen at market lows. 

 

We wouldn’t be surprised to see a rise in stocks from here, but inflation and employment reports will be very important in determining market direction.    

Another thing the market has going for it is seasonality.  October has historically been the best month during midterm election years.  This year has been anything but normal, so we wouldn’t rely on this too much!

 

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.