Commentary for October, 2021

Hello all – we hope you had a nice October.  

Stocks rebounded nicely this month to close at record highs.  The Dow rose 5.8%, the S&P 500 gained 6.9%, and the Nasdaq, which has a higher concentration of technology companies, was up 7.3%.

In the chart below, you can stocks have traded in a narrow, upward-rising trend that almost looks like a straight line.  The sell-off we had in September - the worst month in more than a year - almost ended that trend.  However, the gains this month have put the market back in the trend higher.  It’s been a rare, remarkable stretch for stocks. 

 

What’s also remarkable is the market has followed its historical average almost perfectly this year.  That’s a good sign as the end of the year is typically the strongest period for the market.

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There were a few news items behind the rise in stocks this month.  First is corporate earnings.

Right now, we’ve heard from about half the companies in the S&P 500 on how they fared in the third quarter - and they’ve done pretty well.

Most companies complained about similar issues - shipping problems and the supply chain, lack of workers, and higher costs. But they’ve been able to raise their prices (or shrink their packaging) to overcome these problems.  

The comments from these companies also suggested that these problems are not going away any time soon and costs are likely to be raised even further.  That may be good for corporate earnings, but it’s not great for our bank accounts.  

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Another item helping the markets was the federal government negotiations over the “infrastructure” bills.  There had been talks of raising corporate tax rates to as high as 28% to help pay for the new spending (the rate is 21% currently).  However, tax rate hikes are becoming less likely and that was great news for businesses and the market.

Unrelated - we came across a great chart this month regarding corporate taxes.  When the tax rate was originally lowered, many pundits were upset that the lower tax rates would cause the government to lose revenue.  

However, these lower taxes have actually resulted in a record amount of money going to the government.  It shows the formula works: Lower taxes = higher economic growth = more people working and paying taxes = more tax revenue to the government. 

 

This is something to keep in mind as the “infrastructure” debate continues and more tax increases are proposed.

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The Fed was fairly quiet this month, which also helped the markets.  They still appear likely to begin pulling back on their stimulus in November.  While it seems widely accepted that they will do this, we don’t think the market is pricing it in.  This may bring us some volatility in November.  

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We’ll switch gears to economic data and begin with inflation.  Inflation has been a big story recently as energy prices climb to levels that haven’t been seen in years - or ever, in some parts of the world.  

Thankfully, energy prices moderated slightly this month, though they don’t seem like they will be losing much ground in the coming months as supply remains low and demand high.

Overall, CPI - which measures inflation at the consumer level - still stands near the highest level since 2008.  Inflation at the business level (the PPI) stands at an all-time high. 

 

Economic growth slowed down over the past quarter, too.  The GDP report showed 2% growth, making it the lowest print after the covid shut-downs. 

 

We’re hearing the term “stagflation” more and more as inflation rises and economic growth slows. 

 

The employment picture is improving as fewer people apply for unemployment benefits.

 

Job openings took a turn lower last month, but there’s still more jobs available than there are unemployed people.

 

Below we’ll show charts of other economic data, which have been either roughly flat or showing modest increases.

 

 

 

Optimism took diverging paths between consumers and small businesses this month.  Consumer confidence moved higher:

 

While optimism with small business owners turned lower:

 

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Stocks are on the expensive side in the short run, but have continued to trend higher.  Historically, these last two months of the year are very good for the market so this is a nice tailwind.  However, we think there is good chance of volatility in November as the Fed pulls back on its stimulus and another debt ceiling fight reemerges.  We’d be cautious 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.

Commentary for September, 2021

Hello all – we hope you had a nice September.  Hard to believe we’re already in October.  

It wasn’t a good month for the markets.  In fact, it was the worst month in a year-and-a-half.  The Dow fell 4.3%, the S&P 500 lost 4.8%, and the Nasdaq, which has a higher concentration of technology companies, was off 5.3%.

 

Stocks trended lower early in the month and like so many of the previous months, had a sharp drop in the middle of the month.  It quickly rebounded higher, just like previous months, but then reversed course again to close the month lower.  It was a very frustrating month for investing. 

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There were a few different news items contributing to the market decline.  

We’ll start with Washington, which grabbed a lot of headlines as politicians were very busy this month (that’s never a good thing).

First, there was a fight over the government funding bill in order to prevent a shutdown on October 1st.  After a lot of bickering, this was resolved at the last minute.  

Then there is the debt ceiling fight, which looks like it may have a mid-October deadline.  Similar to the government shutdown fight, this adds some volatility to the markets and is likely to be resolved at the last minute.

Finally, there was the proposed “infrastructure” bills (we use quotation marks since there’s not much traditional infrastructure in there).  These bills introduce a lot more government spending and a lot more taxes.  This is a concern for businesses and for investors who are almost certain to see higher taxes on their investments.  These higher taxes will be a headwind for the markets.  

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A lot of the focus this month was on the Fed, too.  They’ve been talking about pulling back on their stimulus for quite some time, but this month they seemed to indicate they would begin the process in November.  

They’re currently printing $120 billion a month to buy bonds to keep borrowing rates down and in November they will start reducing the amount of money they print.  This money makes its way into the market and supports stocks, so a reduction will also be a headwind for the markets.  This added to the downward pressure this month.    

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We haven’t talked about China much recently, but they also contributed to the decline in the markets.  

The largest property developer in China found itself in trouble this month and was unable to pay some of its debts.  Financial troubles are not uncommon in China, but the government often steps in to help out.  The government showed no willingness to help this time and investors were worried more business defaults were likely to follow.  

In the end, the company made some payments to its Chinese debtors but made no payments to anyone outside China.  The government didn’t seem to see anything wrong with that - and that could be a problem for its foreign relations.  

This issue has not been fully resolved and we’re likely to hear more from them in the coming weeks.  

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Recent high energy prices around the globe are also a serious issue that haven’t gotten much attention in the U.S.  

Europe has been hit especially hard.  Coal and natural gas prices have risen exponentially in the region.  A push for “green energy” has led to less reliance on traditional energy sources, but the green energy hasn’t been able to provide enough power.  Low supply and high demand, as well as transportation issues, have led to record-high prices and shortages all across the continent.

 

China is in a similar boat as they have instituted lower energy-consumption targets.  Power outages were common this month as prices soared and regional governments limited power usage.  Not only is that inconvenient for the people, but many factories were forced to shut down for long periods of time.  For the first time since the pandemic started, the Chinese manufacturing sector actually contracted last month.     

The U.S. is following a similar path as the government requires more “green energy.”  Natural gas prices have risen sharply and oil is at the highest level in three years.  These shortages are expected to persist through the winter, so be prepared for higher energy prices.  These green policies are a big headwind for the economy. 

 

Worries about high energy prices reflect a broader concern about rising inflation.  By all accounts, inflation is at or near its highest level in more than a decade.

CPI, which measures inflation at the consumer level, took a slight turn lower over the past month, but it still stands near the highest level since 2008. 

 

Inflation at the business level, or PPI, has risen to its highest level in 11 years. 

 

Many businesses are warning about this inflation and are passing on the higher prices to customers. 

 

Take a look at how much it costs to ship a container from China to Los Angeles.  Last month we reported it cost about $11,000.  Now it costs more than $20,000!

 

There are growing concerns for the broader economy, too.  GDP projections for the third quarter have continued to decline.

 

 

Stagflation has become a popular word again as investors worry about lower economic growth and high inflation. 

 

The employment picture is weakening, too, as fewer jobs were added last month.

 

 

This is remarkable as there is a record amount of job openings. 

 

The trends in the economy are concerning. We are hopeful that these trends reverse, but fear that the economic proposals out of Washington will only create more headwinds.  

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Where does the market go from here?  

This is a tough call.  The fall is the most volatile period for the markets and September lived up to that billing.  Stocks are on the oversold (or cheap) side from a short-term perspective, but it’s not easy to stick your neck out too far 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.

Commentary for August, 2021

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%.

 

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 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.      

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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? 

 

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. 

 

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.

 

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. 

 

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.

Commentary for July, 2021

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

Stocks continued their march higher.  For the month, the Dow was up 1.3%, the S&P 500 rose 2.3%, and the Nasdaq, which has a higher concentration of tech companies, gained 1.2%.

Our newsletter last month discussed a few red flags we were seeing.  Several indicators we followed were moving lower.  Also, the overall market was rising but fewer and fewer stocks were participating in the rise.  This often occurs before a fall in the market.

These concerns were justified as the markets did fall sharply, as you can see in the chart below.  The indexes had their biggest one-day drop since last October. 

However, the fall was short-lived.  Investors quickly bought the dip and markets rebounded strongly to close the month with decent gains.  

Right now we aren’t seeing the red flags we saw before.  The economy seems to be in decent shape and corporate earnings have done well.  There are new concerns with the Coronavirus and the Fed may be a step closer to pulling back on its stimulus and that could send stocks lower.  We’ll talk about these more later.  

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We’ll start with corporate earnings.  Results for the second quarter began coming in this month and about half the companies in the S&P have reported so far.  

Companies have done much better than expected, although accurate predictions have been tough to make coming out of the pandemic.  While earnings are good now, there’s a concern that earnings may have reached their peak.  Many companies are warning of high inflation and that they see sales slowing in the future.  This is something to keep an eye on.  

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The Fed was also in the news this month as they held one of their policy meetings.  No change in their stimulus policy was announced - as expected - but they seemed closer to pulling back on the stimulus.

Investors have been watching the Fed closely for clues as to when they’ll reduce stimulus since many of the targets the Fed has set have already been reached or surpassed.  Inflation is running at levels we haven’t seen in over a decade and economic growth is strong.   

During the Fed meeting, many reporters asked for specifics on their policies but the Fed never gives a straightforward answer.  Is the sky blue?  It might be today, but it might not be tomorrow.   

They acknowledged the progress in the economy, but noted that it wasn’t enough.  Inflation is high now, but they expect it to recede in the future (they never define when that is).  Also, they expressed concerns about high unemployment, but we believe that’s not a sign of weakness in the economy and is due more to attractive unemployment benefits from the government.  

Our take is that while inflation is high, it will never be a concern to the Fed since they will always believe inflation will be lower in the future.  We think their focus is on employment.  Solid employment reports will force the Fed to pull back on stimulus, but even then it might be by a tiny amount.  The Fed has recently introduced minority unemployment as another metric they follow and it’s always higher than the average, so they can continue to cite that as a concern.  

Frankly, we think the Fed is looking for any excuse to not pull back on stimulus.  They are trapped - they know the stock market will fall if they do and higher borrowing costs on the enormous amount of debt in our system will slow the economy.   We think all this money printing will eventually cause significant problems, but its anyone’s guess as to when that will be.  

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Switching gears to economic data released this month, we’ll start with inflation.  Last month’s report saw a 5% annual increase in inflation, the highest in 13 years.  This month’s report was even higher at 5.4%.  Remember, the Fed wants 2% inflation (which we believe is a bad policy and the target should be 0% - or even negative).

 

The GDP report measures the strength of the economy and it came in at a solid 6.5% for the second quarter.  Economists are warning that this could be the peak in GDP, though. 

With all the concern over high unemployment, there sure are a lot of job openings out there.  More than 9 million, in fact, and we have about 8 million unemployed. 

The manufacturing and service sectors are both growing, though at a slower pace than recent months. 

People are still out shopping as sales are rising.

Despite higher prices from inflation and new Covid headlines, optimism is surprisingly strong.

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Where does the market go from here?  

We continue to think the markets will have a tougher time going forward.  The threat of a pullback in stimulus hangs over the market and every economic report will be scrutinized for how it will influence the Fed.  Bad economic data - especially employment figures - will be good for the market.  We aren’t too enthusiastic on the market at this time.  


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.