Commentary for January, 2024

Hello all - we hope your first month of 2024 was a good one.  

January was a good one for stocks.  For the month, the Dow rose 1.2%, the S&P 500 gained 1.6%, and for a change, the Nasdaq, which has a higher concentration of tech stocks, was the laggard with a 1.0% gain. 

 

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

“As goes January, so goes the year.”

This is an old Wall Street saying that basically means if the market is up in January, it will be up for the year, too.  How accurate is this?  Going back 100 years, it’s been true just about 65% of the time.  While it’s better than 50/50, we still wouldn’t put much faith in it!

Here’s a look at how the different sectors performed this month.

____

FED

A big reason for the market rise last year was the Fed.  They indicated they would begin lowering interest rates after years of record rate hikes.  That means borrowing costs would be lower, which is something stocks like.  

However, this month the central banks intimated to not get too excited.  While they may lower rates this year, it probably won’t be as much as investors expect.  

Here’s a few headlines we saw this month:

A Fed meeting at the end of the month gave little indication of when lower rates can be expected and the market saw some weakness on this.

 

We aren’t so sure a rate cut is coming in the next few months as many investors expect.  This could set the market up for more disappointment as rate cuts never materialize.

____

EARNINGS

We’re about halfway through the earnings reports of companies in the S&P 500.  The earnings haven’t been bad, but there are some pockets of weakness.  

The big story last year was tech stocks, which saw massive gains based on the hype around AI.  That has raised expectations for these stocks.  So far, the AI hype isn’t paying off for these tech companies as their earnings underwhelm.  Since these stocks led the market up, be careful that disappointments in this sector can lead the market down, too. 

____

INFLATION

Inflation has been trending lower over the last roughly two years, which is a key economic metric the Fed looks at.  However, the inflation level seems to have stalled over the last several months.   This is not something the Fed likes to see.  

 

Inflation continues to rise every month, too.  Its not rising as fast as it did immediately post-Covid, but prices ARE still rising.

Excluding energy and food, which economists call the “core” measurement, inflation is still solidly rising every month.

One bright spot for inflation is the PPI, which is the inflation at the business level.  The PPI has been lower for three-straight months now. This is a good sign – first prices come down for businesses, then eventually for consumers.  This suggests that lower inflation should be in our future.  Hopefully.

____

OTHER ECONOMIC DATA

Economic data released this month was mixed.  Overall, the economy still looks healthy, but there are pockets of concern.  We’re also seeing a lot of ‘bottoming’ patterns in the charts, where it suggests a change in trends.

First is the GDP report for the fourth quarter, which shows the strength of the overall economy.  The report was a nice surprise, showing a decent gain.

Its worth noting that a lot of the gains came from government spending, which is usually due to increased debt and is also usually not productive. 

Next, we’ll look at the leading economic indicators, which we’ve talked about for months.  This index 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 21-straight months now.  It has never gone this low without a recession following, although this is something we’ve been saying for many months and a recession still hasn’t come.

Here are the various indicators used in the leading indicator index:

The manufacturing sector of our economy still appears to be contracting, though it is improving, while the services sector showed weakening.

Retail sales ticked higher last month:

Durable goods (these are items with a longer life, like a phone or refrigerator) showed another gain, too.

Consumer confidence moved sharply higher:

Small business optimism was slightly higher, too:

____

Where does the market go from here?

Our indicators show that the market remains very expensive here.  But it remains resilient, too.  We wouldn’t be sellers at this time, but aren’t excited about putting new money in, either. 

 

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, 2023

Hello all - we hope you had a nice December.  

It was a remarkable month with markets reaching or nearing record highs.  For December, the Dow rose 4.8%, the S&P 500 gained 4.5%, and the Nasdaq, which has a higher concentration of tech stocks, added a solid 5.5%.  We’ve also seen nine-straight higher weeks for both the S&P and Nasdaq, the first time that’s happened since 1983.  

The year was incredible, too, with the Dow up 14%, the S&P gained 24%, and the Nasdaq was higher by 43%.

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

The chart for the past year looks impressive.

Here’s a look at how the different sectors performed this year.

A record amount of new money has flowed into the market.  We’ve seen the biggest monthly inflow ever into an ETF that tracks the market.

We’ll touch on bonds, too, which had another big month.  Bond yields continue to fall, which means it’s cheaper to borrow money.   

When bond yields fall, bond prices rise.  For investors in bond index products, like bond ETF’s, that means the ETF price moved higher.  Here’s a look at the price the most popular bond ETF, the Vanguard Total Bond Index:

____

FED

What was the reason for the large increase in stocks this month?  That’s easy – it’s all about the Fed.

The last two years have seen a restrictive Fed policy, where the Fed pulled back on its stimulus by printing less money and raising interest rates.    

This month was a sea change for the markets as that all reversed.  

The Fed shocked investors by explicitly stating that they expect to cut interest rates next year.  Lower rates were something investors thought might happen, but never expected to directly hear from the Fed.  This sent markets skyrocketing.  (It also makes you question why bother analyzing corporations for good investments when markets rise and fall based on Fed policy.)

The comments were also confusing, since two weeks earlier the Fed had explicitly stated that they WERE NOT planning on lowering interest rates.

Economic data released in those two weeks weren’t remarkable enough to produce a sharp U-turn in policy.  

However, there was one data point that DID change.  The election.  Donald Trump took the lead over Joe Biden and Trump leads Biden in all seven swing states. 

A rising stock market in an election year has historically seen the incumbent win.  That means a rising stock market would help Joe Biden.

The Fed and its defenders are always quick to say that the Fed is apolitical and politics never enters their thinking.  But we know they are very political and all share a similar political leaning.  

For example, the former Fed president, Janet Yellen, is the now the Treasury Secretary for the Biden administration.  The things we’ve heard her say on the Biden’s behalf is something only a hard-core liberal would believe, and her views aren’t that far from the other Fed members.  

-

Another possible reason for the sharp pivot from the Fed is higher borrowing costs for the U.S. government.  Our government spending is at record levels, which is a worrisome stat (especially when outside of a wartime which usually has the higher spending).

Treasury Secretary Janet Yellen has publicly mentioned that the higher rates are making it harder for the government to borrow money.  With the massive amount of debt and higher interest rates, we spend more on interest payments on the debt than we do on defense! 

 

Having Jay Powell and the Fed lower borrowing costs will make it cheaper and easier for the U.S. government to borrow money.  

We think these are the two main reasons for the sharp pivot from the Fed – a higher market in the election year and lower borrowing costs for the U.S. government.  There has been no other data points that justify such a reversal in such a short time.  

____

INFLATION

Inflation has been trending lower, which has been helpful for the Fed.  On a year-over-year measurement, inflation moved lower again this month.

Inflation has been higher every month, but it has been trending lower.  The charts look a little funky this month, but you get the point.
 

 

Excluding energy and food, which economists call the “core” measurement, inflation is still rising every month.

Inflation at the business level was flat last month, which is a positive sign. 

____

OTHER ECONOMIC DATA

First we’ll start with the leading economic indicators, which we’ve talked about for months.  This index 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 20-straight months now.  It has never gone this low without a recession following, although this is something we’ve been saying for many months and a recession still hasn’t come.

Here are the various indicators used in the leading indicator index:

The manufacturing sector still appears to be contracting while the services sector showed slight improvement. 

Retail sales ticked higher last month:

Durable goods (these are items with a longer life, like a phone or refrigerator) showed a nice gain after a large drop in the previous month.

Consumer confidence moved higher:

Small business optimism was slightly lower, though:

____

Where does the market go from here?

Our indicators show that the market is very expensive here.  However, the shift from the Fed lead to a sea change in the market and gave investors the green light to pile in.  New money from investors may keep the market afloat here.  We wouldn’t be sellers at this time, but aren’t excited about putting new money in, either.  

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 November, 2023

Hello all - we hope you had a nice November.  

Finally, a nice month for investors!  All three indexes turned in their best months in over a year.  For November, the Dow rose 8.8% to close at its highest level of the year.  The S&P 500 gained 8.9%, and the Nasdaq, which has a higher concentration of tech stocks, added a solid 10.7%.

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

A significant amount of the gain in the market has come from only a handful of stocks.  The top seven stocks in the S&P 500 have gained about 80%, while the remaining 493 stocks have gained about 6%.  This has been a very concentrated rally, which isn’t very healthy. 

Bonds were again a big story this month.  For the last few months, they were a big story because bond yields were rising at a record pace, meaning it was rapidly becoming more expensive to borrow money.   

This month, however, bonds reversed course sharply.  Yields dropped and bond prices rose. 

When bond yields fall, bond prices rise.  For investors in bond index products, like bond ETF’s, that means the ETF price moved higher.  Here’s a look at the price the most popular bond ETF, the Vanguard Total Bond Index:

____

FED

So why the reversal in stocks this month?  There are a couple things we could point to like decent corporate earnings or economic data that still looks good.  However, the biggest reason for the gains is the Fed.

Investors believe the Fed is done raising interest rates.  At least, that was the main takeaway from a Fed policy meeting at the beginning of the month.  That gave investors the green light they had long been looking for and markets shot higher.  

____

INFLATION

Inflation has been helping the Fed, too, as inflation has moved lower.  On a year-over-year measurement, inflation moved lower again this month after being flat or higher the previous three months.    

Inflation is trending lower on a monthly measurement, too.

Inflation at the business level was negative last month, which is a positive sign. 

____

OTHER ECONOMIC DATA

The economy remains in a weird spot.  Economic growth continues to look fine.  GDP has been solid and employment figures still look decent.  

Many commentators are calling this a “soft landing.”  There was a worry when the Fed stopped its stimulus that the economy would crash, or have a “hard landing.”  Obviously that hasn’t happened, hence the phrase “soft landing.” 

However, we think it’s too early to think we are in the clear.  For months we’ve shown many economic indicators that only happen in recessions.  We have a few new ones this month.

First is a chart of Gross Domestic Income (or GDI).  Without getting too far into the weeds, it’s like GDP, but it measures the income that is earned in getting GDP.  You can make GDP look better through government spending, but that isn’t possible with GDI.  

Anyway, real GDI recently turned negative and it only does that in a recession (in the chart, the periods that are recessions are marked with the gray shading).

Another red flag comes from the Beige Book, which is a way the Fed gauges economic activity.  A Beige Book indicator turned negative and only does that during recessions. 

Then there is the leading economic indicators, which we’ve talked about for months.  This index 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 19-straight months now.  It has never gone this low without a recession following.

Here are the various indicators used in the leading indicator index:

The strength of the manufacturing and service sectors of our economy had been improving, but both turned lower in the most recent data. 

Retail sales were lower last month:

Durable goods (these are items with a longer life, like a phone or refrigerator) were down, too.

Amid all the negative data, consumer confidence moved higher:

Small business optimism was slightly lower, though:

____

Where does the market go from here?

Stocks were very oversold (cheap) at the beginning of the month, only to move to very overbought (expensive) levels here.  This is usually not a good time to put new money in the market.

That said, this is a very peculiar time of the year.  Money tends to flow into the market at the end of the year and push stocks higher.  You can see this in the chart below (the light blue line is the average of the market since 1950). 

The green light from the Fed earlier this month likely encourages more new money into the market, too.  

So, while we think stocks are very overbought, it’s possible they could rise into the year end.  However, we’d prefer to wait for better buying opportunities.  





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.