Weekly Market Commentary
June 21, 2021
Is that a hawk?
The Federal Reserve Open Market Committee (FOMC) met last week. They get together eight times a year to review current economic and financial conditions, assess risks to price stability and economic growth, and adjust monetary policy accordingly.
When the Federal Reserve raises the fed funds rate to keep inflation and economic growth in check, it is ‘hawkish’. When the Fed lowers the fed funds rate to encourage inflation and economic growth, it is ‘dovish’.
Last week, the FOMC appeared to veer toward a more hawkish policy.
June 14, 2021
It’s transitory. It’s not transitory. It’s transitory. It’s not transitory.
Media analysts were plucking the inflation daisy petals last week. On Thursday, the Bureau of Labor Statistics released the Consumer Price Index Summary, which showed prices were up 5 percent year-to-year.
“Investors are debating whether the surge in prices at both a producer and consumer level will prove transitory, as the U.S. Federal Reserve believes, or become entrenched. Much of the angst over medium term inflation pressure becoming hotter is fueled by the backdrop of aggressive fiscal and monetary policy. This potentially combustible mix has a policy additive from a Fed prepared to tolerate a higher pace of inflation beyond its target of 2 percent for an unspecified period,” reported Michael Mackenzie of Financial Times.
June 7, 2021
Pulling the economy out of the shed.
If you’ve ever stored tools or machinery in a shed or garage for an extended period of time, you know they often need some care and repair to function properly. The same appears to be true of the pandemic economy.
Economic growth in the United States is on the rebound. The latest report shows real gross domestic product, which is the value of all goods and services produced in our country, was up 6.4 percent annualized during the first quarter of 2021, an improvement from 4.3 percent in the fourth quarter of 2020. Also, pandemic restrictions have been lifted. Americans have begun to spend more and save less, and there is high demand for goods and services.
The economy appears to be primed for stronger growth, but there are some glitches in the system – namely labor and supply chains.
June 1, 2021
Are we at a tipping point?
One side effect of the pandemic was a collapse in demand for oil, which led to “the largest revision to the value of the oil industry’s assets in at least a decade,” reported Collin Eaton and Sarah McFarlane of The Wall Street Journal.
Last week brought another reckoning for big oil as a court ruling and shareholder influence made it clear companies need to revisit their strategies for emissions reductions and clean energy. Here’s what happened:
May 24, 2021
What do markets hate?
They hate uncertainty, and recently there has been plenty of it. Some of the questions plaguing economists and pundits include:
Why aren’t people returning to work? Americans, like people in other parts of the world, have not been rejoining the workforce at the pace many had anticipated. One of the most frequently cited theories was explained by The Economist:
“In America businesspeople, almost to a pinstripe, are convinced that the $300-a-week boost to unemployment insurance explains the shortages. However, pundits do not agree on whether stimulus handouts really lead people to shirk. The evidence is hazy elsewhere, too…Australia ditched its job-protection scheme in March, and shortages have worsened.”
May 17, 2021
Uncle Inflation is here. Will he overstay his welcome?
Ever since the financial crisis, central banks have pursued expansionary monetary policies to encourage reflation and avoid deflation. Well, it’s taken some time, but inflation is finally here.
Last week, major stock indices in the United States moved lower after inflation, as measured by the Consumer Price Index (CPI), was four times higher than anticipated, reported Ben Levisohn of Barron’s.
May 10, 2021
Like a gender reveal gone wrong, last week’s employment report delivered an unexpected surprise.
Economists estimated 975,000 new jobs would be created in April. The United States Bureau of Labor Statistics (BLS) reported there were just 266,000. That’s a big miss.
Economists, analysts, and the media offered a wealth of theories to explain the shortfall. These included:
May 3, 2021
It’s Spring and economic recovery is in the air.
Last week, the Bureau of Economic Analysis reported the U.S. economy grew at a 6.4 percent annualized rate for the first three months of 2021. While that’s good news for companies and workers, asset managers are checking their expectations.
The stock market reflects what investors think may happen in the future. During the past year, major U.S. stock indices moved higher as investors anticipated vaccines and economic recovery, reported Patti Domm of CNBC. Since its March 2020 low, the Standard & Poor’s 500 Index has gained 88 percent.
April 26, 2021
It wasn’t just the price of pork chops.
Last week, as investors weighed the news, strong corporate earnings were offset by higher grocery prices and rising numbers of global coronavirus cases.
Solid corporate earnings weighed favorably.
So far, 25 percent of the companies in the Standard & Poor’s (S&P) 500 Index have reported first quarter earnings, and 84 percent said profits grew faster than expected, reported John Butters of FactSet. The blended earnings growth rate for the S&P 500 (which includes estimated earnings for companies that have not yet reported and actual earnings for companies that have) was 33.8 percent last week. For context, the 5-year average earnings growth rate (actual earnings) for the S&P 500 was 6.9 percent as of last week.
April 19, 2021
Where are Treasury bonds going?
The direction of bond yields is influenced by investors’ expectations for economic growth, among other factors. When economic growth is expected to weaken, bond yields tend to move lower. When economic growth is expected to strengthen, bond yields tend to move higher.
Last year, U.S. Treasury yields began to climb higher on optimism that vaccines, in tandem with fiscal and monetary stimulus, would strengthen economic growth. The yield on 10-year Treasuries rose more than 1 percent in just a few months, from 0.54 percent at the end of July 2020 to 1.75 percent at the end of March 2021.
Last week, Treasury yields moved lower. Ben Levisohn of Barron’s explained it’s “…possible that after yields nearly doubled to start the year, investors were simply waiting to see that the move higher was over before buying again. Of course, nearly everyone was predicting a 2 percent yield on the 10-year, while often forgetting that rarely does anything in financial markets move in a straight line.”
April 12, 2021
Investors didn’t stumble over inflation last week. Why not?
Inflation – rising prices of goods and services – can be measured in a variety of ways. For example, the Consumer Price Index considers changes in the amount consumers pay for goods and services – a bag of carrots, a gallon of gas, or a doctor’s appointment. The Producer Price Index (PPI), on the other hand, considers changes in the amount producers – such as farmers, manufacturers, or physicians – charge for goods and services.
Last week, the Bureau of Labor Statistics reported the PPI increased by 1 percent month-over-month in March 2021. It was twice the increase forecast by economists. On a year-over-year basis, the PPI was up 4.2 percent, which was the biggest gain since 2011, reported Reade Pickert of Bloomberg.
It’s important to pay attention to comparisons. The year-over-year PPI reflected prices from last March, after the pandemic had affected demand and prices dropped lower. Bloomberg explained the phenomenon may continue for several months:
April 5, 2021
Zoom, zoom, zoom.
Big economies tend to recover from recessions about as quickly as semi-trucks accelerate from stop lights. In other words, recovery tends to be slow. That may not be the case this time.
“Everything in this economic cycle is happening at great speed. That is in part a reflection of the scale of economic stimulus, and not only from the [Federal Reserve]. One big fiscal package seems set to follow another. A $1.9trn package has barely passed and a $3trn infrastructure bill is mooted,” reported The Economist.
Economic recovery has helped push stock prices higher, and concerns about inflation have pushed bond yields higher. Here are a few highlights from the first quarter of 2021:
March 29, 2021
Last week, unemployment claims were looking good and consumers were feeling good.
The number of Americans applying for first-time unemployment benefits declined. Just 684,000 people filed claims during the week of March 20, down 97,000 from the week before, according to last week’s report from the Labor Department.
Granted, that’s a large number – higher than the highest number of first-time claims during the Great Recession – but it’s the smallest we’ve seen since the pandemic began, according to Christopher Rugaber of the AP. He wrote:
“Economists are growing more optimistic that the pace of layoffs, which has been chronically high for a full year, is finally easing…Still, a total of 18.9 million people are continuing to collect jobless benefits…Roughly one-third of those recipients are in extended federal aid programs, which means they’ve been unemployed for at least six months.”
March 22, 2021
What are professional asset managers thinking?
Bank of America recently published the results of its March global asset managers’ survey, which polls 220 professional investors responsible for about $630 billion in assets, reported Julia La Roche of Yahoo! Finance.
Many of those surveyed were optimistic about 2021. During the next 12 months:
- 91 percent of those polled expect the economy to strengthen (that’s a record high)
- 89 percent anticipate global profits will improve
- 52 percent expect value stocks to outperform growth stocks
May 15, 2021
Investors had a lot to be enthusiastic about last week.
Major stock indices in the United States soared, finishing the week higher and setting new records along the way, reported Al Root of Barron’s. There was plenty of good news to fuel investor optimism:
- The $1.9 trillion American Rescue Plan was signed into law. The plan provides $1,400 payments to most Americans. It also delivers child-tax credits, health-insurance subsidies, and extends unemployment benefits into September, reported NPR. Funds also were made available for schools, states, and vaccination efforts, as well as tax relief for people receiving unemployment benefits.
- The spread of the coronavirus appears to be slowing. The 7-day average number of cases in the United States dropped 11.2 percent week-to-week, reported the Centers for Disease Control (CDC). More than 20 percent of Americans have received a first dose of a COVID-19 vaccine and more than 10 percent have been fully vaccinated. As circumstances have improved, a number of states have begun easing lockdown restrictions.
- Inflation remained low in February. For the 12 months through February 2021, the Consumer Price Index rose 1.7 percent, reported the Bureau of Labor Statistics last week. That’s well below the Federal Reserve’s usual target of 2 percent. However, food and energy prices increased significantly more than the index average.
March 8, 2021
Neanderthal DNA may make people more – or less – susceptible to COVID-19, reported The Economist. It all depends on whether you have the genes and, if you do, which DNA string you inherited.
No matter what your gene sequence looks like, vaccines can help fight the virus. So far, all of the vaccines available in the United States have proven to be effective in preventing hospitalization and death from coronavirus, according to the Centers for Disease Control (CDC).
We saw the economic effect of accelerating vaccinations last week when the number of new jobs created in February exceeded expectations. The Bureau of Labor Statistics reported there were 379,000 new jobs, primarily in the leisure and hospitality sector, which was hard hit by the virus and lockdowns.
March 1, 2021
Students of financial markets may have noted a historically unusual event last week.
On Thursday, the yield on 10-year U.S. Treasury notes briefly matched the dividend yield for the Standard & Poor’s (S&P) 500 Index. This type of convergence is uncommon. In normal times, the yield on 10-year Treasuries tends to be higher than the dividend yield of the S&P 500. Felix Salmon of Axios explained:
“The 10-year Treasury note is a risk-free asset: If you hold it for 10 years, you know exactly how much it's going to return…The S&P 500 dividend yield is normally lower than the risk-free rate. Investors earn less in dividends than [they] would holding the same amount of money in Treasury bonds, but they hope that rising stock prices will make up the difference.”
February 22, 2021
It’s a contrarian’s dream come true.
Contrarian investors like to buck the trend. They buy when other investors are selling and sell when others are buying.
Last week, Bank of America (BofA) delivered a contrarian’s dream. BofA’s monthly survey of 225 global asset managers, who are responsible for $645 billion in assets under management, showed the managers were almost fully invested, according to CNBC.
The survey showed asset managers’, “…cash levels at the lowest since March 2013, global equity allocations at a 10-year high, and a record number of respondents reporting taking a ‘higher than normal’ level of risk,” reported Randall Forsyth of Barron’s.
February 16, 2021
Way back, when radio disk jockeys played 45-rpm vinyl singles, the A-side of a disk was the song the record company was promoting and the other side – the flip side – held a song that sometimes had an equal or greater impact. For instance, the flip side of Queen’s We Are the Champions was We Will Rock You.
When it comes to the economy and financial markets, flip sides can have significant impact, too. For example:
- Stock market performance. Last week, major stock indices in the United States – the Standard & Poor’s 500, the Dow Jones Industrial, and the Nasdaq Composite – finished at record highs. That was happy news for investors.
The flip side:
Concern that share prices may not be sustainable. “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior…this bubble will burst in due time…,” wrote asset manager Jeremy Grantham of GMO in January 2021.
February 8, 2021
It’s not a black diamond ski run yet, but the yield curve for U.S. Treasuries is steeper than it has been in a while.
A yield curve is the line on a graph showing yields for different maturities of bonds. Yield curves provide insight to bond investors’ perceptions about the economy. There are four basic types of yield curves:
- Normal: The slope is upward because short-term bond yields are lower than long-term bond yields. A normal curve for U.S. Treasuries has a yield gap of about 2.3 percent between 30-year Treasury bonds and 3-year Treasury bills, according to Fidelity. On Friday, the difference was 1.78 percent.
- Steep. The upward curve is unusually steep. This may occur when an economic expansion is underway, demand for capital pushes interest rates higher, and inflation rises.
- Flat: There is no curve because short- and long-term bonds have similar yields. Flattening yield curves can be a precursor of economic slowdown and lower interest rates.
- Inverted: The curve slopes down. Long-term bond yields are lower than short-term bond yields. Some believe an inverted yield curve is a signal that recession is ahead.
Right now, the steepening of the U.S. Treasury yield curve is positive news, according to a source cited by Ben Levisohn of Barron’s:
February 1, 2021
They say people watching the same event often see different things. That seems to have been the case last week when share prices of a few companies experienced tremendous volatility.
Some cast the events as a David vs. Goliath morality tale, however, Michael Mackenzie of Financial Times saw it differently. He wrote, “…a speculative surge from retail investors using borrowed money…has in the past signaled a frothy market top.” (In financial lingo, a market is ‘frothy’ when investors drive asset prices higher while ignoring underlying fundamentals.)
No matter how you characterize it, the events of last week were unusual. Felix Salmon of Axios explained, “Almost never does a stock trade more than twice its market value in a single day…It has happened 7 times this week already, and 20 times this month…What we've seen in the past month, and especially the past week, is certain companies becoming little more than vehicles for short-term gambling."
January 25, 2021
Last week, as COVID-19 vaccination efforts continued, there was speculation about stock market corrections and asset bubbles.
On Sunday morning, Bloomberg reported 63 million doses of the coronavirus vaccine had been administered across 56 countries. In the United States, 21.1 million shots have been delivered – about 51 percent of the vaccinations that were sent to states. At that point, the pace of vaccination in the United States was just over one million doses a day.
Improvements in the pace of vaccinations could lift market optimism, according to Ben Levisohn of Barron’s, but a market correction is still a possibility:
Investors were rocked by economic data showing the economy hit the brakes hard in December.
Last week, major U.S. stock indices decelerated as investors gaped at the economic damage caused by the rising number of coronavirus cases around the world. There have been more than two million COVID-19 deaths globally, with more than 390,000 deaths in the United States. The spread has resulted in new lockdowns and restrictions and has hurt economic recovery.
Ben Levisohn of Barron’s reported:
“This past week – with the market looking ahead to the inauguration and what might be in store following the Capitol riots and Donald Trump’s second impeachment – was a terrible one for economic data. Whether it was small-business confidence, consumer inflation, or just about anything else, the numbers painted a picture of an economy that was slowing more rapidly than expected. Initial jobless claims, which spiked to their highest level since August, and retail sales, which fell 0.7 percent, were particularly frightening.”
January 11, 2021
The event at the United States Capitol building had a resounding impact around the world, but it didn’t deter global stock markets.
Last week, investors weighed the violent disruption of America’s 2020 presidential election process against the outcome of the Senate runoff in Georgia, and decided the latter was more significant. Financial Times reported the Democratic party’s win in Georgia improves the possibility of additional government relief spending in 2021:
“In turn, this renews the momentum behind trends within equity and bond markets that have been unfolding in recent months. These include rising long-term interest rates and inflation expectations that reflect hopes of an accelerating economy later this year.”
January 4, 2021
Last week was the cherry on top of a turbulent year for investors.
After the $900 billion fiscal stimulus bill was signed on Sunday, major U.S. stock indices moved higher. The Washington Post reported, “The S&P 500-stock index, the most widely watched gauge, is finishing the year up more than 16 percent. The Dow Jones Industrial Average and the tech-heavy Nasdaq gained 7.25 percent and 43.6 percent, respectively. The Dow and S&P 500 finished at record levels despite the public health and economic crises.”
U.S. Treasuries gained, too, as yields moved slightly lower. Thirty-year Treasuries finished the week yielding 1.65 percent. While government bonds didn’t offer attractive levels of income during the year, they “…lived up to their billing as a stock market hedge in 2020. Rates plunged as stocks collapsed in March, and the Treasury market finished 2020 with yields not much above the pandemic panic lows and down half a percentage point or more for the year,” reported Barron’s.
December 28, 2020
U.S. stock markets remained calm as a fresh chapter opened in the coronavirus stimulus saga last week.
Congress managed to cobble together a new stimulus package that was acceptable to both sides and pass it. The proposed package included money to help states distribute vaccines, an unemployment benefits extension, $600 checks for eligible Americans, aid for airlines, and other provisions, reported Mike Calia of CNBC.
“…fiscal support is seen as critical to keep the economic recovery from faltering as coronavirus cases rise and cities consider new shutdowns. Consumer spending has flagged, and labor market gains have begun to stall. While the number of Americans applying for unemployment benefits declined last week, it still remains elevated compared with pre-COVID levels,” reported Colby Smith and Eric Platt of Financial Times.
December 20, 2020
Congress is at $900 billion, will they hear $1.4 trillion, $1.4 trillion, governments at $900 billion, who’ll go $1.4 trillion, $1.4 trillion…
The stimulus auction continued last week. Early on Sunday, The New York Times reported, “Lawmakers are on the brink of agreement on a $900 billion compromise relief bill after breaking through an impasse late Saturday night, with votes on final legislation expected to unfold as early as Sunday afternoon and very likely just hours before the government is set to run out of funding.”
Among other items, policymakers’ plan to deliver new stimulus and fund the government is expected to include:
December 14, 2020
When it comes to beverages, frothy can be delicious.
In what may be the least inspiring description of fizzy drinks ever written, a group of food engineers explained, “Aeration in beverages, which is manifested as foam or bubbles, increases the sensory preference among consumers.”
Stock markets can fizz up, too. Share prices bubble, enthusiastic investors invest, and prices go even higher. In a frothy market, share prices often rise above estimates of underlying value. The terms that describe this financial market phenomenon include irrational exuberance, animal spirits, and overconfidence.
Last week, there was speculation about whether some parts of the U.S. stock market have gotten frothy. Eric Platt, David Carnevali, and Michael Mackenzie of Financial Times wrote about an initial public offering (IPO) of stock by a hospitality company. They reported:
December 7, 2020
When is bad news good news? Take a look at last week.
Major stock indices in the United States hit all-time highs on Friday, despite a lackluster employment report and a surge in COVID-19 cases, reported Lewis Krauskopf of Reuters. During the week, we saw:
- The slowest jobs growth since the economic recovery began. The Bureau of Labor Statistics reported 245,000 jobs were created in November. “…a key sign of holiday enthusiasm – the hiring of thousands of workers to help with the holiday retail rush – simply didn’t happen this year. Some of those workers – but clearly not enough – are helping with online shopping duties, filling warehouses around the country, or driving vans from house to house,” reported Avi Salzman of Barron’s.
- New unemployment claims remain steady. More than one million people a week are filing first time jobless claims, reported Dion Rabouin of Axios. On November 14, more than 20 million Americans were receiving unemployment assistance.
November 30, 2020
Last week, vaccine optimism immunized investors against signs of economic weakness.
In previous commentaries we’ve written about narrative economics, which holds that popular stories may affect individual and collective economic behavior. Last week, diverse narratives had the potential to influence consumer and investor behavior, but not all did. You may have read that:
November 23, 2020
The U.S. economy is like a semi-trailer truck. No one likes being stuck behind a semi at a stoplight because big trucks don’t go from zero to 60 in 2.5 seconds. Neither does the U.S. economy.
When the pandemic brought our economy to a near virtual standstill early in 2020, the U.S. government and Federal Reserve (Fed) took extraordinary measures to help the economy get going again:
- Congress passed the CARES Act stimulus, which gave Americans and American businesses badly-needed fuel to support economic recovery. Businesses were able to stay open and people had money to spend. That’s important because consumer spending accounts for almost 70 percent of U.S. economic growth.
- The Federal Reserve paved the road and gave it a downward slope by creating a supportive interest rate environment and implementing special lending facilities intended to support businesses, as well as state and local governments. Some programs were funded by the CARES Act.
November 16, 2020
Vaccine can be a powerful word. It’s worth 14 points in Scrabble (42 on a triple word square) and, last week, it was worth a whole lot more than that to financial markets.
On Monday, a pharmaceutical company and a biotech company announced preliminary trials of their vaccine show it may be 90 percent effective, reported Financial Times. The revelation conjured tantalizing visions of a future in which virus precautions are unnecessary and life returns to normal.
Around the world, pandemic-fatigued populations cheered and markets rallied. CNBC reported:
November 9, 2020
It’s said markets hate uncertainty, but that wasn’t the case last week.
Despite tremendous uncertainty about the outcome of the United States election, major domestic and international stock indices moved higher and the CBOE Volatility Index, better known as Wall Street’s fear gauge, moved 35 percent lower. Ben Levisohn of Barron’s reported:
“By all accounts, it should have been a terrible week for the stock market. At the close of trading on Friday, we still didn’t know whether Joe Biden or Donald Trump had won or which party would control the Senate. There was also set to be at least two recounts – one in Georgia, and one in Michigan – with likely more to come. It’s the kind of uncertainty that the market is supposed to hate.”
Yet, there was little fear to be found in financial markets. Investors’ confidence may have been grounded in a wave of positive economic news:
November 2, 2020
Last week, financial markets and economic data told very different stories.
Reviewing economic data is a bit like looking in a rearview mirror. Typically, it offers information about what is behind us. For example, last week we learned:
- The U.S. economy grew by 33.1 percent during the third quarter of 2020. Strong growth helped boost America’s Gross Domestic Product (GDP), which is the value of all goods and services produced in the nation. At the end of the quarter, GDP was about 3 percent lower than a year ago, reported The Economist.
- Personal income increased in September, and so did spending on goods and services. Americans bought more clothes, cars, and car parts, and spent more on healthcare and recreation.
- New claims for unemployment insurance moved lower last week. Unemployment remains high overall, but a slowdown in new claims is positive.
October 26, 2020
Stimulus talks led investors in a merry dance last week.
So far in 2020, stock markets have been sensitive to fiscal stimulus. Last week, there was optimism a new stimulus package could be negotiated before the election. There also was skepticism about whether it would happen. An expert cited by CNBC stated, “There’s a lot of back and forth on stimulus and every headline makes the market move a little bit, but there’s no follow-through because we don’t have a clear picture on that front.”
Economic data didn’t provide a clear picture either. Some data points suggested economic recovery was continuing, while other information indicated the pandemic was impeding economic growth. For instance: