Broker Check

Weekly Market Commentary

May 13, 2024

Higher rates are doing what they’re supposed to do. 

Last week, Federal Reserve officials spoke about keeping the federal funds rate higher until it becomes clear that inflation will reach the Fed’s two percent target rate. 

While people typically don’t mind earning more interest on their saving and investment accounts, higher rates are painful for consumers. That pain is why higher rates help lower inflation. They discourage borrowing and cause people to buy fewer goods. Lower demand for goods and services should lead to lower inflation, reported Trina Paul of CNBC

So far, the biggest fly in the inflation-reduction ointment is housing. Diccon Hyatt of Investopedia explained: 

“In the first two decades of the 21st century, the U.S. built 5.5 million fewer homes than were needed, the National Association of Realtors estimated in a 2021 report…The effects of that housing shortage are rippling through the economy, most obviously in the form of soaring home prices…official inflation rates, which are designed to measure the cost of living, are highly sensitive to any changes in housing costs. Housing costs make up 45% of the Consumer Price Index (CPI), the most widely watched measure of inflation.”

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May 6, 2024

What will the Federal Reserve do? 

Uncertainty about the direction and timing of Fed rate cuts is causing stock markets in the United States to charge and retreat. U.S. stocks rallied for five consecutive months (anticipating rate cuts early in 2024) before retreating in April after higher-than-anticipated inflation suggested the Fed might delay any rate reductions. 

Markets retreated early last week on concerns the Fed might take a more hawkish tone following the Federal Open Market Committee (FOMC) meeting – but it did not. Following the meeting, the FOMC release stated:

 “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective…The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” 

While the Fed left its rate policy unchanged, it eased a bit using a different policy lever. “…[FOMC] policymakers gave a green light to slowing the pace at which the Fed is shrinking its Treasury holdings, which may modestly work against the rise in market interest rates,” reported Jed Graham of Investor’s Business Daily.

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April 29, 2024

The economy appears to be slowing down. 

Last week, many investors were focused on economic data. The Personal Consumption report offers information about Americans’ income and spending over the previous month. It includes one of the Federal Reserve’s preferred inflation gauges, the personal consumption expenditures (PCE) price index. The March report showed: 

  • Disposable income, which is the amount of money available for Americans to spend and save (after taxes), rose by 1.4 percent, year-over-year. 
  • The U.S. personal saving rate moved lower, falling to 3.2 percent, year-over-year. 
  • Consumer spending was higher than expected, up 0.8 percent from February to March, as Americans spent more on both goods and services. 
  • Headline inflation increased from 2.5 percent year-over-year in February to 2.7 percent year-over-year in March. 
  • Core inflation, which excludes volatile food and energy prices, did not change from month to month and remained at 2.8 percent. 

What does it all mean? 

“More spending is good for the U.S. economy, with consumption accounting for more than two-thirds of the country’s economic activity. But falling savings rates suggest consumers might need to extend themselves financially to keep the shopping going. Friday’s data add to other evidence—such as rising credit card balances and falling excess savings—that suggests, while still strong, the consumer-spending binge won’t continue forever,” explained Nicholas Jasinski of Barron’s

Investors also had an eye on economic growth. The Fed has been raising rates to slow economic growth which, in turn, should help bring inflation lower.

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April 22, 2024

Investors have been recalibrating their expectations. 

There is a lot going on in the world that could affect the value of financial markets – wars, tensions between major powers, a strong dollar, and rising oil prices – just to name a few. Last week, it was Federal Reserve policy. The possibility that the Fed might keep rates higher for longer shook investors, reported Naomi Rovnick of Reuters. 

At a policy forum early in the week, Fed Chair Jerome Powell told the audience: 

“The performance of the U.S. economy over the past year has really been quite strong. We had growth of more than three percent last year as rebounding supply supported both robust growth and spending, and also employment alongside a considerable decline in inflation. More recent data show solid growth and continued strength in the labor market but also a lack of further progress so far this year on returning to our two percent inflation goal…we’ll need greater confidence that inflation is moving sustainably toward two percent before it would be appropriate to ease policy.” 

With the federal funds rate likely to remain at its current level for longer than expected, markets reconsidered how that might affect economic growth and corporate earnings, reported Jacob Sonenshine of Barron’s.

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April 15, 2024

Inflation and geopolitics and earnings. Oh, my! 

It was a rough week for stock markets. “The S&P 500 closed 1.5% lower on Friday, while the Nasdaq Composite dipped 1.6%. Every S&P 500 sector closed lower—and just about 40 stocks in the index finished the day with gains,” reported Connor Smith of Barron’s

A trio of issues caused investors to reassess their expectations for the year. Here’s what many were thinking about: 

Prices rising at home. Early last week, the Consumer Price Index showed prices had moved higher in March. Headline inflation was 3.5 percent year-over-year, up from 3.2 percent in February. Higher prices for gasoline and shelter were the primary drivers of the increase. Inflation, in tandem with strong economic data, dashed investors’ hopes that the Federal Reserve will lower rates soon, reported Augusta Saraiva and Matthew Boesler of Bloomberg

Tensions rising overseas. One of the drivers behind rising prices is geopolitics, reported Rita Nazareth of Bloomberg. Oil markets have been responding to the possibility of escalating tensions in the Middle East, as well as the damage done by drone strikes on Russian oil infrastructure. Equities moved lower and gold moved higher as investors sought so-called safe-haven investments, last week. 

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April 8, 2024

The bull charged from October 2023 through March 2024. Last week, it took a breather. 

Optimistic may be the best word to describe the first quarter of 2024. From the start of the year, investors were confident that an economic soft landing in the United States was possible. The U.S. stock market reflected investors’ conviction that: 

  • The U.S. economy would continue to demonstrate resilience;
  • Inflation would continue toward the Federal Reserve (Fed)’s target; and
  • The Fed would eventually lower the federal funds rate, pushing borrowing costs down and boosting economic growth. 

Over the first quarter, the Standard & Poor’s 500 Index moved 10.2 percent higher. 

“That’s only the fourth time since the start of the millennium [the S&P 500] has gained 8% or more in the first three months of the year…,” reported Teresa Rivas of Barron’s. “Of the 16 times the S&P 500 has managed to rise 8% or more in the first quarter from 1950 through 2023, only once—in 1987, the year of the Black Monday crash—did the index lose ground in the rest of the year.” (While the historic data are interesting, past performance is no guarantee of future results.) 

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April 1, 2024

What do dieters have in common with the Federal Reserve? 

If you’ve ever dieted, you may be familiar with the weight-loss plateau. Many people experience steady progress. The bathroom scale moves lower week by week – until it doesn’t – and that can be discouraging. 

The Federal Reserve has been trying to reduce inflation, and it has had significant success. Its actions are credited with bringing headline inflation from a peak of 9.1 percent in June 2022 to 3.2 percent in February 2024, as measured by the Consumer Price Index.

 Looking back over the last few months, it seems as though inflation hit a plateau (and, perhaps, indulged in a bit of holiday excess).

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March 25, 2024

The central banks have spoken. 

No one expected the United States Federal Reserve to announce a rate change last week – and it didn’t. But Fed Chair Jerome Powell’s comments and the actions of other central banks led to new records being set in stock markets around the world, reported Randall Forsyth of Barron’s

“…the world’s central banks, led by the U.S. Federal Reserve…have all but green-lighted lower policy interest rates in coming months in the expectation that inflation will continue to make downward progress without triggering recessions. The Fed’s counterparts at the European Central Bank and the Bank of England similarly signaled lower rates ahead, while the Swiss National Bank made a surprise cut this past week…Meanwhile, major Latin American central banks, led by Brazil and Mexico, are well along in their rate cuts, having been much prompter in raising their rates to fight inflation starting in 2021, a year or more ahead of the Group of 10.” 

In the United States, a lower federal funds rate could be good news for consumers and businesses. So, how low could rates go?

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March 18, 2024

Here’s the tea on stock markets and presidential elections. 

Last week, a slew of headlines mentioned stock market bubbles and frothy valuations. The implication was that markets might be headed lower because they’ve risen so high. Last Wednesday, Lewis Krauskopf of Reuters reported: 

“Some market participants believe the relentless U.S. stock rally is poised for a breather, even if it remains unclear whether equities are in a bubble or a strong bull run. The benchmark S&P 500…is up over 25% in the last five months, a phenomenon that has occurred just 10 times since the 1930s, according to BofA Global Research…the S&P has already made 16 record highs this year, the most in any first quarter since 1945, CFRA Research data showed.” 

By the end of last week, we’d seen 17 record highs for the Standard & Poor’s (S&P) 500 Index. 

If there is a market downturn this year, election sentiment is likely to be one of the reasons for the move. “Market moves during election years do tend to follow a similar pattern—declines leading up to early November, then a surge through year end once the winner is revealed.” While past performance does not guarantee future results, the S&P 500 has typically finished presidential election years higher, reported Nicholas Jasinski of Barron’s.

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March 11, 2024

The week got off to a good start...

 In testimony before House and Senate committees, Federal Reserve (Fed) Chair Jerome Powell noted that prices had been falling and unemployment rates remained quite low. As a result, he expected the Fed to begin lowering the federal funds rate in 2024. 

“I think we’re in the right place,” he said. “We’re waiting to become more confident that inflation is moving sustainably at two percent. When we do get that confidence—and we’re not far from it—it’ll be appropriate to begin to dial back the level of restriction so that we don’t drive the economy into recession rather than normalizing policy as the economy gets back to normal.” 

After Powell’s comments, the likelihood of a June rate cut rose, and so did U.S. stock indices. The bond market rallied, too, with yields across all maturities of U.S. Treasuries dropping lower through Thursday. 

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March 4, 2024

The bull market is alive and well.

 “We know what investors are thinking,” reported Jacob Sonenshine of Barron’s. “The gains can keep coming, driven by an economy that is neither too hot nor too cold…The economy is growing, but only moderately, and the Federal Reserve can keep thinking about when it can start cutting interest rates…This dynamic is why nobody wants to miss out on the rally—and why they think it can keep going. A recent survey from Investors Intelligence shows the number of bulls outnumbered their bearish counterparts by the widest margin since late 2021.” 

Recent market performance owes much to: 

  • Solid earnings growth and strong corporate profits. Last week, 97 percent of the companies in the Standard & Poor’s 500 Index had shared how well they performed in the fourth quarter of 2023. Overall, blended earnings for companies in the Index grew 4 percent year-over-year, exceeding expectations. Blended net profits were stable at 11.2 percent year-over-year, reported John Butters of FactSet.
  • Slowing Inflation. Last week, one of the Fed’s favorite inflation gauges, the personal consumption expenditures (PCE) price index, showed inflation moved lower year-over-year. Prices rose 2.6 percent over the 12 months through December 2023 and 2.4 percent over the 12 months through January 2024. While inflation trended lower over the longer period, it increased month-to-month. In December 2023, prices rose 0.1 percent, and in January 2024, prices rose 0.3 percent.
  • Enthusiasm for artificial intelligence (AI). Investors expect AI to boost productivity and corporate earnings. “Innovations in electricity and personal computers unleashed investment booms of as much as 2% of U.S. GDP as the technologies were adopted into the broader economy. Now, investment in artificial intelligence is ramping up quickly and could eventually have an even bigger impact on [economic growth],” reported Goldman Sachs. 
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February 26, 2024

Optimism abounds! 

Enthusiasm for everything related to artificial intelligence (AI) drove a global stock market rally last week. Equity markets in the United States, Europe, and Japan hit all-time highs after a leading chipmaker reported better-than-expected earnings and an extraordinary surge in demand for its artificial intelligence-targeted processors, wrote Rita Nazareth of Bloomberg

Investors took the news “as evidence that the generative AI boom is both real and spreading. [The company’s] spectacular earnings report and forward guidance are spurring investors to buy shares of almost any company with a stake in the AI race—everything from computer and networking hardware providers to cloud computing plays to enterprise application software,” reported Eric J. Savitz of Barron’s

Investors weren’t the only ones feeling optimistic last week. Economists who participated in a February Bloomberg survey expect the U.S. economy to grow this year and next year, although a significant minority say that a recession is possible in 2025, reported Augusta Saraiva and Kyungjin Yoo of Bloomberg. They cited a source who stated: 

“The U.S. economy remains the envy of the world…Both real economic growth and employment growth remain strong while inflation rates and interest rates are falling.”

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February 20, 2024

Don’t fight the Fed. 

The Federal Reserve (Fed) is the central bank of the United States. A longstanding bit of investment wisdom is: Don’t fight the Fed. It means that investors should align their strategies with the Fed’s monetary policy. Economic growth is influenced by Fed policy, and stock markets tend to reflect the economy, rising when it grows and falling when it contracts. As a result, Kent Thune of The Balance reported, when the Fed is:  

  • Tightening monetary policy by raising the federal funds rate to slow economic growth, investors should be cautious. 
  • Easing monetary policy by lowering the federal funds rate to stimulate economic growth, investors can be more aggressive (within the boundaries of their risk tolerance and financial goals).  

The Fed has left rates unchanged since last summer. In January, the Fed indicated that inflation was moving in the right direction, and the economy remained strong. It projected that the federal funds rate would fall to 4.6 percent by year-end, implying three rate cuts of 0.25 percent in 2024.

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February 12, 2024

China is out of favor with investors. 

For decades, China was among the fastest-growing economies in the world. Its real gross domestic product, which is the value of all goods and services it produces, grew by about nine percent a year, on average, from 1978 through 2022, according to The World Bank. However, the pace of economic growth in China slowed over the last decade and dropped sharply during the pandemic. 

Many investors expected China to rebound quickly in 2023 after its Zero Covid policy ended, but that hasn’t happened. Instead, “Exports weakened and deflation deepened, but the big letdown was consumer spending, which slumped as young people struggled to find jobs and the long awaited reckoning for the housing market finally arrived,” reported Allen Wan of Bloomberg

China’s stock market performance reflected its economic malaise. “The market value of China’s and Hong Kong’s shares is down by nearly $7 [trillion] since its peak in 2021. That is a fall of around 35%, even as [the market value] of America’s stocks has risen by 14%, and India’s by 60%,” reported The Economist via X.

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February 5, 2024

We’ve been hearing a lot about layoffs. 

Last week, the January 2024 Challenger Report found that employers based in the United States cut more than 82,000 jobs in January. That’s a lot. In December 2023, about 35,000 layoffs were announced. The January job cuts were concentrated in a few industries, and the reasons for the cuts included companies restructuring to lower costs and reorienting toward artificial intelligence. 

Layoffs often are a sign the economy is losing steam, but that doesn’t appear to have been the case in January since employers added more than 353,000 new jobs during the month, reported the Bureau of Labor Statistics (BLS). 

If we subtract the number of layoffs from the number of new jobs (353,000 – 82,000 = 271,000), the total number of jobs created in January was still significantly higher than the 185,000 new jobs economists anticipated.

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January 29, 2024

Even better than expected!

 The United States economy is not performing the way anyone thought it would. Instead of tipping into a recession last year, it crushed expectations. Gross domestic product, which is the value of all goods and services produced in the country, expanded 2.5 percent, after inflation, for the year. 

U.S. economic growth

 

1Q 2023:               2.2 percent

2Q 2023:               2.1 percent

3Q 2023:               4.9 percent

4Q 2023:               3.3 percent 

It’s interesting to note that the U.S. economy has been outperforming other developed countries’ economies. For example, GDP for the Group of Seven (G7), which includes seven countries plus the European Union, has grown 4.7 percent, in total, since the fourth quarter of 2019 (prior to the pandemic). G7 GDP includes – and got a boost from – U.S. economic growth.

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January 22, 2024

Are you feeling optimistic or pessimistic? 

Consumers are a force to be reckoned with – and we’re all consumers. We buy coats and tweezers, electricity and bread, screens and fishing poles. We download apps and games and educational materials. As consumers, we are vital to the American economy. In fact, consumer spending accounts for about two-thirds of the U.S. economy when it’s measured using gross domestic product or GDP. 

Many consumers are feeling more optimistic than they have in a while. Last week, the University of Michigan (UM) reported that consumer sentiment is soaring. After a double-digit rise in December 2023, the UM Consumer Sentiment Index rose an additional 13 percent in January 2024. Surveys of Consumers Director Joanne Hsu reported: 

“Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as a recession ended. For the second straight month, all five index components rose, with a 27% surge in the short-run outlook for business conditions and a 14% gain in current personal finances. Like December, there was a broad consensus of improved sentiment across age, income, education, and geography.”

Investors are feeling pretty good, too. Throughout January, the weekly AAII Investor Sentiment survey found that a higher percentage of investors than usual expected stocks to move higher over the next six months. Last week, though, that percentage dropped lower as uncertainty increased around the depth and timing of possible Federal Reserve rate cuts.

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January 16, 2024

Is inflation retreating? 

Last week, we received a lot of information about inflation. Some seemed to support the idea that inflation was sticky, meaning it wasn’t moving lower, while other data suggested inflation was in retreat. Here’s what we learned: 

  • Headline inflation, as measured by the Consumer Price Index, suggested inflation was headed in the wrong direction last month – higher. It showed prices rising more than expected (0.3 percent, month-to-month) in December 2023. In November, prices rose less (0.1 percent, month-to-month). 
  • Core inflation, which excludes volatile food and energy prices, showed inflation was steady. Prices rose by the same amount (0.3 percent, month-to-month) in November and December. 
  • Producer prices are the prices producers received for goods and services. Last week, the Producer Price Index showed inflation was headed in the right direction – lower. Producer prices fell (-0.1 percent, month-to-month) in November and December. 
  • Conflict in the Middle East could stoke inflation by sending the prices of oil and shipping higher. 

The Federal Reserve (Fed) has been working to bring inflation down since March of 2022. Over that time, it has lifted the federal funds rate from zero to 0.25 percent to 5.25 percent to 5.50 percent, and inflation has dropped from a peak of 8.9 percent in June 2022 to 3.4 percent in December 2023. The Fed’s goal is to lower inflation to two percent.

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January 8, 2024

And we’re off…to a slow start. 

Last week, investors appeared to suffer from a New Year’s hangover. The culprit was too much optimism. 

After its December meeting, with inflation easing and the U.S. economy remaining resilient, the United States Federal Reserve (Fed) indicated that three rate cuts were possible in 2024. Assuming the Fed drops rates by 0.25 percentage points each time, the effective federal funds rate would fall by 0.75 percentage points to about 4.5 percent by the end of this year. 

That was welcome news. Lower rates make borrowing less expensive for businesses and consumers. As a result, rate cuts could lead to lower interest rates on home and auto loans, as well as credit cards. In addition, lower rates could boost corporate profits and push stock prices higher.

 Ebullient investors saw the inch and took a mile, extrapolating the possibility of three Fed rate cuts in 2024 to six rate cuts. Jeff Cox of CNBC explained. “Markets…followed up the meeting and Chair Jerome Powell’s press conference by pricing in an even more aggressive rate-cut path, anticipating 1.5 percentage points in reductions next year, double the [Fed’s] indicated pace.”

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January 2, 2024

2023 was a big year for U.S. stocks. 

The story of 2023 has its roots in 2022, when the Standard & Poor’s (S&P) 500 Index lost almost 19.5 percent amid rising inflation and aggressive Federal Reserve rate hikes. As 2022 came to a close, many on Wall Street predicted further pain in the new year. Economists forecasted a 70 percent chance of recession in 2023, and consumer and investor confidence were both low. 

Pessimism persisted well into 2023. Some of the negativity may have been due to loss aversion. Behavioral economics has found that the pain of losing is far more powerful than the pleasure of winning. Overall, investors were less bullish than usual for much of 2023, according to the AAII Investor Sentiment Survey. In addition, consumer sentiment fluctuated significantly over the year, often reflecting expectations for inflation and interest rates. 

U.S. Stock Markets Finished the Year Higher

The S&P 500 trended higher from March through July. Early on, the rally was driven by just a few technology stocks; however, the gains became more widespread as inflation slowed, economic growth remained healthy, and the likelihood of recession receded. The rally cooled in August as investor confidence slipped when inflation data moved in the wrong direction, opening the door to additional Fed rate hikes. However, bullish sentiment improved again in October and remained above average throughout most of November and December.

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December 27, 2023

Have rates peaked?

 Last week, at its final policy meeting for 2023, the United States Federal Reserve indicated that rates may have peaked. After the meeting, Chair Jerome Powell said: 

“As we approach the end of the year, it is natural to look back on the progress that has been made toward our dual mandate objectives. Inflation has eased from its highs, and this has come without a significant increase in unemployment. That is very good news… 

“While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. We are prepared to tighten policy further if appropriate. We are committed to…bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.” 

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December 18, 2023

Have rates peaked? 

Last week, at its final policy meeting for 2023, the United States Federal Reserve indicated that rates may have peaked. After the meeting, Chair Jerome Powell said: 

“As we approach the end of the year, it is natural to look back on the progress that has been made toward our dual mandate objectives. Inflation has eased from its highs, and this has come without a significant increase in unemployment. That is very good news… 

“While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. We are prepared to tighten policy further if appropriate. We are committed to…bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.” 

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December 11, 2023

Still exceeding expectations. 

Last week, the United States Treasury market rallied. Yields fell and bond prices rose as some bond market investors enthusiastically embraced the idea that the Federal Reserve will soon change course. Michael Mackenzie and Rich Miller of Bloomberg explained: 

“Softening inflation and employment data in the past month have convinced investors that the Federal Reserve is done raising interest rates and ignited bets that cuts of at least 1.25 percentage points are in store over the next 12 months. Treasury yields, which touched highs of 5% as recently as October, have declined sharply, with the U.S. 10-year benchmark sliding more than three-quarters of a percentage point.” 

Bond investors were hoping that last week’s unemployment report would show jobs and wage growth slowing in November. Instead, employers added more jobs than expected (199,000 jobs vs. 180,000), and the unemployment rate fell to 3.7 percent.

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December 4, 2023

We’re cycling along. 

It’s easy to forget that economic activity tends to move in cycles. A full cycle, known as the business cycle, typically includes four stages: 

  • Contraction occurs when economic growth slows as an economy produces fewer goods and services. Economic contractions often include recessions. As productivity contracts, it can negatively affect the profitability of companies, as well as the number of jobs available and the income security of workers. The United States economy contracted during the first two quarters of 2022. 
  • Trough is the stage at which economic growth hits bottom for the cycle. It occurs before an expansion begins. The month following a trough is the first month of an expansion.  
  • Expansion occurs when an economy produces more goods and services. The United States economy has been expanding since mid-year 2022. Productivity, as measured by gross domestic product, grew 5.2 percent year-over-year in the third quarter of this year. 
  • Peak is the stage at which economic growth reaches its highest point for the cycle, just before a contraction begins. The month following a peak is the first month of a contraction.  

“It might be tempting to think the stages of the business cycle are like the cycles on your dishwasher – regular cycles that occur in predictable patterns: The rinse cycle always begins after the wash cycle has completed, and each rinse always lasts the same length of time…But there is nothing ‘regular’ about the business cycle,” wrote Scott A. Wolla in the St. Louis Federal Reserve’s Page One Economics® blog.

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November 27, 2023

In November, investors were more optimistic than consumers. 

At the start of November, investors were decidedly bearish. During the week of November 1, the AAII Investor Sentiment Survey found that about 50 percent of respondents were pessimistic about the prospects for stocks over the next six months, and about 24 percent were bullish. The current historic averages are 31 percent bearish and 37.5 percent bullish. (The remainder are neutral.) 

Many believe the survey is a contrarian indicator, meaning that stocks are likely to rise when investors are bearish and fall when investors are bullish. November offered some data to support the theory as United States stocks trended higher during the month. 

As stock markets gained, participants in the AAII survey became more bullish. The Thanksgiving week survey found that more than 45 percent of respondents were feeling bullish, and as we already mentioned, just 24 percent were feeling bearish. Quite a reversal from four weeks earlier.

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November 20, 2023

Is it done? (We’re not talking about the turkey.) 

Last week, investors enthusiastically embraced the idea that the Federal Reserve (Fed) could be done raising rates – and that it might even begin to lower them. As conviction about the possibility of rate cuts increased, stock and bond markets rallied, reported Koh Gui Qing and Dhara Ranasinghe of Reuters. 

The catalyst was easing inflation. 

Last week, the Consumer Price Index indicated that inflation in the United States was flat from September to October, and 3.2 percent for the preceding 12-month period. Core inflation, which excludes volatile food and energy prices, also slowed, up 0.2 percent month-to-month and 4 percent year-over-year.

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November 13, 2023

The Markets 

Earnings grew in the third quarter. 

Four times a year, during earnings season, publicly traded companies report how well they performed during the previous quarter. The strength of corporate earnings – also known as bottom-line profits – is one of the economic indicators that investors watch closely. 

When companies consistently grow earnings, investors feel confident they may continue to do so. Consequently, solid earnings can help lift a company’s share price. The opposite is also true. When earnings are lower than expected, investors may lose confidence in a company or look for better relative opportunities. As a result, weak earnings may lead to a company’s share price falling. 

Companies in the Standard & Poor’s 500 (S&P 500) Index have been in an “earnings recession.” That occurs when year-over-year earnings decline for two consecutive quarters. The earnings of companies in the S&P 500 retreated for three consecutive quarters – from October 2022 through June 2023, reported John Butters of FactSet

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November 6, 2023

Will there be a year-end rally? 

Last week, there was a lot of speculation about whether the United States will see a year-end stock market rally. Some say yes, and some say no. 

For example, at Bank of America, “Chief investment strategist Michael Hartnett broke from his usual bearish view to say technicals no longer stand in the way of a year-end rally for the S&P 500 Index. Savita Subramanian, head of U.S. equity and quantitative strategy and an optimist on stocks this year…[said] a contrarian indicator from the bank is also close to offering a buy signal…,” reported Alexandra Semenova and Farah Elbahrawy of Bloomberg

In contrast, Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson thinks a fourth-quarter rally is unlikely. One bearish sign is that some higher-quality mega-cap growth stocks traded lower even after reporting strong earnings. In addition, “given the significant weaknesses already apparent in the average company earnings and the average household finances, we think it will be very difficult for these mega-cap companies to avoid these headwinds too...Finally, with interest rates so much higher than almost anyone predicted six months ago, the market is starting to call into question the big valuations at which these large cap winners trade.”

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October 30, 2023

The Mark Twain Effect?

 Historically, economic theory was based on the idea that financial decisions were grounded in rational thought. In recent years, behavioral economists have recognized that people don’t always behave rationally. In fact, research has found that investors like shortcuts that help simplify decision-making. While rules of thumb can be helpful, it’s important to use common sense. Some investment theories are a bit wacky, such as: 

  • The Aspirin Indicator: This theory holds that there is an inverse correlation between aspirin production and stock market performance. When aspirin production is down, markets are up (fewer headaches). When production is up, stocks are down (more headaches). 
  • The Hemline Index: The idea behind this theory is that market rises and falls in line with skirt lengths. When skirts are shorter, the market rises. When hemlines move lower, the stock market does, too.
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October 23, 2023

Markets were resilient. 

Last week, investors had a lot to process – geopolitics, inflation, consumer sentiment, the possibility of government shutdown – and markets were volatile. Toward the end of the week, some investors were reassured when earnings season kicked off with reports showing major banks posted stronger-than-expected profits during the third quarter. Here’s a brief look at what happened during the week: 

War in Israel. Hamas terrorists attacked Israel, and Israel declared war. The human toll has been high and continues to increase. The conflict has potential to spread across the region. While economics is a lesser concern, the war may disrupt energy supplies, keeping inflation – and interest rates – higher for longer, according to Ziad Daoud, Galit Altstein and Bhargavi Sakthivel of Bloomberg

U.S. inflation proved persistent. In September, the Consumer Price Index (CPI) showed prices rose 3.7 percent year-over-year. When volatile food and energy prices were excluded, inflation was 4.1 percent year-over-year. Inflation has fallen a long way from its June 2022 peak of 8.9 percent, but the decline has stalled, and inflation remains well above the Federal Reserve’s two percent target. That reinforces the idea that the U.S. Federal Reserve may leave rates higher for longer, reported Chris Anstey of Bloomberg.

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October 16, 2023

The Markets 

Markets were resilient. 

Last week, investors had a lot to process – geopolitics, inflation, consumer sentiment, the possibility of government shutdown – and markets were volatile. Toward the end of the week, some investors were reassured when earnings season kicked off with reports showing major banks posted stronger-than-expected profits during the third quarter. Here’s a brief look at what happened during the week: 

War in Israel. Hamas terrorists attacked Israel, and Israel declared war. The human toll has been high and continues to increase. The conflict has potential to spread across the region. While economics is a lesser concern, the war may disrupt energy supplies, keeping inflation – and interest rates – higher for longer, according to Ziad Daoud, Galit Altstein and Bhargavi Sakthivel of Bloomberg

U.S. inflation proved persistent. In September, the Consumer Price Index (CPI) showed prices rose 3.7 percent year-over-year. When volatile food and energy prices were excluded, inflation was 4.1 percent year-over-year. Inflation has fallen a long way from its June 2022 peak of 8.9 percent, but the decline has stalled, and inflation remains well above the Federal Reserve’s two percent target. That reinforces the idea that the U.S. Federal Reserve may leave rates higher for longer, reported Chris Anstey of Bloomberg.

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October 9, 2023

Financial markets lost ground during the third quarter. 

While year-to-date returns for the Standard & Poor’s (S&P) 500 Index remain above the historic average, which was 10.24 percent, including dividends, from 1973 to 2022, the rally in U.S. stocks stalled during the third quarter of 2023, reported Lewis Krauskopf, Ankika Biswas and Shashwat Chauhan of Reuters

Early in the quarter, U.S. stocks gained, driven higher by better-than-expected corporate earnings, falling inflation and optimism that the Federal Reserve (Fed) might be near the end of its rate-hiking cycle. Since March of 2022, the Fed has lifted the Federal Funds effective federal funds rate from near zero to 5.33 percent and reduced its bond holdings by $1 trillion through quantitative tightening, reported Michael S. Derby of Reuters

The Fed’s actions are designed to bring inflation lower by slowing economic growth and reducing demand for goods and services. However, the U.S. economy continues to hum along. The labor market has been particularly resilient. Last week’s employment data showed number of jobs created in September was almost double the Dow Jones consensus estimate, reported Jeff Cox of CNBC. The U.S. unemployment rate remained near historically low levels, and the labor force participation rate increased over the quarter.

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October 2, 2023

Inflation is slowing but consumers aren’t feeling it.

In August, for the first time in two years, inflation (excluding volatile food and energy costs) dropped below four percent. Last week, one of the Federal Reserve (Fed)’s favored inflation measures – the Personal Consumption Expenditures (PCE) Price Index – indicated that prices rose 3.9 percent, year-over-year, in August 2023. That’s an improvement from January, when prices rose by 4.9 percent, year-over-year, but it remains above the Fed’s target of 2 percent.

While slowing inflation is good news, many Americans are not feeling relief. “Even as the Federal Reserve’s favored measure of price gains eases, the cost of food, gasoline, car insurance and other essentials is still elevated after two years of persistent increases…It costs $734 more each month to buy the same goods and services as two years ago for households who earn the median income,” according to a source cited by Mark Niquette, Jarrell Dillard and Michael Sasso of The Washington Post.

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September 25, 2023

How high will they go?

Just as the market anticipated, the Federal Reserve Open Market Committee (FOMC) chose not to raise interest rates last week. However, Fed officials made it clear another rate increase might be necessary before the end of 2023 as continued economic strength, higher energy prices, robust consumer spending, and rising wages in a strong labor market have kept upward pressure on inflation.

FOMC economic projections indicate the Fed anticipates the effective federal funds rate will remain higher for longer than many hoped. The median projected rates were:

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September 18, 2023

Adding new ingredients to the economic blender.

The performance of United States economy in 2023 has been as unexpected as a lentil-avocado-cinnamon smoothie – a tasty surprise. Last week, economic data suggested the Federal Reserve may need to do more to slow the economy. The consumer price index showed inflation edging higher, wholesale inflation was higher than expected (largely due to higher energy prices), and retail sales were healthy.

Stronger-than-expected economic data inspired market optimism that the Federal Reserve will bring inflation down without a recession. However, new ingredients are being added to the economic mix that could prove less palatable. These include:


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