A historically weak quarter, six months, and year for both stocks & bonds, is now behind us. With stocks and bonds both showing weakness, even a well balanced portfolio didn't stand a chance for positive returns.
As most of you are aware, we have been bearish on core bonds for almost two years, and recommended under exposure for some time. Generally speaking, our portfolios benefited, although there was little room to hide so far this year.
As shown in the chart below, since 1976, the second quarter of 2022 was the fifth worst for the S&P 500 Index, and the fourth worst for the Bloomberg U.S. Aggregate Bond Index. And to top it off, the worst quarter for a combination of the two.
Below are some additional things to consider about the most recent quarter:
Of the 10 worst quarters for a 60/40 portfolio, every other one was driven mostly by S&P 500 losses. The third quarter of 1981 was the only other quarter in the bottom 10 that saw both stocks and bonds decline.
Q1 and Q2 2022 combined was the second worst two-quarter period for a 60/40 portfolio.
This is the second consecutive quarterly loss for a 60/40 portfolio. That has happened nine times in the past. The average return over the next quarter was 5.0%. The streak ended at two quarters seven times and extended to a third quarter twice.
We remain in a turbulent period for markets and the economy. While we don’t believe anything more than a mild recession is priced into the S&P 500, we think the S&P 500 still has the potential to see solid gains from here by year end.
Despite experiencing the worst first half in the market in 52 years, history has shown that it (normally) pays to stay invested during downturns similar to the one we have faced so far in 2022. In fact, in the 12 “bear markets” the S&P 500 has undergone since 1957, the 12-month performance was positive on 9 out of 12 occurrences
Please reach out with any questions.
Debbie
[post_title] => Weekly Update: July 25: Click here to read what happens after a historically weak quarter for stocks and bonds
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[post_date] => 2022-08-04 08:52:00
[post_date_gmt] => 2022-08-04 13:52:00
[post_content] => By Debra Taylor, CPA/PFS, JD, CDFA™
Dear Friends,
There is a lot of pessimism in the markets right now. We know the list of concerns is long and includes an aggressive Federal Reserve agenda with a not-so-soft approach to a soft landing. Stagflation, ongoing China lockdowns, disrupted supply chains, exaggerated earnings estimates, and of course the ongoing Russia-Ukraine war, are all reasons for concern.
The chart below shows us 60 years of historical data on how stocks have bounced back strongly after two-quarter drops, like we've just experienced in the first half of 2022. If history is to repeat itself, we can expect an average gain of 21.5% in the final two quarters. Although we cannot predict the future, it does help to provide some reassurance that better days are on their way.
And good change may be coming soon. July has tended to be a good month for stocks. Over the last decade, the S&P 500 gained an average of 2.5% in the month of July, only marginally behind April & November - the best performing months.
The much anticipated earnings season is here, and it will provide critical guidance either way. The next round of inflation data, third-quarter earnings, and updates from the Federal Reserve, will help to determine whether July follows its typical pattern of stock market gains. Regardless, we like our odds. Remember, shallow bear markets like we've had so far, tend to bottom in about seven months on average. Month seven is July. It may be too soon to call a bottom, but history seems to be on the bulls' side.
Summer is finally here, but 2022 is still shaping up to be one of the worst years for investors ever. That’s the bad news. The good news is, the year isn’t over and we have several reasons why we believe the bulls shouldn’t throw in the towel just yet.
Here are three reasons why investors should remain optimistic as we enter the second half of 2022.
1) Bad Starts to A Year at Halftime Don't Always Mean More Trouble
The S&P 500 Index is down 21% for the year, which would be the worst first-half of any year since 1970. As bad as that has been for investors, the good news is previous years that were down at least 15% at the midway point of the year saw the final six months higher every single time, with an average return of nearly 24%.
As the table shows below, big drops to start a year tend to see big bounces back. Although most investors probably don’t feel like that is possible in 2022, just remember history says a surprise bullish move is possible.
2) Horrible Quarters Are Often Followed by Smiling Bulls
Next, a horrible quarter tends to see a nice rebound. Looking at previous quarters, when down at least 15%, the next two-quarter stocks were higher 7 out of 7 times, with an average return of more than 17%. Things get even better when looking at the full-year return, being up nearly 30% on average. That is something most investors aren’t expecting right now, but we are guessing they’ll be quite happy should history repeat itself.
3) Back-to-Back Weekly Drops Aren't Fun, But Could Be a Good Sign
Lastly, the S&P 500 fell more than 5% in back-to-back weeks in June, another potentially bullish development. In fact, after previous times the S&P 500 fell that much, a year later it was up more than 28% on average and down only once (1987.)
Presently, there are numerous reasons to remain optimistic about having a really good second half of the year. Although the market has not been easy on us thus far, we continue to stay patient, follow the process, and focus on our client's long-term goals.
Please reach out with any questions.
Debbie
[post_title] => Weekly Update: July 5: Click here to read 3 reasons why we have reasons to remain optimistic as we enter the second-half of the year!
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[post_date] => 2022-08-04 08:48:00
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[post_content] => By Debra Taylor, CPA/PFS, JD, CDFA™
Dear Friends,
The S&P 500 is in a bear market, after closing on Monday, June 13th, with a greater than 20% decline from its recent peak. A look back at past bear markets shows that there is good news and bad news once the large-cap index has crossed that symbolic threshold.
Since 1929, the S&P has experienced more than two dozen bear markets. This time, it has been a quicker-than-average descent into bear territory, at 111 trading days since the Index’s January 3 record high, according to Dow Jones Market Data.
The median bear market peak-to-trough decline for the S&P has been almost 28%, with the average bear markets lasting about ten months, on average.
What may be even more important, longer-term returns for the S&P after falling into a bear market are positive. Since 1950, the Index has been higher 75% of the time, three months after falling into a bear market. It has also been positive 75% of the time a year later, with a median gain of 26%. Patience is definitely rewarded when the market turns bearish.
Stocks rallied hard the week of May 31st, as the S&P 500 Index broke a seven-week losing streak in resounding fashion. That strong week was followed by last week's losses, creating a see-saw effect that has everyone wondering, Is this the low? Today we will take a look at why the technical picture suggests volatility is likely to remain elevated in the near term and the market bottom is not here yet. However, we do remain optimistic for the medium and long term.
First, let’s take a look at the technical set-up of the S&P 500. Stocks are flirting with their recent low of 3800, as the Index is testing support. In other words, due to much uncertainty, it is hard for stocks to break higher and they could go lower.
Second, we remain skeptical that this market has truly bottomed without the capitulation usually found at major market lows. Nothing in markets has to happen, but whether it is put/call ratios, a stubbornly low VIX (a measure of implied market volatility based on options prices), or even just the fact that several of the nongrowth sectors arguably remain rangebound from 2021 and haven’t corrected, it would be highly unusual for us to see such a major market low without genuine signs of investor panic and indiscriminate selling. Of the five major signs of panic that LPL tracks and are often found at major market bottoms, only one has been triggered so far this year in contrast to a minimum of 3 that have been found at recent lows in March 2020, the fall of 2015, late 2011 and the Great Financial Crisis in 2008-2009.
Finally, while the market is inching closer, it remains in the seasonally weak part of the year and a May or June low would still be on the early side of the average low in a midterm year. Looking at all the midterm years going back to 1950, only two have seen their yearly low before May 19, when the S&P 500 made its closing low three weeks ago. We would note though, that the depth of this correction is almost exactly in line with the average mid-term year pullback. And regardless of when we make that bottom, as the chart below shows, the gains a year after the low have been substantial with a more than 30% average return and only one occurrence falling short of a double-digit gain.
In short, until we get inflation under control and the market sees some clarity from the Federal Reserve, we may be churning along for a while, possibly until the end of the year. Please reach out with any questions.
A historically weak quarter, six months, and year for both stocks & bonds, is now behind us. With stocks and bonds both showing weakness, even a well balanced portfolio didn't stand a chance for positive returns.
As most of you are aware, we have been bearish on core bonds for almost two years, and recommended under exposure for some time. Generally speaking, our portfolios benefited, although there was little room to hide so far this year.
As shown in the chart below, since 1976, the second quarter of 2022 was the fifth worst for the S&P 500 Index, and the fourth worst for the Bloomberg U.S. Aggregate Bond Index. And to top it off, the worst quarter for a combination of the two.
Below are some additional things to consider about the most recent quarter:
Of the 10 worst quarters for a 60/40 portfolio, every other one was driven mostly by S&P 500 losses. The third quarter of 1981 was the only other quarter in the bottom 10 that saw both stocks and bonds decline.
Q1 and Q2 2022 combined was the second worst two-quarter period for a 60/40 portfolio.
This is the second consecutive quarterly loss for a 60/40 portfolio. That has happened nine times in the past. The average return over the next quarter was 5.0%. The streak ended at two quarters seven times and extended to a third quarter twice.
We remain in a turbulent period for markets and the economy. While we don’t believe anything more than a mild recession is priced into the S&P 500, we think the S&P 500 still has the potential to see solid gains from here by year end.
Despite experiencing the worst first half in the market in 52 years, history has shown that it (normally) pays to stay invested during downturns similar to the one we have faced so far in 2022. In fact, in the 12 “bear markets” the S&P 500 has undergone since 1957, the 12-month performance was positive on 9 out of 12 occurrences
By Debra Taylor, CPA/PFS, JD, CDFA™ Dear Friends, A historically weak quarter, six months, and year for both stocks & bonds, is now behind us. With stocks and bonds both showing weakness, even a well balanced portfolio didn’t stand a chance for positive returns. As most of …
Medicare can be a confusing topic for many. You can’t simply sign up anytime you want – and your enrollment timeframe can depend on a variety of factors. To help you figure out when your eligibility begins, we have put together the following flowchart. Download the checklist today to …
The Federal Reserve raised rates 0.75% to a range of 2.25-2.50%.
U.S. gross domestic product declined 0.9%, restrained by falling goods purchases and slower inventory growth.
The S&P 500 gained 9.2% in July, its best month since COVID vaccine data was released in November 2020.
U.S. GDP shrank for the second consecutive quarter, contracting by 0.9%. Much of the economy remains strong, and services consumption continues to increase. Weakness in goods, inventories, housing, and government spending are contributing to signs the economy is slowing.
The Personal Consumption Expenditures (PCE) Price Index confirmed the earlier Consumer Price Index report that inflation remains a challenge. PCE was up 1.0% as fuel prices added to pricing pressure in other sectors. Core PCE, which excludes food and energy, rose 0.6%.
Markets welcomed the idea the Fed may slow interest rate hikes sooner than expected. The S&P 500 gained 4.3% last week to complete a 9.2% rally for the month. The global MSCI ACWI rebounded 3.3%. The Bloomberg Aggregate Bond Index jumped 0.6%.
Figure 1
Are We in a Recession?
Many investors seem to have learned that two quarters of declining GDP means the country is in a recession. Yet, this definition isn’t totally accurate. There are far more factors the National Bureau of Economic Research (NBER) uses to determine whether there is a recession, but for much of the public, the two-negative-quarters definition seems to have stuck.
Like most rules, two quarters of economic decline isn’t a terrible test for a recession. The NBER defines recession as, “…a significant decline in economic activity that is spread across the economy and lasts for more than a few months.” Two quarters of declining GDP is usually significant, affects the broad economy, and lasts for more than a few months.
Reality indicates recessions are more complicated. Figure 1 shows none of the last three recessions matches the popular definition of two consecutive quarters of GDP growth. The 2001 recession had two nonconsecutive quarters of growth. The Great Financial Crisis had multiple negative growth quarters but started with a down and then up quarter. The 2020 COVID crisis had two consecutive negative quarters only because the very short recession overlapped the first and second quarters.
Sometimes quarterly economic patterns create short-term irregularities. The first quarter’s 1.6% decline in GDP had several. Personal consumption and investment remained robust. Declining federal spending from the end of pandemic-related support and weak exports, partly related to Russia’s invasion of Ukraine, caused the initial data release to show the economy shrunk in the first quarter. Those factors fail the test of the decline being spread across the economy. From a broader perspective, the vast majority of the economy remained strong. In fact, it was too strong, and the Federal Reserve was forced to embark on a program of rapid rate increases to tame inflationary pressures.
The weakness in the second quarter was broader than the first. Goods spending dropped 1.1%. Residential investment fell 3.7%, in line with our expectations that higher interest rates would pressure housing demand. Government spending also continued to decline as pandemic-related programs continued to wind down. Each of these areas experienced abnormal growth during the pandemic. People sought out goods to make social distancing less painful. The demand for housing rose rapidly as some people left big cities and others sought to expand their homes. Government programs supporting people displaced by the pandemic are no longer as necessary. Inventories also stopped increasing as rapidly as in previous quarters, pulling growth lower. What is bouncing back is services consumption, which increased 1.0% in the second quarter. Exports also bounced back from the temporary weakness in the first quarter.
While we don’t believe the U.S. has entered a recession, we do see the economy has slowed. Some of this pullback is necessary, as excess demand and lack of supply have caused unacceptable levels of inflation. Those inflationary pressures are quite broad. Wages rose 1.6% last quarter and are 5.7% higher than a year earlier. Core PCE inflation rose 0.6% last month. In order for inflation to move toward 2.0% per year, wage pressures will need to drop.
The recession argument wasn’t the only item that interested markets. The Fed also indicated it is seeing some signs of economic slowing. According to Fed Chair Jerome Powell, the recent rate hike has raised rates to a “moderately restrictive level” and the Fed will be more data dependent. Markets took this statement to mean the Fed is willing to slow interest rate increases if inflation starts moving lower.
Whether the U.S. ultimately enters a recession or not is still to be seen. Risks are higher than normal, but a recession, in our view, is far from certain. The Fed would like to avoid a recession, but previous comments suggest it would be OK with “softish landing” in which the economy entered a shallow recession and then rebounded without the inflationary pressure. The broader point is the Fed recognizes its policy has tightened materially and it will adjust its future outlook and not keep raising rates and creating a far worse economic slowdown.
The S&P 500’s 9.2% increase last month indicates the market is moving that way as well.
-
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.S&P 500 INDEXThe Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.MSCI ACWI INDEXThe MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.BLOOMBERG U.S. AGGREGATE BONDThe Bloomberg US Agg Total Return Value Unhedged, also known as “Bloomberg U.S. Aggregate Bond Index” formerly known as the “Barclays Capital U.S. Aggregate Bond Index”, and prior to that, “Lehman Aggregate Bond Index,” is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).National Bureau of Economic Research. https://www.nber.org/research/business-cycle-datingBureau of Economic Analysis. 7/28/22. https://www.bea.gov/news/2022/gross-domestic-product-second-quarter-2022-advance-estimateBureau of Economic Analysis 6/29/22. https://www.bea.gov/news/2022/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-revised-firstBureau of Economic Analysis.7/29/22. https://www.bea.gov/news/2022/personal-income-and-outlays-june-2022U.S. Department of Labor Statistics. 7/29/22. https://www.bls.gov/news.release/eci.nr0.htmFederal Reserve. 07/27/22. https://www.federalreserve.gov/newsevents/pressreleases/monetary20220727a.htmFederal Reserve. 07/27/22. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20220727.pdfCompliance Case #01445642
[post_title] => Market Commentary: As Anticipated, Fed Announces Another 0.75% Rate Hike
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[post_content] => Central banks are playing the leading role in today’s markets. Last week, the European Central Bank raised interest rates 0.5%, pulling the deposit facility rate to 0%. It is the first interest rate increase in 11 years and the first time the rate hasn’t been negative in eight years. Japan’s central bank took a different approach, leaving rates stable. The Japanese Consumer Price Index has only risen 2.3% in the last year. That is much higher than normal but close to the target of 2%.
Key Points for the Week
The European Central Bank joined the inflation fight, raising rates 0.5%. Japan left rates unchanged.
The United Kingdom continues to lead all G7 countries with a 9.4% inflation rate.
Housing starts fell 2% last month as higher interest rates pushed demand lower.
The U.K. is on the other end of the inflation spectrum. Inflation in Britain jumped 0.8% last month and is now 9.4% higher than one year ago. The Bank of England indicated a 0.50% hike is possible at the next meeting given that inflation has remained elevated despite a steady stream of 0.25% rate increases.
The domestic housing market is starting to respond to higher interest rates in the U.S. Housing starts fell 2%, the second straight monthly decline (Figure 1). The Federal Reserve is likely to reduce demand further by increasing interest rates 0.75% at its meeting this week.
Markets seem to have priced many of these events in already. The S&P 500 gained 2.6% last week. The global MSCI ACWI rebounded 3.2%. The Bloomberg Aggregate Bond Index rallied 0.7% as long-term rates declined despite the widely expected additional rate increases.
Figure 1
Nearly a Full Court Press
In basketball, a full court press is when the defense pressures the offense the entire length of the floor. Every player needs to exert significant effort for a press to be successful. If only three of the players are trying to press and the rest are not, the press will be broken fairly easily. Global central banks are engaging in their own version of the full court press against inflation as more central banks are joining the effort to reduce excess global demand. Until last week three major players hadn’t raised rates: the European Union, China, and Japan. We will examine each country as we look toward the Federal Reserve interest rate decision this week.
The European Central Bank surprised markets last week by raising interest rates 0.50% to 0%. The reason this is so surprising is it is the first time in 11 years that the ECB increased interest rates. In fact, this is the first time in eight years that the deposit rate in Europe is positive. The market expected the increase to be 0.25%, but June’s outsized inflation report at 8.6% caused the ECB to raise rates more aggressively.
Interestingly, the ECB didn’t provide any forward guidance on moves it may make later this year. It has signaled it will be data-dependent, meaning it will wait to see what the July inflation number looks like. One reason the ECB may be hesitant to raise rates too quickly is Europe’s inflation is being driven by supply issues, especially on energy due to the conflict in Russia. The European economy has weakened as the sanctions on Russia have slowed growth. Exacerbating the problem is weakness in the euro. The euro is as weak as it’s been in the past 20 years, which is making energy imports priced in U.S. dollars even more expensive. A 0.50% increase showed markets the ECB was serious, while the lack of future guidance reflects the weak European economy.
Japan’s central bank has been the lone holdout of major developed economies. The Bank of Japan announced last week that it would keep interest rates unchanged, with its short-term rates remaining at -0.1. This comes despite the weakest level for the yen versus the U.S. dollar since 1998. The fear from BOJ governors is that any increase in rates, even to stop the fall of the yen, would be too damaging to Japan’s economic recovery. The difference is Japan is experiencing much more muted inflation than the U.S. and Europe. The expectation in Japan is that core inflation will increase by only 2.3% over the next year.
China’s monetary policy has moved in the opposite direction from the rest of the world. The Chinese have actually cut rates and taken other steps to invigorate the economy. At first glance this doesn’t make much sense, as China is a big importer of energy. China’s situation is different because it will buy oil from Russia, likely at a lower price than what the rest of the world pays. It also continues to lock down cities and engage in strong forms of social distancing. By restricting activity, the Chinese are effectively pushing down demand for all sorts of goods and services, and those policies are likely doing more to slow their economy than a 0.50% rate hike.
We expect central banks to ratchet up the pressure more next week. The Fed is expected to raise rates 0.75% when its meeting concludes on Wednesday, matching June’s increase. Any other outcome would be surprising. Fed Chair Jerome Powell’s press conference after the meeting will be watched closely for future guidance. If rates move up 0.75%, the target rate will be 2.25-2.5%, which is above what the economy could sustain before COVID.
Our expectation is the broad number of nations tightening policy will start to reduce the effects of excess demand on inflation and remove some of the pressure from supply-constrained markets at the same time. The Fed moving rates past what many believe is neutral means short-term rates will be working to slow the economy. The ECB moving rates to 0% means the strange incentives encouraged by negative rates will disappear. Every rate hike helps to slow the economy, but the ECB hike last week and the expected Fed move this week are key events in the fight against inflation.
-
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.S&P 500 INDEXThe Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.MSCI ACWI INDEXThe MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.BLOOMBERG U.S. AGGREGATE BONDThe Bloomberg US Agg Total Return Value Unhedged, also known as “Bloomberg U.S. Aggregate Bond Index” formerly known as the “Barclays Capital U.S. Aggregate Bond Index”, and prior to that, “Lehman Aggregate Bond Index,” is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).Wall Street Journal. Megumi Fujikawa. 7/21/2022. https://www.wsj.com/articles/bank-of-japan-sees-inflation-hitting-2-3-this-fiscal-year-11658374450Wall Street Journal. The Editorial Board. 7/21/2022. https://www.wsj.com/articles/the-ecb-raises-while-mario-draghi-falls-christine-lagarde-european-central-bank-interest-rates-italy-11658426371Financial Times. Chris Giles. 7/20/2022. https://www.ft.com/content/e777a2d1-bc5c-4e01-8605-2be0682aad5eUS Census Bureau. 7/19/2022. https://www.census.gov/construction/nrc/pdf/newresconst.pdfVOA. 7/06/2022. https://www.voanews.com/a/fresh-covid-19-outbreaks-put-millions-under-lockdown-in-china/6648113.htmlCME Group. 07/24/2022. https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.htmlCompliance Case #01439315
[post_title] => Market Commentary: European Central Bank Joins Fight Against Inflation, Raises Rates 0.5%
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[post_content] => The Consumer Price Index (CPI) leapt 1.3% in June, following a 1.0% increase in May. The measure of inflation has risen 9.1% in the last year and reached its highest level since 1981 (Figure 1). Energy prices have been the top contributor in the last 12 months, responsible for 3.0% of the 9.1% annual increase. Core CPI, which excludes food and energy, rose 0.7%. Its annual level continues to slide lower, dropping from 6.0% to 5.9%. Shelter costs rose sharply as rents and housing prices pushed them higher.
Key Points for the Week
The Consumer Price Index jumped 1.3% in June, beating expectations. Inflation has now increased 9.1% in the last year.
Retail sales surged 1.0% as higher prices and strong employment helped retail demand stay robust in the face of higher inflation.
Chinese GDP fell 2.6% in the second quarter. Lockdowns and a weaker property market caused the Chinese economy to shrink.
The U.S. consumer is holding up well despite the inflationary pressures. June retail sales rose 1.0% and are 8.4% higher over the last year. When adjusted for inflation, consumers are paying more for slightly fewer goods as inflation has risen faster than sales. In June, the 1.0% rise in sales lagged the 1.3% rise in inflation, and the 8.4% yearly sales gain trails the 9.1% inflation hike. For example, gasoline station sales surged 5.9% because gasoline prices were significantly higher.
Chinese GDP fell 2.6% last quarter as China’s approaches to COVID-19 restricted economic activity. The shutdowns were major contributors to retail sales falling in April and May and only partially rebounding in June. The risk of future lockdowns continues to loom large on Chinese growth and the global supply chain.
Markets were lower last week, although a rally on Friday after the retail sales report helped narrow weekly losses. The S&P 500 fell 0.9%. The global MSCI ACWI gave back 1.6%. The Bloomberg Aggregate Bond Index rallied 0.9%. The Job Openings and Labor Turnover Survey as well as second quarter earnings are the key data points likely to move markets this week.
Figure 1
Inflation Spirals Higher
U.S. inflation continued to run higher in June. A monthly increase of 1.3% added to already high inflation and pushed the yearly inflation rate to 9.1%. As we shared last week, pay increases have been most rapid for those with the least education and lowest-paying jobs. While these pay gains have helped, this group is also the most vulnerable to increases in inflation as they spend a higher percentage of their incomes on basic goods and have less spending flexibility than higher earners.
Energy costs have contributed significantly to annual inflation. Although energy makes up only 7% of the basket of goods used to measure CPI, it has contributed 3.0% to the yearly inflation rate, accounting for nearly one-third of the increase. When combined with food and auto prices, the three categories contributed 56% of the inflation, yet make up only 28% of the basket. Any relief in these areas could help slow inflation.
The details of the report provided little positive news. A few travel categories reported lower prices, but those have still increased by more than the overall CPI average in the last year. A plethora of categories climbed more than 0.5%, suggesting inflation pressure continues to broaden.
Some relief on energy prices will help next month's report. Gasoline prices have declined for more than 30 straight days, after peaking in early June. Because the average price in June was above May’s average, gasoline pumped inflation higher in June. That should reverse in July. Some factors working in the opposite direction will make next month’s inflation a tougher comparison. Monthly inflation ebbed lower in the third quarter last year, and that means smaller monthly increases may still push the annual inflation rate higher than the already high 9.1%.
The Federal Reserve meeting in two weeks is the next big event in the ongoing fight to lower inflation. In its recent minutes and subsequent press appearances, Fed governors have gone out of their way to make up for being overly optimistic about inflation trends earlier. Since dropping “transitory” from its description of inflation late last year, the Fed has become more hawkish, meaning it has more will to raise rates. That hawkishness, combined with the big jump in CPI, has cemented expectations for at least a 0.75% increase in interest rates later this month. Some have begun to forecast an increase of 1.0%, matching the Canadian central bank’s recent hike.
A 1.0% increase seems a big step given the moves already made by the Fed and others. Even amid the high inflation, strong employment environment, and solid retail sales, there are signs the global economy is slowing. The International Monetary Fund (IMF) announced it will reduce its projections for economic growth for the second time in three months due to the ongoing war in Ukraine, higher inflation, and ongoing supply bottlenecks. Some Fed governors are counselling against raising rates too fast. Esther George, who leads the Federal Reserve Bank of Kansas City, worries, “…that a rapid pace of rate increases brings about the risk of tightening policy more quickly than the economy and markets can adjust.”
Interest rate hikes often slow the economy after a lag, as some economic momentum takes a while to reverse. The U.S. is not alone in raising rates. The U.K., South Korea, Canada, and Australia have all increased rates, which will help slow global activity. According to the IMF, 75 central banks have raised interest rates since July 2021.
Perhaps a useful analogy for the Fed’s current challenge is someone trying to train for a marathon after sitting on the couch for most of the pandemic and then postponing the start of the training program until long after the recommended start date. The erstwhile marathon runner will have to accelerate her training much more rapidly to get in good enough shape to finish the race. At the same time, the intense training regimen required increases the chance of injury. The Fed is in a similar situation. Having waited too long to start increasing rates, it finds itself having to walk a narrow path between pushing too hard and not pushing hard enough.
Based on the signals the Fed is giving, we expect it will increase rates 0.75%. That attempts to balance the goal of taking big steps to curtail inflation while still giving the economy and markets time to adjust to a higher rate environment.
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This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.S&P 500 INDEXThe Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.MSCI ACWI INDEXThe MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.NBC News. Laura Eagan. 07/17/2022. https://www.nbcnews.com/politics/gas-prices-are-falling-voters-say-arent-feeling-relief-rcna37680IMF. Kristalina Georgieva. 07/13/2022. https://blogs.imf.org/2022/07/13/facing-a-darkening-economic-outlook-how-the-g20-can-respond/Wall Street Journal. Nick Timaros. 07/17/2022. https://www.wsj.com/articles/fed-officials-preparing-to-lift-interest-rates-by-another-0-75-percentage-point-11658068201?mod=hp_lead_pos1Wall Street Journal. Michael S. Derby. 07/11/2022. https://www.wsj.com/articles/feds-george-concerned-about-effect-of-aggressive-rate-rises-on-economy-11657554589?mod=article_inlineCheddar News. Alex Vuocolo. 12/15/2021.0 https://cheddar.com/media/fed-chair-powell-drops-transitory-from-statement-speeds-up-taper#:~:text=Fed%20Chair%20Powell%20Drops%20'Transitory'%20From%20Statement%2C%20Speeds%20Up%20Taper,-Dec%2015%2C%202021&text=As%20prices%20for%20goods%20hit,in%20its%20latest%20policy%20statementUS Bureau of Labor Statistics. 07/13/2022. https://www.bls.gov/news.release/cpi.nr0.htmUS Census Bureau. 07/15/2022. https://www.census.gov/retail/marts/www/marts_current.pdfCNBC. Evelyn Cheng. 07/14/2022. https://www.cnbc.com/2022/07/15/china-q2-gdp.htmlCompliance Case # 01432458
[post_title] => Market Commentary: U.S. Consumers Still Strong Amid Inflation; Fed Remains Hawkish
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[post_content] => Positive jobs data supported the market last week. The U.S. establishment survey indicated 372,000 new jobs were created in June. The rally was broad-based as every sector added jobs last month except for the governmental sector. Health care, professional and business services, and leisure and hospitality marked the highest gains (Figure 1).
Key Points for the Week
The U.S. economy produced 372,000 new jobs last month as every non-governmental sector added jobs.
Unemployment remained at 3.6%. The household survey indicated workers are no longer returning to the labor force even though more than 11 million jobs remain unfilled.
Home equity lines and credit cards are becoming more common tools for managing cash flow as interest rates have increased and government aid programs have wound down.
The household survey indicated the number of people reentering the labor force is starting to slow. The participation rate dropped slightly last month and seems to have leveled out after steady increases through the post-pandemic recovery. This trend confirms our view that the pandemic caused some people to retire early or exit the labor force for other reasons. Unemployment remained at 3.6%, and average hourly earnings climbed 5.1%. Non-managerial workers’ wages are rising most rapidly. They are 12.6% higher than one year ago and rose 1.0% last month.
The Job Openings Labor Turnover Survey (JOLTS) indicates companies are pulling back unfilled job applications at a slow rate despite interest rate hikes designed to slow the economy. Job openings dropped 427,000 in May as declines in manufacturing and professional and business services eased demand. The Federal Reserve may have preferred further reductions in labor demand as an indication that inflation pressures are declining (Figure 2).
The S&P 500 recovered 2.0% last week, supported by the strong jobs data. The MSCI ACWI added 1.6%. Bonds reversed recent gains. The Bloomberg Aggregate Bond Index fell 0.9%. The Consumer Price Index leads a busy list of data releases this week as earnings season accelerates.
Figure 1
Figure 2
Job Growth, Participation, and Rates
Good news for workers makes it more likely the Federal Reserve will raise rates 0.75% at its meeting in late July. Last week, the government released three major job reports, and all three pointed to ongoing strength in the labor market. The June establishment report indicated the economy continues to produce a large number of jobs. The household survey shows the COVID-driven reassessment of life has cemented a reprioritization of work that has caused some to leave the labor force. The JOLTS data show openings are headed lower, but not fast enough for the Fed to slow its plan for higher rates.
Establishment Survey
Jobs growth was robust in June. Payroll data indicated the U.S. added 372,000 jobs, beating expectations by nearly 100,000. Previous months were revised lower by 74,000. Even counting the revisions, job growth was higher than expected. It has also been consistent the last four months, which all produced between 350,000 and 400,000 jobs. That means new job entrants are finding jobs relatively easily and more people are returning to positions. With the gains, 98% of the jobs lost in March and April of 2020 have now been recovered (Figure 1).
The underlying data showed broad labor market strength. Every major private sector industry added jobs, with health care and leisure and hospitality producing the most. Manufacturing added 29,000 jobs and now employs more people than before the pandemic. Government employment, which is often affected by educational hiring, was the only sector that lost jobs.
Household Survey
The household survey showed similar trends. Unemployment held steady at 3.6%. The household survey suggested employment and the labor force both shrunk. Fewer households working pushed the participation rate down to 62.2%, well short of the pre-crisis level of 63.4%. After a steady number of people rejoined the labor force as the economy reopened, the participation rate has stalled at about 1% below pre-pandemic highs.
JOLTS
The JOLTS report for May was also released last week. Job openings fell 427,000 to 11.3 million, which was 200,000 higher than expectations. Manufacturing and professional and business services declined 208,000 and 325,000, respectively. The ratio of job openings to unemployed workers declined to 1.89. The Fed would like to see excess demand for labor decline, and the large quantity of open positions suggests this isn’t happening very quickly (Figure 2).
The Fed
Minutes from its most recent meeting suggest the strong jobs data will support the hawkish Fed raising rates 0.75% later this month. The Fed is concerned about its credibility and looks intent on suppressing inflation quickly. In its minutes, the Fed noted, “many participants saying that a significant risk now facing the Committee was that elevated inflation could become entrenched if the public began to question the resolve of the Committee to adjust the stance of policy as warranted.”
About the only data point left that may cause the Fed to slow is the Consumer Price Index, which will be published this week. It is possible significantly smaller-than-expected price increases could cause the Fed to back off and only raise rates 0.5%.
Last week’s releases leave us better off than a week ago because the economy looks more capable of weathering increased rates without going into a recession. The Fed’s path to taming inflation while avoiding a recession is still narrow, just a little wider than it was before.
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This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.S&P 500 INDEXThe Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.Bloomberg U.S. Aggregate Bond IndexThe Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.US Bureau of Labor Statistics, 7/8/2022. https://www.bls.gov/news.release/empsit.nr0.htmUS Bureau of Labor Statistics, 7/6/2022. https://www.bls.gov/news.release/jolts.nr0.htmFederal Open Market Committee. 06/14/2022. https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20220615.pdfCompliance Case # 01425380
[post_title] => Market Commentary: Robust Labor Market Growth Continues with Fed Poised for Another Rate Hike
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[post_content] => The Personal Consumption Expenditure (PCE) Price Index increased 0.6% in May, after rising only 0.2% in April. PCE inflation is an alternative inflation measure to the Consumer Price Index (CPI), which is released earlier. The two measures both show inflation to be very high, but the CPI indicates prices have risen 8.6% in the last year, while PCE inflation has increased only 6.3%. The biggest difference is the basket of goods that make up each measure. For example, PCE inflation includes a wider range of medical costs, which have not increased as much as energy prices. Energy comprises 7% of the CPI and just 4% of the PCE. The Fed has indicated it favors the PCE measure, modified to exclude food and energy. PCE ex food and energy increased just 0.3% as gasoline prices rose significantly in May.
Key Points for the Week
Core PCE inflation, which excludes food and energy, rose 0.3%.
Personal consumption rose 0.2% as higher spending on services overcame a decline in spending on goods.
The S&P 500 fell 20% in the first half of the year — its worst first-half performance since 1970.
One trend likely to help the Fed reduce inflation is increased spending on services. Services spending rose 0.7% while goods spending dropped 0.7% last month. Services account for a larger share of the economy, so the net effect was a 0.2% increase in overall spending. Service inflation has been lower than goods inflation, and decreasing goods spending is likely to reduce price pressures on some items in short supply.
The S&P 500 declined 2.2% last week as markets became more concerned about the risks of recession in the coming year. The index of large-cap U.S. stocks fell 20% in the first half of the year. Global stocks matched the S&P 500’s decline. The MSCI ACWI sagged 2.2%. Because the concern was more about recession than inflation, bond prices increased. The Bloomberg Aggregate Bond Index added 0.4% last week and posted its second week of gains. The Department of Labor’s update on the U.S. employment situation leads the list of economic releases this week.
Figure 1
Figure 2
Five Reasons to Expect a Better Second Half
This year’s Fourth of July celebrations weren’t for the first-half market performance. The S&P 500, including dividends, declined 20% in the first six months of the year. The fall represented the worst first-half market performance since 1970. Emotionally, this market has taken its toll through a decline that started the second day of the year and accelerated in the second quarter. High inflation has been the biggest challenge, and every time we get gas, buy groceries, or check the market we are reminded of it.
The propensity in down markets is to expect current trends to continue. In difficult markets, it is also easier to focus on known negative factors that have proven to be challenging. Yet, as we enter the second half of the year, there are strong reasons to expect improvement. Here are five forces we believe will make the second half of the year more attractive than the first.
Much of the bad news is already reflected in market prices.
The first half of 2022 contained a lot of bad news for markets, and prices fell in response. Inflation continued to increase, COVID shutdowns slowed the repair of supply lines, and Russia invaded Ukraine. In response to high inflation, the Federal Reserve pivoted and raised interest rates three times, once by 0.5% and once 0.75%. Europe reacted to Russia’s invasion of Ukraine by drastically reducing its purchases of Russian oil, contributing to slower economic growth and higher inflation. While those events had negative consequences, remember the market has already reacted to the news. With the S&P 500 20% lower than at the start of the year, it’s hard to argue that markets have ignored what has occurred.
Inflation seems to be moderating.
The Fed’s favorite measure of inflation increased 0.3% for the fourth consecutive month. But the Personal Consumption Expenditures Price Deflator (PCE) ex Food and Energy has moderated in recent months. From October to January, core PCE increased approximately 0.5% per month. An increase of 0.3% is still too high. Multiplying it by 12 creates a simplified annual inflation rate of around 3.6%, which is well above the Fed’s target of 2%. But our view is the steps the Fed is taking are starting to work, and additional hikes will contribute to slower price increases in coming months.
Political uncertainty is ebbing lower.
In the presidential election cycle, the second year of the administration is statistically the most challenging. Domestic political uncertainty has made this year even more so. House and Senate majorities are very narrow, and both houses of Congress could switch parties in November. The Supreme Court has been full of surprises, and the Jan. 6 commission has added to the mix. By the fourth quarter, and possibly even the third, polling data will provide some clarification on how midterm elections will turn out. The high inflation has also undercut any desire for a major spending initiative. Because the last support package seemed to feed inflation, avoiding high government spending should help reduce inflationary pressure.
Much of the economy remains strong.
While the current bear market is the 11th since 1950, it is only the fourth to occur outside of a recession. Non-recessionary bear markets are usually shallower, averaging a 28% decline, compared to an average 39% decline for recessionary bear markets (Figure 2). This week, the government will release the Job Opening and Labor Turnover Survey (JOLTS) for May and the Employment Situation report for June. The ideal result is decent job creation while companies choose to pull back open positions to reduce the excess demand for labor.
The system works.
Hopefully, as investors lit off fireworks celebrating our country's founding 246 years ago, they appreciated the resiliency of the American system. Investors who focus only on the short-term swings in inflation, political winds, and Fed policy should take note of the longer-term success of this republic and how people and equity markets have prospered. Even with two bear markets, inflation and a global pandemic, the S&P 500 is up double digits over the last 10 years.
The key is to find the right balance. This has been a tough year, and we will continue to monitor a wide range of near-term risks and how they affect markets. Because many of those risks are already reflected, at least partially, in current prices, the more impactful data points may be those showing how a system with a long record of success is recovering.
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This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.S&P 500 INDEXThe Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.Bloomberg U.S. Aggregate Bond IndexThe Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.Bureau of Economic Analysis. 6/30/22.https://www.bea.gov/news/2022/personal-income-and-outlays-may-2022Bureau of Labor Statistics 06/10/22 https://www.bls.gov/news.release/cpi.t01.htmFederal Reserve https://www.federalreserve.gov/monetarypolicy/openmarket.htmCompliance Case # 01420404
[post_title] => Market Commentary: Moderating Inflation, Ebbing Political Uncertainty Among Reasons for Hope in the Face of a Tough Market
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[post_date] => 2022-08-01 09:43:02
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[post_content] => Last week was a big one for monetary policy and economic data. The Federal Reserve raised interest rates 0.75%, with unanimous agreement that higher rates were required to bring inflation under control. In his press conference, Fed Chair Jerome Powell announced the Fed was becoming more data dependent. The market interpreted that statement to mean rate hikes would likely slow in the future, especially if inflation starts moving lower.
Key Points for the Week
The Federal Reserve raised rates 0.75% to a range of 2.25-2.50%.
U.S. gross domestic product declined 0.9%, restrained by falling goods purchases and slower inventory growth.
The S&P 500 gained 9.2% in July, its best month since COVID vaccine data was released in November 2020.
U.S. GDP shrank for the second consecutive quarter, contracting by 0.9%. Much of the economy remains strong, and services consumption continues to increase. Weakness in goods, inventories, housing, and government spending are contributing to signs the economy is slowing.
The Personal Consumption Expenditures (PCE) Price Index confirmed the earlier Consumer Price Index report that inflation remains a challenge. PCE was up 1.0% as fuel prices added to pricing pressure in other sectors. Core PCE, which excludes food and energy, rose 0.6%.
Markets welcomed the idea the Fed may slow interest rate hikes sooner than expected. The S&P 500 gained 4.3% last week to complete a 9.2% rally for the month. The global MSCI ACWI rebounded 3.3%. The Bloomberg Aggregate Bond Index jumped 0.6%.
Figure 1
Are We in a Recession?
Many investors seem to have learned that two quarters of declining GDP means the country is in a recession. Yet, this definition isn’t totally accurate. There are far more factors the National Bureau of Economic Research (NBER) uses to determine whether there is a recession, but for much of the public, the two-negative-quarters definition seems to have stuck.
Like most rules, two quarters of economic decline isn’t a terrible test for a recession. The NBER defines recession as, “…a significant decline in economic activity that is spread across the economy and lasts for more than a few months.” Two quarters of declining GDP is usually significant, affects the broad economy, and lasts for more than a few months.
Reality indicates recessions are more complicated. Figure 1 shows none of the last three recessions matches the popular definition of two consecutive quarters of GDP growth. The 2001 recession had two nonconsecutive quarters of growth. The Great Financial Crisis had multiple negative growth quarters but started with a down and then up quarter. The 2020 COVID crisis had two consecutive negative quarters only because the very short recession overlapped the first and second quarters.
Sometimes quarterly economic patterns create short-term irregularities. The first quarter’s 1.6% decline in GDP had several. Personal consumption and investment remained robust. Declining federal spending from the end of pandemic-related support and weak exports, partly related to Russia’s invasion of Ukraine, caused the initial data release to show the economy shrunk in the first quarter. Those factors fail the test of the decline being spread across the economy. From a broader perspective, the vast majority of the economy remained strong. In fact, it was too strong, and the Federal Reserve was forced to embark on a program of rapid rate increases to tame inflationary pressures.
The weakness in the second quarter was broader than the first. Goods spending dropped 1.1%. Residential investment fell 3.7%, in line with our expectations that higher interest rates would pressure housing demand. Government spending also continued to decline as pandemic-related programs continued to wind down. Each of these areas experienced abnormal growth during the pandemic. People sought out goods to make social distancing less painful. The demand for housing rose rapidly as some people left big cities and others sought to expand their homes. Government programs supporting people displaced by the pandemic are no longer as necessary. Inventories also stopped increasing as rapidly as in previous quarters, pulling growth lower. What is bouncing back is services consumption, which increased 1.0% in the second quarter. Exports also bounced back from the temporary weakness in the first quarter.
While we don’t believe the U.S. has entered a recession, we do see the economy has slowed. Some of this pullback is necessary, as excess demand and lack of supply have caused unacceptable levels of inflation. Those inflationary pressures are quite broad. Wages rose 1.6% last quarter and are 5.7% higher than a year earlier. Core PCE inflation rose 0.6% last month. In order for inflation to move toward 2.0% per year, wage pressures will need to drop.
The recession argument wasn’t the only item that interested markets. The Fed also indicated it is seeing some signs of economic slowing. According to Fed Chair Jerome Powell, the recent rate hike has raised rates to a “moderately restrictive level” and the Fed will be more data dependent. Markets took this statement to mean the Fed is willing to slow interest rate increases if inflation starts moving lower.
Whether the U.S. ultimately enters a recession or not is still to be seen. Risks are higher than normal, but a recession, in our view, is far from certain. The Fed would like to avoid a recession, but previous comments suggest it would be OK with “softish landing” in which the economy entered a shallow recession and then rebounded without the inflationary pressure. The broader point is the Fed recognizes its policy has tightened materially and it will adjust its future outlook and not keep raising rates and creating a far worse economic slowdown.
The S&P 500’s 9.2% increase last month indicates the market is moving that way as well.
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This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.S&P 500 INDEXThe Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.MSCI ACWI INDEXThe MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.BLOOMBERG U.S. AGGREGATE BONDThe Bloomberg US Agg Total Return Value Unhedged, also known as “Bloomberg U.S. Aggregate Bond Index” formerly known as the “Barclays Capital U.S. Aggregate Bond Index”, and prior to that, “Lehman Aggregate Bond Index,” is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).National Bureau of Economic Research. https://www.nber.org/research/business-cycle-datingBureau of Economic Analysis. 7/28/22. https://www.bea.gov/news/2022/gross-domestic-product-second-quarter-2022-advance-estimateBureau of Economic Analysis 6/29/22. https://www.bea.gov/news/2022/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-revised-firstBureau of Economic Analysis.7/29/22. https://www.bea.gov/news/2022/personal-income-and-outlays-june-2022U.S. Department of Labor Statistics. 7/29/22. https://www.bls.gov/news.release/eci.nr0.htmFederal Reserve. 07/27/22. https://www.federalreserve.gov/newsevents/pressreleases/monetary20220727a.htmFederal Reserve. 07/27/22. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20220727.pdfCompliance Case #01445642
[post_title] => Market Commentary: As Anticipated, Fed Announces Another 0.75% Rate Hike
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Last week was a big one for monetary policy and economic data. The Federal Reserve raised interest rates 0.75%, with unanimous agreement that higher rates were required to bring inflation under control. In his press conference, Fed Chair Jerome Powell announced the Fed was becoming more dat …
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[post_content] => By Erin Wood, Senior Vice President, Financial Planning and Advanced Solutions
Just a few years ago, Rose retired with a decent-sized 401(k). With some careful budgeting and a part-time job, her retirement finances were on track. Rose was looking forward to traveling, reigniting her passion for photography and spending time with her son and her grandkids.
The pandemic changed everything. Her son contracted COVID-19 in the early days of the pandemic. His health deteriorated quickly and he died at only 35 years old. He didn’t have life insurance. A gig worker without a 401(k), he had very minimal retirement savings.
Rose’s grandchildren, ages 2 and 6, joined the more than 140,000 U.S. children under the age of 18 who lost their primary or secondary caregiver due to the pandemic from April 2020 through June 2021. That’s approximately one out of every 450 children under age 18 in the United States.
Rose’s ex-daughter-in-law battles drug addiction and had lost custody of the kids during the divorce, so Rose became the children’s primary caregiver. She quickly discovered that caring for young children as an older adult is more physically challenging than when she raised her son, so she made the difficult decision to leave her part-time job to have the energy to care for her active grandchildren. She wants to do everything for these kids who have lost so much — but it puts her financial security at risk.
Sadly, she is far from alone.
Read the full article
[post_title] => COVID’s Financial Toll Isn’t What You Think
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[post_content] => By: Erin Wood, CFP®, CRPC®, FBS®, Senior Vice President, Financial Planning, Carson Group
Laura and Caroline are in their late 50s. Friends since meeting at a playgroup for their toddlers, both were in long-term, seemingly happy marriages. Laura married her high school sweetheart right after they graduated from college and worked as an RN while her husband attended medical school. When their first child was born, Laura decided to become a stay-at-home parent. She just celebrated sending her last child off to college and was looking forward to enjoying an empty nest with her husband.
Already established in her career as an accountant for a large insurance firm, Caroline married a bit later, at 33. Today, she’s a financial controller for the same firm. Her spouse owns his own landscaping business. Caroline is the high-wage earner in the family.
Unfortunately, both women are now surprised to be facing a “gray” divorce: a divorce involving couples in their 50s or older. Each will need to make some tough choices as they deal with the emotional devastation of unraveling a long-term marriage. Although my focus as a financial planner is to help my clients find their financial footing during and after divorce, I also encourage clients to build a strong network of family and friends as well as a therapist or clergy person to offer critical emotional support during this time.
[post_title] => Emerging Financially Healthy After a Gray Divorce
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[post_content] => Franklin Lakes, NJ- WomenCertified Inc., home of the Women’s Choice Award identifies Financial Advisors and Firms based on rigorous research focused on 17 points of objective criteria, in addition to references of validation from the advisor’s peers and/or superiors. As such, it is an honor to announce that Debra Taylor has earned the Women’s Choice Award, demonstrating a strong commitment to providing exemplary services for female clientele.
Read the full article
[post_title] => Debra Taylor Receives the Women’s Choice Award® for Providing Exemplary Financial Services to Women
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[post_content] => Debra Taylor was named a Five Star award winner for 2022 in November 2021. By earning this honor, Debra has shown an outstanding commitment to clients.
As such, it is an honor to announce that Debra Taylor, CPA/PFS, JD, CDFA, Wealth Manager has earned the 2022 Five Star Wealth Manager Award, demonstrating a strong commitment to providing exemplary services to her clients.
Read Full Article
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[post_content] => Debra Taylor presented the Keynote Address to 3,000 Thrivent Financial Advisors from her command center at home due to the COVID-19 outbreak. Her presentation of “Tax Matters: Implementing Key Strategies for a Winning Year,” was met with great praise from the audience. She looks forward to working with Thrivent again in the future!
[post_title] => Debra Taylor Presented Virtual Keynote Address for Thrivent Financial on January 26, 2021
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[post_content] => By Erin Wood, Senior Vice President, Financial Planning and Advanced Solutions
Just a few years ago, Rose retired with a decent-sized 401(k). With some careful budgeting and a part-time job, her retirement finances were on track. Rose was looking forward to traveling, reigniting her passion for photography and spending time with her son and her grandkids.
The pandemic changed everything. Her son contracted COVID-19 in the early days of the pandemic. His health deteriorated quickly and he died at only 35 years old. He didn’t have life insurance. A gig worker without a 401(k), he had very minimal retirement savings.
Rose’s grandchildren, ages 2 and 6, joined the more than 140,000 U.S. children under the age of 18 who lost their primary or secondary caregiver due to the pandemic from April 2020 through June 2021. That’s approximately one out of every 450 children under age 18 in the United States.
Rose’s ex-daughter-in-law battles drug addiction and had lost custody of the kids during the divorce, so Rose became the children’s primary caregiver. She quickly discovered that caring for young children as an older adult is more physically challenging than when she raised her son, so she made the difficult decision to leave her part-time job to have the energy to care for her active grandchildren. She wants to do everything for these kids who have lost so much — but it puts her financial security at risk.
Sadly, she is far from alone.
Read the full article
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By Erin Wood, Senior Vice President, Financial Planning and Advanced Solutions Just a few years ago, Rose retired with a decent-sized 401(k). With some careful budgeting and a part-time job, her retirement finances were on track. Rose was looking forward to traveling, reigniting her passion …
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Figure 1
Are We in a Recession?
Many investors seem to have learned that two quarters of declining GDP means the country is in a recession. Yet, this definition isn’t totally accurate. There are far more factors the National Bureau of Economic Research (NBER) uses to determine whether there is a recession, but for much of the public, the two-negative-quarters definition seems to have stuck.
Like most rules, two quarters of economic decline isn’t a terrible test for a recession. The NBER defines recession as, “…a significant decline in economic activity that is spread across the economy and lasts for more than a few months.” Two quarters of declining GDP is usually significant, affects the broad economy, and lasts for more than a few months.
Reality indicates recessions are more complicated. Figure 1 shows none of the last three recessions matches the popular definition of two consecutive quarters of GDP growth. The 2001 recession had two nonconsecutive quarters of growth. The Great Financial Crisis had multiple negative growth quarters but started with a down and then up quarter. The 2020 COVID crisis had two consecutive negative quarters only because the very short recession overlapped the first and second quarters.
Sometimes quarterly economic patterns create short-term irregularities. The first quarter’s 1.6% decline in GDP had several. Personal consumption and investment remained robust. Declining federal spending from the end of pandemic-related support and weak exports, partly related to Russia’s invasion of Ukraine, caused the initial data release to show the economy shrunk in the first quarter. Those factors fail the test of the decline being spread across the economy. From a broader perspective, the vast majority of the economy remained strong. In fact, it was too strong, and the Federal Reserve was forced to embark on a program of rapid rate increases to tame inflationary pressures.
The weakness in the second quarter was broader than the first. Goods spending dropped 1.1%. Residential investment fell 3.7%, in line with our expectations that higher interest rates would pressure housing demand. Government spending also continued to decline as pandemic-related programs continued to wind down. Each of these areas experienced abnormal growth during the pandemic. People sought out goods to make social distancing less painful. The demand for housing rose rapidly as some people left big cities and others sought to expand their homes. Government programs supporting people displaced by the pandemic are no longer as necessary. Inventories also stopped increasing as rapidly as in previous quarters, pulling growth lower. What is bouncing back is services consumption, which increased 1.0% in the second quarter. Exports also bounced back from the temporary weakness in the first quarter.
While we don’t believe the U.S. has entered a recession, we do see the economy has slowed. Some of this pullback is necessary, as excess demand and lack of supply have caused unacceptable levels of inflation. Those inflationary pressures are quite broad. Wages rose 1.6% last quarter and are 5.7% higher than a year earlier. Core PCE inflation rose 0.6% last month. In order for inflation to move toward 2.0% per year, wage pressures will need to drop.
The recession argument wasn’t the only item that interested markets. The Fed also indicated it is seeing some signs of economic slowing. According to Fed Chair Jerome Powell, the recent rate hike has raised rates to a “moderately restrictive level” and the Fed will be more data dependent. Markets took this statement to mean the Fed is willing to slow interest rate increases if inflation starts moving lower.
Whether the U.S. ultimately enters a recession or not is still to be seen. Risks are higher than normal, but a recession, in our view, is far from certain. The Fed would like to avoid a recession, but previous comments suggest it would be OK with “softish landing” in which the economy entered a shallow recession and then rebounded without the inflationary pressure. The broader point is the Fed recognizes its policy has tightened materially and it will adjust its future outlook and not keep raising rates and creating a far worse economic slowdown.
The S&P 500’s 9.2% increase last month indicates the market is moving that way as well.
-
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
BLOOMBERG U.S. AGGREGATE BOND
The Bloomberg US Agg Total Return Value Unhedged, also known as “Bloomberg U.S. Aggregate Bond Index” formerly known as the “Barclays Capital U.S. Aggregate Bond Index”, and prior to that, “Lehman Aggregate Bond Index,” is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).
National Bureau of Economic Research. https://www.nber.org/research/business-cycle-dating
Bureau of Economic Analysis. 7/28/22. https://www.bea.gov/news/2022/gross-domestic-product-second-quarter-2022-advance-estimate
Bureau of Economic Analysis 6/29/22. https://www.bea.gov/news/2022/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-revised-first
Bureau of Economic Analysis.7/29/22. https://www.bea.gov/news/2022/personal-income-and-outlays-june-2022
U.S. Department of Labor Statistics. 7/29/22. https://www.bls.gov/news.release/eci.nr0.htm
Federal Reserve. 07/27/22. https://www.federalreserve.gov/newsevents/pressreleases/monetary20220727a.htm
Federal Reserve. 07/27/22. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20220727.pdf
Compliance Case #01445642
[post_title] => Market Commentary: As Anticipated, Fed Announces Another 0.75% Rate Hike
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[post_content] => Central banks are playing the leading role in today’s markets. Last week, the European Central Bank raised interest rates 0.5%, pulling the deposit facility rate to 0%. It is the first interest rate increase in 11 years and the first time the rate hasn’t been negative in eight years. Japan’s central bank took a different approach, leaving rates stable. The Japanese Consumer Price Index has only risen 2.3% in the last year. That is much higher than normal but close to the target of 2%.
Key Points for the Week
Figure 1
Nearly a Full Court Press
In basketball, a full court press is when the defense pressures the offense the entire length of the floor. Every player needs to exert significant effort for a press to be successful. If only three of the players are trying to press and the rest are not, the press will be broken fairly easily. Global central banks are engaging in their own version of the full court press against inflation as more central banks are joining the effort to reduce excess global demand. Until last week three major players hadn’t raised rates: the European Union, China, and Japan. We will examine each country as we look toward the Federal Reserve interest rate decision this week.
The European Central Bank surprised markets last week by raising interest rates 0.50% to 0%. The reason this is so surprising is it is the first time in 11 years that the ECB increased interest rates. In fact, this is the first time in eight years that the deposit rate in Europe is positive. The market expected the increase to be 0.25%, but June’s outsized inflation report at 8.6% caused the ECB to raise rates more aggressively.
Interestingly, the ECB didn’t provide any forward guidance on moves it may make later this year. It has signaled it will be data-dependent, meaning it will wait to see what the July inflation number looks like. One reason the ECB may be hesitant to raise rates too quickly is Europe’s inflation is being driven by supply issues, especially on energy due to the conflict in Russia. The European economy has weakened as the sanctions on Russia have slowed growth. Exacerbating the problem is weakness in the euro. The euro is as weak as it’s been in the past 20 years, which is making energy imports priced in U.S. dollars even more expensive. A 0.50% increase showed markets the ECB was serious, while the lack of future guidance reflects the weak European economy.
Japan’s central bank has been the lone holdout of major developed economies. The Bank of Japan announced last week that it would keep interest rates unchanged, with its short-term rates remaining at -0.1. This comes despite the weakest level for the yen versus the U.S. dollar since 1998. The fear from BOJ governors is that any increase in rates, even to stop the fall of the yen, would be too damaging to Japan’s economic recovery. The difference is Japan is experiencing much more muted inflation than the U.S. and Europe. The expectation in Japan is that core inflation will increase by only 2.3% over the next year.
China’s monetary policy has moved in the opposite direction from the rest of the world. The Chinese have actually cut rates and taken other steps to invigorate the economy. At first glance this doesn’t make much sense, as China is a big importer of energy. China’s situation is different because it will buy oil from Russia, likely at a lower price than what the rest of the world pays. It also continues to lock down cities and engage in strong forms of social distancing. By restricting activity, the Chinese are effectively pushing down demand for all sorts of goods and services, and those policies are likely doing more to slow their economy than a 0.50% rate hike.
We expect central banks to ratchet up the pressure more next week. The Fed is expected to raise rates 0.75% when its meeting concludes on Wednesday, matching June’s increase. Any other outcome would be surprising. Fed Chair Jerome Powell’s press conference after the meeting will be watched closely for future guidance. If rates move up 0.75%, the target rate will be 2.25-2.5%, which is above what the economy could sustain before COVID.
Our expectation is the broad number of nations tightening policy will start to reduce the effects of excess demand on inflation and remove some of the pressure from supply-constrained markets at the same time. The Fed moving rates past what many believe is neutral means short-term rates will be working to slow the economy. The ECB moving rates to 0% means the strange incentives encouraged by negative rates will disappear. Every rate hike helps to slow the economy, but the ECB hike last week and the expected Fed move this week are key events in the fight against inflation.
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This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
BLOOMBERG U.S. AGGREGATE BOND
The Bloomberg US Agg Total Return Value Unhedged, also known as “Bloomberg U.S. Aggregate Bond Index” formerly known as the “Barclays Capital U.S. Aggregate Bond Index”, and prior to that, “Lehman Aggregate Bond Index,” is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).
Wall Street Journal. Megumi Fujikawa. 7/21/2022. https://www.wsj.com/articles/bank-of-japan-sees-inflation-hitting-2-3-this-fiscal-year-11658374450
Wall Street Journal. The Editorial Board. 7/21/2022. https://www.wsj.com/articles/the-ecb-raises-while-mario-draghi-falls-christine-lagarde-european-central-bank-interest-rates-italy-11658426371
Financial Times. Chris Giles. 7/20/2022. https://www.ft.com/content/e777a2d1-bc5c-4e01-8605-2be0682aad5e
US Census Bureau. 7/19/2022. https://www.census.gov/construction/nrc/pdf/newresconst.pdf
VOA. 7/06/2022. https://www.voanews.com/a/fresh-covid-19-outbreaks-put-millions-under-lockdown-in-china/6648113.html
CME Group. 07/24/2022. https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
Compliance Case #01439315
[post_title] => Market Commentary: European Central Bank Joins Fight Against Inflation, Raises Rates 0.5%
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[post_content] => The Consumer Price Index (CPI) leapt 1.3% in June, following a 1.0% increase in May. The measure of inflation has risen 9.1% in the last year and reached its highest level since 1981 (Figure 1). Energy prices have been the top contributor in the last 12 months, responsible for 3.0% of the 9.1% annual increase. Core CPI, which excludes food and energy, rose 0.7%. Its annual level continues to slide lower, dropping from 6.0% to 5.9%. Shelter costs rose sharply as rents and housing prices pushed them higher.
Key Points for the Week
Figure 1
Inflation Spirals Higher
U.S. inflation continued to run higher in June. A monthly increase of 1.3% added to already high inflation and pushed the yearly inflation rate to 9.1%. As we shared last week, pay increases have been most rapid for those with the least education and lowest-paying jobs. While these pay gains have helped, this group is also the most vulnerable to increases in inflation as they spend a higher percentage of their incomes on basic goods and have less spending flexibility than higher earners.
Energy costs have contributed significantly to annual inflation. Although energy makes up only 7% of the basket of goods used to measure CPI, it has contributed 3.0% to the yearly inflation rate, accounting for nearly one-third of the increase. When combined with food and auto prices, the three categories contributed 56% of the inflation, yet make up only 28% of the basket. Any relief in these areas could help slow inflation.
The details of the report provided little positive news. A few travel categories reported lower prices, but those have still increased by more than the overall CPI average in the last year. A plethora of categories climbed more than 0.5%, suggesting inflation pressure continues to broaden.
Some relief on energy prices will help next month's report. Gasoline prices have declined for more than 30 straight days, after peaking in early June. Because the average price in June was above May’s average, gasoline pumped inflation higher in June. That should reverse in July. Some factors working in the opposite direction will make next month’s inflation a tougher comparison. Monthly inflation ebbed lower in the third quarter last year, and that means smaller monthly increases may still push the annual inflation rate higher than the already high 9.1%.
The Federal Reserve meeting in two weeks is the next big event in the ongoing fight to lower inflation. In its recent minutes and subsequent press appearances, Fed governors have gone out of their way to make up for being overly optimistic about inflation trends earlier. Since dropping “transitory” from its description of inflation late last year, the Fed has become more hawkish, meaning it has more will to raise rates. That hawkishness, combined with the big jump in CPI, has cemented expectations for at least a 0.75% increase in interest rates later this month. Some have begun to forecast an increase of 1.0%, matching the Canadian central bank’s recent hike.
A 1.0% increase seems a big step given the moves already made by the Fed and others. Even amid the high inflation, strong employment environment, and solid retail sales, there are signs the global economy is slowing. The International Monetary Fund (IMF) announced it will reduce its projections for economic growth for the second time in three months due to the ongoing war in Ukraine, higher inflation, and ongoing supply bottlenecks. Some Fed governors are counselling against raising rates too fast. Esther George, who leads the Federal Reserve Bank of Kansas City, worries, “…that a rapid pace of rate increases brings about the risk of tightening policy more quickly than the economy and markets can adjust.”
Interest rate hikes often slow the economy after a lag, as some economic momentum takes a while to reverse. The U.S. is not alone in raising rates. The U.K., South Korea, Canada, and Australia have all increased rates, which will help slow global activity. According to the IMF, 75 central banks have raised interest rates since July 2021.
Perhaps a useful analogy for the Fed’s current challenge is someone trying to train for a marathon after sitting on the couch for most of the pandemic and then postponing the start of the training program until long after the recommended start date. The erstwhile marathon runner will have to accelerate her training much more rapidly to get in good enough shape to finish the race. At the same time, the intense training regimen required increases the chance of injury. The Fed is in a similar situation. Having waited too long to start increasing rates, it finds itself having to walk a narrow path between pushing too hard and not pushing hard enough.
Based on the signals the Fed is giving, we expect it will increase rates 0.75%. That attempts to balance the goal of taking big steps to curtail inflation while still giving the economy and markets time to adjust to a higher rate environment.
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This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
NBC News. Laura Eagan. 07/17/2022. https://www.nbcnews.com/politics/gas-prices-are-falling-voters-say-arent-feeling-relief-rcna37680
IMF. Kristalina Georgieva. 07/13/2022. https://blogs.imf.org/2022/07/13/facing-a-darkening-economic-outlook-how-the-g20-can-respond/
Wall Street Journal. Nick Timaros. 07/17/2022. https://www.wsj.com/articles/fed-officials-preparing-to-lift-interest-rates-by-another-0-75-percentage-point-11658068201?mod=hp_lead_pos1
Wall Street Journal. Michael S. Derby. 07/11/2022. https://www.wsj.com/articles/feds-george-concerned-about-effect-of-aggressive-rate-rises-on-economy-11657554589?mod=article_inline
Cheddar News. Alex Vuocolo. 12/15/2021.0 https://cheddar.com/media/fed-chair-powell-drops-transitory-from-statement-speeds-up-taper#:~:text=Fed%20Chair%20Powell%20Drops%20'Transitory'%20From%20Statement%2C%20Speeds%20Up%20Taper,-Dec%2015%2C%202021&text=As%20prices%20for%20goods%20hit,in%20its%20latest%20policy%20statement
US Bureau of Labor Statistics. 07/13/2022. https://www.bls.gov/news.release/cpi.nr0.htm
US Census Bureau. 07/15/2022. https://www.census.gov/retail/marts/www/marts_current.pdf
CNBC. Evelyn Cheng. 07/14/2022. https://www.cnbc.com/2022/07/15/china-q2-gdp.html
Compliance Case # 01432458
[post_title] => Market Commentary: U.S. Consumers Still Strong Amid Inflation; Fed Remains Hawkish
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[post_content] => Positive jobs data supported the market last week. The U.S. establishment survey indicated 372,000 new jobs were created in June. The rally was broad-based as every sector added jobs last month except for the governmental sector. Health care, professional and business services, and leisure and hospitality marked the highest gains (Figure 1).
Key Points for the Week
Figure 1
Figure 2
Job Growth, Participation, and Rates
Good news for workers makes it more likely the Federal Reserve will raise rates 0.75% at its meeting in late July. Last week, the government released three major job reports, and all three pointed to ongoing strength in the labor market. The June establishment report indicated the economy continues to produce a large number of jobs. The household survey shows the COVID-driven reassessment of life has cemented a reprioritization of work that has caused some to leave the labor force. The JOLTS data show openings are headed lower, but not fast enough for the Fed to slow its plan for higher rates.
Establishment Survey
Jobs growth was robust in June. Payroll data indicated the U.S. added 372,000 jobs, beating expectations by nearly 100,000. Previous months were revised lower by 74,000. Even counting the revisions, job growth was higher than expected. It has also been consistent the last four months, which all produced between 350,000 and 400,000 jobs. That means new job entrants are finding jobs relatively easily and more people are returning to positions. With the gains, 98% of the jobs lost in March and April of 2020 have now been recovered (Figure 1).
The underlying data showed broad labor market strength. Every major private sector industry added jobs, with health care and leisure and hospitality producing the most. Manufacturing added 29,000 jobs and now employs more people than before the pandemic. Government employment, which is often affected by educational hiring, was the only sector that lost jobs.
Household Survey
The household survey showed similar trends. Unemployment held steady at 3.6%. The household survey suggested employment and the labor force both shrunk. Fewer households working pushed the participation rate down to 62.2%, well short of the pre-crisis level of 63.4%. After a steady number of people rejoined the labor force as the economy reopened, the participation rate has stalled at about 1% below pre-pandemic highs.
JOLTS
The JOLTS report for May was also released last week. Job openings fell 427,000 to 11.3 million, which was 200,000 higher than expectations. Manufacturing and professional and business services declined 208,000 and 325,000, respectively. The ratio of job openings to unemployed workers declined to 1.89. The Fed would like to see excess demand for labor decline, and the large quantity of open positions suggests this isn’t happening very quickly (Figure 2).
The Fed
Minutes from its most recent meeting suggest the strong jobs data will support the hawkish Fed raising rates 0.75% later this month. The Fed is concerned about its credibility and looks intent on suppressing inflation quickly. In its minutes, the Fed noted, “many participants saying that a significant risk now facing the Committee was that elevated inflation could become entrenched if the public began to question the resolve of the Committee to adjust the stance of policy as warranted.”
About the only data point left that may cause the Fed to slow is the Consumer Price Index, which will be published this week. It is possible significantly smaller-than-expected price increases could cause the Fed to back off and only raise rates 0.5%.
Last week’s releases leave us better off than a week ago because the economy looks more capable of weathering increased rates without going into a recession. The Fed’s path to taming inflation while avoiding a recession is still narrow, just a little wider than it was before.
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This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
US Bureau of Labor Statistics, 7/8/2022. https://www.bls.gov/news.release/empsit.nr0.htm
US Bureau of Labor Statistics, 7/6/2022. https://www.bls.gov/news.release/jolts.nr0.htm
Federal Open Market Committee. 06/14/2022. https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20220615.pdf
Compliance Case # 01425380
[post_title] => Market Commentary: Robust Labor Market Growth Continues with Fed Poised for Another Rate Hike
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[post_content] => The Personal Consumption Expenditure (PCE) Price Index increased 0.6% in May, after rising only 0.2% in April. PCE inflation is an alternative inflation measure to the Consumer Price Index (CPI), which is released earlier. The two measures both show inflation to be very high, but the CPI indicates prices have risen 8.6% in the last year, while PCE inflation has increased only 6.3%. The biggest difference is the basket of goods that make up each measure. For example, PCE inflation includes a wider range of medical costs, which have not increased as much as energy prices. Energy comprises 7% of the CPI and just 4% of the PCE. The Fed has indicated it favors the PCE measure, modified to exclude food and energy. PCE ex food and energy increased just 0.3% as gasoline prices rose significantly in May.
Key Points for the Week
Figure 1
Figure 2
Five Reasons to Expect a Better Second Half
This year’s Fourth of July celebrations weren’t for the first-half market performance. The S&P 500, including dividends, declined 20% in the first six months of the year. The fall represented the worst first-half market performance since 1970. Emotionally, this market has taken its toll through a decline that started the second day of the year and accelerated in the second quarter. High inflation has been the biggest challenge, and every time we get gas, buy groceries, or check the market we are reminded of it.
The propensity in down markets is to expect current trends to continue. In difficult markets, it is also easier to focus on known negative factors that have proven to be challenging. Yet, as we enter the second half of the year, there are strong reasons to expect improvement. Here are five forces we believe will make the second half of the year more attractive than the first.
[post_title] => Quarterly Market Outlook Highlights: Q3 2022
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[post_title] => Taylor Financial Group Half-Time Update
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[post_content] => Watch this webinar hosted by Carson’s Ryan Yamada, Senior Wealth Planner, and Tom Fridrich, Senior Wealth Planner, as they dive into RMDs.
[post_title] => Everything You Need to Know About RMDs
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[post_title] => Halftime 2022 Market Update
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[post_title] => Debra Taylor Presented Virtual Keynote Address for Thrivent Financial on January 26, 2021
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[post_content] => By Erin Wood, Senior Vice President, Financial Planning and Advanced Solutions
Just a few years ago, Rose retired with a decent-sized 401(k). With some careful budgeting and a part-time job, her retirement finances were on track. Rose was looking forward to traveling, reigniting her passion for photography and spending time with her son and her grandkids.
The pandemic changed everything. Her son contracted COVID-19 in the early days of the pandemic. His health deteriorated quickly and he died at only 35 years old. He didn’t have life insurance. A gig worker without a 401(k), he had very minimal retirement savings.
Rose’s grandchildren, ages 2 and 6, joined the more than 140,000 U.S. children under the age of 18 who lost their primary or secondary caregiver due to the pandemic from April 2020 through June 2021. That’s approximately one out of every 450 children under age 18 in the United States.
Rose’s ex-daughter-in-law battles drug addiction and had lost custody of the kids during the divorce, so Rose became the children’s primary caregiver. She quickly discovered that caring for young children as an older adult is more physically challenging than when she raised her son, so she made the difficult decision to leave her part-time job to have the energy to care for her active grandchildren. She wants to do everything for these kids who have lost so much — but it puts her financial security at risk.
Sadly, she is far from alone.
Read the full article
[post_title] => COVID’s Financial Toll Isn’t What You Think
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Market Commentary
Market Commentary
Market Commentary: As Anticipated, Fed Announces Another 0.75% Rate Hike
Market Commentary: European Central Bank Joins Fight Against Inflation, Raises Rates 0.5%
Market Commentary: U.S. Consumers Still Strong Amid Inflation; Fed Remains Hawkish
Market Commentary: Robust Labor Market Growth Continues with Fed Poised for Another Rate Hike
Market Commentary: Moderating Inflation, Ebbing Political Uncertainty Among Reasons for Hope in the Face of a Tough Market