The Markets
Here’s the tea on stock markets and presidential elections. Last week, a slew of headlines mentioned stock market bubbles and frothy valuations. The implication was that markets might be headed lower because they’ve risen so high. Last Wednesday, Lewis Krauskopf of Reuters reported: “Some market participants believe the relentless U.S. stock rally is poised for a breather, even if it remains unclear whether equities are in a bubble or a strong bull run. The benchmark S&P 500…is up over 25% in the last five months, a phenomenon that has occurred just 10 times since the 1930s, according to BofA Global Research…the S&P has already made 16 record highs this year, the most in any first quarter since 1945, CFRA Research data showed.” By the end of last week, we’d seen 17 record highs for the Standard & Poor’s (S&P) 500 Index. If there is a market downturn this year, election sentiment is likely to be one of the reasons for the move. “Market moves during election years do tend to follow a similar pattern—declines leading up to early November, then a surge through year end once the winner is revealed.” While past performance does not guarantee future results, the S&P 500 has typically finished presidential election years higher, reported Nicholas Jasinski of Barron’s. Despite the historic record, election rhetoric can make it difficult to remember that markets are efficient and adjust to changing risks. While election sentiment may sway stock markets over the shorter term, global economic growth, company fundamentals, central bank policies, and other factors, such as “the implications of the artificial intelligence [AI] boom on corporate earnings” are likely to matter more over the longer term, reported Jasinski. No matter how emotional the election becomes, remember that your portfolio was built to meet your financial goals. If your longer-term goals and risk tolerance have not changed, making significant portfolio changes because of worries about the election outcome is not a sound idea. That said, if you’re uneasy about the election and its potential effect on your savings and investments, please get in touch. We want to hear about your concerns and will help you identify potential solutions. Major U.S. stock indices finished last week with mixed results. The bond market retreated amid inflation pressures, and U.S. Treasury yields moved higher over the week. The Markets
The week got off to a good start... In testimony before House and Senate committees, Federal Reserve (Fed) Chair Jerome Powell noted that prices had been falling and unemployment rates remained quite low. As a result, he expected the Fed to begin lowering the federal funds rate in 2024. “I think we’re in the right place,” he said. “We’re waiting to become more confident that inflation is moving sustainably at two percent. When we do get that confidence—and we’re not far from it—it’ll be appropriate to begin to dial back the level of restriction so that we don’t drive the economy into recession rather than normalizing policy as the economy gets back to normal.” After Powell’s comments, the likelihood of a June rate cut rose, and so did U.S. stock indices. The bond market rallied, too, with yields across all maturities of U.S. Treasuries dropping lower through Thursday. On Friday, a mixed bag of employment data arrived. It showed that:
The data suggested that the labor market was strong but cooling, and bolstered hopes that a soft landing might be ahead. While that was positive news, it was overshadowed by weakness in technology stocks. Sarah Hansen of Morningstar reported, “The stock market started 2024 with a blistering rally…But the relentless pace of gains has some watchers worried about soaring valuations on stock prices and frothy trading.” On Friday, major U.S. stock indices finished the week lower. However, U.S. Treasury bonds rallied as yields declined over the week. The Markets The bull market is alive and well. “We know what investors are thinking,” reported Jacob Sonenshine of Barron’s. “The gains can keep coming, driven by an economy that is neither too hot nor too cold…The economy is growing, but only moderately, and the Federal Reserve can keep thinking about when it can start cutting interest rates…This dynamic is why nobody wants to miss out on the rally—and why they think it can keep going. A recent survey from Investors Intelligence shows the number of bulls outnumbered their bearish counterparts by the widest margin since late 2021.” Recent market performance owes much to:
Last week, the Standard & Poor’s 500 and Nasdaq Composite Indices closed at record highs, while the Dow Jones Industrial Average retreated. All three indices finished February with gains, reported Chuck Mikolajczak of Reuters. The U.S. Treasury market rallied with yields falling for all but the shortest maturity of Treasuries. The Markets
Optimism abounds! Enthusiasm for everything related to artificial intelligence (AI) drove a global stock market rally last week. Equity markets in the United States, Europe, and Japan hit all-time highs after a leading chipmaker reported better-than-expected earnings and an extraordinary surge in demand for its artificial intelligence-targeted processors, wrote Rita Nazareth of Bloomberg. Investors took the news “as evidence that the generative AI boom is both real and spreading. [The company’s] spectacular earnings report and forward guidance are spurring investors to buy shares of almost any company with a stake in the AI race—everything from computer and networking hardware providers to cloud computing plays to enterprise application software,” reported Eric J. Savitz of Barron’s. Investors weren’t the only ones feeling optimistic last week. Economists who participated in a February Bloomberg survey expect the U.S. economy to grow this year and next year, although a significant minority say that a recession is possible in 2025, reported Augusta Saraiva and Kyungjin Yoo of Bloomberg. They cited a source who stated: “The U.S. economy remains the envy of the world…Both real economic growth and employment growth remain strong while inflation rates and interest rates are falling.” Chief executive officers (CEOs) are feeling optimistic, too. The Conference Board Measure of CEO Confidence™ survey found that CEOs are feeling much better than they did at the end of last year.
Last week, major U.S. stock indices moved higher, yields on longer maturities of U.S. Treasuries moved lower. The Markets
Don’t fight the Fed. The Federal Reserve (Fed) is the central bank of the United States. A longstanding bit of investment wisdom is: Don’t fight the Fed. It means that investors should align their strategies with the Fed’s monetary policy. Economic growth is influenced by Fed policy, and stock markets tend to reflect the economy, rising when it grows and falling when it contracts. As a result, Kent Thune of The Balance reported, when the Fed is:
The Fed has left rates unchanged since last summer. In January, the Fed indicated that inflation was moving in the right direction, and the economy remained strong. It projected that the federal funds rate would fall to 4.6 percent by year-end, implying three rate cuts of 0.25 percent in 2024. The market did its own math and came to a different conclusion. It decided inflation would drop steadily, economic growth would falter, and the Fed would cut rates six times in 2024, reported Nicholas Jasinski of Barron’s. Last week, economic data suggested the Fed has yet to win its fight against inflation, although there was a sign that economic growth might be moderating.
The data caused markets to recalculate. Now, investors “have moved closer to the view of Fed policymakers, most of whom as of December penciled in 50 to 75 basis points of rate cuts by the end of 2024,” reported Howard Schneider and Michael S. Derby of Reuters. As markets adjusted to the revised outlook, major U.S. stock indices finished lower, and yields on longer maturities of U.S. Treasuries moved higher. The Guidance Wealth Office will be closed on
Monday, February 19th, in observance of Presidents Day. The Markets China is out of favor with investors. For decades, China was among the fastest-growing economies in the world. Its real gross domestic product, which is the value of all goods and services it produces, grew by about nine percent a year, on average, from 1978 through 2022, according to The World Bank. However, the pace of economic growth in China slowed over the last decade and dropped sharply during the pandemic. Many investors expected China to rebound quickly in 2023 after its Zero Covid policy ended, but that hasn’t happened. Instead, “Exports weakened and deflation deepened, but the big letdown was consumer spending, which slumped as young people struggled to find jobs and the long awaited reckoning for the housing market finally arrived,” reported Allen Wan of Bloomberg. China’s stock market performance reflected its economic malaise. “The market value of China’s and Hong Kong’s shares is down by nearly $7 [trillion] since its peak in 2021. That is a fall of around 35%, even as [the market value] of America’s stocks has risen by 14%, and India’s by 60%,” reported The Economist via X. In recent months, investors have been pulling money out of China. “Much of that cash is now heading for India, with Wall Street giants…endorsing the South Asian nation as the prime investment destination for the next decade. That momentum is triggering a gold rush…The euphoria has made Indian equities among the most expensive in the world,” reported Srinivasan Sivabalan, Chiranjivi Chakraborty, and Subhadip Sircar of Bloomberg. The Chinese government has been trying to stimulate growth and reassure investors. In late January, “the People’s Bank of China announced a larger-than-expected cut in banks’ required reserve ratio…But sentiment remains about as downbeat as can be, despite reports that authorities are considering a package to bolster the stock market totaling some two trillion yuan (almost $280 billion). That’s not just among Chinese domestic investors—that negativity is shared around the world,” reported Randall Forsyth of Barron’s. In contrast, U.S. investors have been bullish. Last week, the Standard & Poor’s 500 Index closed above 5,000 for the first time. The U.S. Treasury bond market remained relatively steady as yields on many maturities of Treasuries finished the week about where they started it. The Markets
We’ve been hearing a lot about layoffs. Last week, the January 2024 Challenger Report found that employers based in the United States cut more than 82,000 jobs in January. That’s a lot. In December 2023, about 35,000 layoffs were announced. The January job cuts were concentrated in a few industries, and the reasons for the cuts included companies restructuring to lower costs and reorienting toward artificial intelligence. Layoffs often are a sign the economy is losing steam, but that doesn’t appear to have been the case in January since employers added more than 353,000 new jobs during the month, reported the Bureau of Labor Statistics (BLS). If we subtract the number of layoffs from the number of new jobs (353,000 – 82,000 = 271,000), the total number of jobs created in January was still significantly higher than the 185,000 new jobs economists anticipated. Overall, the U.S. unemployment rate remained at 3.7 percent, although there were differences by gender and race. Women (over age 20) 3.2 percent Men (over age 20) 3.6 percent Asian 2.9 percent White 3.4 percent Hispanic/Latino 5.0 percent Black 5.3 percent The BLS reported that wages moved higher in January. Average hourly earnings increased 4.5 percent over the 12 months through January 2024. If inflation continues to slow – it was 3.4 percent in December – that could be good news for consumers. However, the fight against rising prices continues. Katia Dmitrieva of Bloomberg explained: “The [employment] report clearly shows that demand [for workers] and wage pressures are far from cooling. That is consequential for the Federal Reserve, which has been signaling that the strength in the labor market shows inflationary pressures are still in the system, and that’s something policymakers will keep in mind before pivoting to rate cuts.” After falling for much of the week, U.S. Treasury yields rose after strong jobs data dashed hopes the Federal Reserve would cut rates sooner rather than later. Stock investors remained confident despite the possibility that rates would remain higher for longer, and major U.S. stock indices finished the week higher. The Markets
Even better than expected! The United States economy is not performing the way anyone thought it would. Instead of tipping into a recession last year, it crushed expectations. Gross domestic product, which is the value of all goods and services produced in the country, expanded 2.5 percent, after inflation, for the year. U.S. economic growth 1Q 2023: 2.2 percent 2Q 2023: 2.1 percent 3Q 2023: 4.9 percent 4Q 2023: 3.3 percent It’s interesting to note that the U.S. economy has been outperforming other developed countries’ economies. For example, GDP for the Group of Seven (G7), which includes seven countries plus the European Union, has grown 4.7 percent, in total, since the fourth quarter of 2019 (prior to the pandemic). G7 GDP includes – and got a boost from – U.S. economic growth. G7 economic growth (October 2019 through September 2023) U.S.: 7.4 percent G7: 4.7 percent Canada: 3.5 percent EU: 3.4 percent Italy: 3.3 percent Japan: 2.4 percent UK: 1.8 percent France: 1.8 percent Germany: 0.3 percent Here’s the really good news: Inflation continued to move lower while the economy grew last quarter. Last week, the personal consumption expenditures index reported that core inflation, which excludes food and energy prices, dropped from 3.2 percent to 2.9 percent. Headline inflation was 2.6 percent. Last week, major U.S. stock indices finished higher. The yield on the benchmark 10-year U.S. Treasury finished the week in the same place it started. The Markets
Are you feeling optimistic or pessimistic? Consumers are a force to be reckoned with – and we’re all consumers. We buy coats and tweezers, electricity and bread, screens and fishing poles. We download apps and games and educational materials. As consumers, we are vital to the American economy. In fact, consumer spending accounts for about two-thirds of the U.S. economy when it’s measured using gross domestic product or GDP. Many consumers are feeling more optimistic than they have in a while. Last week, the University of Michigan (UM) reported that consumer sentiment is soaring. After a double-digit rise in December 2023, the UM Consumer Sentiment Index rose an additional 13 percent in January 2024. Surveys of Consumers Director Joanne Hsu reported: “Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as a recession ended. For the second straight month, all five index components rose, with a 27% surge in the short-run outlook for business conditions and a 14% gain in current personal finances. Like December, there was a broad consensus of improved sentiment across age, income, education, and geography.” Investors are feeling pretty good, too. Throughout January, the weekly AAII Investor Sentiment survey found that a higher percentage of investors than usual expected stocks to move higher over the next six months. Last week, though, that percentage dropped lower as uncertainty increased around the depth and timing of possible Federal Reserve rate cuts. “…the median projection from all Fed officials [is] for three rate cuts in 2024. That is a more conservative outlook than the one shared by investors, who expect six cuts starting in March,” according to a source cited by Jennifer Schonberger of Yahoo! Finance. Last week, a rally in technology stocks helped the Standard & Poor’s 500 Index close at an all-time high. Yields on many maturities of Treasuries moved higher over the week. The Markets
Is inflation retreating? Last week, we received a lot of information about inflation. Some seemed to support the idea that inflation was sticky, meaning it wasn’t moving lower, while other data suggested inflation was in retreat. Here’s what we learned:
The Federal Reserve (Fed) has been working to bring inflation down since March of 2022. Over that time, it has lifted the federal funds rate from zero to 0.25 percent to 5.25 percent to 5.50 percent, and inflation has dropped from a peak of 8.9 percent in June 2022 to 3.4 percent in December 2023. The Fed’s goal is to lower inflation to two percent. Markets are keeping a close eye on the Fed’s success, because they want to see rates move lower. Lower rates put more money in the pockets of businesses and consumers, which supports economic growth and higher stock prices. Last week, few investors expected the Fed to begin lowering the federal funds rate this month; however, about three-fourths of them anticipated rates would begin to drop in March, according to data from the CME FedWatch Tool. Major U.S. stock indices finished the week higher. Yields on most maturities of Treasuries moved lower from last Friday to this Friday. |
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