The Markets
In November, investors were more optimistic than consumers. At the start of November, investors were decidedly bearish. During the week of November 1, the AAII Investor Sentiment Survey found that about 50 percent of respondents were pessimistic about the prospects for stocks over the next six months, and about 24 percent were bullish. The current historic averages are 31 percent bearish and 37.5 percent bullish. (The remainder are neutral.) Many believe the survey is a contrarian indicator, meaning that stocks are likely to rise when investors are bearish and fall when investors are bullish. November offered some data to support the theory as United States stocks trended higher during the month. As stock markets gained, participants in the AAII survey became more bullish. The Thanksgiving week survey found that more than 45 percent of respondents were feeling bullish, and as we already mentioned, just 24 percent were feeling bearish. Quite a reversal from four weeks earlier. Consumers were considerably less optimistic. While sentiment improved from last year, it dropped almost 4 percent from October to November, according to the University of Michigan Consumer Sentiment Survey. It was the fourth consecutive month of declining sentiment. “November’s reading reflects a balance of factors, some of which improved while others worsened. More-favorable current assessments and expectations of personal finances were offset by a notable deterioration in expected business conditions…Younger and middle-aged consumers exhibited strong declines in economic attitudes this month, while sentiment of those age 55 and older improved from October,” wrote Surveys of Consumers Director Joanne Hsu. The survey found consumers expect inflation to average 4.5 percent over the next 12 months, and 3.2 percent over the longer term even though inflation has slowed significantly and was just 3.2 percent over the last 12 months. Despite recent declines, consumers are worried inflation could change course. Stocks moved higher last week as many investors remained confident the Federal Reserve was done raising rates. Some anticipate rate cuts early next year, reported Barron’s. Bond markets weren’t so sure, though, and U.S. Treasury yields moved broadly higher during the week. Guidance Wealth will be closed for Thanksgiving on Thursday, November 23rd. Friday, November 24th, our office will be open 9:30am - 1:00pm.
The Markets Is it done? (We’re not talking about the turkey.) Last week, investors enthusiastically embraced the idea that the Federal Reserve (Fed) could be done raising rates – and that it might even begin to lower them. As conviction about the possibility of rate cuts increased, stock and bond markets rallied, reported Koh Gui Qing and Dhara Ranasinghe of Reuters. The catalyst was easing inflation. Last week, the Consumer Price Index indicated that inflation in the United States was flat from September to October, and 3.2 percent for the preceding 12-month period. Core inflation, which excludes volatile food and energy prices, also slowed, up 0.2 percent month-to-month and 4 percent year-over-year. The change in headline inflation was largely due to lower energy prices, which were down 2.5 percent in October and down 4.5 percent for the preceding 12-month period. In addition, the prices of gasoline and fuel oil dropped. The cost of shelter also grew more slowly – up 0.3 percent in October compared to up 0.6 percent in September – but it was 6.7 percent higher year-over-year. There were other signs the U.S. economy may be softening, too. Earlier in the month, the October employment report saw the unemployment rate rise and hiring slow. Last week, the number of people filing unemployment claims increased more than expected, and continuing claims rose to the highest level since 2021, according to Angela Palumbo of Barron’s. The market rallies lost some steam after Boston Fed President Susan Collins indicated she wasn’t yet ready to call the inflation fight by ruling out additional rate increases, reported Reuters. It was an important reminder. While a slower pace of overall price increases is great news, inflation remains well above the Fed’s two percent target. Last week, major U.S. stock indices moved higher with the Standard & Poor’s 500 Index gaining 2.2 percent, the Dow Jones Industrial Average advancing 1.9 percent, and the Nasdaq Composite up 2.4 percent, according to Jacob Sonenshine of Barron’s. Treasury yields moved lower across all maturities. Guidance Wealth will be closed for Thanksgiving on Thursday, November 23rd. Friday, November 24th, our office will be open 9:30am - 1:00pm.
The Markets Earnings grew in the third quarter. Four times a year, during earnings season, publicly traded companies report how well they performed during the previous quarter. The strength of corporate earnings – also known as bottom-line profits – is one of the economic indicators that investors watch closely. When companies consistently grow earnings, investors feel confident they may continue to do so. Consequently, solid earnings can help lift a company’s share price. The opposite is also true. When earnings are lower than expected, investors may lose confidence in a company or look for better relative opportunities. As a result, weak earnings may lead to a company’s share price falling. Companies in the Standard & Poor’s 500 (S&P 500) Index have been in an “earnings recession.” That occurs when year-over-year earnings decline for two consecutive quarters. The earnings of companies in the S&P 500 retreated for three consecutive quarters – from October 2022 through June 2023, reported John Butters of FactSet. Last week, with 92 percent of companies in the S&P 500 reporting on third-quarter performance, overall earnings were up 4.1 percent, year-over-year. The earnings recession is over. While that’s positive news, concerns about slowing economic growth and the possibility of recession caused many analysts to lower estimates for fourth-quarter earnings by more than usual, reported FactSet. Year-over-year earnings growth for the fourth quarter is estimated to be 3.2 percent, down from estimates of 8 percent at the end of September. Analysts also lowered forecasts for the first half of 2024. They expect earnings growth to be 6.7 percent year-over-year in the first quarter, and 10.5 percent year-over-year in the second quarter. Downward earnings revisions reflect current market uncertainty. Last week, in a Bloomberg opinion piece, economist Mohamed El-Erian explained that while many hope for a soft economic landing, “There are multiple other plausible scenarios for the trajectory of interest rates...frustrating as it is for many of us seeking clarity, there is a range of possible reasons why policy rates may decline in 2024, and their economic and market implications can vary significantly. Conversely, there are also reasons why rates may remain elevated for most of next year.” Last week, investors appeared to embrace the idea that a soft landing and lower rates may be ahead. Major U.S. stock indices gained led by big technology and growth stocks, while the Treasury market remained relatively calm. At week’s end, the yield on the benchmark 10-year U.S. Treasury was 4.6 percent. The Markets
Will there be a year-end rally? Last week, there was a lot of speculation about whether the United States will see a year-end stock market rally. Some say yes, and some say no. For example, at Bank of America, “Chief investment strategist Michael Hartnett broke from his usual bearish view to say technicals no longer stand in the way of a year-end rally for the S&P 500 Index. Savita Subramanian, head of U.S. equity and quantitative strategy and an optimist on stocks this year…[said] a contrarian indicator from the bank is also close to offering a buy signal…,” reported Alexandra Semenova and Farah Elbahrawy of Bloomberg. In contrast, Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson thinks a fourth-quarter rally is unlikely. One bearish sign is that some higher-quality mega-cap growth stocks traded lower even after reporting strong earnings. In addition, “given the significant weaknesses already apparent in the average company earnings and the average household finances, we think it will be very difficult for these mega-cap companies to avoid these headwinds too...Finally, with interest rates so much higher than almost anyone predicted six months ago, the market is starting to call into question the big valuations at which these large cap winners trade.” The bottom line is no one knows with any certainty what the future will bring. Instead of trying to predict market lows and highs, we help investors manage risk by building well-allocated and diversified portfolios that are designed to help them meet their financial goals. These portfolios typically include a mix of stocks, bonds and other assets. By holding a variety of assets that respond differently to market conditions, investment portfolios may provide more consistent and less volatile returns over time. It’s important to remember, though, that while diversification is a valuable tool, it does not ensure a profit or prevent a loss. After three months of weakness, investors cheered last week’s gains in U.S. stock and bond markets. Major U.S. stock indices moved higher over the week, and yields on U.S. Treasuries moved lower. The Markets
The Mark Twain Effect? Historically, economic theory was based on the idea that financial decisions were grounded in rational thought. In recent years, behavioral economists have recognized that people don’t always behave rationally. In fact, research has found that investors like shortcuts that help simplify decision-making. While rules of thumb can be helpful, it’s important to use common sense. Some investment theories are a bit wacky, such as:
This year, U.S. stocks moved lower in October. Last week, the Standard & Poor’s 500 and Nasdaq 500 Composite Indices both entered correction territory, reported Connor Smith of Barron’s. A correction occurs when an Index (or stock) drops 10 percent to 20 percent from its previous high. In general, corrections are normal adjustments as stocks trend higher. On occasion, a correction can mark the start of a bear market, reported the Corporate Finance Institute. No one likes to see a negative return on an account statement. Sometimes, when markets have moved lower, investors are tempted to make portfolio changes to minimize losses. This is rarely a good idea. Timing the market is exceptionally difficult. Missing just a few days of returns can dramatically affect long-term performance. A better choice is to have a well-diversified portfolio that is invested according to your long-term financial goals and then make changes when your goals change, or you experience a life transition. Last week, major U.S. stock indices moved lower, and yields on most longer-term U.S. Treasuries finished the week lower. The Markets
Stay calm and consider the big picture. Today, investors have a myriad of worries that are creating tremendous uncertainty. A September Investopedia survey found investors are concerned about how their investments may be affected by:
Now, they’re also concerned about war in the Middle East. Sometimes, in the midst of uncertainty, it can be helpful to take a step back and look at the bigger picture. Consider the historical performance of the Standard & Poor’s (S&P) 500 Index. The current version of the Index debuted in 1957. That year, its average closing price was 44.42. Last week, the Index closed at 4,224.16. The S&P 500 didn’t travel in a straight line; a lot happened over that 66-year period. The United States experienced 10 recessions. The world witnessed dozens of wars, uprisings and regime changes. The Berlin Wall was built and torn down. Neil Armstrong walked on the moon. Russia defaulted on its debt and recovered. China and the U.S. normalized relations. The Chinese economy grew rapidly, as did the economies of many emerging countries. Americans experienced hurricanes Katrina, Sandy, Harvey and Irma, the savings and loan bailout, the global financial crisis, the Great Recession, 9/11, the COVID-19 pandemic, and so much more. Some events roiled financial markets while others had little effect. When events have led to the S&P 500 losing value, the Index recovered. Sometimes it recovered quickly, sometimes it took more time. For example:
In each case, the Index recovered and moved higher over time. Of course, past performance is not indicative of future results. Investor concerns about geopolitical events and market volatility can lead to poor decision-making, including investors selling stocks or moving to cash at times when they might be better off holding onto their portfolio or adding to it. The goal of investing is to buy low and sell high, but that takes enormous discipline. When investors see the value of their portfolios falling, they may become fearful and sell. That can lock in losses and cause investors to miss out when the market rebounds. Falling share prices can create opportunities to buy sound companies at attractive prices. If you would like to discuss opportunities in the current market or if you have concerns about the performance of your savings and investments, please get in touch. Together, we’ll review your financial goals, risk tolerance and portfolio allocation. Last week, U.S. stock and bond markets headed lower after Federal Reserve Chair Jerome Powell indicated the fight against inflation is not over and rates are likely to stay higher for longer, reported Connor Smith for Barron’s. Yields on U.S. Treasuries moved higher. The Markets
Markets were resilient. Last week, investors had a lot to process – geopolitics, inflation, consumer sentiment, the possibility of government shutdown – and markets were volatile. Toward the end of the week, some investors were reassured when earnings season kicked off with reports showing major banks posted stronger-than-expected profits during the third quarter. Here’s a brief look at what happened during the week: War in Israel. Hamas terrorists attacked Israel, and Israel declared war. The human toll has been high and continues to increase. The conflict has potential to spread across the region. While economics is a lesser concern, the war may disrupt energy supplies, keeping inflation – and interest rates – higher for longer, according to Ziad Daoud, Galit Altstein and Bhargavi Sakthivel of Bloomberg. U.S. inflation proved persistent. In September, the Consumer Price Index (CPI) showed prices rose 3.7 percent year-over-year. When volatile food and energy prices were excluded, inflation was 4.1 percent year-over-year. Inflation has fallen a long way from its June 2022 peak of 8.9 percent, but the decline has stalled, and inflation remains well above the Federal Reserve’s two percent target. That reinforces the idea that the U.S. Federal Reserve may leave rates higher for longer, reported Chris Anstey of Bloomberg. Consumers were less optimistic. Inflation is affecting the finances of individuals and businesses, according to the University of Michigan’s Surveys of Consumers Director Joanne Hsu. The October consumer sentiment survey found, “Assessments of personal finances declined about 15%, primarily on a substantial increase in concerns over inflation, and one-year expected business conditions plunged about 19%. However, long-run expected business conditions are little changed, suggesting that consumers believe the current worsening in economic conditions will not persist.” U.S. budget negotiations remained stalled. Congress has about a month left to negotiate and pass the appropriations bills necessary to fund the U.S. government for fiscal 2024. However, the House of Representatives currently cannot proceed without an elected Speaker of the House. On November 17, stop-gap funding measures end. Without additional funding measures a government shutdown is possible, reported David Morgan, Richard Cowan, and Moira Warburton of Reuters. Banks did well in the third quarter. Earnings season got off to a good start last week. Major U.S. banks were the first to report, and some saw profits rise significantly in the third quarter. One large bank reported its profit was 35 percent higher, year-over-year. Major U.S. stock indices finished a volatile week higher. Bond markets produced mixed results with yields on longer maturities of U.S. Treasuries moving lower. The Markets
Financial markets lost ground during the third quarter. While year-to-date returns for the Standard & Poor’s (S&P) 500 Index remain above the historic average, which was 10.24 percent, including dividends, from 1973 to 2022, the rally in U.S. stocks stalled during the third quarter of 2023, reported Lewis Krauskopf, Ankika Biswas and Shashwat Chauhan of Reuters. Early in the quarter, U.S. stocks gained, driven higher by better-than-expected corporate earnings, falling inflation and optimism that the Federal Reserve (Fed) might be near the end of its rate-hiking cycle. Since March of 2022, the Fed has lifted the Federal Funds effective federal funds rate from near zero to 5.33 percent and reduced its bond holdings by $1 trillion through quantitative tightening, reported Michael S. Derby of Reuters. The Fed’s actions are designed to bring inflation lower by slowing economic growth and reducing demand for goods and services. However, the U.S. economy continues to hum along. The labor market has been particularly resilient. Last week’s employment data showed the number of jobs created in September was almost double the Dow Jones consensus estimate, reported Jeff Cox of CNBC. The U.S. unemployment rate remained near historically low levels, and the labor force participation rate increased over the quarter. The strong economy has been a source of significant uncertainty. Some economists believe it is an indication the Fed has engineered a soft landing and inflation will reach targeted levels without a recession, although 60 percent of the economists surveyed by Bloomberg continue to say a recession is ahead, reported Rich Miller, Molly Smith and Kyungjin Yoo. Government turmoil also has created uncertainty. In early August, Fitch Ratings surprised financial markets by lowering its rating on U.S. Treasuries from AAA to AA+. The company indicated that “a high and growing general government debt burden, and the erosion of governance” were the impetus for the downgrade. In September, when Congress debated whether to approve the necessary appropriations bills to fund the U.S. government for fiscal 2024, Moody’s Investors Service – the only remaining major credit rating agency to award U.S. Treasuries a AAA rating – warned that a government shutdown would be a “credit negative” event, reported Matt Phillips of Axios. Congress temporarily avoided a government shutdown by passing a continuing resolution that provides funding through mid-November. By the end of the quarter, optimism that the end of the Fed’s tightening cycle was near had faded amid uncertainty about the strength of the economy, the possibility of a government shutdown, and a growing number of labor disputes. In late September, the Fed released its economic projections, making it clear that an additional rate hike was possible in 2023, and rate cuts were unlikely before 2024. The Fed’s hawkish outlook helped push stock and bond markets lower. In late September, the S&P 500 Index was down about 7 percent from its July high. From August through September, the yield on the 10-year U.S. Treasury note rose from 4.05 percent to 4.59 percent. Bond prices fall as yields rise. Last week, despite the strong jobs report bolstering the likelihood of another Fed rate hike, the S&P 500 and Nasdaq Composite Indices moved higher. The Dow Jones Industrial Index lost ground. Yields on U.S. Treasuries generally moved higher over the week. The Markets
Inflation is slowing but consumers aren’t feeling it. In August, for the first time in two years, inflation (excluding volatile food and energy costs) dropped below four percent. Last week, one of the Federal Reserve (Fed)’s favored inflation measures – the Personal Consumption Expenditures (PCE) Price Index – indicated that prices rose 3.9 percent, year-over-year, in August 2023. That’s an improvement from January, when prices rose by 4.9 percent, year-over-year, but it remains above the Fed’s target of 2 percent. While slowing inflation is good news, many Americans are not feeling relief. “Even as the Federal Reserve’s favored measure of price gains eases, the cost of food, gasoline, car insurance and other essentials is still elevated after two years of persistent increases…It costs $734 more each month to buy the same goods and services as two years ago for households who earn the median income,” according to a source cited by Mark Niquette, Jarrell Dillard and Michael Sasso of The Washington Post. Ongoing pain in the pocketbook is due, in part, to higher oil prices, which are not included in core inflation numbers. The price of crude oil rose to the highest level in more than a year last week, before falling slightly. Rising prices resulted from low inventories and reduced production levels among OPEC+ (the Organization of Petroleum Exporting Countries plus 11 other non-OPEC members) that reduced global oil supply, reported Lee Ying Shan of CNBC. In August, the cost of gasoline, lubricants, and other oil-related products rose, reported Jeffry Bartash of MarketWatch. Regardless of oil prices, investors were hopeful last week that the Fed might not raise rates again in 2023. Revised economic data from the Bureau of Economic Analysis showed the economy grew at a slightly slower pace in the second quarter of 2023 than it did in the first quarter. In addition, consumer spending, which is the primary driver behind economic growth in the United States, cooled. The data suggest the Fed is making progress – reducing price pressures by slowing economic growth and lowering demand for goods. Stocks moved higher on Thursday before reversing course. The Dow Jones Industrial Average and Standard & Poor’s 500 Index finished the week lower, according to Barron’s. Yields on longer-term U.S. Treasuries moved higher over the week. The Markets
How high will they go? Just as the market anticipated, the Federal Reserve Open Market Committee (FOMC) chose not to raise interest rates last week. However, Fed officials made it clear another rate increase might be necessary before the end of 2023 as continued economic strength, higher energy prices, robust consumer spending, and rising wages in a strong labor market have kept upward pressure on inflation. FOMC economic projections indicate the Fed anticipates the effective federal funds rate will remain higher for longer than many hoped. The median projected rates were:
Fed Chair Jerome Powell indicated that an economic soft landing – a slowdown in economic growth that results in lower inflation without a recession – remains a possibility, reported Howard Schneider and Michael S. Derby of Reuters. Former Treasury Secretary Lawrence Summers warned that any expectation for a soft landing might be too optimistic as significant risks remain, including upward pressure on wages, slowing consumer spending, and higher borrowing costs, reported Chris Anstey of Bloomberg. As a result, it’s possible the Fed could be surprised by weaker economic growth or higher inflation. After the FOMC meeting, yields on bonds moved higher. The yield on a one-year United States Treasury bill finished Wednesday at 5.47 percent, and the yield on the benchmark 10-year Treasury note closed at 4.35 percent. U.S. stock markets moved lower as investors considered the potential effects of high interest rates for longer. Rising interest rates (and tightening bank lending standards) make borrowing more difficult, lifting the cost of capital and lowering profits. When company profits drop, share price valuations tend to move lower, reported Mary Hall in Investopedia. As investors mulled the Fed’s outlook, the possibility of a government shutdown, and other factors, major U.S. stock indices finished the week lower, according to Barron’s. Yields on U.S. Treasuries generally moved higher over the week. |
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