Broker Check

7300 Wealth Connect – November 2022

A Brighter October

The same headwinds that have clouded the economic outlook and the investing landscape remained in place as the calendar shifted from September and moved into October.

But that didn’t prevent the Dow Jones Industrial Average from turning in its best monthly performance since 1976, according to Barron’s.

Notably, market action this year followed a typical seasonal pattern—weakness in September and strength in October, according to S&P 500 data from the St. Louis Federal Reserve.

Three factors did most of the heavy lifting last month:

  • Oversold conditions led to buying—technical factors,
  • Q3 profits are clearing a low hurdle, coming in better than expected (Refinitiv), and
  • A late month story in the Wall Street Journal suggested that some Fed officials are showing greater unease with big rate hikes to fight inflation.

Another jumbo-sized rate hike is expected in November, but some folks at the Fed may want to slow things down and assess the economic impact of prior increases.

Nonetheless, inflation has yet to ease—see Figure 1.

Meanwhile, Gross Domestic Product (GDP), which is the largest measure of goods and services, rebounded in Q3 following declines in Q1 and Q2 (Figure 2).

Rising at a 2.6% annualized pace in Q3, real (inflation-adjusted) GDP hit a record $20.0 billion, barely eking out the prior record in Q4 2021.

Note how nominal (non-inflation adjusted) GDP has surged while real (adjusted for inflation) GDP has been nearly flat over the last four quarters. This means that the volume of goods and services moving through the economy has been almost flat (real GDP), as price hikes drove the total value of output (nominal GDP).

While GDP is an important quarterly report, it is backward-looking. In this case, July through September. We’re in November.

Investors attempt to price in economic events anywhere from six to nine months in the future.

Housing, which is an important leading economic indicator, is in a recession thanks to the stratospheric rise in mortgage rates.

The Leading Index, which consists of 10 economic reports that tend to presage economic activity, has dropped in six of the last seven months, according to the Conference Board.

The Leading Index has a perfect record of calling recessions over the last 60 years, but nailing the onset of a recession is not its strong point

A peek ahead

Historically, the fall typically marks a stronger seasonal period for stocks, according to the Stock Trader’s Almanac. The midterm elections could also bring some much-needed clarity.

Still, the economic fundamentals that have contributed to today’s bear market have yet to unwind.

But, as we’ve said before, no one rings a bell when a bear market ends. Investors seek out trends before they explicitly show up in the economic data. A durable market bottom will likely occur before the current trend shifts.

7300 Wealth Connect – October 2022

Rate-Hike Worries, Economic Uncertainties Cloud Outlook

The table of returns reflects a continued drop in stocks and rise in yields during the third quarter. It does not reflect a bear market rally during July and early August.

The Federal Reserve hiked its key rate, the fed funds rate, by another 75 basis points (basis points = bp; 1 bp = 0.01%) in July to 2.25—2.50%. Some of Fed Chief Jay Powell’s remarks seemed to suggest the Fed might soon slow its pace of rate increases.

Predictably, stocks gained ground. In fact, the S&P 500 Index retraced more than 50% of its prior peak-to-trough decline (Bloomberg News).

But Fed officials pushed back on the idea of a Fed pivot. At the end of August, Powell’s short but direct nine-minute speech at a symposium in Jackson Hole, WY stressed the Fed’s resolve to bring inflation back down, and equities gave up ground.

A disappointing Consumer Price Index released in September and a very hawkish tone from the September 21st Fed meeting, including another 75 bp rate hike, signaled a steely resolve to squash inflation, and market volatility continued into the end of the month.

Take the Fed’s projections in Figure 1 with a couple of grains of salt.

The Fed failed to forecast the initial strength of the economic recovery and bet that last year’s surge in inflation would be transitory. Its forecasting models are not that credible right now.

But the shift in the rate forecast caught the attention of short-term traders. You see, the Fed raised its year-end forecast for the fed funds rate by a whopping 100 bp from June to 4.4% and its year-end 2023 forecast by 80 bp to 4.6%.

That’s a significant change in a mere three months. It signals that November might give us afourth-straight 75 bp rate hike and another 50 bp in December.

Even without those hikes, the Fed’s campaign has been the most aggressive since the second half of 1980, when it lifted the fed funds rate from about 9% to 19% in only six months, according to data from the St. Louis Federal Reserve.

Bottom Line

The speed and tenacity of the Fed’s moves have jarred investors. Higher interest rates compete for investor dollars and hamper economic growth.

The soaring dollar against major currencies, which has occurred amid heightened global uncertainty and higher rates at home (rising interest rates encourage foreign investors to seek higher returns in the U.S.), added to financial instability.

Additionally, the Fed’s campaign is raising fears that it could “break” something in financial markets, whether in the U.S. or abroad.

Although markets typically have an upbeat Q4, according to S&P 500 data from the St. Louis Federal Reserve, inflation has yet to decisively move to the downside and peak hawkishness has been elusive.

Furthermore, an economic downturn is a real possibility next year.

But bear markets end when negativity is high. No one rings a bell when the storm is over. We saw that in 2009, the steep market corrections of 2011 and 2018, and again in 2020.

During the recovery from the 2008-09 financial crisis and the pandemic-led bear market, sentiment remained decidedly negative as stocks initially rallied.

Economic and market forecasting is a very inexact science. Simply put, there are too many unknown variables. But the table below offers a historical perspective.

The peak-to-trough decline for the S&P 500 is 25.2% through September 30.

7300 Wealth Connect – September 2022

Powell’s Volcker Moment

Paul Volcker headed up the Federal Reserve between 1979 and 1987. He is widely credited with squashing the inflation that seeped into nearly every corner of the economy in the 1970s.

But the medicine the Fed force-fed us was harsh. The Fed pushed up its key rate, the fed funds rate, to almost 20% by the end of 1980, per the St. Louis Federal Reserve. The jobless rate rose to nearly 11% in late 1982, which at the time was the highest since the 1930s.

It broke the back of inflation. But the price was steep, as the U.S. fell into a deep recession.

Today, inflation is high, but isn’t as embedded in the economy as it was in the 1970s. So far, the medicine that’s needed is unlikely to be as harsh as during the early Volcker years.

However, like the jump in interest rates that stifled demand for goods, services, and workers, the Fed is hoping to employ lessons learned in the 1970s without a steep recession.

For starters, the Fed quickly jettisoned its zero-rate money policy, it’s no longer talking ‘transitory inflation,’ and it wants to avoid the stop and go attack on the wage/price spiral in the 1970s, which failed to quell inflation and led to a harsh policy response from Volcker’s Fed.

In other words, the longer inflation persists—the thinking goes—the more difficult it is to put the inflation genie back in the bottle.

Before we go on, let’s acknowledge that Powell and the highly credentialed economists at the Fed failed to forecast the persistent rise in inflation and failed to react last year. Today, they are playing catchup.

While it would be unfair to blame today’s inflationary environment completely on the central bank—trillions of dollars in fiscal stimulus, pandemic lockdowns, and supply chain woes have also contributed to the problem, they are tasked with cleaning up the mess.

Powell’s Fed is well aware of the mistakes that helped lead to the prolonged period of rising prices in the 1970s, and central bankers don’t want a repeat.

Yet, over the short term, 2022 has been a period of heightened uncertainty for investors. That said, at the end of August, Powell vigorously reiterated the Fed’s commitment to bringing inflation back down.

In a brief speech that lasted fewer than 9 minutes, Powell called the Fed’s goal of price stability its “overarching focus right now.”

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” he said.

Powell added that softer economic growth will “bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Powell’s use of the word ‘pain’ is unusual for a Fed chief. However, in no uncertain terms, he wanted to communicate that the Fed is resolute in its fight and will do what’s needed to force inflation back to the Fed’s 2% target.

Threshold for pain

How much pain the Fed might inflict on the economy is unknown. Would the Fed blink if anything more than a mild recession took hold? Is there an economic line in the sand?

The Fed’s not saying. If it revealed a line it won’t cross, its credibility would further come into question. Yet, a squash-inflation-at-all-costs mentality could bring a political backlash.

Please review Figure 1. Note that inflation has historically peaked during a recession and eases in the early stages of an economic recovery.

Recessions blunt demand for goods and services, commodities, and labor. Businesses typically struggle to raise prices during a recession, while a rise in unemployment puts a lid on wage hikes and cost pressures. It wrings inflation out of the economy. In the months that follow a recession, excess capacity tends to keep inflation low.

When we have seen inflation slow outside a recession, it occurred amid a sharp but temporary drop in oil prices (mid-1980s and late 1990s), or the sharp productivity gains of the 1990s.

Today, the Fed is turning to what it believes is its tried-and-true anti-inflation playbook.

During the early part of August, investors seemed optimistic the Fed might cut rates next year. A host of Fed speakers and Powell blunted such hopes, sparking a fresh round of volatility.

Bottom line

Powell mentioned pain. Today, the Fed is trying to stifle demand for goods and services and significantly slow wage increases. The high number of job openings leaves it some wiggle room that might help prevent a recession or anything more than a mild recession.

The Fed also wants to bring down commodity prices and lower prices for housing and financial assets. The rate of inflation may have already peaked, but the Fed doesn’t want to declare victory until its convinced price stability is within its grasp.

7300 Wealth Connect – August 2022

Investors Look Beyond Inflation, Rate Hikes, and Recession Fears

Inflation is high, the Federal Reserve is hiking interest rates, Gross Domestic Product (GDP), which is the broadest measure of economic activity, is declining. Yet, the stock market had a significant rebound in July.

Investors attempt to price in events before they hit the headlines. We saw it in the first half of the year. But does July’s rally herald better economic news, or is it simply a bear market rally?

Inflation is a big problem, no question about it. In June, the Consumer Price Index hit 9.1%, according to the U.S. Bureau of Labor Statistics (BLS). It’s the worst reading in over 40 years.

However, gasoline prices fell in July, commodity prices are down, and there are some cautiously encouraging signs that inflation may finally be peaking.

It doesn’t necessarily mean that inflation will slow sharply. But if the worst is behind us (a big maybe), it would be encouraging news for investors.

Meanwhile, the Federal Reserve just hiked the fed funds rate by 75 basis points (bp, 1 bp = 0.01%) to a range of 2.25-2.50%.

Since early May, the Fed has boosted the fed funds rate by 200 bp. It’s the most aggressive series of rate increases since early 1982—see Figure 1.

In the past, the Fed seemed willing to throw a lifeline to investors when market declines turned ugly. Not today. It’s a different environment, as the Fed seems intent on squashing the very inflation it helped create.

Yet, it would be unfair to blame today’s inflationary environment completely on the central bank. Trillions of dollars in fiscal stimulus, pandemic lockdowns, and supply chain woes have also contributed to inflation.

During his July 27 press conference, Fed Chief Jerome Powell forcefully argued the Fed will maintain its course until it sees “compelling evidence that inflation is moving down, consistent with inflation returning to 2%.”

Yet, he hinted that the Fed might slow its pace of rate increases later in the year. Investors took that as an encouraging sign. Still, it’s highly dependent on inflation.

Lastly, GDP is down two-straight quarters: a 1.6% annualized drop in Q1 and a 0.9% annualized decline in Q2, according to the U.S. Bureau of Economic Analysis.

It meets the common and simple definition of a recession. But are we in a recession?

The National Bureau of Economic Research (NBER) makes that determination in the U.S. It can take months for the NBER to declare and backdate the start of a recession.

The NBER defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

Well, GDP is down for more than a few months, but to contend that any decline is significant and is spread across the economy is far more problematic.

While business spending fell in Q2 and residential construction got clobbered, consumer spending, which accounts for 70% of GDP, increased, albeit at a slower pace than Q1.

Over the last six months through June, the U.S. BLS said payroll growth has averaged 457,000 per month. Layoffs, not significant job growth, mark recessions.

While GDP may not tell the entire story, economic growth has significantly slowed, wages are not keeping up with inflation, and stocks stumbled in the first half of the year.

Consequently, it’s a gloomy number, even if the economy hasn’t yet met the NBER’s strict definition. Perhaps the term stagflation, stagnate economic growth + inflation, more closely describes today’s environment.

Bottom Line

Investors attempt to price in and anticipate events by roughly six to nine months. In the first half of the year, investors correctly anticipated the uncertain economic environment.

Investors also seem to be pricing in a mild recession.

The Conference Board, which releases the monthly Leading Economic Index (LEI), believes “a recession around the end of this year and early next is now likely” after its Index fell for four consecutive months (through June). The LEI is designed to foreshadow economic trends.

A more pronounced economic downturn, if it were to occur, probably hasn’t been factored in by investors. But would the Fed blink in the face of a recession? Powell side-stepped the question.

Another series of unusually large rate hikes may not be priced in either. The same can be said of an even faster rate of inflation.

Yet, no one rings a bell when the market hits bottom. Instead, investors attempt to sniff out better news before it reaches the headlines. That helps describe what we saw last month.

If you have questions or would like to talk, we are only a phone call or email away.

7300 Wealth Connect – July 2022

Shifting Fundamentals

Stocks during the first half of the year turned in their worst performances since 1970, according to CNBC. In part, it’s a timing issue since the broad-based S&P 500 Index peaked just after the year began. But that doesn’t ease the uncertainty that has fueled the decline.

Let’s back up for a moment. During the 2010s, the economic fundamentals were supportive of stocks: modest economic growth, rising corporate profits, low interest rates, and low inflation. When the Federal Reserve began hiking interest rates, the pace was gradual.

Rate hikes were gradual because economic growth wasn’t particularly fast, and inflation wasn’t a problem. In fact, the Fed fretted over its inability to get inflation up to its 2% target. In retrospect, call it a high-class problem.

It’s not that we didn’t see pullbacks. We did. Stocks never move up in a straight line, and corrections, when they occur, come unexpectedly. Nonetheless, favorable economic fundamentals reasserted, and the broad market indexes trended higher over the decade.

Today, the economic fundamentals have shifted.

These include surging inflation, aggressive Fed rate hikes, Russia’s ongoing war and its impact on oil and certain commodities, and recent Covid lockdowns in China—all which are helping raise fears of a recession.

As Figure 1 illustrates, inflation is at a 40-year high, and we have yet to see significant signs that inflation is slowing.

In response to stubbornly high inflation, the Fed shifted away from its super easy money policy last year. Today, it’s talking tough, playing catchup, and forcefully raising interest rates in order to wring inflation out of the system.

In June, the Fed lifted the fed funds rate by 75 basis points (bp, 1 bp =0.01%) to a range of 1.50–1.75%. It was the first 75 bp rate increase since 1994—see Figure 2.

Still, the aggressive path and factors outside its control have reduced the odds the Fed can engineer a soft landing—a slowdown in inflation that doesn’t trigger a recession.

Fed Chief Powell acknowledged near the end of June, “It has gotten harder. The pathways (to avoid a recession) have gotten narrower.” Such uncertainty has pressured stocks since a recession would hamper corporate earnings.

Figure 2 highlights the path of the fed funds rate over the last 30 years. Former Fed Chief Alan Greenspan preemptively raised rates in 1994—300 bp in one year—to stave off inflation.

Though unemployment was high, double-digit inflation of the 1970s and early 1980s was still uppermost on the minds of Fed policymakers.

During the early 2000s, “measured (his word of choice)” rate increases amounted to seventeen 25 bp rate hikes. During the late 2010s, Powell gradually lifted the fed funds rate.

In prior rate-hike cycles, increases were preemptive. Today, the Fed is reacting to high inflation. And the Fed believes another 50 or 75 bp is probably appropriate at its upcoming July meeting.

Note in Figure 1 that inflation peaked and slowed during and after a recession.

Why? Consumer demand falls, which makes it more difficult to raise prices. Additionally, the jobless rate rises, and wage growth slows. Smaller wage increases put less pressure on prices.

However, let’s state the obvious. Triggering a recession to stifle inflation is not ideal.

Today, a recession is a risk but not a foregone conclusion. Some leading economic indicators such as housing sales and consumer confidence have turned lower. But job openings are high, layoffs remain low, job growth is strong, and plenty of stimulus cash remains in the bank.


The first half of the year is the worst start since 1970. However, perspective is in order. Since 1957, the S&P 500 Index has averaged a 20% or greater decline over a six-month period roughly every five years, per CNBC.

And there have been five periods when the broad-based index lost more than 30% over six months. In every instance, stocks eventually recovered.

If you have questions or would like to talk, we are only a phone call or email away.

7300 Wealth Connect – June 2022

Bearing Down

Stocks are teetering on the edge of a bear market but have yet to officially slip into a bear market. So, what is a bear market? Most analysts define a bear market as a 20% or greater decline in a major market index.

The tech-heavy Nasdaq Composite has lost nearly 30% from its November closing high to its latest bottom in late May (Yahoo Finance). But the Nasdaq and the better-known Dow Jones Industrial Average, which is off 15.1% peak-to-trough, are usually not considered arbiters.

Instead, the S&P 500 Index is generally considered the benchmark for bear markets.

On an intra-day basis, the S&P 500 briefly pierced the 20% barrier late last month, according to the Wall Street Journal, but the index has yet to close below 20%.

From its closing peak of 4,796.56 on January 3, the S&P 500’s most recent closing bottom of 3,900.79 on May 19 translates into a peak-to-trough loss of 18.68%.

While bear markets can be unsettling (and let’s remember, we have yet to officially enter a bear market), the duration has typically been shorter than bull markets.

The Schwab Center for Financial Research reviewed S&P 500 data going back to 1966. It found that the average bear market lasted 446 days (including weekends/holidays), with an average decline of 38.4%.

Bull markets, however, averaged 2,069 days and returned an average of 209.2%.

Figure 1 highlights that since the mid-1960s, bear markets have centered around recessions.

Except for the 1987 one-day market crash, we must go back to the mild bear market of 1966, when the S&P 500 shed 22% amid a sharp slowdown in economic growth. But a recession was avoided.

Notably, the S&P 500 lost nearly 20% during 1976-1978, 1998, 2011, and 2018, but avoided a bear market. The economy failed to slip into a recession during those periods.

Let’s look at a few more statistics. LPL Research reviewed data going back to the end of WWII.

It found that the S&P 500 Index lost an average of 32.7% during 13 bear markets, with the average bear market lasting 12.8 months. If we slide into a bear market, its start date will be pegged at January 3.

This year’s volatility

For starters, we can blame market weakness on high inflation and the Federal Reserve.

The Fed has responded to high inflation via a much more aggressive response than past ratehike cycles.

Last year, the Fed kept its super easy monetary policy in place far too long, forcing it to play catchup.

We can also point to Russia’s invasion of Ukraine, which has pushed the price of oil above $100 per barrel, new supply chain disruptions from draconian Covid lockdowns in China, and some fears that the economy may slip into a recession later in the year or early next year.

No one knows when we may bottom or if the market has already put in a bottom. Yet, there is no shortage of opinions from market ‘gurus’ and ‘talking heads.’

Historically, on average market pullbacks have not been as deep and as long when a recession was avoided.

We also know that time in the market, not the attempt to time the market, has been the better path to one’s financial goals.

To paraphrase one financial journalist, the hall of fame for market timers is a very lonely club.

Warren Buffett once said, “I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.” His track record speaks volumes.

What do we typically see at a market bottom? There is no shortage of negative chatter.

Yes, negative sentiment abounds today: high inflation, rising interest rates, and more. But a turnaround in stocks usually occurs before bad news subsides.

As the long-term data suggest, market pullbacks eventually end, and stocks move higher. Why? The U.S. economy has expanded over a long period, and a well-diversified portfolio has tapped into that long-term economic growth.

7300 Wealth Connect – May 2022

Interest Rates, Interest Rates, and Interest Rates

Talk of a steep series of rate hikes, persistently high inflation, recent recession worries, Covid lockdowns in China, and the backdrop of the war in Ukraine created stiff headwinds for stocks in April.

Minus the war and lockdowns in China, the overriding themes since the beginning of the year have been inflation and how the Federal Reserve might react to inflation. During April, most Fed officials pulled few punches, and investor sentiment reflected the sour mood.

Let’s review the table below. Stocks had a tough month as bond yields jumped. Furthermore, yields are up sharply since the beginning of the year. Without diving into a mind-numbing discussion of discounted cash flows, higher rates compete with stocks for an investor’s dollar.

Last year, yields held at stubbornly low levels, despite high inflation. This year, the aggressive stance from Fed officials has moved the needle on bonds.

Let’s look at a couple of remarks last month. “It is of paramount importance to get inflation down,” Fed Vice Chair Lael Brainard said in an early April speech (Wall Street Journal).

“Paramount” is a strong word. It wasn’t an off-the-cuff comment. It came in prepared remarks. Since she had been considered more dovish (reluctant to aggressively raise interest rates to slow inflation), her comments suggested other dovish members are on board.

San Francisco Fed President Mary Daly said high inflation “is as harmful as not having a job… If you don’t have the confidence (the Fed will use its inflation-fighting tools), let me give it to you (CNBC).”

What is the Fed trying to communicate? Well, Fed officials don’t want to surprise investors, especially if it involves rate increases. It’s better to hint at any pain rather than surprise with shock and awe.

One closely followed measure from the CME Group suggests a 50 bp (basis point, 1 bp =0.01%) rate hike at the May 4th meeting is all but guaranteed. There is also a high probability May’s increase could be followed by 75 bp in mid-June, and another 50 bp in July.

While there are no guarantees as economic conditions could change, such a path would put the fed funds rate at 2.00-2.25% after the July meeting, up from 0.25—0.50% today.

It’s a magnitude of rate hikes we haven’t seen since 1994—see Figure 1, which is a repeat of last month’s graph.

In the 2000s, the Fed’s tone was more measured: a series of 25 bp rate hikes over two years, as it ‘pre-emptively’ moved against inflation. It was even more gradual in the 2010s. Today, the Fed is ‘reacting’ to inflation, hoping to atone for last year’s mistake, since it mistakenly believed inflation was temporary.

However, better-than-expected first quarter profits, according to Refinitiv, helped shield investors from even more volatility. Plus, most economic gauges point to economic growth.

For instances, if the economy were slowing significantly, we would see it in an uptick in layoffs. First-time claims for unemployment insurance are near the lowest since the late 1960s. As Figure 2 illustrates, continuing claims, which measures the number of individuals who receive regular benefits, is at the lowest reading in over 50 years.

If those folks were struggling to find work, claims would be rising.

Besides, anecdotal reports from various companies, including restaurants, travel, and entertainment, suggest the consumer is healthy.

For example, an April 23rd story in the Wall Street Journal:

Concert ticket prices soar on strong demand, not just inflation—Strong fan interest in better seats and experiences prompts more aggressive pricing at box office

Consumers would be far more reluctant to shell out the big bucks if they weren’t feeling good about their finances. Recent GDP data from the U.S. BEA confirms strong spending on services, though we are seeing a modest shift away from goods.

While wages aren’t keeping up with inflation, some stimulus money is still socked away in savings accounts, which is aiding spending.

But higher interest rates and incomes that aren’t keeping up with inflation could eventually lead to greater resistance. We are not there yet, as the Federal Reserve hopes to slow inflation without leading the economy into a recession.

It will require skill and a little bit of luck.

The recent rise in the dollar could help slow inflation for imported goods. Next, help with the supply chain would be welcome. If you have questions or would like to talk, we are only a phone call away.

7300 Wealth Connect – April 2022


The Dow Jones Industrial Average is down 5.8% since its January 4th record high and the broader-based S&P 500 Index is off 5.5% since its January 3rd record high, according to St. Louis Federal Reserve market data through March 31.

If we measure the respective peaks to the most recent troughs of both indexes, the Dow lost 11.3% (January 4—March 8) and the S&P 500 Index lost 13.0% (January 3—March 8).

Selloffs are inevitable, and losing ground is hardly a reason to get excited, even if the recent pullback is modest.

Yet, given the Russian invasion of Ukraine, high inflation, soaring oil/gas prices, and rising rates from the Federal Reserve, stocks have been resilient in the face of stiff headwinds.

The most immediate impact of the war has been on gasoline prices, as illustrated by Figure 1.

The jump in gasoline prices will have an immediate impact on inflation, and we’ll see it reflected in the March Consumer Price Index, when it is released in mid-April.

But the overall economic impact is less certain. For every penny increase in the price of gas, U.S. consumer spending drops by $1.18 billion a year, according to an estimate from Federated Global Investment Management (Bloomberg).

For example, a $0.75 jump in gasoline, if maintained over a year, would hit spending by roughly $90 billion. But U.S. Gross Domestic Product is over $24 trillion, which would translate to less than 0.4%. It’s not insignificant, but by itself, it’s not enough to throw the economy into a recession.

Still, it’s not simply gasoline prices that are rising, and we may see some resistance to higher prices in general.

For investors, war generated an enormous amount of uncertainty, and stocks lost ground in the wake of the invasion. Yet, fighting continues and stocks have moved off the early March low.

Ukraine is far from an ideal situation, and how the war may unfold is a big unknown. But recently, there have been no significant developments that might negatively affect investor sentiment, and investors seem to be taking the apparent stalemate in stride.

Put another way, investors have gradually adapted to a new normal.

It’s not that we are immune to wanton acts of aggression by Russia. We’re not. Investors view geopolitical events through a very narrow prism. That is, how it may affect economic growth.

During March, economic activity appeared to accelerate. Weekly first-time claims for jobless benefits fell to a 52-year low per the Dept of Labor, and the U.S. BLS reported 431,00 new jobs.

The Federal Reserve rediscovers its purpose

We haven’t seen a truly aggressive rate-hike cycle since 1994, when the Fed lifted the fed funds rate from 3% to 6% in one year—see Figure 2.

The last time we saw a 50 basis point ( 1 bp = 0.01%, so 50 basis points in this example = 0.50%) rate increase was in 2000.

As illustrated in Figure 2, the Fed raised the fed funds rate last month by 25 bp to a range of 0.25—0.50%.

The Fed’s Summary of Economic Projections released in March suggests the fed funds rate could rise to 1.75—2.00% by the end of the year. One closely followed gauge from the CME Group suggests a fed funds rate of 2.50—2.75% is possible by year-end.

Of course, these are simply projections and measures of sentiment at a point in time. They are based on the aggressive tone taken by Fed Chief Powell, recent comments by Fed officials, today’s tight labor market, and high inflation.

The Fed’s goal is to slow overall economic demand, which is putting upward pressure on prices, and reduce the huge number of job openings, which puts upward pressure on wages. Both variables raise costs for businesses, which can get added to the price of retail goods.

Few would turn down a big raise. That’s understandable. But the Fed sees a wage-price spiral and too-strong demand as inflationary.

Of course, to bring down inflation, the Fed will need help from the supply chain, but the war in Ukraine will likely exacerbate problems, at least over the shorter term.

During the mid-1960s, mid-1980s, and mid-1990s, the Fed pre-emptively acted against the potential of higher inflation and engineered what analysts call a ‘soft landing,’ which simply means it didn’t throw the economy into a recession.

Today, the economy is creating plenty of jobs, but inflation is higher, which makes the Fed’s task more challenging.

Why is it more challenging? High inflation will likely require more aggressive rate increases, which might slow the economy too quickly.

The Fed is not acting proactively against the possibility of higher inflation. Instead, it is reacting to higher prices, hoping to bring inflation back to its 2% target without a recession, i.e., a hard landing.

7300 Wealth Connect – February 2022

January’s Rocky Start

January was an uncertain month for investors. It didn’t take long for a more aggressive stance by the Federal Reserve to inject volatility into the market. But does the first month set the tempo for the rest of the year? Before we delve into the “what and why,” let’s look at what is popularly known as the January barometer.

The January barometer suggests that the performance of the S&P 500 Index in January foreshadows the performance for the rest of the year. But does it really work?

Since 1945, the January barometer has held true roughly 75% of the time when January was positive, according to Fidelity Investments. That is to say, in most cases, an up January has led to an up year.

One reason may be fairly simple: the historical proclivity of stocks to rise. However, what happens when January finishes in the red, as we saw last month? Well, the answer is less clear.

Going back to 1950, in 14 out of 28 years when January ended lower, the stock market gained ground during the year, sometimes by a very substantial amount. That was the case in 2020 and 2021.

Of course, what happens in the past does not always correctly predict what will happen in the future. There are much more important fundamental factors, including profits, the economy, monetary policy, interest rates, and more.

The Fed—no more Mr. Nice Guy

Last year’s kinder and gentler Federal Reserve has been replaced by a Fed that is rattling its saber. It’s a far cry from a year ago when Fed Chief Powell suggested there would be no rate hikes through at least 2023.

Figure 1 illustrates the Fed has been much more patient this time around. In the last cycle, it began a gradual series of rate hikes in 2015 when inflation was low, and the jobless rate was 5.0%. Today, the Fed is behind the inflation curve and strongly hinted it would like to catchup.

But trying to rein in inflation without causing an economic hard landing could be a challenge.

In December, the Fed’s own Economic Projections suggested three, ¼ percentage-point rate hikes in 2022. In early January, several Fed officials suggested at least four. By month’s end, Fed Chief Powell wouldn’t rule out the possibility of one rate hike per meeting (there are eight schedule meetings each year; January was the first).

Nearly all observers expect the first rate increase to occur in March.

How might rising interest rates slow inflation? The Fed sees higher interest rates as a way to put the brakes on faster economic growth, slow overall demand, and take pressure off prices.

The economy ended the year with an annualized growth rate of 6.9% in the fourth quarter, according to the U.S. BEA. Last year, three of the four quarters saw economic growth north of 6%. That’s impressive.

Strong economic growth lowered the jobless rate to 3.9% as of December, per the U.S. BLS. Further, significant labor shortages in some industries are pushing up wages while supply chain disruptions are exacerbating inflation. Wage hikes are great for workers, but they can also lead to higher prices.

As we enter February, investors are attempting to price in higher interest rates, which could offer stiffer competition to stocks. However, economic growth supports higher profits, which aid stocks. It’s akin to an economic tug of war.

Expecting volatility

If we travel back 100 years, we’d find that volatility is the norm. According to CNBC, the average intra-year peak to trough in the stock market going back to 1928 was 16.5%. In 59 of 94 years, intra-year losses were in excess of 10%. In 24 of the 94 years, losses topped 20%. Yet, in most cases, stocks finished the year higher.

Since 1921, the Dow posted an annual advance 70% of the time, per Trading Investment. What unnerves some investors is the idea that stocks seem to take the stairs up and the elevator down.

Since peaking early in the year, the S&P 500 Index’s peak-to-trough decline was 9.8%, according to St. Louis Federal Reserve data. It’s just shy of an official correction of 10%. The decline in the tech-heavy Nasdaq was more pronounced.

And, according to the Wall Street Journal, speculative and unprofitable firms have been hit the hardest. To paraphrase Warren Buffett, you find out whose swimming without clothes when the tide goes out.

As we’ve cautioned in the past, making investment decisions based on market action is rarely profitable. A disciplined approach based on one’s long-term goals has historically been the straightest path to reaching one’s financial goals.

Circumstances change. We understand that. If that’s the case, let’s talk. We’re only a phone call away.

7300 Wealth Connect – January 2022

When Worlds Collide

Putin has invaded Ukraine.

Investors have been preparing for such an eventuality, as we’ve seen the major indexes decline in recent weeks, but the reality created another bout of selling early today before a rally pushed stocks into the green.

By day’s end, stocks erased early losses. The Dow rose 0.3%, the S&P 500 Index gained 1.5%, and the Nasdaq added 3.3%. Sell the rumor, buy the news? It depends on how things unfold in the coming days and weeks. At a minimum, expect volatility.

Let’s add one more headwind. Investors are also grappling with higher inflation and expectations the Fed will raise interest rates this year to slow inflation.

Yet, strong corporate profits and the growing economy have cushioned the downside.

Russia makes noise

Massing troops along the border of Ukraine has created a heightened level of uncertainty for investors. Increased uncertainty translates into additional outcomes for the U.S. and global economy. Most of those outcomes, even if remote, are to the downside.

Therefore, short-term investors recalibrate and attempt to discount the uncertainty. Over time, the new reality gets incorporated into the outlook and the focus returns to the domestic economy. That has been the historical pattern.

Stocks had been priced for perfection. However, a more hawkish sounding Fed and Russia’s aggressive posture toward Ukraine provided the perfect excuse for short-term traders to take profits.

While we have been due for a market correction, attempting to time such a correction is all but impossible. There are those who have been calling for a correction for over a year and were stampeded by the bulls.

Besides, you must be right twice to be successful—near the top and near the bottom. The smartest analysts haven’t figured out that equation, and they never will.

Longer-term, the biggest influence over stocks is the U.S. economy. But how the invasion affects consumer psychology will play a big role.

A significant impact on the U.S. economy from a war in Asia doesn’t seem likely. Are people going to avoid dining out, or, for that matter, skip the purchase of an appliance or a planned trip? It seems unlikely.

Moreover, a larger war involving NATO and the U.S. is not currently in the cards based on repeated statements from European and U.S. leaders.

But what’s happening overseas is something you and I cannot control. Control what you can control.

Maintain a disciplined approach. Your financial plan helps manage emotions. It is the roadmap to your goals. It incorporates the unexpected potholes you will hit along the way to your goals.

Just as it helps prevent you from taking on too much risk when stocks are soaring, it also helps prevent emotional decisions that are rarely profitable when stocks are declining.

Oh, and so far, the S&P 500’s decline has been modest 10.6% from the Jan 3 peak (Yahoo Finance data).

While we won’t forecast a market bottom (who really can), BMO Investment Strategy and FactSet calculated that the average rebound following a 10-20% correction was 13.8% after 3 months, 20.0% after 6 months, and 27.3% after one year (data back to 1970).

Recall that stocks came back after 9-11. Though the road was bumpier, history tells us stocks came back after Pearl Harbor.

Before we wrap up, let me offer a sobering perspective for those who are suffering in Ukraine. What’s happening at home doesn’t compare to what’s happening to the moms, dads, sons, and daughters in Kyiv. I wouldn’t want to trade places with them. I’m sure you wouldn’t either.

Finally, I’m reminded of a comment from UBS analyst Art Cashin. When he began in the business over 60 years ago, a veteran trader told him, “The world only ends once. Don’t bet on the end of the world. The odds are way against you.”

7300 Wealth Connect – December 2021

A Greek Alphabet Soup

In December 2020, the news media reported a new variant of the coronavirus that causes COVID-19. Since then, other variants have been identified and are under investigation, according to John Hopkins Medicine.

If we quickly review the CDC’s website, we count 11 variants. Many remain under the radar, such as the Alpha, Beta, Gamma, and Epsilon. Lambda is no longer mentioned by the CDC.

The Delta variant, labeled a variant of concern, has been responsible for the spike in cases during the summer and fall.

Not one has caused much concern among investors amid the growing use of vaccines and therapeutics. This is very important to the economy and investors, as these tools have been used in place of economically destructive lockdowns and social distancing restrictions.

It’s not that they are full proof. They aren’t. But lockdowns and various restrictions had been the preferred tool for government officials.

Enter Omicron

On Black Friday, Omicron was labeled a variant of concern by health officials. It’s still very early, and the situation is fluid, but Omicron appears to be very contagious, and current vaccines and treatments may be less effective.

On Black Friday, the knee-jerk reaction among short-term investors was to sell first and ask questions later, as they openly fretted about any potential impact on the U.S. and global economy.

Following sharp gains over the last year, it’s not a surprise that unexpected bad news can create the right conditions for a selloff. But end-of-month weakness doesn’t necessarily presage further losses.

Today, short-term traders are trading on headlines. If further bad news is not forthcoming or updates to vaccines and treatments prove to be effective against Omicron, we could see volatility brought on by the new variant recede.

Flexing its muscles

As the month ended, we received a signal from Fed Chief Powell that the Fed is starting to take inflation more seriously.

“At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases … perhaps a few months sooner,” Fed Chief Powell said before a Senate committee.

In early November, the Fed said it would begin tapering its $120 billion in monthly bond purchases by $15 billion per month in November and again in December. Economic conditions would dictate the pace in 2022.

November 30th comment was a shift in Powell’s stance, and investors took notice.

Yes, Virginia, the economy is strong, but so is inflation

Moody’s High Frequency GDP model puts growth at an impressive 8.5% in Q4. The Atlanta Fed’s GDPNow Model is tracking Q4 at 8.6%. Yes, Q4 is still in play, but it’s a sharp acceleration from Q2’s 2.1%, per the U.S. BEA.

However, the Consumer Price Index (CPI) rose 6.2% versus one year ago. It’s a 30-year high. And it’s not simply food and gasoline that has driven up prices.

The core CPI, which excludes food and energy, also hit a 30-year high—see Figure 1.

Pent-up demand and a boatload of pandemic stimulus are fueling economic activity. In addition, raw material costs and wages are rising, and supply has been affected by production woes around the globe. It’s the perfect storm for higher inflation, and it may finally have the Fed’s attention.

Final thoughts

Solid economic growth, impressive profit growth, and low interest rates, which offer little competition for stocks, have sparked strong gains this year for investors in well-diversified stock portfolios. But stocks are never immune from volatility.

Yet, volatility is usually short lived. Over long periods, the major stock market indexes have had an upward bias. But we recognize that gains don’t come in a straight line.

We continue to suggest adherence to your long-term financial plan. It doesn’t eliminate risk but helps manage risk. We also discourage timing the market. Few if any can consistently pick the peaks and valleys in the market.

Time in the market, not timing the market, has historically been the best long-term path for wealth creation and reaching one’s financial goals.

7300 Wealth Connect – November 2021

October Trick or Treating Yields Treats

Historically, September has not been kind to investors. Using S&P 500 data from the St. Louis Federal Reserve dating back to 1970, September ranks dead last in returns.

But October has the ghoulish reputation. The Crash of 1929 and 1987 were in October, and the selloff in October 2008 was tied to the financial crisis.

But reputations don’t always square up with reality. October has historically been a favorable month for stocks, according to long-term averages (St. Louis Federal Reserve data).

Following the biggest monthly decline since March 2020, the S&P 500 Index3 rallied last month, posting its best monthly return of 2021—see Figure 1. The index, along with the Dow Jones Industrial Average1, set multiple new highs late in the month.

More impressively, the S&P 500 has cobbled together strong returns for much of the year. Seven of the last ten months have seen an advance of at least 2% in the broad-based index.

Since the beginning of the year, the S&P 500 has set 59 new closing highs, according to LPL Research and S&P 500 data from the St. Louis Fed.

So, what helped turn stocks around following a modest decline in September? The start of Q3 earnings season was the primary catalyst for October’s convincing performance.

Given the unending chatter about slowing economic growth, rising inflation, cost pressures, and significant supply chain bottlenecks, investors were too pessimistic going into the season. Expectations had been lowered and anxieties were high.

The large banks unofficially kicked off earnings season in the middle of the month. Results came in much better than expected, according to CNBC and the Wall Street Journal, and it sparked a shift in sentiment.

Over a two-day period that ended October 15, the Dow rallied 917 points, or 2.7%, according to market data provided by the St. Louis Fed. Within a few days, the Dow and the S&P 500 Index claimed fresh territory.

That doesn’t mean there weren’t any problems. A number of firms said cost pressures and supply chain bottlenecks hampered results. Overall, however, the numbers have been strong.

Here’s another short, but more granular look. On October 1, analysts were forecasting a 29.4% rise in S&P 500 profits versus a year ago, per Refinitiv.

As of October 29 (with 56% of companies having reported results), analysts had ratcheted their estimate to 39.2%, a significant upward revision. As we’ve seen in recent quarters, Wall Street analysts have been far too conservative in their profit forecasts.

Anything north of 20% would historically be strong.

Today, we’re comparing recent results with numbers from a year ago, when the economy was just beginning to recover from a short but severe recession. Still, an upward revision of nearly 10 percentage points is impressive.

Also aiding sentiment, analysts have upwardly revised estimates for Q4 and 2022, which have also aided the broader stock market.

With the economy growing and corporate profits exceeding forecasts, low interest rates have left investors with few options.

Final thoughts

Solid economic growth, impressive profit growth, and low interest rates, which offer little competition for stocks, have sparked strong gains this year for investors in well-diversified stock portfolios.

Yet, and not to throw a cold towel on the strong year-to-date-performance, we can never discount the possibility of a market correction.

Inflation remains a threat and the Federal Reserve has tilted slightly more hawkish as of late. Nonetheless, the fundamentals have been quite positive.

7300 Wealth Connect – October 2021

September and Hurdles

Historically, September has not been kind to investors. Using S&P 500 data over the last 50 years, September ranks dead last, with an average return of -0.73% excluding dividends.

Since 2010, the S&P 500 Index’s return has been negative six times, including last month, which saw the broad-based index decline by 4.8%.

But the third quarter started out on a firm note, with gains continuing through August. As we’ve seen for much of the year, economic growth, very strong profit growth, and low interest rates have fueled the market’s spectacular rise.

Since the new bull market began in late March 2020, the S&P 500 Index has yet to fall by 10%, which would be considered a correction—see Figure 1.

While we have had selloffs this year, they have been short-lived. We have yet to see a pullback greater than 5%, until now (Figure 1). Still, a 5% pullback is modest.

We’re due for some type of consolidation, but timing a correction and correctly calling the bottom (and doing it consistently) is a feat few, if any, have mastered.

Bottlenecks, the Fed, and the economy

Last month, uncertainty crept into market sentiment. On the inflation front, much can be blamed on strong demand for consumer goods and a supply chain that cannot keep up. And Covid-related bottlenecks and supply disruptions aren’t going away quickly.

Fed Chief Jerome Powell had been optimistic that supply constraints would be temporary, but he conceded last month that inflation has been “frustrating” and believes it will run into 2022.

“It’s also frustrating to see the bottlenecks and supply chain problems not getting better — in fact, at the margins, apparently getting a little bit worse. We see that continuing into next year probably, and holding up inflation longer than we had thought,” he said.

Blown inflation projections aside, we can take some solace that outsized gains in a few items have primarily driven up the Consumer Price Index (CPI), per U.S. BLS data.

The rate of increase for services are within their long-term range. But consumer goods have sped up amid global supply chain issues and tight supplies of key raw materials (Figure 2).

We not only see it in the graphic, but a slew of companies have also acknowledged the problem in their quarterly earnings reports.

Further, a slightly more hawkish tilt by the Fed also leaned on sentiment, with central bankers now hinting a rate hike could come by late 2022, per its quarterly projections.

Meanwhile, economic growth is slowing more quickly than expected, as stimulus fades and labor shortages and supply chain disruptions take their toll. For example, the semiconductor shortage has been especially acute for automakers.

Drama on Capitol Hill, China, and Covid

Separately, the debate on raising the debt ceiling is causing jitters. The government will lose its ability to borrow by October 18, according to the U.S. Treasury Dept. A default on U.S. Treasuries has never occurred.

It’s a very unlikely event, but it would have a detrimental impact on financial markets and the economy if Congress fails to raise the debt ceiling.

Finally, we’re seeing problems surface in China’s real estate market. Such problems may stay contained to China, but they made headlines last month.

The jump in Covid cases is having some effect on the economy. More recently, however, CDC data shows that new cases have slowed. Let’s see how this plays out later in the fall.

Yet, let’s not get too pessimistic. Stocks have surged over the last year. Short-term traders are looking for reasons to step back, and hurdles that surfaced last month provided a good excuse.

While any number of short-term issues can create volatility, the economic fundamentals, growth and low interest rates, cushioned the downside last month.

7300 Wealth Connect – September 2021

Dodging COVID and Global Troubles

August is historically a weak month for stocks. Reviewing S&P data back to 1970, the average monthly return for the S&P 500 Index in August, excluding dividends, is just 0.21%. August ranks 11 out of 12. September is the worst month, with an average return of -0.65%.

Yet, the table of returns illustrates investors overlooked troubling developments last month. Notably, the S&P 500 and the NASDAQ Composite notched several record highs in August. Both are sitting on sizable year-to-date gains. Why?

The same powerful tailwinds that have been in place for much of the year—economic growth, very strong profit growth, and very low interest rates—remain in place.

But, you may ask, “What about the rise in Covid cases?” So far, investors don’t believe the jump in Covid will have a material impact on U.S. economic growth. In past surges, local and state
governments restricted economic activity to curb the spread. Today, the market is viewing the vaccines as an inoculation against a rapid slowdown in the economy.

While the highly contagious Delta variant or any future variants could eventually disrupt activity, investors are not currently concerned about an economic impact.

You may also ask, “What about troubling news spewing out of Afghanistan?” The tragedy unfolding in Asia is disturbing. Investors, however, view the world through a very narrow lens: will the unrest in Afghanistan affect the U.S. economy?

Put another way, will the crisis deter people from traveling, delay a big purchase, or prevent someone from dining at a restaurant? The short answer: very doubtful.

We have seen hourly and day-to-day volatility, which is common during any bull market cycle. But investors don’t see an impact on U.S. economic growth over the next six to nine months from a Taliban takeover and possible civil war. By month’s end, major market indexes were just off all-time highs.

The economy, Covid, and stocks

Let’s review three broad-based indicators.

Weekly first-time claims for unemployment benefits measure the number of individuals each week who make their first-time application for benefits following a layoff.

When business activity is slowing, we’d expect layoffs to rise, as falling sales and falling profits encourage business owners to cut staff. Conversely, if business activity is picking up, we’d expect layoffs to decline, since most businesses would be more reluctant to lose employees.

Today, we have yet to see an upturn in layoffs (Figure 1), suggesting economic growth isn’t being significantly affected by the rise in Covid cases.

The second indicator offers a unique peek at how individuals and families view Covid.

Lockdowns and social distancing restrictions have had a big impact on restaurants and bars. Note the sharp decline in early 2020, when the pandemic began, and late 2020, when cases accelerated in the fall (Figure 2)

Through August, sales at restaurants and bars have gained ground for five-consecutive months, including a strong 1.7% rise in August. If people are concerned, they are not avoiding crowded restaurants.

Let’s briefly review one more report, the Leading Index from the Conference Board. The Leading Index consists of 10 economic indicators that tend to signal future economic activity.

The index rose a strong 0.9% in July, which follows a 0.5% rise in June and a 1.2% rise in May. July’s reading was a fresh all-time high, signaling that solid economic growth is expected to continue in the near term.

As we enter September, investors will consider whether lofty valuations can hold up to the unwinding of fiscal stimulus and the potential for a reduction in Federal Reserve bond buys later in the year. A pullback is inevitable. For now, powerful tailwinds have been supportive.

7300 Wealth Connect – August 2021

Last Year’s Stock Market Rally Extends into 2021

Last year’s stock market rally was an explosive recovery that saw the major market averages set new highs. We’re well into 2021, and the major market averages have continued to push to new heights.

Figure 1 highlights the six longest running bull markets since WWII and compares them to the performance of the current bull run. Through the end of July, the current bull market, as measured by the broad-based S&P 500 Index3, takes the top spot. It exceeds the early performance of the long-running bull market that was born out of the 2008 financial crisis.

Before we get carried away and extrapolate today’s upward move, let’s also point out that the nearly 10-year bull market of the 1990s got off the ground slowly. In other words, let’s state something we already know, but bears repeating. Past performance is not a guarantee of future performance.

A review of the major themes driving stocks

If we step back and look at what is driving stocks, we can’t credit just one variable. Instead, several tailwinds have been responsible for the strong rally. These include:

  1. The Fed has provided super easy money. Interest rates are extremely low, which encourages investors to seek out stocks for more acceptable returns. The Fed has also been buying about $120 billion in bonds each month, which pumps additional cash into the financial system
  2. The strong economic recovery has been a tailwind. It’s expensive, and it raises the federal deficit, but strong fiscal stimulus puts cash into the hands of consumers, which helps drive economic activity.

    The U.S. BEA reported that Gross Domestic Product(GDP), the largest measure of goods and services, expanded at an annual pace of 6.5% in Q2, up from 6.3% in Q1. Consumer spending was an important component in the robust reports.

    In addition, the vaccines have accelerated the reopening. Notably, spending in Q2 was strong for service-related businesses tied to activities outside the home.

  3. Plus, the strong economic recovery has led to huge gains in corporate profits, which have far exceeded analyst forecasts in recent quarters, according to Refinitiv.

    As economic growth seems set to moderate in the third quarter, we’ll likely see profit growth moderate. However, analysts surveyed by Refinitiv continue to boost earnings forecasts in Q3 and Q4, which lends support to equities.

Looking at it as an equation, low interest rates + strong corporate profits tied to upbeat economic growth have led to a series of new highs in the major market indexes.

Yet, markets are never without risk. While there have been no major recent corrections, the risk we might see some type of pullback later in the year can’t be dismissed.

Economic growth is expected to continue this year, barring a sharp uptick in new Covid cases and related restrictions, which could create stock market volatility.

Inflation has been much higher than the Federal Reserve and many analysts had expected. If the surge in inflation isn’t temporary and proves to be more persistent than expected, we could see the Fed hit the monetary brakes faster than most anticipate.

For now, the Fed’s own projections released in June suggest the central bank may be penciling in two small rate hikes in 2023. Even if that occurs, rates would remain low by historical standards

Long-term perspective

Except for the 1987 stock market crash, bear markets (a 20% or greater decline in the S&P 500 Index), have been centered around recessions, according to S&P 500 data from the St. Louis Federal Reserve and Yahoo Finance. That streak has been in place since the mid-1960s.

Still, while long-term financial plans don’t eliminate risk, they help manage risk and take market volatility into account.

Following the big gains in stocks, it’s important to add that the investment plan is also designed to keep investors from taking on too much risk, when big market gains sometimes encourage individuals to dive too heavily into stocks.

7300 Wealth Connect – July 2021

House Price Explosion

The pandemic has created long-lasting distortions in the economy. Fiscal stimulus checks and generous jobless benefits have left many folks with extra cash. We have seen that play out in strong sales for home improvement and autos.

While distancing restrictions that had been in place have the travel industry, that may change amid pent-up demand and falling Covid cases. A shortage of rental cars has sent prices into the stratosphere in some locales.

One industry that has been met with unexpected demand is housing. Surging sales and the lack of supply have created bidding wars around the nation.

According to the National Home Price Index, prices are at a record level (blue line)—Figure 1. In addition, the acceleration in prices, which began in the middle of 2020, is up at the fastest pace on record (red line). The survey began in 1987.

In another survey, the National Association of Realtors said that the median price of an existing home hit a record $350,300 in May, up 23.6% from May 2020. The median price of a new home in May is up 18% versus one year ago to a record $374,400, according to the U.S. Census.

Yet, as any realtor will tell you, the three most important things in real estate are location, location, location. What is happening in one neighborhood may not be mirrored in another, but nationally prices have soared amid a shortage of inventory.

Making sense out of the madness

Rising prices can’t be pinned on one thing. There is plenty going on including:

  1. Mortgage rates fell to record lows. The 30-year fixed mortgage fell below 3% last July, according to Freddie Mac’s weekly survey. It held below 3% until March and has hovered near that mark since
  2. The pandemic discouraged potential buyers from listing homes last year. As a result, inventories fell sharply, limiting choices for buyers at a time low mortgage rates were encouraging fence sitters to start looking.
  3. New home builders were caught flat-footed by surging demand and have struggled to catch up. Moreover, soaring lumber prices have caused added delays. Notably, the price of lumber fell sharply in June but remains about double the pre-pandemic price (CNBC).
  4. The Wall Street Journal reported in April that the pandemic set in motion a furious scramble to buy vacation homes. In January 2020, 9% of mortgage applications came from investors and those wanting a second home. That rose to 14% last February.
  5. On a related note, investors chasing yield have snapped up houses, renting them and nibbling away at supply. These investors aren’t simply mom and pop landlords. The Wall Street Journal said pension funds are also buying homes they plan to rent.
  6. Mortgage forbearance has helped keep people in their home, preventing a flood of foreclosures.
  7. Potential sellers who want to move fear a quick house sale could leave them without a home to buy; therefore, they choose to stay put, further limiting the supply of houses.

Still, unlike the bubble during the 2000s, we aren’t seeing a building boom with large numbers of speculators chasing up prices. Just the opposite, there are not enough homes to satisfy demand.

Moody’s Analytics noted last month, “Stress lines are developing as… house prices have substantially outstripped household incomes, effective rents, and construction costs.”

But Moody’s added, “A bubble develops when there is speculation, or when buyers are purchasing homes with the intent of selling quickly for a profit. This isn’t what is happening in today’s housing market,” as house flipping remains low.

Nonetheless, the bubble question is tough to answer simply because forecasting the future involves inputting unknown future variables into an imperfect forecasting model.

The table of returns highlights the major market averages added to gains in Q2, as strong economic growth, strong profit growth, low interest rates, Fed bond buys, falling daily Covid cases, and the reopening of the economy aid stocks.

Notably, long-term Treasury yields fell in Q2, which suggests that investors may be accepting the Fed’s line that the recent burst in inflation is temporary. It could also suggest that economic growth is set to peak in Q2, as fiscal stimulus wanes.

7300 Wealth Connect – June 2021

A Four-Letter Word Called Inflation

Most have heard the question, “Is too much of a good thing, still a good thing?” Early in the year, Treasury bond yields were rising in reaction to congressional generosity. You know, trillions and trillions of dollars of stimulus cash being pumped into the economy.

The cash has aided the economic recovery, and stocks have reacted favorably. Today; however, too much money is generating a new concern: inflation.

The core Consumer Price Index (CPI), which excludes food and energy, rose at its fastest monthly pace in 40 years, up 0.9% in April—see Figure 1. Add food and energy into the mix and the CPI increased a worrisome 0.8%.

Admittedly, inflation worries have popped up before. Inflation Rears Its Ugly Head Once Again was a March 2008 Wall Street Journal headline.

Today, economists are debating whether the recent flare-up is temporary and tied to the reopening of the economy and pent-up demand or something more ominous that would eventually force the Federal Reserve to jack up interest rates.

Fed officials have repeatedly insisted that today’s jump in prices is “transitory,” their preferred word of choice. What does transitory mean? It simply means temporary.

That may turn out to be the case, but let’s dig a little bit deeper. Policymakers are finding out that it is easier to fuel the demand side of the economy (consumers and businesses buying goods) than get the productive side of the economy, which generates that supply of goods, back on its feet.

Using a very broad overview, Figure 2 helps explain what’s happening. The demand for goods has surged thanks largely to fiscal stimulus, but the production of goods has lagged badly.

Imports have made up some of the difference, hitting a record high in March per U.S. Census data. Still, a tight supply of some goods is pushing up prices. It’s the classic case of supply and demand as the economy reopens.

Recent headlines shine a light on the problem. A May 13th story in the Wall Street Journal, Empty Lots, Angry Customers: Semiconductor Crisis (Shortages) Throws Wrench into Car Business, sums up what’s happening in the auto industry.

Or here is another look from a May 11th CNBC feature: U.S. Faces Major Shortages in Everything from Labor to Semiconductors, Lumber, and Packaging Material.

Problems are especially acute in housing.

The National Association of Homebuilders said that lumber shortages are leading to skyrocketing lumber prices, adding an average of $36,000 to the cost of new home in one year.

Where might we be headed? Congress is debating infrastructure and big new spending bills. There is still plenty of fuel in the tank to support consumer spending, and the Fed insists its easy money policy won’t be changed anytime soon,

Further, it is unknown when supply-side bottlenecks might clear or whether labor shortages may fuel wage increases that get tacked on to retail prices.

Yet, disinflationary demographic trends that predate the Covid crisis remain in place. The same could be said of globalization, though less so than in recent years. Plus, labor unions no longer have the power to exact inflationary wage hikes as they did in the 1970s.

Besides, a burdensome rise in inflation would probably be met by a quicker response from the Fed than what we saw a generation ago.

Inflation is not a four-letter word, but it might as well be. A repeat of the 1970s is an unwanted outcome. However, the low inflation of the last decade is unlikely to be matched over the medium term.

7300 Wealth Connect – May 2021

A Robust Economic Rebound

It’s been one year since the Covid pandemic pushed the economy off a cliff. Fast forward to today. What a difference a year makes. The economy has roared back. Some sectors have benefited enormously, while others have lagged.

Gross Domestic Product (GDP), which is the largest gauge of goods and services in the economy, slowed in Q4 from Q3’s record annualized pace of 33.4%, but it accelerated in Q1 to a 6.4% annualized pace – see Figure 1.

Successful rollout of the vaccines, fewer restrictions on businesses, and stimulus money contributed to Q1’s upbeat pace. Breaking down some of the numbers, consumer spending jumped 10.7% in Q1 versus a more subdued 2.3% in the final quarter of last year.

What the consumer does is important because consumer outlays account for nearly 70% of GDP, according to U.S. Bureau of Economic Analysis (BEA) data.

However, consumer outlays have been distorted by the pandemic, as Figure 2 illustrates.

Spending on durable goods, which is generally defined as purchases designed to last at least three years, such as autos or home appliances, surged in Q1. Big-ticket items have benefited enormously from stimulus checks.

Yet, services continue to lag. Note the steep decline in Q2 2020 for services amid widespread restrictions on sectors that rely heavily on person-to-person interactions. The cash was available, but the transmission mechanism between consumers and business was blocked.

Where might we be headed? Economic forecasting is inexact. While the strong stock market rally indicates investors sniffed out the economic rebound over the last year, most forecasters were far more pessimistic.

A resurgence in the virus could put a damper on the rest of the year, but “excess savings” may be set to drive activity for much of 2021. It’s one reason investors have pushed the major stock market averages higher.

Moody’s Analytics defines excess saving as savings “above what households would have saved if the pandemic had not occurred, and their savings behavior had been the same as in 2019.”

In other words, it’s the extra cash that was squirreled away as we curtailed spending amid lockdowns and social distancing restrictions on various businesses.

As of the first quarter of 2021, Moody’s estimates that excess savings around the world is over 6% of global GDP. The U.S. has the world’s highest rate of excess savings, equal to 12% of GDP, or $2.6 trillion. Stimulus checks, paycheck protection loans, and very generous jobless benefits have all contributed to the stockpiling of cash.

We see it in the elevated savings rate—see Figure 3.

Might the savings rate eventually settle at an elevated rate? It’s possible, but it’s cash that seems set to power growth as the economy reopens.

7300 Wealth Connect – March 2021

Too Much of a Good Thing? Treasury Yields Rise.

The Federal Reserve is in no mood to raise interest rates. The Fed’s Summary of Economic Projections suggests that its key short-term lending rate, the fed funds rate, could remain near zero through the end of 2023.

The Fed is not worried about inflation and continues to use a wide array of tools, including bond buys and low rates, to encourage economic growth and get people back to work.

Moreover, Congress is intent on passing another large relief package that will include putting more money into the hands of consumers and the unemployed via stimulus checks and an extension of generous unemployment benefits.

Is too much of a good thing a good thing?

Twentieth century film star Mae West playfully remarked, “Too much of a good thing can be wonderful.” But is it?

Interest rates are low, the economy is growing, and there is plenty of cash in the financial system. Further, Congress appears ready to pass another big package.

The combination has supported the economy and helped fuel gains in the stock market. However, Treasury bond yields are beginning to react. Since the Fed is pledging to keep rates low, why are longer-term Treasury yields moving higher as illustrated in Figure 1?

First, the Fed can control short-term rates, but can only hope to influence longer-term yields through commentary by Fed officials and its own guidance. But other factors play a role in long-term yields, too.

For starters,

1. While uncertainty persists, sentiment suggests that U.S. economic growth will accelerate this year, which reduces the attractiveness of safer Treasury bonds (Treasury yields and bond prices move in the opposite direction). The average 2021 forecast for Gross Domestic Product per a survey of economists by Moody’s Analytics is 6.1%.

2. Investors are beginning to fear that too much fiscal stimulus could push inflation higher, which reduces the appeal of fixed income investments. Money supply growth of 25% last year is the fastest in over 60 years (St. Louis Federal Reserve). It is also raising inflation concerns. It would be the classic case of too much money chasing too few goods.

3. The Fed’s insistence that it will keep short-term interest rates low for a long period may also be lifting inflation fears amid worries the economy could overheat and push up prices.

One gauge investors use to measure inflation expectations is the 10-Year Breakeven Rate, which provides an estimate as to the level of annual inflation investors expect over the next 10 years.

While a rate near 2.25% signals that inflation expectations have not become unanchored, the level has been rising, recently hitting a 6 ½ year high—see Figure 2.

While the rate of inflation probably has an upward bias this year, that doesn’t mean an unwanted rise in prices is on the horizon. Besides, accurately forecasting inflation over the long term is dicey at best since the inflation-forecasting equation has many moving parts.

Bottom line

Yields on corporate bonds have risen at a more modest pace so far. And both corporate and Treasury yields remain at an historically low level.

In some respects, the rise in Treasury yields is a sign of confidence in the economic outlook. But investors are also trying to discount an uptick in inflation amid a very easy monetary policy and very generous government stimulus.

Ultimately, the path of the pandemic will probably have the biggest influence on the economy. Uncertainty remains, but new vaccines and the decline in new cases are cautiously encouraging.

7300 Wealth Connect – February 2021


The summary below is provided for educational purposes only. If you have any thoughts or would like to discuss any other matters, please feel free to contact me.

Drama on Wall Street

The major market indexes have had a very strong run since bottoming last March. We saw some uncertainty early in the fall heading into the election, but the bitter contest is over. With the announcement of vaccines and new fiscal stimulus, stocks roared to new highs.

Moreover, low interest rates, monthly Federal Reserve bond buys, better-than-expected corporate profits, and a growing economy have added to favorable sentiment.

Yet, euphoria can sometimes breed too much euphoria, which can create conditions that can lead to unexpected volatility.

Revenge of the nerds

Last week, a few stocks that had been heavily shorted by hedge funds (shorting is a risky way to profit if a stock falls in price), soared in price as young speculators used social media chat rooms to encourage purchases and snare professionals in a money-losing trap. It’s a populist and profit motive for these chatroom traders.

The stock that received the most attention was GameStop (GME), a struggling video game retailer that’s been heavily shorted (CNBC, MarketWatch) by the professionals. GameStop was selling below $20 per share in early January but peaked at over $480 on January 28, according to price data from Yahoo Finance. GameStop closed at $325 on January 29.

Why have a few names created volatility? There are fears that hedge funds being squeezed might be forced to sell other stocks and raise cash.

Fed Chief Jerome Powell was asked about market action at last week’s press conference, which followed the first Fed meeting of the year.

Powell declined to comment on specific firms, but opined that recent fiscal policy and vaccines were responsible for market gains since November, not easy Fed policy, i.e., low interest rates.

Low rates and Fed bond buys, economic growth, better-than-expected corporate profits, fiscal stimulus, and the new vaccines have all fueled the rally. Mix in social media, an Internet-driven insurgency, and zero-commission trading, and unexpected volatility surfaced last week.

Volatility can happen for any number of reasons. A 10% market correction can never be ruled out. Still, the economic fundamentals that lifted stocks over the last year remain in place.

How might the drama end?

Most professionals believe it will end when most short sellers have given up and have closed out their positions, or regulators or brokers intervene. At that point, we could see a sharp selloff in GameStop and other companies hyped by the chatroom crowd. But might young traders target new, heavily shorted stocks? Might this turn into a new phenomenon we must adapt to?

Longer term, economic fundamentals and economic activity determine stock prices.

As billionaire investor Leon Cooperman said on CNBC late last month, “At the end of the day, the stock market reflects economic progress or the lack thereof. Water seeks its own level.”

Growth moderates in the fourth quarter

The U.S. BEA reported that Gross Domestic Product, which is the largest measure of economic output, slowed from Q3’s record annualized pace of 33.4% to 4.0% in Q4—see Figure 1.

Historically, 4% is solid, but we saw a significant moderation in consumer spending, as the surge in new U.S. Covid cases late last year played a big role in restricting activity. Business investment and housing, however, helped drive overall growth.

In December, nonfarm payrolls fell by 140,000. This included a loss of 372,000 jobs in the restaurant industry, according to the U.S. Bureau of Labor Statistics.

In other words, one industry more than offset job gains in the rest of the economy.

Various surveys of manufacturing and the broad-based service sector suggest that economic growth sped up in January. In particular, Markit Economics, which surveys the economic landscape, said U.S. manufacturing in January accelerated at its fastest pace since it began publishing its index

Rising Covid cases late last year have hampered overall growth. While new cases have slowed per Johns Hopkins data, they remain elevated. And the risk from new strains is adding to uncertainty.

However, fiscal stimulus is in the pipeline, additional government stimulus is on the table, and a high savings rate seem set to send a mountain of cash into the economy this year.

Ultimately, the rollout and success of the new vaccines will play an important role in driving economic confidence in the months ahead.

One final note on last week’s action: When volatility strikes, even seasoned investors sometimes consider changes to well-diversified financial plans. Over the longer term, relying on timetested investment principles and avoiding decisions based on short-term market gyrations have historically led to the best outcome.

If you have any questions or concerns, feel free to reach out to me. Please stay safe.

7300 Wealth Connect – 01 – 21


The summary below is provided for educational purposes only. If you have any thoughts or would like to discuss any other matters, please feel free to contact me.

Never Bet Against America

2020 tested America like no other year. It was as if the perfect storm made landfall and washed across the continent. The Covid pandemic, the shutdown of the economy, a presidential election, fires and hurricanes, and civil disobedience.

Yet, as the economy was near the bottom, investment legend Warren Buffett reiterated, “Never bet against America.” We won’t forget this year, but optimism is embedded in our DNA.

Let’s quickly look at some stats. The shuttering of the economy early in the year led to the steepest quarterly decline in U.S. Gross Domestic Product (GDP) on record, according to the U.S. BEA. Economic growth in the following quarter rebounded at the fastest pace on record.

Despite a vicious market selloff in March, stocks recovered and set new highs.

“For Many Big Businesses, 2020 Was a Surprisingly Good Year,” so said a December 18th story in the Wall Street Journal. We see it reflected in equities.

Figure 1 highlights the steep selloff in March, followed by the subsequent rally.

We counsel that market pullbacks are a natural part of the investing landscape, though we acknowledge that the 33.9% peak-to-trough decline in the S&P 500 occurred in only one month.

Yet, let’s take a moment to review Figure 2. Figure 2 highlights the annual return for the S&P 500 Index, including dividends, and the maximum pullback during each year.

Since 1980, the average annual intra-year pullback in the S&P 500 has been 14.2%; yet, the S&P 500 has averaged a 13% advance each year (including dividends).

Here are some additional data points. From 1980 to 2020 (41 years), there have been:
• 7 down years, with the average decline during a down year of -13.1%
• 34 up years, with the average increase during an up year of +18.4%

The only time we’ve had back-to-back declines was 2000-2002 (stock bubble bursting).
• 21 out of 41 years, we’ve had pullbacks of 10% or more, or an average of every 1.95 years.
• 6 of the 41 years saw pullbacks of 20% or more, or an average of every 6.83 years.

Figure 2 illustrates the long-term upward bias in stocks.

Changes in sentiment can force stocks lower over shorter periods, but favorable economic fundamentals have helped fuel longer-term gains.

A review

The economic shutdown triggered the first bear market since the 2008 financial crisis. But there were two important catalysts that helped fuel the subsequent rally.

First, the Federal Reserve went far beyond measures announced during 2008. Second, Congress passed the $2 trillion CARES Act, which provided generous benefits for the unemployed, while aiding households, and small and larger businesses.

The CARES Act and the Fed couldn’t prevent the worst quarterly decline in GDP we’ve ever experienced, but it helped set the stage for a sharp economic rebound in Q3.

Record low interest rates, coupled with economic growth, played a big role in the market’s rally.

Still, the pandemic created distortions in behavior. Technology performed admirably, and you see it reflected in the outperformance of the tech-heavy Nasdaq.

Autos, home improvement, online retailers, streaming services, housing, and big box retailers deemed to be essential did very well during the pandemic.

However, oil and gas, mom and pop outfits, and traditional department stores suffered.

The same could be said of businesses that rely on person-to-person interactions, including movie theaters, sporting events, restaurants, concerts, air travel, and hotels.

It has been the tale of two economies

A Look Ahead

While cautious optimism prevails, the path of the economy is likely to depend on the course of the virus. The likelihood that vaccines will be widely available by June could provide a significant boost to sectors hit hard by social distancing. But distribution of the vaccines must accelerate soon.

Just as investors sniffed out the robust Q3 economic recovery, record highs in December suggest we’ll see further improvement next year, though expect the recovery to be uneven.

Of course, there are always risks.

The Fed is unlikely to lift short-term rates in the new year. But could investors be too complacent regarding bond yields, which many believe are expected to remain low in 2021?

Could inflation unexpectedly rise amid the heavy injections of fiscal stimulus and cash into the economy? And when stocks are priced for perfection, unexpected bad news can create volatility.

Investor’s corner

That said, we can and should acknowledge there are unknowns beyond our control.

Therefore, control what you can control. You can’t control the stock market, and timing the market isn’t a realistic tool. But the one variable you can control is your financial plan.

Among other factors, your plan should consider your time horizon, risk tolerance, and financial goals.

Investors with a long-term time horizon that adhere to a holistic financial plan, which takes multiple economic and market cycles into account, are on the best path to wealth creation and their financial goals.

Finally, I want to wish you a Happy and Prosperous New Year!

I am thankful and humbled that you have chosen me to be your financial advisor, and I look forward to serving you in 2021! Always remember, we are here to assist you, and we are always as close as phone call or email.

7300 Wealth Connect – 06 – 20


The summary below is provided for educational purposes only. If you have any thoughts or would like to discuss any other matters, please feel free to contact me.

Looking for the Ray of Light at the End of a Dark Tunnel

Businesses shed 20.5 million jobs in April. It was the largest number of job losses since monthly records began in 1939 according to the St. Louis Federal Reserve.

Figure 1 offers another vantage point – the percentage change versus the prior month. April’s 13.5% decline in nonfarm payrolls easily surpassed the 4.8% drop at the end of WWII.

While weekly first-time claims for unemployment insurance are slowing, they continue to exceed levels seen in every prior recession (Dept. of Labor).

In April, the unemployment rate surged to a post-depression high of 14.7% (U.S. BLS). Some analysts believe it could surpass 20% in May (Econoday).

Government enforced lockdowns designed to slow the spread of COVID-19 and “flatten the curve” have put tens of millions of people out of work. Beyond that, falling demand for most goods and services has spurred additional layoffs.

But we may be seeing some signs that the economy is starting to stabilize. Over the last 10 weeks, 40 million people have filed a claim for unemployment insurance (Dept of Labor through the week ended May 23).

Those who must continue to file to receive jobless benefits fell 3.9 million to 21 million in the week ended May 16 (data on continuing claims are one week behind), which suggests state reopenings are encouraging businesses to bring back furloughed workers.

High frequency data offers up hopeful signs, too. While unconventional, weekly and even daily data points suggest the economy is trying to bottom. We won’t quickly return to pre-COVID-19 employment levels, but early indications are cautiously encouraging.

Daily travel through TSA checkpoints is rising again – see Figure 2.

Hotel occupancy is ticking higher as lockdowns ease and leisure travel slowly rises (Figure 3).

The US MBA Purchase Index, which measures home loan applications, has risen for 6-straight weeks and had its fifth-best reading over the last 12 months (Figure 4). It suggests that housing sales are recovering at a faster pace than had been anticipated.

If we’re looking for a tangible sign that any economic recovery may be more robust than many expect, look no further than the money supply. Thanks to the trillions of dollars spent by the government and the massive monetary response from the Federal Reserve, money supply growth has soared beyond anything we’ve ever seen (Figure 5).

However, what might be called the transmission mechanism has been broken via lockdowns and shelter-in-place orders. The money is there, it just can’t be spent right now. But economies are slowly reopening around the country.

Where might we be headed?

Even in the best of times, economic forecasting can be difficult. Today, the outlook is clouded with a much greater degree of uncertainty.

Will the virus lay down over the summer? How will reopenings proceed? How quickly can a vaccine or effective treatment be developed that’s readily available? What might happen to COVID-19 next fall and winter? How quickly will consumers venture back in public and resume prior spending patterns? All are difficult to answer but will help determine the path and speed of an economic recovery.

Final thoughts

Given the severity of the downturn, the stock market has been incredibly resilient.

The S&P 500 Index is down just 5.8% year-to-date and down just 10.1% from its February 19 peak. The unprecedented response by the Federal Reserve has lent support and so has the $2.9 trillion in fiscal relief from the federal government.

More recently, talk of a vaccine and state reopenings have aided stocks against the backdrop of rock-bottom interest rates.

Analysts are divided as to how quickly the economy may recover, and the questions posed above may be used as a guide.

Though the outlook remains unusually uncertainty, investors collectively look to the future, and they are betting on a rebound later in the summer.

7300 Wealth Connect – 05 – 20


The summary below is provided for educational purposes only. If you have any thoughts or would like to discuss any other matters, please feel free to contact me.

The Wall Street Main Street Disconnect

The economic data are rolling in. With few exceptions, we don’t have much of a read on April’s numbers, but March has been ugly.

Weekly first-time claims for unemployment insurance have exceeded 30 million in a 6-week period – see Figure 1. It’s disheartening and a number that would have been inconceivable a couple of months ago.

March’s 5.4% decline in industrial production was the biggest one-month drop since the end of World War II (St. Louis Federal Reserve). A 7.5% decline in March consumer spending was the largest ever recorded (dating back to 1959).

The Chicago Fed National Activity Index is a broad-based measure of economic activity. It is comprised of 85 separate monthly indicators.

In March, it registered its sharpest monthly decline ever – see Figure 2.

Preliminary Q1 GDP fell at an annualized pace of 4.8% – see Figure 3. The number is subject to revisions. Q2 is expected to be much worse as the full impact of the crisis is reflected in the economic data.

The monthly rally for the Dow and S&P 500 is the best since 1987 and the best April since 1938, according to Dow Jones Market Data.

Let’s explore the primary reasons for April’s rise.

  1. Don’t fight the Fed is an old Wall Street adage. Economic activity has fallen off a cliff, which suggests stocks should have followed.

    Through the near-term bottom of March 23, stocks were in a tailspin, but the Federal Reserve has acted with unprecedented speed.

    For example, the Fed began a torrent of bond-buying to stabilize markets. Between March 16 and April 16, the Fed bought nearly $79 billion a day in Treasury and mortgage-backed securities. By comparison, it bought about $85 billion a month between 2012 and 2014 per the Wall Street Journal.

    Further, the Fed has not only resurrected credit market programs used in the 2008 financial crisis, it is aggressively reaching out to Main Street.

  2. The federal government has reacted with uncharacteristic speed, doling out over $2.5 trillion in stimulus checks, jobless benefits, help to small businesses, and more. Some of the programs haven’t worked flawlessly, but the government’s efforts are well above the $787 billion in 2009 stimulus.

    Is it too much? Some will fret over the expected explosion in the deficit. However, the response to the economic crisis has had strong bipartisan support.

  3. Investors are forward-looking and are eyeing 2021. In 2019, S&P 500 profits hit a record $163/share (Refinitiv). While the range of uncertainty is very high and projections are subject to change, profits are forecast to fall to $131/share in 2020 and rise to $168/share in 2021 (as of Apr 30).

    $168 may still be too high, and much will depend on how the economic outlook unfolds. Nevertheless, talk of some type of economic recovery later this year and next aids sentiment.

  4. Finally, the virus appears to be peaking, and investors are cautiously eyeing states that are set to slowly reopen their economies. It’s a delicate task, balancing the need to contain the virus with economic vitality.
  5. Possible treatments and a COVID-19 vaccine have also soothed nerves.

We can continue to expect stock market volatility in the near term. The economic outlook is uncertain as businesses slowly re-open, but there is talk of more support from the federal government and the Federal Reserve. Given what’s happening in the real economy today, stock market reaction has been cautiously encouraging.

Final thoughts

I don’t want to downplay the havoc created by COVID-19. We are living in a world that nobody could have possibly envisioned a few months ago. You may have friends and loved ones who are dealing with the disease. It’s incredibly unpleasant.

Yet, unexpected blessings have surfaced. People are reaching out to family and friends via texting, Zoom, and emails. Some are even connecting the old-fashioned way – by phone.

Activities and jobs around the country have been suspended but not ended. I am confident we will eventually see an economic recovery take root, and the pandemic will subside.

We are a resilient people. Together we will get through this dark night, and we will be stronger for it.

Stay safe, stay healthy, and please abide by government mandates designed to slow the spread of COVID-19. Remember, my door is always open.

7300 Wealth Connect – 04 – 20


The summary below is provided for educational purposes only. If you have any thoughts or would like to discuss any other matters, please feel free to contact me.

The COVID-19 Recession and the Policy Response

The year began on a firm footing. Economic growth appeared to be accelerating and job growth was strong. Coupled with low interest rates and forecasts for accelerating profit growth, stocks repeatedly hit new highs.

At one point, the Atlanta Fed’s GDPNow model, which incorporates economic reports on a real time basis, placed Q1 economic growth at 3.3%. But that was yesterday’s news. The coronavirus epidemic has forced economic activity to a halt in many parts of the country. What we are seeing is far different vs. the more typical recession, if there is such a thing as a typical recession.

Recessions have their roots in various causes. Inevitably, consumer and business confidence takes a hit and spending declines. Today, however, many are simply unable to spend.

Social distancing and mandatory closures of businesses have placed a roadblock in front of our normal spending patterns. The service sector, with its person-to-person interactions, has been the hardest hit, and massive layoffs have begun.

The shift in the atmosphere has been incredibly abrupt. Aircraft carriers don’t turn on a dime. But the $20 trillion U.S. economy has. It’s unprecedented.

We are seeing an enormous amount of volatility in the stock market because investors don’t know how to forecast the depth and severity of the recession or what will happen to corporate profits.

The enormous amount of economic uncertainty is very difficult to model (to predict the eventual outcome) because we don’t have a modern precedent.

Imagine a ship near a rocky coast that’s socked in by fog, but the lighthouse isn’t putting out light. Or, you’re driving down the road at 40 mph and someone puts a blindfold on you. In a manner of speaking, that’s what’s happened to the market.

Today’s recession more closely resembles a natural disaster that affects an entire region. When a disaster happens, businesses typically treat such an event as transitory.

This time, the entire country is feeling the sting. The longer it drags on, the more businesses will fail and the more temporary layoffs will become permanent.

The Fed and the government step in

In order to soften the economic blow, the Federal Reserve has gone well beyond simply cutting interest rates to zero. It has implemented several programs designed to keep credit flowing in the economy and prevent a health crisis from morphing into a new financial crisis.

That said, banks are in much better shape today than 2008. The Fed has been proactive to prevent, not react to a major failure. In just three weeks, it has purchased nearly $1 trillion in assets to support various credit markets (Fig. 1). That number will likely go much higher.

Additionally, the Fed has focused on corporate and municipal bond markets, commercial paper markets (short-term unsecured loans by large companies), money market funds, and more.

Yet, its interest isn’t simply in Wall Street. It has also reached out to Main Street and is getting deeply involved in loans and grants to small businesses so that firms can maintain payrolls, at least for a time.

Put another way, its response has been far more aggressive and its scope has been much broader than during the 2008 financial crisis. The same can be said of the $2 trillion stimulus package signed by the president at the end of March.

The goal – ease what’s going to be a steep economic downturn in Q2 and put a foundation in place for an eventual economic recovery. If government mandates require we stay at home and require that businesses temporarily close, it only seems reasonable for the government to lend a helping hand.

Though volatility is expected to continue, it’s an important reason why stocks rallied near the end of March following a 34% selloff in the S&P 500 Index in just over a month (St. Louis Federal Reserve).

The average peak-to-trough decline in a bear market (defined as a 20% drop or greater) is 36.2% per LPL Research (back to 1929). But the speed of today’s decline is unprecedented.

Oil is pummeled

Cratering demand for oil and a price war launched by Saudi Arabia last month sent oil prices to the lowest level in almost 20 years. However, falling gasoline prices are likely to provide little support for spending as driving subsides and layoffs hit the energy sector.

Looking to history

There isn’t a modern precedent, but let me offer two past epidemics as guidance.

The deadly 1918 Spanish flu pandemic caused a 7-month recession in the U.S. (National Bureau of Economic Research). Going back to the 1850s, it is the shortest recession on record.

In Q1 1958, GDP fell 10.0% (St. Louis Fed). While the research available is sparse, the 1957-58 outbreak of the Asian flu appears to be the culprit behind the steep decline. GDP rebounded in the second quarter, and the length of the recession was pegged at 8 months (NBER).

Still, I recognize the economy today is much different. We’re much more service-oriented today. In the late 1950s, our manufacturing base was bigger. Yet, massive stimulus is in the pipeline.

Road to recovery

No one rings a bell on Wall Street sounding the all-clear sign. Collectively, investors attempt to price in future events. The 2007-09 recession ended in June (NBER), but stocks bottomed in early March (St. Louis Fed, various sources).

But here are some signposts to look for.

  1. A massive response by the Federal government and the Federal Reserve. I think we can check the box on this signpost.
  2. A peak in U.S. cases and subsequent decline in new cases.
  3. Removal of lockdowns and our confidence to go back in public rises.
  4. Effective treatments and/or a vaccine are developed.
  5. Economic clarity – how steep and how long might the recession be?

I recognize this is a very troubling time. What’s happening is unparalleled in modern history. We are facing an economic crisis, and one inspired by a health crisis. Historically, pandemics peak, and this one will peak, too. Further, underlying U.S. economic fundamentals are strong.

I’m confident that we will eventually see an economic recovery, furloughed workers will start going back to work, and you and I will patronize these businesses. In the meantime, I’m always available to take your questions and discuss your concerns.

Stay safe, stay healthy, abide by government mandates designed to slow the spread of COVID19, and remember, my door is always open.