#economicoverview

There was a big repricing of inflation expectations over February, as the January Consumer Price Index (CPI) showed an uptick in inflation and the January Jobs report was much stronger than expected. Here are 3 things you need to know:

1. 2yr U.S. inflation breakevens were up +85 basis points (bps) to 3.18%, having ended January at just 2.33%. This was the second largest monthly move higher since February 2009 after the +87bps move in October last year. (Source: Deutsche Bank, FRED Economic Data)
2. February saw the 2-year Treasury yield increase more than +70bps and the 10-year Treasury yield increase more than +50bps. Yields move inversely to prices.
3. Bloomberg’s Global Aggregate Bond Index had its worst February since inception in 1990. (Source: Bloomberg Finance LP)

Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov); Bloomberg; FactSet.

Indices:

• The Bloomberg Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
• The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
• The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
• The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Overall, January continued the strong bounce back seen for most global assets since October even if the performance seen in the first half of the month wasn’t quite matched in the second half. It was still the best January in several years for many assets. Here are 3 things you need to know:

1. Q4 2022 Gross Domestic Product (GDP) came in above expectations at 2.9%. The increase primarily reflected increases in inventory investment and consumer spending. Real GDP increased 2.1% in 2022.
2. U.S. inflation data released in January showed the rates of headline and core Consumer Price Index (CPI) slowed in December to 6.5% and 5.7%, respectively.
3. The following are selected examples of it being the best January since the year in brackets: US Investment Grade Corp Bond Index (1975), European Banks (best January since index started in 1987), the Italian FTSE MIB Index (1998), NASDAQ (2001), Copper (2003), the Shanghai Comp Index (2009), the Hong Kong Hang Seng Index (2012), the Euro High Yield Index (2012), the Stoxx Europe 600 stock index (2015), US Treasuries (2015), Gold (2015), and the Germany DAX stock index (2015). (Source: Deutsche Bank, Bloomberg Finance LP)

Sources:

Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov); Bloomberg; FactSet.

Indices:

• The Bloomberg Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
• The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
• The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
• The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Although this year has felt spooky, the U.S. stock market rallied in October after enduring several straight months of losses, leading to optimism that the end of the bear market may be in sight.

Here are 3 things you need to know:

1. The S&P 500 ended the month up 8%. Ten of the 11 sectors of the S&P 500 rose during the month, with energy stocks leading the way higher.
2. Gilts (a UK Government liability in sterling) led the way in fixed income thanks to the fiscal U-turn and a new Prime Minister after a disastrous decline under former PM Liz Truss. But they’re still down -35% year-to-date (in US Dollar terms).
3. U.S. WTI Oil had a good month as the OPEC+ group cut production, and it’s far and away the best year-to-date performer (+15%).

Sources:

1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov); Bloomberg; FactSet; Deutsche Bank.
2. Indices:
   • The Bloomberg Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
   • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
   • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
   • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Thomas Steffanci, PhD, Senior Portfolio Manager

Some say it is a chaotic and frustrating time to be an investor. Rising employment and wages and resilient consumer spending are offset by rising inflation driven mostly by volatile commodity markets and supply chain disruptions. Higher corporate earnings estimates are being met by declining price-earnings multiples. And the Russia-Ukraine conflict raises unknown and unknowable geo-political risks. Stock prices inevitably were lower to reflect such a dismal environment.

All the bearish headlines have been overwhelming and lay the foundation for investors to get trapped in “confirmation bias”, the tendency to put more weight on information that supports a pre-existing view. There are many analysts and investors committed to the outlook that the global economy is declining, and stocks are headed for a massive move lower, and the Federal Reserve (the “Fed”) can make it worse.

It goes like this: Since the end of the second World War, the Fed has never successfully engineered a decline in inflation that was running more than 4% that didn’t result in a recession. This was because they had to break either the economy or the financial markets to reverse the previous cycle’s household wealth gains to reduce consumer spending and prices.

But the Fed’s recent public pronouncements about their future intentions, while only raising the Federal Funds rate to a range of .50% -.75% so far, have already forced 10-year bond yields up from 1.5% to 3% this year, causing the worse drop in bond returns since the middle of the 19th century. And most speculative equity positions have been wiped out such as the 78% decline from its high in Cathie Wood’s Ark Innovation Fund (ARKK), and cryptocurrency index fund Bitwise (BITW) falling from $100 to $15. Both the Nasdaq¹ and the Russell 2000² have declined by 30%. The Fed has already broken a lot of things. All of this has tightened financial conditions already.

So, is it highly unlikely that the Fed will push as hard as the market has already discounted? In fact, the Fed’s favorite inflation gauge, the personal consumption deflator (PCE), excluding food and energy, already peaked in February on a year-to-year basis.³ And the worry about surging wages pushing up inflation may be premature, as average hourly earnings have been declining on a year-to-year basis for the past three months.⁴ Existing and new home sales are falling sharply, and housing inventories have risen to a 9-month supply as mortgage rates are near 5%.⁵ Real income growth is negative and anecdotes from Amazon, Walmart and Target suggest retail inventories are close to being fully replenished even as overall consumption growth is decelerating.

All of this suggests a lower glide path for inflation, the size and extent of monetary tightening, and the diminished odds of stocks making a “massive move lower”.

1. The Nasdaq Composite is a capitalization-weighted index that includes almost all stocks listed on the Nasdaq stock exchange and is heavily weighted towards companies in the information technology sector.

2. The Russell 2000 Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.

3. Source: Bureau of Economic Analysis.

4. Source: Bureau of Labor Statistics and Tradingeconomics.com.

5. Source: National Association of Realtors and Tradingeconomics.com.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your BFSG account holdings correspond directly to any comparative indices or categories.

Stocks rebounded in March even as the Russia/Ukraine conflict continued to escalate. The key message from the Federal Reserve is that it is focused on fighting inflation and is prepared to hike short-term interest rates steadily and reduce its balance sheet until it reaches its goals.  Q1 earnings season will kick off the week of April 11^th and although Wall Street analysts have recently scaled back their expectations for quarterly earnings, they’ve been raising their forecasts for the rest of the year, according to FactSet.  Earnings typically are the key engine of equity returns over the long run.

Here are 3 things you need to know:

1. U.S. inflation data showed price increases hovering near 40-year highs. The report showed a further rotation back to services spending as the economy, and away from goods spending.
2. Jobs data showed a robust labor market with the unemployment rate dropping to 3.6% from 3.8%, while the labor force participation rate ticked up to 62.4%.
3. The 1^st quarter was one of the worst quarters for 10-year Treasury bonds since the early 1980’s. The Treasury yield curve inverted (higher yields for shorter-term bonds vs. longer-term bonds) between the 10-year and 2-year notes and 30-year and 5-year bonds, further stoking concerns of an impending recession.

Sources:

1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov)
2. Indices:
   • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
   • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
   • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
   • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.