#stockmarketupdate

Christmas came early this year for the markets. The idea that falling inflation could mean that the end to the rate hiking cycle is not far off gave both stocks and bonds a boost.

Here are 3 things you need to know:

1. The October consumer price index (CPI) showed prices rose 7.7% from a year ago and 0.4% from the prior month, according to the Labor Department, both below expectations. Prices of goods and autos fell, as supply chain disruptions continued to ease. Food, services, and shelter inflation were stickier.
2. Long-term U.S. Treasuries returned +7% in November, their biggest monthly gain since August 2019. Global bonds as measured by the Global Aggregate Bond index, rebounded in November (+4.7%), adding a record $2.8 trillion in market value.
3. Not all assets were in recovery mode in November. The US Dollar Index saw its worst monthly performance in over a decade (-5%). Bitcoin fell (-16%) as investors withdrew $20 billion from crypto funds in November.

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; Goldman Sachs Asset Management.; John Hancock Investment Management.
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

The Q3 Gross Domestic Product (GDP) growth rate of 2.6% was in line with the consensus. But it was anything but normal. The increase was entirely driven by a large increase in the trade balance. Net exports surged 2.8% due to a 1.6% increase in exports of energy commodities and military hardware, and a 1.2% decrease in imports. Inventory liquidation was lower than Q2, giving a boost to GDP.  Consumer spending rose 1%, mostly in services, offsetting a decline in consumer goods purchases. Capital spending creeped up with residential investment falling for the third straight quarter.

The big market reaction to this report came from the GDP price deflator rising just 4.1%, well below the 5.3% expected, and down more than half from 9.0% last quarter. But much of this was the result of a decline in the growth of import prices due to the rising dollar. With the dollar having declined over 4% from its September 28 top, import prices are not likely to repeat their magnified impact on the GDP deflator going forward.

Bottom Line? The report, excluding the trade balance, showed little core growth in Q3 and by itself should not change the Federal Reserve’s (the Fed) thinking/forecasts for 1-2% GDP growth. The main reason the GDP print was strong is because Europe is collapsing into a recession and is now overly reliant on US energy and weapons exports. It also did little to dispel fears that the US will eventually tip into a classical recession given the aggressive steps the Fed is taking to stamp out elevated inflation.

The decline in 10-year bond yields seems to be the ongoing reaction to the Fed in becoming more aware of the liquidity strains the strong dollar has created in global currency markets, anticipating a slowdown in their rapid ascent in the Fed funds rate. Those expectations were boosted by today’s (outlier) decline in the growth of the GDP deflator. The stock market reaction highlighted these events as both energy and industrial stocks are leading the advance.

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.

Investors bought the dip in July on hopes the Federal Reserve is about to change course and relax policy before inflation has even peaked.

Here are 3 things you need to know:

1. July was the best month for the S&P 500 since November 2020, when the first vaccine trial results were reported.
2. High yield corporate bonds returned +5.9% in July (total return), the strongest monthly performance since 2009.
3. Gross Domestic Product (GDP) fell at a 0.9% annualized rate in the 2^nd quarter, marking the second consecutive quarter of declining economic output.

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.

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.

From the end of the Global Financial Crisis in 2009 until now, the combined balance sheets of the Fed, European Central Bank and the Bank of Japan grew from approximately $5.3 trillion to over $23.7 trillion.(1) The markets were awash in liquidity over the past decade, and the rising tide lifted virtually all financial assets. Central banks around the world are on track to hike rates more than 250 times this year while shrinking their balance sheets.(2) The FOMC post-meeting statement announced that balance sheet runoff will start on June 1. As Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.”

Here are 3 things you need to know (3):

1. The S&P 500 ended May with a gain of 0.01%, despite wild swings, a brief bear market (a drop of 20%), disappointing economic data, and pessimistic forecasts.
2. The April core PCE price index (the Federal Reserve’s preferred inflation measure) declined to 4.91% year-over-year. Core inflation was again boosted by rapid shelter inflation—which has run at the highest level since 1990 over the last year.
3. The FOMC raised the funds rate target range by 0.5pp to 0.75%-1.0%, as widely expected. The May FOMC minutes indicated a broad consensus for Fed Chairman Powell’s baseline of 50bp hikes at both the June and July meetings.

Sources:

1. Source: Blackstone Investment Strategy, national sources and Macrobond, as of 4/30/2022.
2. Source: BofA Global Investment Strategy, as of 5/5/2022.

3. 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)
4. 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.