News & Views
Here is a sampling of our market updates to clients.
Clients,
We are proud to present our first monthly report from our new offices, and glad to say some of the storm clouds are passing. Risks are still there but on balance appear less so than earlier this year, with the S&P500 eking out a 3.5% YTD total return through May. [Note today’s shockingly weak jobs created report throws some cold water on this]. A second interest rate rise by the Fed is now certainly expected, while who knows what we can expect in the Presidential election(!). Perhaps the best we can say is it makes for good (i.e. very poor) theater.
Many of you have been setting your update appointments where we typically will freshen up your RETIREMENT PROJECTION and address any current issues for you. Please feel free to call Karen to schedule.
Specifically too, we would like to thank you for the referrals that have been coming – we very much appreciate the confidence in us, and of course we will treat your referrals as attentively as we have always treated you.
MARKET & ECONOMIC UPDATE
Dear Clients, June 24, 2021
Since our last update, the behavior of the economy and stock markets continues to be affected by (1) the rate of vaccinations and the speed at which businesses re-open, (2) market interest rates (primarily Treasury rates) and corresponding inflation fears, and (3) the periodic rotation between Value and Growth Stocks. Growth stocks regained favor after their 1Q sell-off and drove the S&P 500 and NASDAQ indexes to their all-time highs in June.
To give you some perspectives on the above, we elaborate on several important events of the past month:
- The Federal Reserve has remained committed to their high liquidity (Mortgage/Treasury Bond purchases) and low interest rate program, (0-.25% Federal Funds rate). They have insisted that inflation signs are going to be “transitory” and not require near-term changes in policy. While they may be correct about “commodity inflation” (<10% of inflation), they may be under estimating the labor shortage and increasing wage pressures (<90% of inflation). In the past month lumber prices have dropped 40%, and copper and gold are down some 20-25%. China, as the largest consumer of commodities, is trying to curb “speculation” by selling off some of their reserves to drive down prices.
- Labor costs are just starting to rise. Today there are about 7 million unemployed and over 9 million job postings. Filling jobs is hard and companies are raising wages. Our economy is based on services rather than manufacturing and so labor costs become far more important. There is nothing “transient” about increased labor costs. This is further exacerbated by the 2.7% of workers who are quitting their present employment for better opportunities.
- Increased demand for treasuries by global institutional investors, pension funds, and domestic investment managers has driven down the 10-yr Treasury yields from 1.75% (in March) to a recent 1.5%. This in turn has aided the rotation from Value to Growth stocks (and why as tech stocks rose we took the opportunity to lighten up on them and control risk in accounts which we manage).
The May CPI report at 5% - highest in 13 years, forced the Fed to finally acknowledge that inflation is running well above expectations. They did so in the aftermath of their June 16, 2021 Fed meeting by suggesting, for the first time since the 2020 recession, that they are shifting their stance to a more hawkish time. While it may take many months before the timing and extent of any bond purchase “tapering” and increase in the Fed Funds rate, it was in important signal nonetheless.
Discuss “danger of bubble in speculative stocks” namely the WSJ article I provided
So, for now, the end of Q2 is near. Earnings will be spectacular and Q2 GDP is estimated at 8%!!! What happens next will depend on the Q2 earnings commentaries beginning in about 3 weeks.
As we’ve been mentioning, we are continuing to deepen our relationship withi our good friends at Castle Rock Wealth Management. We are working on co-officing with them later this year. We’ll keep you posted.
Best wishes to all our valued clients,
Mark Greenberg, JD, CFP® Dusan C. Pecka, PhD
*WINNER 5-STAR Wealth Manager Award, San Francisco East Bay
Seven time winner - 2012, 2016 through 2021
WEALTH & TAX PLANNERS
Investment advisory services offered through Wealth & Tax Planners, a Registered Investment Adviser. Securities offered through Mutual Securities, Inc., member SIPC/FINRA. Mutual Securities, Inc. and Wealth & Tax Planners are not affiliated companies. CA Insurance Lic. #0675661. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. It is for informational and planning purposes. Nothing herein shall be construed as an offer or solicitation to buy or sell any securities. Nor is it legal or accounting advice. Investing carries risks and expenses and involves the potential loss of investment. Past results are not indicative of future results. Please read the prospectus first should you decide to invest. Wealth & Tax Planners disclosure document ADV-Part II is available upon request.
Market and Economic Update – November 2022
Dear Clients,
The month of October brought a surprise no one counted on - snapping a two-month losing streak with a very big rise in the markets. In particular the last week of the month saw a massive rally taking the S&P 500 from the 3600 level to 3900. The stock gains were largely based on Wall Street’s hopes that the Fed will slow its rate of increasing interest rates. We feel that is overly optimistic especially as to their November meeting which is almost certain to see a 75bps increase, and are still of the view that markets will be very turbulent until the Fed sees progress in its current “Job #1” – its war against inflation. In similar fashion to the misplaced optimism of July/August, perhaps this Bear market rally may ultimately disappoint. We shall see. The upcoming mid-term elections could produce a positive for stocks if we have a divided government as balance of power and gridlock is something the markets like. Should Fed Chair Powell hint at a smaller increase in the December rate, that too would be positive for stocks. Year-to-date the S&P 500 is down – 18.8%, the NASDAQ – 29.8%, while the Dow is only -9.9%.
Note that the S&P 500 rose less in October than the headline Dow Industrials average that you may be reading about because that is not as burdened by overvalued tech companies. We’ve seen numerous techs missing their targets and getting slammed - Amazon, Facebook/Meta, Microsoft, Google, etc. While other more mundane, ‘old-economy’ companies have managed to muddle along - United Airlines, Bank of America Corp., Nestlé SA, Coca-Cola Co., McDonald’s, etc. Many analysts surmise the government’s wartime-like response to the pandemic— very generous fiscal stimulus that showered cash on households – is keeping the consumer spending. That however cannot last forever.
Why do we strike a cautious note? The hard facts are summarized below:
- The consumer price index (CPI) for September was 8.2% vs 8.3 for August, a %, a barely perceptible drop, and the core CPI rose 6.6% (year-over-year) vs 6.3% in August.
- The economy created 263,000 jobs in September, only modestly less than the 315,000 in August. The unemployment rate was 3.5% in September – a half-century low!
- The 4-week average unemployment claims was 219,000 – right in line with the pre-pandemic numbers, again not showing a slowdown.
- The growth in 3rd quarter wages and benefits for private-sector workers excluding incentive-paid occupations rose 5.6% from a year earlier!!!
These data clearly indicate that the war on inflation is not close to being won as the robust labor market (and thus consumer spending) remains strong in-spite of the large rate increases by the Fed. While there is some gradual slowdown in economic activity, the only prominent sector to have experienced a major slowdown is housing with new and existing home sales dropping by some 25-30%. However only small price drops have taken place (yet).
Cruelly this fight to tame inflation is difficult if not impossible without creating real unemployment. In fact, the Fed has not hidden that is its goal. When people are unemployed, or fear becoming unemployed, they will of course spend less, and that is what will ultimately tame inflation. This need to slow the economy and increase unemployment is unfortunately also the road to recession.
Increasingly that is looking difficult to avoid, and we question whether a “soft landing” (slowing without crashing the economy) is realistic. So do other major outlets – the World Bank President David Malpass warned of a “real danger” of a worldwide contraction next year. The International Energy Agency lowered its global oil demand growth forecast because “major institutions” downgraded their latest global GDP estimates. Last week the IMF’s “World Economic Outlook” (WEO) warned “In short, the worst is yet to come, and for many people 2023 will feel like a recession.”
That said, we still see any recession as relatively light even as certain markets – tech and residential real estate - are hit harder. Techs were overblown and real estate (even in the Bay Area) is getting stressed with 7% mortgage rates, essentially double what they were less than a year ago (and a 20-year high!). The slowdown however is notably very different than the liar loans and severe overvaluation in the housing markets that induced the Great Recession of 2008-09 (plus years of dereliction of duty by risk management departments in banks, insurance companies). We are not in that kind of troubled market.
A little more history will help the perspective. This is also not 1998, where an explosion of emerging market debt eventually collapsed under its own weight, sparking a liquidity and foreign exchange crisis that required action from global central banks and the bailout of a massive hedge fund (LTCM). And this is not 2010/2011 where decades of fiscal irresponsibility from southern European nations collided with German frugality and sparked a sovereign bond crisis and left investors wondering if the newly formed EU would band together to bailout Greece and any other nation that was hopelessly fiscally underwater. These were existential crises that confronted investors with a stark lack of information. This current environment is not that. This is much more ‘run of the mill.’
A favored analyst put it well – “The global economy has a big inflation problem. Recessions are better than entrenched inflation (neither are good, but the former is better than the latter) so central banks will hike rates to cool inflation to a tolerable target (not 2%, but something probably between 3%-4%). Those rate hikes will cause recessions, which will help fix inflation. It’s a process we must endure, and last week we learned that we’re not quite as far along as we’d hoped. Inflation is not yet declining materially, which means we must endure more rate hikes and a slowing of the economy to get to the proverbial “other side.”
Unfortunately, being at this stage of the process leaves the markets susceptible to shocks. Internationally the first shock was Russia invading Ukraine, which made conditions worse for the global economy via higher commodity prices, higher geopolitical risk premiums, and general anxiety. The second shock came when China decided to do things differently than the rest of the world (what a surprise!) and continue to lock down their cities and economies to stop the spread of something that can’t be stopped. This hasn’t worked, so the global economy must deal with a “stop/start” Chinese economy that resembles the lurches and jerks of a car stalling out. The third shock came from the U.K. via Prime Minister Truss’ historic bungling of the inflation problem, which caused an unwelcomed spike in global bond yields that hurt virtually every other country with tradeable bonds and has led to Chancellor of the Exchequer Kwarteng being fired less than two months into the job!
While those shocks are unneeded and ill-timed, at base we are still dealing with an inflation problem that the Fed and other global central banks will fix, but that fix will bring slower growth and lower asset prices.
As we’ve been saying this whole year, for markets to stabilize, we must get proof inflation is receding, and there’s not enough of it yet. Hence, we think the Fed will keep raising rates, and markets won’t stabilize till they end or at least slow the pace. Again, some think this will happen after the November hike, expecting the December increase to be more moderate. We aren’t so sure. Therefore, in this wait and see mode we continue to recommend conservative positioning in your accounts, avoid getting sucked into interim rallies (a Bull spike within a greater Bear market), and be defensive.
* SOURCES – Wall St. Journal, N. American edition, and Yahoo Finance, believed reliable but not guaranteed.
Make sure to contact us if you have any questions or concerns.
Sincerely,
Mark
Mark Greenberg, JD, CFP®
*WINNER 5-STAR Wealth Manager Award, San Francisco East Bay
Eight times now - 2012, 2016, 2017, 2018, 2019, 2020, 2021, and now 2022 - featured in Diablo magazine.
WEALTH & TAX PLANNERS
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Investment advisory services offered through Wealth & Tax Planners, a Registered Investment Adviser. Securities offered through Private Client Services (PCS), member SIPC/FINRA. PCS and Wealth & Tax Planners are not affiliated companies. CA Insurance Lic. #0675661. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. It is for informational and planning purposes. Nothing herein shall be construed as an offer or solicitation to buy or sell any securities. Nor is it legal or accounting advice. Investing carries risks and expenses and involves the potential loss of investment. Past results are not indicative of future results. Please read the prospectus first should you decide to invest. Wealth & Tax Planners disclosure document ADV-Part II, form CRS, and Privacy Policy are available upon request.
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