Weekly Market Commentary

Weekly Market Commentary

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Weekly Financial Market Commentary

October 25, 2021

Our Mission Is To Create And Preserve Client Wealth

It’s MESSI!

No, this commentary is not about Lionel Messi, the Argentine soccer phenom who is widely regarded one of the greatest footballers of all time. However, it is about something that economists say may be as rare as Messi’s talent: Moderating Expansion with Sticky Supply-driven Inflation (MESSI).

You can see why we prefer the acronym.

MESSI is a type of inflation that occurs when “strong, but cooling demand is met by constrained, but accelerating supply, leading to transitory, yet sticky inflation.”1 The coronavirus pandemic may have produced just the right circumstances, according to Gregory Daco of Oxford Economics.

“Initially, extreme health conditions, severe social distancing measures, and unprecedented fiscal transfers to households supported a surge in spending on goods. With domestic and international supply struggling to rebound quickly and inventories being run down, prices for goods surged. Later, as the health situation improved, the re-opening of the economy led to greater demand for services which also ran into the tight supply conditions, leading to higher service sector inflation.”

The recent rapid rise of inflation has many people concerned that we may experience runaway inflation, which occurs when prices rise rapidly, or stagflation, which occurs when economic growth slows while inflation rises. Daco doesn’t believe either will prove to be the case:

“It’s not runaway inflation, and it’s certainly not stagflation…In the debate between transitory and runaway inflation, we have repeatedly said that the truth lies somewhere in the middle, with inflation likely to be ‘sticky but not oppressive.’”

The baseline view from Oxford Economics is that higher inflation will persist into the first half of 2022 before falling back to about two percent by the end of next year.

Time will tell.

What do you know about bonds? The bull market in bonds has persisted for 40 years. In September 1981, the interest rate on 10-year U.S. Treasury bonds was 15.8 percent. In 2020, the interest rate bottomed at 0.52 percent and has moved higher. Whether the bull market ends or continues, it’s important for investors to know bond basics. Test your knowledge of bonds by taking this brief quiz.

1.    In general, a bond is:
a.    A loan that an investor makes to a company, a government, or another organization
b.    An investment that pays a specific amount of interest over a set period of time
c.     An investment that is expected to return an investor’s principal at maturity
d.    All of the above

2.    If interest rates rise, what will typically happen to bond prices?
a.    Prices rise
b.    Prices fall
c.     Prices remain stable
d.    There is no relationship between interest rates and bond prices.

3.    Bonds are called many different names. Which of the following is not an alternative name for bonds?
a.    Fixed income
b.    Notes
c.     Equities
d.    Debt securities

4.    The interest rate on floating-rate notes adjusts as rates change. When might it be advantageous to have these bond investments in a portfolio?
a.    When interest rates fall
b.    When interest rates rise
c.     Anytime
d.    Never

If you have any questions about the quiz or about bonds and the role they play in your portfolio, give us a call.

Weekly Focus – Think About It
“Don’t think money does everything or you are going to end up doing everything for money.”
—Voltaire, philosopher

 

Answers: 1) d; 2) b; 3) c: 4) b

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Investment advice offered through Research Financial Strategies, a registered investment advisor.
* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

Special Edition – oil and gas prices going UP!

Special Edition – oil and gas prices going UP!

$200 Oil Trifecta
Cold – Supply – Change

Three Forces

The weather, Mideast supply, climate change—these three forces could combine to give us oil costing $200 per barrel in the not-so-distant future. And the first two—weather and supply—could very well give us $100 oil in the immediate future.

Bank of America (BoA)

BoA points to the weather as the potential cause of oil costing $100 per barrel in the winter of 2022. According to Reuters, BoA Global Research recently posted an update:

“A much colder than normal winter could lead global oil demand to surge by 1 to 2 million barrels per day (mbpd), with the winter supply shortfall easily exceeding 2 mpbd in such a scenario, the bank said in a note dated Sept. 10.”[1]

The BoA note continued:

“Downside risks include a new COVID-19 wave, taper tantrum, a China debt crisis, and the return of Iranian crude barrels. Having said all of that, winter weather risk is quickly becoming the most important driver of energy markets.” [2]

Weather experts point to an artic Polar Vortex threatening Europe and the United States.

“A new stratospheric Polar Vortex has now emerged over the North Pole and will continue to strengthen well into the Winter of 2021/2022. It will interact with a strong easterly wind anomaly high over the tropics. This interaction happens every few years and has actually brought colder winters to Europe and the United States in the past.”[3]

So bundle up to stay warm. And stick some extra money aside to pay for higher gas and a spike in home heating.

OPEC—At It Again

Covid brought a decrease in the demand for oil. Responding, OPEC cut its output by 5.8 million barrels per day. Then, when world economies bounced back faster then expected, OPEC raised production 400,000 barrels per month.

The rise was not enough to tackle the rise in gasoline prices, so the Biden administration and the government of India called for a more rapid increase in production.

“OPEC members seem to not view rising prices as a critical problem for now,” energy analysts at risk consultancy Eurasia Group said in a research note.[4]

So brace yourself: cold weather and a shrinking supply could give us $100 oil by year’s end.

And Then There’s This

Recently, western governments have banded together to limit the rise in the Earth’s temperature to less than 1.5 C degrees. How to achieve this goal? According to the journal Nature, the secret lies in keeping oil, gas, and coal in the ground:

“A report by scientific journal Nature earlier this week noted that 58 per cent of the world’s oil reserves, 59 per cent of fossil methane gas reserves and 89 per cent for coal reserves should remain in the ground . . . .”[5]

Needless to say, this is not music to OPEC’s ears, and according to one Mideast energy minister:

“‘Recommending that we should no longer invest in new oil… I think that’s extremely dangerous,’ Mohammed bin Hamad Al-Rumhi, Oman’s energy minister, told a conference on clean energy transitions on Thursday.”[6]

“‘My biggest fear, if we stop investing in the fossil fuel industry abruptly, is there will be energy starvation and the price of energy will just shoot (up),’ said Al-Rumhi, in charge of output in the Middle East’s largest producer outside of the Organization of Petroleum Exporting Countries.”[7]

Cutting supply does not necessarily reduce demand. As noted above, prices will just “shoot up.”

So $200 oil might very well greet us at the pump in the not-so-distant future.

Weekly Market Commentary

Weekly Market Commentary

How Are Your Investments Doing Lately?  Receive A Free, No-Obligation 2nd Opinion On Your Investment Portfolio >

Weekly Financial Market Commentary

October 4, 2021

Our Mission Is To Create And Preserve Client Wealth

September strikes again…

If you look back over the last 20 years, September has been the worst performing month for the Standard & Poor’s 500 Index, according to Nasdaq.

This year, the S&P 500 dropped 4.8 percent in September. That wasn’t enough to wipe out gains from earlier in the third quarter, and the Index finished the quarter slightly higher. The Dow Jones Industrial Average and the Nasdaq Composite Index also tumbled in September. Their losses erased the previous two month’s gains, so the Dow and Nasdaq finished the quarter lower than they started it, reported Caitlin McCabe and Caitlin Ostroff of The Wall Street Journal.

Investors had a lot to consider during September and over the third quarter, including:

·         Resurgence of the coronavirus. On July 1, the seven-day moving average of coronavirus cases in the United States was about 14,500. Early September, the average had rocketed to about 170,000. By the end of September, the average was trending lower, reported the Centers for Disease Control.

One result of COVID-19 is that life expectancy at birth fell from 2019 to 2020. In the United States, life expectancy at birth has fallen by more than one year. Italy, Poland and Spain also have seen life expectancy drop by more than one year, reported The Economist. Lifespan increased in two countries: Denmark and Norway.

·         Global economic growth concerns. The resurgence of COVID-19 also dented global business executives’ confidence that the world economy will improve during the next six months, according to latest McKinsey Global Survey. While the majority (71 percent) of those surveyed said that economic conditions will improve in the coming months, the number was lower than the prior quarter’s 81 percent. Survey respondents said the top risks to economic growth were the pandemic, supply chain disruptions and inflation.

·         Supply chain disruptions. The supply chains issues created by the pandemic have not been easy to resolve. David Lynch of The Washington Post reported:

“The commercial pipeline that each year brings $1 trillion worth of toys, clothing, electronics and furniture from Asia to the United States is clogged and no one knows how to unclog it…the median cost of shipping a standard rectangular metal container from China to the West Coast of the United States hit a record $20,586, almost twice what it cost in July, which was twice what it cost in January, according to the Freightos index. Essential freight-handling equipment too often is not where it’s needed, and when it is, there aren’t enough truckers or warehouse workers to operate it.” Toward the end of September, more than 70 container ships were anchored near the West coast, waiting for a berth to open so goods could be delivered.  

·         Rising inflation. The cost of producing goods has been increasing. “The producer price index, a proxy for corporate or wholesaler costs, has risen for eight months in a row and, in August, was up 10.5% from a year earlier, the highest reading since June 1981. Compare this to the consumer price index, a proxy for realized manufacturer or retailer prices, which was up 5.3%. This 5.2-percentage-point gap is one of the largest in more than 40 years, suggesting higher costs are outpacing merchant end-prices…,” reported Lisa Shalett of Morgan Stanley. When producer costs rise faster than consumer prices, companies’ profitability may drop and that could negatively affect earnings.

·         Tightening central bank policy. The Federal Reserve is concerned about inflation, too, and is considering a move toward less accommodative monetary policy. In late September, Federal officials indicated that tapering – slowly reducing monthly purchases of securities – could begin later this year. Once purchases have ended, the Fed could begin to raise interest rates in late 2022 or 2023, depending on how the economy is growing, reported Jonnelle Marte of Reuters.

As if these issues weren’t enough, investors also had to process the potential effects of a global energy crisis, China’s regulatory crackdown, and another U.S. debt-ceiling standoff.

Can we talk? The pandemic accelerated the adoption of autonomous checkouts at retailers. Some stores have self-checkouts, while others have installed a “combination of sensors, cameras, computer vision and deep learning” that makes it possible to eliminate cashiers and checkouts entirely, reported Anna Oleksiuk on the Intellias blog.

At the other end of the shopping-experience spectrum is the “Kletskassa,” also known as the “chatty checkout,” which was implemented by a large grocery store chain in the Netherlands. It’s a checkout line that promises conversation with the cashier. 

“1.3 million people in the Netherlands are older than 75 years – and one large supermarket chain is making sure they’re not getting too lonely in their elder years. The Dutch government with its campaign, ‘One Against Loneliness,’ has galvanized organizations, towns, companies, and individuals to find solutions. The [grocery store chain]…is doing their part with its innovative chatty check outs,” reported The Good News Network.

The slower, chatty lane was developed specifically for older citizens, but may appeal to a much wider group of people on days when they have the time to engage.

Weekly Focus – Think About It
“For me, I am driven by two main philosophies: know more today about the world than I knew yesterday and lessen the suffering of others. You’d be surprised how far that gets you.”
—Neil deGrasse Tyson, astrophysicist

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Investment advice offered through Research Financial Strategies, a registered investment advisor.
* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

 

Investment advice offered through Research Financial Strategies, a registered investment advisor.

 

Sources:
https://www.nasdaq.com/articles/september-third-quarter-2021-review-and-outlook-2021-10-01
https://www.wsj.com/articles/global-stock-markets-dow-update-09-30-2021-11632987743 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/10-04-21_Wall%20Street%20Journal_Stocks%20End%20September%20with%20Losses_2.pdf)
https://covid.cdc.gov/covid-data-tracker/#trends_dailycases (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/10-04-21_CDC_Trends%20in%20Number%20of%20COVID-19%20Cases_3.pdf)
https://www.economist.com/graphic-detail/2021/09/29/in-many-rich-countries-covid-19-has-slashed-life-expectancy-to-below-2015-levels (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/10-04-21_The%20Economist_In%20Many%20Rich%20Countries%20COVID-19%20Has%20Slashed%20Life%20Expectancy_4.pdf)
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-coronavirus-effect-on-global-economic-sentiment
https://www.washingtonpost.com/business/interactive/2021/supply-chain-issues/ (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/10-04-21_The%20Washington%20Post_Inside%20Americas%20Broken%20Supply%20Chain_6.pdf)
https://www.morganstanley.com/ideas/earnings-season-cost-pressures
https://www.reuters.com/business/finance/feds-harker-says-it-will-soon-be-time-begin-tapering-bond-purchases-2021-09-29/
https://www.barrons.com/articles/stock-market-today-51633076687?mod=hp_LEAD_1 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/10-04-21_Barrons_The%20Down%20Climbed%2c%20Merck%20Rose_9.pdf)
https://intellias.com/autonomous-checkouts-the-future-of-retail/
https://www.goodnewsnetwork.org/a-checkout-line-where-slower-is-better-supermarket-jumbo/
https://www.goodreads.com/quotes/tag/philosophy?page=2

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