· Stocks moved higher this past week as it appears as if interest rates have at least plateaued if not peaked thereby increasing the appetite for equities. It also didn’t hurt that August’s Non-Farm Payroll report was about as good as it gets for those who believe the Fed can negotiate a soft landing. The data pointed to modest job growth along with easing wage inflation as workers return to the labor force. Rather than break out the champagne, it would be prudent to remind ourselves that September is usually a difficult month for investors and as we close out the summer, “right when you think it’s safe to go back in the water….”
August turned in its usual dismal performance with the S&P 500 dropping 1.77%. That index fared better than most as the Dow Jones Industrial Average fell 2.36% while the NASDAQ Composite shed 1.77%. Don’t let this weakness fall you as all of the major indices are solidly in the green year-to-date and only a few percentage points away from their all-time highs. Nonetheless, we are biding our time through this seasonally weak period, expected to last into mid-October by trimming peripheral positions, tax-loss harvesting and maintaining a healthy balance in money markets yielding approximately 5% along with a combination of fixed-income securities.
· According to the U.S. Census Bureau, by 2030, “all baby boomers will be older than age 65. This will expand the size of the older population so that 1 in every 5 residents will be retirement age.” According to Jonathan Vespa, a demographer within the U.S. Census Bureau, “by 2034 (previously 2035), there will be 77.0 million (previously 78.0) people 65 years and older compared to 76.5 million (previously 76.7 million) under the age of 18.”
· According to a report from Insider, in regard to employees who do not want to return to the office, Amazon CEO Steve Jassy told them that “it’s past the time to disagree and commit. If you can’t disagree and commit it’s probably not going to work out for you at Amazon because we are going back to the office at least three days a week.” Jassy added that “it’s not right for all of our teammates to be in three days a week and for people to refuse to do so.”
· According to a survey from Bankrate and as reported by CNBC, “a majority of full-time workers and job seekers – 81% -- support a four-day work week versus a traditional five-day schedule. Of those workers, 89% said they would be willing to make sacrifices to work just four days.”
· Blue collar wages are rising faster than white as is unemployment. The primary causes of this are a lack of available blue collar workers, especially in the service industry as compared to demand along with on-shoring in an effort to partially decouple from utilizing China as a primary source for labor.
· One more wage fact to ponder. According to the Federal Reserve Bank of New York, “the average reservation wage (the lowest wage responds would be willing to accept for a new job) reached its highest reading of $78,645.” That figure has risen by 7.92% from July 2022’s level of $72,873. Given this along with other data included within here and elsewhere will make it difficult for the Fed to hit its 2% inflation target anytime soon.
· Brilliant, Google to begin selling mapping data as a revenue generator. According to reports, the interfaces will include solar, energy and air quality information and be licensed to traditional energy providers (utilities) along with solar, real estate and hospitality companies. Google hopes to generate up to $100 million in revenue within the first year.
· According to the American Society of Civil Engineers, there are approximately 10,000 power generation facilities nationwide that have strung more than 600,000 circuit miles of transmission lines, 240,000 of which are considered high voltage. However, due to a more than $300 billion deficit necessary in order to update the lines, the average line is pushing up against its expected lifespan of fifty years. This along with changing weather patterns will pose substantial challenges to utilities, municipalities, and taxpayers.
· Rig counts dropped by 1 to 631, the eighth consecutive week that rig counts have fallen, this according to oilfield services company Baker Hughes. At present, rig counts are at their lowest level since February 2022 and are 129 below year ago levels. The reduction in rig counts along with a replenishment of the Strategic Petroleum Reserve (SPR) is supportive for oil prices at or near these levels. The main variables moving forward are the strength of the global economy, especially China along with the changes in supply by OPEC+.
· Mortgage Rates remain well above seven percent. According to data from FreddieMac, the average rate on a 30-year mortgage stood at 7.18% last week, down from 7.23% the week prior. That said, as inventories remain at historically low levels, prices should remain elevated. The rate on the same loan one-year ago was just over 5% and on December 31, 2020, 2.67%.
· We believe the Fed will not raise rates at its next regularly scheduled meeting September 19-20. We also believe that rates will stay in and around these levels (historically normal) for longer than was originally expected. As noted last week, the Fed has already used its mulligan on inflation when Chair Jerome Powell called it ‘transitory’ back in 2021 and therefore does not want to run the risk of being wrong again. This may in turn keep them more hawkish than the market is currently anticipating. That said, given the ten rate hikes since the first on March 17, 2022, totaling 5.50%, we believe we are at the point in the economic cycle where the Fed will be moving more cautiously, perhaps not at every meeting of the Open Market Committee (FOMC) and in increments of 0.25% as opposed to aggressively. The market can handle this. Fed action from this point forward in the economic cycle is more about messaging and signaling their hawkish intentions as opposed to providing a headwind or tailwind to short-term economic activity.”
· Remember playing hide ‘n seek as a kid? Well, as we all know eventually that great hiding place gets discovered and becomes quite crowded. Despite the fact that as noted above we have been biding our time by holding a little more cash than we like during these dog days of summer, eventually we will deploy that cash as over the long-term history has shown that this is the recipe for achieving and maintaining financial independence. A week ago Friday, the Investment Company Institute published data that assets within money market funds have risen by $925 billion thus far this year as investors have hid out from the volatility in the financial markets that occurred in 2022. In our opinion, it will take a while for investors to begin to feel comfortable deploying that cash as the interest paid within these accounts hover around 5%. However, as the Fed gets inflation under control, that rate should begin to decline which in turn will prompt investors to deploy their cash elsewhere.
· Don’t get sucked in by investing solely in short-term fixed income securities such as money markets, short-term bonds or Certificates of Deposit (CDs) despite their yields being higher than longer dated securities as a result of the inverted yield curve. With the interest on the 10-year U.S. Treasury hovering around 4%, we recommend laddering bonds in order to add predictability to your stream of future income.
· Corporate news – 3M (MMM) agreed to a $6 billion settlement with more than a ¼ million veterans in regard to faulty earplugs; Goldman Sachs (GS) is selling its investment advisory business to Creative Planning for $29 billion.
· Upcoming Economic Reports scheduled to be released this week include the following, on Tuesday, July Orders for Durable Goods, July Factory Orders and the August Services Purchasing Managers’ Index from the Institute for Supply Management; on Wednesday, the July Trade Balance; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance; and on Friday, July Wholesale Inventory Report and July Consumer Credit.
· Second quarter earnings season has begun to wind down. However, several notable companies will report earnings that will provide insight into the health of the economy. These include – Zscaler (ZS), GameStop (GME), Toro (TTC), DocuSign (DOCU), National Beverage (FIZZ), and Kroger (KR).
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Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”