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On April 28th, 1944, 750 US soldiers perish while practicing for the D-Day invasion of Normandy during Exercise Tiger at Slapton Sands, England.
U-boats preyed on sluggish landing ships, and support between the Army and Navy proved spotty. The tragedy highlighted many issues that needed fixing before the actual invasion could take place. But even the final plan is far from perfect. Indeed, constant practice and small-unit tactics eventually penetrated Hitler’s Atlantic Wall long after the original plan was abandoned out of necessity. As General Eisenhower, Supreme Chief Allied Expeditionary Force was fond of saying, “In preparing for battle, I have always found that plans are useless, but planning is indispensable.” As we potentially head toward correction territory in most major market indices (including bonds!), it is a great opportunity to “battle test” your own plans. If markets continue their downward trend, are you prepared financially and mentally? Use what so far is a moderate correction to stress test your portfolio. What will it look like in a stock market that is down twice as much? Three times? What will you see if interest rates rise more than they already have? How prepared are you for 3% inflation? If you aren’t ready for what your portfolio might look like, then it's time to act. Adjust your tactics and fine-tune your strategy. Don’t ditch a good plan; be ready for what comes next. It’s always preferable to be the predator than the prey.
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 April showers continue
After a strong start to the week, markets took another tumble as first-quarter gross domestic product (GDP) decelerated much more steeply than anticipated on Thursday. The Dow was down over 700 points at one point and the S&P 500 was down over 70 points before recovering about half of the losses. Lingering fears of elevated inflation, recessionary worries and Friday’s personal consumption expenditures (PCE) report all combined with disappointing guidance and earnings reports from Meta and IBM to create a toxic environment. Friday was much calmer with a nice rebound, and the market broke its three-week losing streak. PCE rose 0.3% in March, bringing the year-over-year reading to 2.7% (versus 2.5% in February). An increase was expected given the latest consumer price index (CPI) and producer price index (PPI) readings. Much of the angst and negativity was expressed on Thursday, but markets rallied to close out the week on a high note. Personal income rose 0.5% in March and is up 4.7% in the past year. Somewhat troubling was that government pay rose 0.8% in March and is up 8.5% in the past year. The government is also spending less, which may help explain the decreased GDP number we just saw. Real GDP for the first quarter came in at +1.6%, significantly below the consensus of 2.5% and even outside the consensus range of +1.7% to 2.8%. Personal spending was the primary positive driver, while net exports (exports – imports) were the largest detractors. GDP dropped from 4.9% in the third quarter of 2023 to 1.6% just two quarters later, which is quite a deceleration. In our view, this is what deceleration looks like: inflation outpacing growth. We are not outgrowing inflation, and that is exactly what we do not want to see. Once the government stops spending, the cracks of a fragile economy can’t be covered up. Sure, consumers are spending, but not as much as before, and for how long? The 1.6% rate is the slowest growth rate in almost two years. Inflation remains a big problem, while prices are up. This means short-term interest rates will stay higher for longer, and recession is in play. Earnings will be further hampered and markets will likely suffer. Let’s hope there’s not a bigger storm brewing, and we see the markets bloom in May after a stormy April. Earnings contribute to the market’s turbulence It’s important to note that not every market driver is macroeconomic. Sure, major data surprises, disappointments or confirmations keep things moving, but earnings are still the market’s lifeblood. Yes, the economic environment should be considered if the markets are to perform or stall, but if the underlying securities making up the markets aren’t healthy, all the negative macro news simply contributes to declines and volatility. No amount of great economic data will help if earnings are weak for a prolonged period. After several years of higher inflation, higher interest rates and heightened regulations, companies are starting to show signs of weakness. The cost of doing business is rising, and it is much more difficult to pass costs on to consumers. Companies are having a hard time keeping up. Last week was a prime example, with 30% of S&P 500 companies reporting first-quarter earnings. Verizon disappointed on Monday, but markets may have felt a little oversold from the week prior and we pushed higher. Tuesday brought some bright earnings from Spotify, General Motors and GE. Then we received the first estimate for first-quarter GDP. Markets reacted to the news as you would expect, but earnings disappointments from Meta added to the nervousness. We clawed some of the losses back, but the week was a classic example of how weakness in one area can make things worse somewhere else, and the combination can lead to dramatic market movements. Coming this week
It was a bad month last week
The market’s pain continued last week, as Federal Reserve speakers doused hopes of coming rate cuts in the face of persistent inflation and continued strength for the economy and jobs. Adding to market misery was the anticipation of Israel’s possible response to a massive drone and missile attack from Iran. The drone attack was mostly ineffective; Israel shot down almost all the missiles and drones. Casualties were light, but sadly, one 10-year-old girl was severely injured by shrapnel. The big news regarding the Iranian attack wasn’t that it was going to happen or that it was ineffective but it was the first time Iran fired at Israeli and U.S. forces from inside its own borders. That’s a significant change; prior to last week, Iran was using its proxy forces in Gaza (Hamas), Lebanon (Hezbollah), Yemen (the Houthis), and Iraq and Syria (the Islamic Resistance in Iraq) to attack Israel and U.S. forces in the region. Markets feared the Israeli response would target Iranian energy infrastructure and send oil prices soaring. They were also worried the conflict in the region would spill over into something larger, involving more nations. Israel responded early Friday by targeting an Iranian military base in a very limited attack. Oil spiked overnight, but settled back to its recent levels on Friday. The worst didn’t happen, but markets were still very nervous and sold off most of the week. Bond yields didn’t benefit from any flight to safety, as Treasury yields oddly increased instead of dipping, as you might expect when people turn to bonds. Volatility rose by nearly 50%, shifting from a sleepy 12-13% range to over 18%. Are we out of the woods? Not by a long shot. Israel isn’t a country that forgets, and they will respond when they feel the time is right. Until this crisis subsides, we will have to live with the volatility. Fed speakers talking down rate cuts (more in the next section) only added to the tension, while lukewarm earnings contributed to the sour mood last week. However, with the exception of the last couple of weeks, all of the markets are up significantly from October 2023 lows. We’ve had a recent retraction, but that’s something we should expect from time to time in the stock market. We’re not overly concerned with the current state of the markets, but it’s always good to remember things can deteriorate quickly. Discipline, patience and vigilance are all in order. Hope for rate cuts in 2024 begins to fade Stubbornly high inflation, solid job growth and a resilient economy (according to the latest numbers, at least) have all converged to deny the directional data the Fed would like to see before starting rate cuts. According to the CME FedWatch tool, it is looking increasingly likely that we will not see a rate cut until September. Fed Chair Jerome Powell spoke last Tuesday and offered the following: “We think policy is well positioned to handle the risks that we face.” He also said, “Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.” That translates to no rate cuts until we see lower inflation, slower job growth and a softer economy. Powell did say the Fed was prepared to cut rates if the economy slowed significantly. That would also mean we were headed into a recession, and no one wants rate cuts under those circumstances. We went from a possible six or seven cuts starting in March to three cuts starting in June — and now we’re at maybe one or two starting in September. But the longer the Fed waits, the less likely we are to get a rate cut. September is already uncomfortably close to the elections and cuts could be viewed as a political move by the Fed. We have said earlier that the window for the Fed was tight given the election, and for now the window appears to have closed for cuts in late spring and early summer. If we do see rate cuts, they likely won’t happen until November and/or December. That would be after the election, but will it be enough to revive sluggish markets and propel us to a strong ending to the year? Or will it be too little too late? Coming this week
🗓️ On April 20th, 1611, William Shakespeare’s tragedy Macbeth is performed for the first time at the Globe Theatre in London.
🎭One of William Shakespeare's most famous and frequently performed tragedies it is believed to have been written sometime between 1603 and 1607. The Bard’s shortest tragedy is a nod toward James I, a Scot who ascended to the throne of England after the death of Queen Elizabeth I. The play is often considered one of Shakespeare’s darkest works, deeply imbued with elements of the supernatural, political ambition, and moral corruption. Macbeth draws heavily on historical sources, particularly the works of Raphael Holinshed, whose "Chronicles" Shakespeare used as a basis for many of his historical plays. The real Macbeth was a Scottish king from 1040 to 1057 whose rule was far more stable and less tyrannical than depicted in Shakespeare’s depiction. Today, Macbeth retains a reputation for being unlucky, allegedly because the text uses the spells of real witches. It is still considered bad form to utter the actual name of the Scottish Play while inside a theatre. 🏴 Investing lessons from Shakespeare's "Macbeth" might not be immediately obvious, given its primary focus on ambition, power, and guilt. Then again, there may not be three better words to describe Wall Street. Several key investment insights can be extracted when considering the themes and decisions driving the narrative. Here are four of them: 🎭 "What's done cannot be undone.” Just as Macbeth overextends himself based on the witches' sketchy predictions, some of us might rely too heavily on speculative, risky investments touted by “experts.” Talk about unlucky. Which brings us to… 🎭 "A tale, told by an idiot, full of sound and fury, signifying nothing.” Macbeth is heavily influenced by the witches, whose equivocal prophecies lead him astray. This highlights the importance of choosing advisors wisely and being critical of the sources and quality of the information on which investment decisions are based. Avoid the bad actors and the false predictions. 🎭 "Let every man be master of his time.” Macbeth is fixated on immediate power, neglecting the long-term implications of his actions, which ultimately lead to his destruction. Focusing solely on short-term gains can jeopardize long-term wealth, especially if it means taking unsustainable risks or engaging in questionable practices. 🎭 "Confusion now hath made his masterpiece.” Macbeth's actions caused immense psychological distress, which affected his decision-making abilities and reign. Similarly, investors should be aware of the emotional and psychological toll that investing can take, especially in volatile markets, and strive to maintain clarity.  Inflation accelerates, jobs stay strong and rate cut expectations implode
Markets had a rough week as the Consumer Price Index (CPI) and Producer Price Index (PPI) readings didn’t show signs of slowing inflation. Instead, inflation has crept slowly back up after dropping to 3.0% in June 2023. We’ve previously covered the market’s expectations about rate cuts, including how many cuts we might expect this year and the Federal Reserve’s narrow window to make them without looking political. Over the past three months, we’ve gone from expecting six or seven cuts to accepting three — and now markets are praying for one or two by the end of the year. In March, it seemed the Fed would make the first cut at its June meeting. However, the chances of that happening have dropped significantly. The reason? Inflation has stalled between 3%-4% and remained stubbornly elevated for almost a year. And what else has remained stubbornly inflated? The cost of oil. Regular gas nationally was around $3.70 per gallon last week, and oil is now hovering around $86 per barrel. Measures of inflation omit “volatile food and energy prices.” But the problem is that once those volatile prices move upward for a prolonged period, they begin to impact other things. Specifically, when the price of gas goes up, people spend more on gas and less on other things. One could argue higher prices limit producers’ ability to keep raising prices on their products because people are buying less, which slows economic activity and inflation. In the meantime, how long does that take to manifest itself if people don’t have money they can spend or borrow or both? As we know, energy is in everything. For producers, when input costs (in this case, gas) go up, prices also go up to make up for additional costs. If people are willing to pay, then prices will remain high. This can only go on for so long before people run out of money and the cycle reverts because businesses cannot sell the same things for the same prices. As a result, they make less and employ less before they cut prices. Then less energy is needed because they are producing less and, theoretically, demand for energy goes down. If we don’t have a policy to stabilize volatility, it will be reflected in prices. Right now, it is contributing a great deal to inflation — whether or not it’s “officially” measured. Add to all this the upcoming travel season and the brewing anticipation of how Iran may continue to retaliate against Israel for its recent attack on the Iranian embassy in Syria. That will put even more pressure on oil prices and drive gas prices higher, thus impacting inflation. That gives the Fed two choices: a) leave rates where they are and wait for the economy to slow down while hoping for a long and soft landing, or b) raise rates again to stem inflation and potentially drive the economy into recession. Neither scenario sounds like fun, and neither looks like it will feature rate cuts any time soon. What else is worrying markets? First-quarter earnings reporting started last week, providing fresh worries for markets. Delta Airlines had record earnings, but that didn’t save markets from selling off on Wednesday following the CPI report. After a brief bounce, the next day JP Morgan issued weak guidance that sealed a rough week. We got crushed as rates continued to rise, with the 10-year Treasury yield settling at 4.5%, its highest level since November. Another sour note was an action of 10-year Treasury notes on Wednesday, which was met by soft demand and weak participation from investors. It seems people aren’t confident about the future and want higher rates to tie up their money longer. Finally, as we touched on earlier, Fed funds futures are implying just one or two quarter-point cuts this year. That’s a long way from the six or seven cuts people expected in January. And thanks to elevated inflation, we may not see any cuts at all this year. Coming this week
On April 11th, 1898, President William McKinley petitions Congress to issue a declaration of war against Spain. Congress, awash in anti-Spanish rhetoric after the unexplained explosion aboard the USS Maine in Havana harbor, obliged, and the President called for 125,000 volunteer troops. His own Assistant Secretary of the Navy answered the call, resigning to become the second in command of the 1st United States Volunteer Cavalry. Theodore Roosevelt put together a group of volunteers drawing on his own diverse past. He enlisted cowboys and college men; beat cops and scam artists; blue-blooded politicians and Native Americans. The distinct mix of the group became its strength, with natural administrators standing side-by-side with bare-knuckle fighters. For Teddy Roosevelt, all that mattered was that the blend worked. Remember when politicians could unite people? Me neither. But it happened with Roosevelt and his Rough Riders. As we head into another divisive election season, it is important to remember that political opinions are best conveyed at the polls on election day (or more commonly on Facebook) and not in your portfolio. It is a fact that Republicans often feel better about the economy under a Republican president, while Democrats often feel better about the economy under a Democratic president. Duh. This is an example of confirmation bias. Human beings will look for information confirming their biases and ignoring what goes against them. And yet, we are awash in statistics that continue to show that investors who allowed their political opinions to overrule their investing discipline would have missed out on above-average returns during political administrations they didn’t like. We should all unite behind at least one idea: hating or loving the government is not an investment strategy.  Markets pull back slightly from record highs After hitting record highs in late March, markets pulled back a bit last week. Stocks moved lower after the March Institute for Supply Management’s (ISM) manufacturing reading came in higher than expected and indicated slight expansion for the first time in over a year. The ISM prices paid index also surprised on the upside, showing a rebound in input prices. This “good news” rattled markets, which have been looking for signs the economy is shrinking so the Federal Reserve can start interest rate cuts in June. But the ISM services report on Wednesday provided a bit of solace; the report showed services fell back for the second month in a row and prices paid for those services fell to their lowest level since the beginning of the pandemic in March 2020. And then there’s the data on jobs. The ADP employment report released on Wednesday showed we added 184,000 private sector jobs in March. Industries adding the biggest numbers? Construction, financial services and manufacturing. Meanwhile, the Bureau of Labor Statistics (BLS) reported 303,000 new non-farm payroll jobs were added in March, mostly in the health care, government and construction industries. The unemployment rate stayed steady at 3.8%. All of this data says the economy is still healthy, which seems like good news on the surface. However, it’s continued cause for concern that the Fed will put off rate cuts. In response, the yield on the 10-year U.S. Treasury jumped to its highest intraday level since November. Remember a year — and even six months — ago, when all the talk was about a coming recession? The hubbub seems to have evaporated, and experts’ expectations for a recession are dwindling. The U.S. economy seems to have reached a balance where steady commercial activity, growing employment and rising wages can coexist despite higher interest rates. Coming this week
On April 6th, 1808, German immigrant John Jacob Astor founds the American Fur Company in New York City. Astor also created the Pacific Fur Company as a subsidiary, intending to connect his holdings on the Great Lakes and interior waterways of the west to a port on the Pacific Ocean. He found s a young and able administrator named Wilson Price Hunt to lead an overland expedition following Lewis and Clark’s route westward. Hunt struck out from St. Louis in the fall of 1810 with fifty-nine adventurers despite lacking meaningful experience leading expeditionary parties and predictably getting much more than he had bargained for in the process. He reached Oregon with just fifty-four of the original party, one of whom became mentally ill from the stress of the journey. The stresses included nightly raids from indigenous tribes, extreme hunger, and a general lack of assurance as to the correct route westward. Hunt made it and established the outpost of Astoria, Oregon. He was then forced to abandon it when war broke out with the British in 1812. What did this wayward wanderer and man of adventure do next? He opened a shop in St. Louis and later became the postmaster there. Yawn, right? In economic terms, Wilson Price Hunt evaluated the amount of money he would receive for continuing to take extreme risks and found it not worthwhile. Oh, that some of today’s investors took similar stock of their own risk premium. Perhaps, they too, might opt for more yawning and less craziness. But the good news is, there has not been a better time to be conservative/boring in the last two decades. And you don’t need to be a business genius like Astor to see that.  Best quarter in five years for U.S. stocks The first quarter of 2024 will go down as the best quarter for U.S. stocks since 2019. When the smoke cleared, the S&P 500 was up over 10%, the Nasdaq gained 9% and the Dow was up over 5% for the quarter. That’s pretty good for three months; the last time we saw a quarter like this one was 2019, which turned out to be a really good year for stocks. Hopefully, that’s what we have in store for the final three quarters of 2024. Not everything was smooth in the first quarter. Rate cut expectations were changed, there were concerns earnings would be crushed, inflation was stubbornly stalled and consumers were exhausted. Still, markets persevered, and — despite the many reasons for throwing in the towel or sitting on the sidelines — those whose plans included U.S. equities were rewarded. The risk and angst were there, but so was the reward. You bought the ticket and took the ride, and now you have some cushion and can reallocate back to targets and keep your plan on track. If you weren’t involved in the markets, perhaps you can find some soft spots in the coming months and average yourself back in a responsible manner. But if you have been staying in close contact with your advisor and staying disciplined, this quarter should not have been a surprise. As always, there will be unexpected news to react to, but we should all know that by now. The only constant is change, but having a plan and sticking with it gives us the confidence and comfort that we have at least some measure of control. That doesn’t mean we never change and just sit by and watch the world spin away from us. Instead, what we do is constantly ask: Are we on track? What adjustments can we make to stay on track? Small tweaks add up after a while and make a big difference over time. The key is to stay informed, aware and realistic — and stay in touch with your advisor to make sure you are properly allocated. Sam is not the man! Sam Bankman-Fried (SBF) was sentenced to 25 years of jail time for defrauding investors in FTX. He tapped investors in his crypto exchange and used other people’s money to fund a lavish lifestyle, give gifts to friends and family, and donate to politicians. He faced a maximum of 110 years in jail, and prosecutors wanted him to do 40 to 50 years. The defense agitated for 6.5 years, arguing bizarrely that SBF’s “special dietary needs” would not be met in prison and that he “would not thrive” behind bars. The judge finally had enough and sentenced SBF to 25 years after his conviction by a jury of his peers last year. He will have some time to consider his actions and will not be free for at least 15 years, after which he may be paroled but isn’t allowed to run any financial business ever again. The economy is still chugging along — but for how long? The final reading of fourth-quarter gross domestic product (GDP) was revised from 3.2% to 3.4% last week, which is pretty strong despite higher interest rates. Inflation remains elevated and appears to have leveled off, while Friday’s personal consumption expenditures (PCE) numbers were in line with expectations. We spent more, but wages declined, so people are spending more and getting less with less money. It’s not a great sign for the economy in the near term and doesn’t bode well for the Federal Reserve to ease up on rates anytime soon. The employment number for March will be released this week and is expected to show around 200,000 jobs created last month. A significant upward surprise will not be welcomed. Finally, the fallout from the shipwreck that collapsed the Francis Scott Key Bridge and closed all shipping into and out of the Port of Baltimore bears watching as we head into the new quarter. Coming this week We’ll see a delayed response to the latest PCE numbers early in the week since markets were closed on Good Friday when the data was released. Fed officials are making the rounds this week, with speakers lined up every day but Monday. Data this week includes factory orders, job openings data for February and U.S. auto sales (Tuesday); the ADP employment report and MBA mortgage applications (Wednesday); and unemployment claims and the U.S. trade balance (Thursday). The Bureau of Labor Statistics’ employment situation (non-farms payroll) will be released on Friday. The last reading was a surprising +275,000, and the consensus is calling for 200,000. |
Patrick HueyPatrick Huey is a small business owner and the author of two books on history and finance as well as the highly-rated recently-released fictional work Hell: A Novel. As owner of Victory Independent Planning, LLC, Patrick works with families and non-profit organizations. He is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Advisor in Philanthropy® and an Accredited Tax Preparer. He earned a Bachelor’s degree in History from the University of Pittsburgh, and a Master of Business Administration from Arizona State University. Archives
August 2024
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