DIASTOLE ECONOMIC AND MARKET COMMENT
July 1, 2024

Friday marked the end of the first half of the year in markets, and the Standard and Poor’s 500 logged in a gain of 14.5% for the period. Chipmaker Nvidia was responsible for more than a third of that gain. The Nasdaq Composite Index, which also contains Nvidia, rose 18% in the first half of 2024, while the Dow Jones Industrials lagged, gaining just 3.8% for the first six months of 2024.

The Dow is suffering from too-much-value-in-a-growth-world - meaning that the Index contains no Nvidia, which is driving markets these days. Nvidia is benefitting from the artificial intelligence (AI) explosion, for which it makes microchips.

But there are other stories affecting markets. Yes, the Federal Reserve is one of them. The Open Market Committee will meet at the end of this month and decide whether or not to raise or lower interest rates. The Fed’s preferred inflation measure, the Personal Consumption Expenditures Index, was released last week and showed that there was no increase in prices from April to May, and that prices increased by just 2.6% for the trailing 12 months. Yay! (The Fed’s stated target for inflation is 2%.) That probably takes a rate HIKE off the table (nothing is for sure, but…). Will we see an interest-rate reduction? No predictions until we get the all-important Fed leak. Chairman Jerome Powell is very good at telegraphing what the Fed is going to do before it acts. He knows that the stock markets don’t like to be surprised (unless it’s cake. Everyone loves cake.)

But to put it in perspective: according to CNN, inflation was at 4% a year ago, and 9% two years ago. This year is better! Leading inflation downward are lumber costs, which have fallen by 27% SINCE MID-MARCH. You will remember that lumber got very expensive during the pandemic, when we worked remotely and decided to build home offices and decks.

Analysts are not united in their Fed forecasts. Some say July is a possibility for a rate reduction. Some say September. And others say not until after the election. While a strong first half of the year usually is followed by a strong second half anyway, a rate cut would fuel further rallies.

But always remember that there are two sides to every story. Big corporate borrowers will grin at rate cuts, but big banks won’t. They will be forced cut the rates they charge, and even if they also cut the interest they pay, it will leave them with a smaller profit margin.

According to Bloomberg, U.S. retail sales barely increased in May, and earlier months’ sales were revised downward. Normally this would be bad news for the economy, because we like Americans to shop. But in the current situation, where we’re hoping for inflation to moderate, this bad news is good news.

CDK Global is the data and software provider which is used by most car dealers to handle sales, records, and scheduling. It was hit by cyber attacks on June 19th and forced to shut down most of its systems. Automobile dealerships have resorted to workarounds that involve pencils and calculators. CNN anticipates that car sales may be so affected that our GDP is reduced. CDK says that it is paying a ransom demanded by hackers and that services will resume shortly. I hope so.

Housing remains a problem spot in the economy. Prices for homes are growing even more expensive (home prices have risen by about 50% since 2019), while sales of single-family homes are falling. From April to May, new home sales fell by more than 11%. Those sales hit an annualized rate of 619,000 while economists had expected 647,500.

More bad news is good news: the unemployment rate for bachelor’s degree recipients aged 20 to 29 has risen to 12% - almost four points higher than last year, according to the Bureau of Labor Statistics. Nobody likes to see people out of work, but the Fed is watching the labor market for signs that it is slowing down so that it can thread the needle and reduce interest rates before we fall into a recession. Again, fingers crossed.

For the week ending on June 28th, the S&P 500 finished at 5,460, the Dow at 39,118, and the Nasdaq at 17,732. The yield on the ten-year Treasury Note closed at 4.37%. U.S. crude oil cost $81.54 per barrel, N.Y. gold cost $2,339.60 per ounce, and one Euro was worth $1.07.

Elizabeth E. Cook
Partner, Diastole Wealth Management

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) The Wall Street Journal, CNN, CNBC, The New York Times, USA Today, The Washington Post, Axios, Yahoo Finance, Business Insider, Morning Brew, Barron’s, MarketWatch, The Economist, Fortune, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220.

Happy Fourth of July! Enjoy your hot dogs and sparklers and be grateful for our freedom!

DIASTOLE ECONOMIC AND MARKET COMMENT
July 8, 2024

We only had three and a half days of trading last week, due to the Fourth of July holiday. (If you didn’t eat 58 hot dogs in ten minutes, you weren’t really trying.) And yet still the S&P 500 and the Nasdaq Composite Index both managed multiple record-high closes. The Dow finished higher for the week too, but didn’t hit a record.

And in a classic case of bad-news-is-good-news, Friday’s June jobs report, which saw unemployment rise from 4% in May to 4.1%, propelled equity prices higher as market-watchers rubbed their hands together in glee and imagined a Federal Reserve rate cut in September. Actual net-new jobs created came in slightly higher than expected at 206,000, but prior months were revised downward.

The Fed has the sometimes-contradictory responsibilities of maintaining full employment while also keeping inflation low. At this point, it is clearly focusing on inflation, and is willing to tolerate higher unemployment in order to reach its inflation goal. Of course, 4.1% unemployment is historically low, so maybe I’m being unduly critical. The long-term average unemployment rate is 5.69% according to YCharts.

Inflation is not a new problem. It was tragically high in Germany after World War I, for example. But we can also look a little further back than that. In ancient Rome, inflation was such a concern that rulers had a Draconian cure for it: executing anyone who was found to be raising prices unnecessarily. Yikes! (They also had a cure for a declining population: encouraging women to be promiscuous.)

If you’re following Bitcoin (BTC), you already know that its price has fallen drastically over the past few months - now down about 25% from its March high. Despite the recent halving, which is a reminder that only a limited number of Bitcoin will ever be mined, the currency is suffering from basic lack of interest as well as a recent notice from the Mt. Gox website that despite the failure of Mt. Gox, distributions to depositors would begin this month. Bitcoin investors fear that those who receive BTC from Mt. Gox will turn right around and sell it, driving prices further down.

Next week: more news, more words.

For the week ending on July 5th, the S&P 500 finished at 5,567, the Nasdaq at 18,352, and the Dow Jones Industrials at 39,375. The yield on the ten-year Treasury Note closed at 4,272. U.S. crude oil cost $82.43 per barrel, N.Y. gold cost $2,388.60 per ounce, and one Euro was worth $1.08.

Elizabeth E. Cook
Partner, Diastole Wealth Management

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) The Hustle, Business Insider, Yahoo Finance, Bloomberg, Axios, The New York Times, The Wall Street Journal, The Washington Post, USA Today, Fortune, The Economist, Barron’s, MarketWatch, CNN, CNBC, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220.

A horrible accident might result in a limb being amputated to save the life of the… ant? Turns out that some ants perform amputations on their little ant buddies who get hurt - in order to extend the lives of the cute little fellas. Ants are sweet! At least at YOUR house.

DIASTOLE ECONOMIC AND MARKET COMMENT
July 15, 2024

The Dow Jones Industrial Average closed last week at a record high of 40,000, up 1.6% for the week. The Standard & Poor’s 500 rose 0.9% last week, while the Nasdaq Composite was higher by 0.3%. It was an unusual week, with the tech-heavy indices lagging the Dow, which is full of good, old-fashioned value companies.

It could be that some of the Artificial Intelligence (AI) naysayers are finally being heard as they discuss the dangers of deep fakes (AI-created false narratives), invasion of privacy, and the machine-driven end of the world. Or, more likely, investors are noticing that AI-related stocks are still not realizing their potential in terms of revenue. A lot of AI infrastructure is being built by a lot of AI companies, but they won’t all survive. There will be some shakeout in the new industry because there always is.

There’s shakeout in used cars right now, with prices down 8.9% from a year ago. Electric vehicles are faring worse than the average, with prices for used EVs down 16%. And worst of all are some Tesla Model 3s, whose value has fallen 40% in one year. Consumer prices down, and stock prices up? Yes, please.

It’s not just stock prices that are rising. Bond prices rose last week, too. Why? Because of the Federal Reserve. The answer is always the Fed! On Thursday, the June Consumer Price Index (CPI) was released, and showed that prices fell from May to June. Actually fell. Year over year, inflation was 3.3%, but for the last three months, core CPI, which excludes food and energy and is preferred by the Fed, rose just 2.1%. That’s awfully close to the Fed’s target of 2%.

Additionally, June’s jobs report, which we received earlier in July, showed that unemployment rose to 4.1%. This indicates a tightening labor market, in which jobs are a little harder to find, and more people can’t find one. Combined with the inflation news, analysts speculated that the Fed would have to move this year to lower interest rates - possibly as soon as September. Possibly THIS month, when the Open Market Committee meets on the 30th and 31st. Remembering that the Fed is charged with keeping inflation down AND employment high, this unemployment number is yet more encouragement for Jerome Powell and crew to start easing up, lest unemployment worsen.

And, in fact, employees are less likely to quit their jobs now than during “the job-switching frenzy of the pandemic years,” as the Wall Street Journal puts it. New jobs are harder to find. According to Robert Half, a workplace consulting and recruiting firm, about 35% of U.S. adults plan to look for another job in the second half of this year, down from 49% a year ago.

An interest rate cut will benefit companies that carry loans, people who carry loans and credit card balances (although credit card companies are loath to lower rates, it is possible to shop cards, find a better offer, and transfer your balance), and banks. But banks may get caught in the middle for awhile as rates settle down. They’ve just started paying more for deposits, as consumers demanded it, and will be unable to lower them as fast as they will have to lower interest rates on mortgages and other loans. Poor banks.

Boeing is stuck in a nightmare that keeps getting worse. According to CNN, Boeing sold just three 737 Max jets in the past month, plus eleven 777 freight planes. Gross sales were down 70% from the same period last year. And then came the guilty plea that Boeing entered to one charge of conspiracy to defraud the United States - related to its role in the two fatal 737 Max crashes. Boeing agreed to pay $487 million in fines - far less than families of victims wanted it to pay. In many other industries, a company like Boeing would be toast, but because of the worldwide monopoly that it shares with Airbus, Boeing keeps going.

China, whose GDP is not quite as high as it would like, and whose old one-child policy is causing an ongoing population crisis, is also facing tanker-gate. (Or whatever that would be in Chinese.) It turns out that some trucks used for transporting fuel or chemical liquids were also used for edible liquids like cooking oil or syrup - without cleaning in between. The large companies which are implicated in the scandal say that an investigation is ongoing.

For the week ending on July 12th, the S&P 500 finished at 5,615, the Nasdaq at 18,398, and the Dow at 40,000. The yield on the ten-year Treasury Note closed lower at 4.189%. U.S. crude oil cost $82.37 per barrel, N.Y. gold cost $2,404.67 per ounce, and one Euro was worth $1.09.

Elizabeth E. Cook
Partner, Diastole Wealth Management

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable including, but not limited to, The Wall Street Journal, The New York Times, The Washington Post, USA Today, The Economist, Fortune, Barron’s, MarketWatch, Business Insider, Yahoo Finance, Axios, Bloomberg, The Bureau of Labor Statistics, CNN, CNBC, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220.

Billionaire Peter Thiel, who made his fortune in PayPal, Facebook, and other endeavors, has a new idea: The Enhanced Games. This is a version of the Olympics in which doping is welcome. He is assuming that doping is rampant anyway, and this will level the playing field - despite the potential for physical harm to the participants. It may remind you of an old Saturday Night Live sketch called “The All-Drug Olympics”, in which one weight lifter attempts to lift an enormous barbell, only to have his arms rip off at the shoulder. The announcer says, “That’s gotta be disappointing!”

DIASTOLE ECONOMIC AND MARKET COMMENT
July 22, 2024

While all eyes were on the political landscape last week, a market rotation snuck by under the radar. The Magnificent Seven tech stocks fell from grace, while smaller, non-tech companies rose. A midweek report from Bloomberg stating that the Biden administration was considering tighter restrictions on sales to Chinese tech firms was the first blow, and was followed by Friday’s monumental computer outage.

While Microsoft announced that less than 1% of Windows devices were affected by the CrowdStrike-caused blue screen of death, that was still 8.5 million users worldwide. Airlines were grounded and some stores, banks, and hospitals had to close. There are still users offline today, as the fix has required restarting whole networks, which is easier said than done. Congratulations if you use a Mac.

The Standard & Poor’s 500 fell just under 2% last week, while the Nasdaq Composite Index dropped 3.65%. Both had recently hit record highs. The Dow Jones Industrials rose 0.72%, and the small-capitalization focused Russell 2000 climbed 1.68%. Small-cap stocks are expected to benefit from lower interest rates, which are presumably still coming this year.

The Federal Reserve’s July meeting is on the 30th and 31st - next week. We have received no leaked information that a rate cut will be coming then, so we can assume that it is not. There is no August meeting, so the next opportunity to slash interest rates comes in September. According to Barron’s, odds-makers now put the chance of a September cut at 93.5%. And according to Bloomberg, traders believe that the Fed will cut three times this year. If it’s not July, then presumably it would be September, November, and December - the only three meetings left in the year. But the traders might be wrong.

While inflation is clearly moderating (even Burberry is cutting prices), there are still pockets of craziness. For instance, the cost of automobile insurance, which rose 7% from 2022 to 2023, has grown an additional 12% from 2023 to 2024. Individual drivers who cannot afford these hikes are resorting to increasing their deductibles or switching to not-full-coverage policies.

But regular folks are not the only ones facing pockets of inflationary pressure, even as overall inflation approaches the Fed’s target rate of 2%. The federal government is having to sell Treasury debt with higher yields in order to attract buyers as we fund our deficit. Right now the yield on the ten-year Treasury Note is around 4.2%, and total outstanding Treasury debt is more than $27 trillion. As interest rates and yields fall in the future, existing bonds with higher yields will be worth more. That’s why bond yields and bond prices move in opposite directions.

Interest rates and house prices usually move in opposite directions, too, although that’s not been true in the last few years. Home buyers have a limited amount of income to devote to their mortgage, and the more interest they pay, the less house they can afford. But scarcity has driven home prices higher even in the face of higher mortgage rates. Those higher rates are why so many people aren’t moving: they don’t want to trade a fabulous low-rate mortgage for an unattractive higher-rate one. And they’ve got surging home equity to show for it. But it’s not so easy to access, since a cash-out refi, or home-equity line of credit would expose them to higher rates too. Home ownership is the primary route to personal wealth in the U.S. “We know the typical homeowner has 40 times the wealth of a renter in this country,” says Jessica Lantz of the National Association of Realtors.

Another way to increase personal wealth is through inheritance. And if you have an inherited IRA that came to you in 2020 or afterward, you should be aware that the IRS has finalized rules first explored in 2019 for heirs of inherited IRAs. These new rules don’t affect spouses who inherit, just other heirs. In most cases, the inherited account will have to be emptied over ten years, with a mandatory partial withdrawal each year followed by a complete withdrawal in year ten. Please discuss with your accountant to find out exactly how the new rules apply to you. Withdrawals from a regular IRA are fully taxable.

For the week ending on July 19th, the S&P finished at 5,505, the Dow at 40,287, and the Nasdaq at 17,726. The yield on the ten-year Treasury Note closed at 4.239%. U.S. crude oil cost $80.05 per barrel, N.Y. gold cost $2,404.00 per ounce, and one Euro was worth $1.09.

Elizabeth E. Cook
Partner, Diastole Wealth Management

News and information presented here was gathered from sources believed to be reliable, including (but not limited to) The Wall Street Journal, The New York Times, The Washington Post, USA Today, Bloomberg, Yahoo Finance, Business Insider, Fortune, Axios, Morning Brew, CNBC, CNN, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220.

In the 14th century, more than a quarter of the population of Europe died of bubonic plague, after it broke out on the Silk Road between Europe and China. That’s 50 million people. Thanks to the Black Death, we saw the rise of a middle class, many of whom acquired the property of wealthy landowners in the wake of their deaths. But you, too, can have bubonic plague! Every year, a few cases spring up in the American west, transmitted by the fleas on rats or other animals. This year, so far, three cases have been reported. Antibiotics are effective against the plague if taken early.