DIASTOLE ECONOMIC AND MARKET COMMENT
December 20, 2021

Note: There will be no Market Comment next week on the 27th. See you again next year!

Hanukkah is over, Christmas and Kwanzaa and New Year’s are coming. I’m almost partied out (by which I mean Zoomed out - since I have not, in fact, attended any parties). And the Federal Reserve Board feels the same way. Enough fun already!

Which is why the Fed announced on Wednesday that it would speedy-quick wrap up its program of buying bonds, so that it could begin raising interest rates. Right now, the Fed predicts three rate hikes of 0.25% each in 2022, followed by the same in 2023. That would take big-bank rates up to about 1.5% - 2.0% in 2023. Add a tidy sum for bank profit on top of that, and you see where consumer rates will be.

But will it be enough to dampen consumer demand and slow inflation? During last year’s Covid shut down, consumers switched from doing things to buying things. They borrowed record amounts of money at record-low interest rates and did what they do best: consumed. In the interim between the last shut-down and the new shut-downs (see Europe and any restaurant that has discovered a positive Covid test among its staff) people WENT OUT.

Now that it’s cold up North, people are staying in, hopefully fully vaccinated and boosted and masked. And they’re still shopping. People who don’t celebrate Christmas may not know one of the unwritten rules of the holiday: if there is time left after you have finished your shopping, you just keep shopping.

But the Omicron variant, which is 70-times more transmissible than original Covid (now called Covid Classic) is putting a dent in some plans. Lots of people are getting breakthrough cases, which, although no fun, are usually not life-threatening, and yet, the vast spread of the variant may cause more deaths than expected, just because of its prevalence.

The stock markets reacted positively to the Fed’s announcement on Wednesday. “Look, the Fed is being responsible and responsive. Things are under control.” Until Thursday, when investors decided that the Fed was grossly underestimating the damage that inflation would cause and the Fed reaction was puny. Markets fell. For the week, the Dow Jones Industrials fell 1.7%, the S&P fell 1.9%, and the Nasdaq lost almost 3%. But remember that the S&P rose 25% in 2021 through 12/15. It can afford to give a little back

Jeremy Seigel, Wharton School economist, is saying that U.S. stocks may still have room to grow. In a talk to Bank of America on Thursday, Siegel said that all U.S. stocks combined have a forward price-to-earnings ratio of 22 - which is considered high. But if you omit the FANG stocks plus Microsoft, forward P/E is 19, which many analysts consider attractive. He also reminds people that dividend-paying value stocks may be the only way to keep pace with rising inflation. (Just in case you were wondering why your advisor keeps value stocks in your allocation when you could just put everything in Tesla.)

Fed Chairman Jerome Powell, in his Wednesday speech, said that a record-high stock market, record-high home prices, and family savings are giving workers the breather they need to find a better job. As Americans’ savings dwindle, will more of them go back to work? Well, perhaps not if they’re over 55. In November, 3.6 million more Americans than in November 2019 left the labor force and said they did not want a job. 90% of them were over 55. Early retirement is taking a bite out of the labor force, and it’s supported by those record-high home prices and record-low rates on mortgage refinances. These workers may never return.

The new, improved debt ceiling was signed into law on Thursday by President Biden. It raised the debt ceiling by $2.5 trillion. The American government debt level in early December was $29 trillion. So - we raised the ceiling by less than 10%. Can kicked down the road? Check.

90% of all bitcoins that will ever exist have already been mined. And it will take more than 100 years to mine the last 10%. This scarcity is one of the reasons that bitcoin enthusiasts name for why the cryptocurrency has value. I, as you know, am a crypto-skeptic. I don’t see how, just because a thing is rare, it is more valuable. Of course, I’m not an illegal arms dealer, so maybe I’m not the target demographic? Of the 21 million currently-existing bitcoins, 3.7 million are lost. Forgotten passwords, hard drives in landfills, you name it. Oops.

For the week ending December 17th, the Standard & Poor’s 500 finished at 4,620, the Dow at 35,365, and the Nasdaq Composite Index at 15,269. The yield on the ten-year Treasury Note closed at 1.40%. U.S. crude oil cost $70.72 per barrel, N.Y. gold cost $1,804.90 per ounce, and one Euro was worth $1.12.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed to be reliable, including, but not limited to The New York Times, The Washington Post, The Wall Street Journal, USA Today, Barron’s, The Economist, Bloomberg, Yahoo Finance, Insider, CNBC, CNN, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220 or reply to this email to reach me, Liz Cook.

Apparently there is no cream cheese in supermarkets. Anywhere. Have cows also quit their jobs during Covid? But fear not, Kraft has given up to 18,000 people $20 to try something that is not cheesecake for their holiday dessert. The rest of us are left trying not to think about cream cheese. To think about anything other than creamy, cool, delicious cream cheese.
DIASTOLE ECONOMIC AND MARKET COMMENT
January 3, 2022

Happy New Year! We continue to live in interesting times, and I wonder if they would be QUITE as interesting if I didn’t read so much news. Because, day by day, week by week, nothing much happens in my tiny orbit, which is just how I like it!

Last week was a quiet one in the markets - the slow week between Christmas and New Year’s - and yet the S&P reached another new high before skidding slightly lower on slim volume toward Friday. The biggest news of the week was Covid, specifically the Omicron variant, which everyone agrees is waaaay more transmissible than previous variants, but possibly less lethal. Corollary stories include: everyone wants to be tested, but no one can find tests; a booster shot really reduces your level of symptoms if you get a breakthrough case; and new Covid cases in Florida have risen from 500 per day (in July) to 75,000 per day last week. Yikes! I am now succumbing to the scientific wisdom that says I should wear an N95 or KN95 mask in public, rather than the beautiful silk ones with filters that I prefer.

Office workers are once again staying home, shoppers are ordering online, and jobs are going begging. The job situation is an interesting one. New unemployment claims, which are indicative of how many people have been laid off, are at a low level not seen since October of 1969 (a four-week moving average of under 200,000). It is estimated that 1.5 million workers have taken an early retirement since the pandemic began, plus more than 800,000 Americans are known to have died from the pandemic, with many other “extra” deaths going unattributed to Covid. That’s a big chunk taken out of the labor pool. No wonder that employers are raising wages to attract workers, which is a large factor in the rise of inflation.

Eighteen years from now, we will look back to this year to explain why workers are in short supply. U.S. population growth has fallen to its lowest rate since… forever. Our population grew by 392,665 people - an increase of only 0.1% - from July of 2020 to July of 2021. This is the first time since 1937 that the American population grew by fewer than one million people. If we don’t grow people domestically, we must increase immigration.

Supply-chain challenges remain, and also contribute to inflation, although Christmas shipments were not as late as analysts had feared they would be. It helped that shoppers bought early, fearing the very delays that did not materialize. Retail sales for the holiday season this year were up 10.7% versus 2019, while online shopping was 61% higher than before the pandemic.

Elon Musk is a big story no matter what year it is. Mr. Musk, the head of Tesla and SpaceX, and the world’s richest man, exercised 22.8 million Tesla options at $6.24 per share in 2021, while selling about 15.7 million shares to help pay for the taxes on the options. He now owns more than 177 million shares of Tesla, currently worth above $1,162 per share. Remember when the U.N. gave him a plan to end current world hunger for six billion dollars? That’s apparently been lost in the shuffle.

China has filed a complaint about SpaceX-launched Starlink satellites, saying that its astronauts had to twice take evasive action to avoid colliding with one in 2021. SpaceX has launched about 1,800 Starlink satellites to provide internet access to people in more than 20 countries.

And Tesla delivered a record 936,000 autos last year - 87% higher than deliveries in 2020. But Tesla also recalled 500,000 cars over safety concerns. Either the hood latches have a tendency to wear out and the backup latches are misaligned (oops), or the rear-view camera, which is trunk mounted, might break if owners get in and out of the trunk too often.

At&T and Verizon have agreed with the government to postpone 5G service (for six months) near airports until it can be determined if 5G interferes with the flight safety systems of aircraft. The government wanted an open-ended commitment not to use 5G near airports, but the big telecom companies denied that request. With Omicron now accounting for an estimated 59% of new Covid infections, and thousands of flights cancelled each day due to sick crews, the 5G problem seems less important, although it’s easy for me to say since I haven’t been on a plane in two years.

In 2021, the Standard & Poor’s 500 rose almost 27%, the Dow Jones Industrials rose 18.7%, while the Nasdaq Composite Index grew by 21.4%. Student loan payments were deferred by another 90 days until May, and the Powerball jackpot drawing scheduled for tonight is worth more than $500 million. Go! Buy your ticket!

For the week ending December 31st, the S&P finished at 4,766, the Dow at 36,338, and the Nasdaq at 15,644. The ten-year bond yield closed at 1.51%. U.S. crude oil cost $75.21 per barrel, N.Y. gold cost $1,828.60 per ounce, and one Euro was worth $1.14.

Elizabeth E. Cook
Partner

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

The IRS has issued a reminder to all taxpayers to remember to include ill-gotten gains in the income totals on your tax return. Deal drugs on the side? Find a wallet full of cash? Steal cars for parts? That income must be included on your 1040. No word from the IRS about whether you can deduct the costs of your nefarious businesses.
DIASTOLE ECONOMIC AND MARKET COMMENT
January 10, 2022

This week’s question: if people are selling bonds AND selling stock, where is the money going? 

Bond prices are falling as investors sell, no doubt because everyone thinks inflation is coming on quickly. When yields rise (as prices fall) older fixed-rate bonds are less attractive and owners dump them.

Stock prices are falling too, as shares are sold. Inflation is probably to blame there, as well, because among stocks, it is the high-tech companies that are falling faster (growth stocks tend to hold more debt on their balance sheets and suffer more as rates are rising). Value stocks, which are older, less-tech-y companies with cleaner balance sheets, are more impervious to rate hikes, and have been holding up better.

There are three kinds of investments, not including derivatives (which on a good day I might argue are more like wagers), and those are debt (bonds), equity (stock), and cash. Debt involves borrowing and loaning money. Equity involves ownership. If the first two categories are dropping, it indicates that people are moving into cash, the only category left. And that is confirmed by the record amount of cash that is now “sitting on the sidelines”. $5 trillion sits in cash today, versus the previous record high of $3.5 trillion, which was reached during the Great Recession in 2009. That money will have to go somewhere, since keeping it in cash and earning almost nothing as rates rise makes no sense. I’d like to tell you absolutely that the money is going to go back into value stocks, which pay good dividends, but I can’t promise it. Sometimes investors do stupid things. Your best approach, as always, is to keep a conservative asset allocation that includes all three categories of investments and rebalance annually. Do I hear a yawn? Okay, okay, if you’re good, you can put a little money into variable rate bonds if you must.

Last week the Federal Reserve released its latest meeting minutes, which confirmed that it is planning to increase the rate at which it ends its current stimulus measures, after which it will begin hiking rates, probably beginning in March and adding 0.25% each quarter thereafter through 2023. This confirmation that rates are rising upset investors last week, although it’s been clear for weeks, if not months, that all of this was coming.

Also upsetting investors last week was Friday’s report on December jobs. The official Department of Labor employer-survey release announced that 199,000 new jobs had been created for the month, and analysts were shocked (shocked, I tell you) by the underwhelming number. But we receive three job reports per month, and the other two were much better. The Department of Labor household-survey showed 651,000 new jobs created. And the ADP payroll report, which covers a different period, and cut off before Omicron became the big concern it is now, showed 807,000 new private-sector jobs. We have also seen that with the pandemic changing employment, the first print of new jobs tends to be revised upward in subsequent prints. For all of 2021, 6.4 million new jobs were created, and the unemployment rate fell from 6.3% to 3.9% - both record performances.

In November, there were 10.6 million available jobs and only 6.9 million available workers. No wonder, then, that wages grew by 4.7% versus November of 2020. Efforts to attract employees are also adding to inflationary pressures.

Over the past year, Elon Musk’s wealth grew by $118 billion to more than $300 billion. To put it in perspective, let’s do a little exercise. First, count to a million. (Hint: it will take 11 days without breaks.) Then count to a billion (hint: 30 years!) You can stop counting now.

Food prices are rising, adding to inflation, as labor shortages, bad weather, supply-chain issues, and increased demand are all to blame, but also: THE CHINESE. Despite having less than 20% of the world’s population, the Chinese government is hoarding corn (by the middle of this year, it will hold 69% of the global supply), rice (60%), and wheat (51%).  The Chinese government is working to make the Chinese people self-sufficient, and although they might eventually sell us some of their overage, they will no doubt make us pay.

The Coca-Cola company is planning a new release later this year of an alcoholic Fresca drink. The canned cocktail is called Fresca Mixed, and while waiting for further details, we are getting very very thirsty.

For the week ending on January 7th, the Standard & Poor’s 500 closed at 4,677, the Dow Jones Industrials at 36,231, and the Nasdaq Composite Index at 14,935. The yield on the ten-year Treasury Note was higher at 1.77%. U.S. crude oil cost $78.90 per barrel, N.Y. gold cost $1,797.40 per ounce, and one Euro was worth $1.14.

Elizabeth E. Cook
Partner

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

Last week I commented upon the IRS ruling that says you must pay taxes on anything you’ve stolen. Among other surprising things that are taxable: scholarships, gambling winnings, unemployment benefits, cancelled debt, employer gifts, payment for donated eggs, the Nobel Prize, and buried treasure. It’s a good thing Rick and Marty are digging in Canada!
DIASTOLE ECONOMIC AND MARKET COMMENT
January 18, 2022

In the small town where I live, more than 200 people are testing positive for Covid-19 each day. And that only includes official testing sites, not home tests. There are only 10,000 people living here (in the winter). You see the problem. I cannot stay more home than I am already staying! But Covid fatigue is in full force. Restaurant parking lots are crowded. Store parking lots are crowded. Luckily, we have a high vaccine rate, but hospitals are full, and even vaccinated people can have a bad case of Omicron.

I don’t think we’ll get official shutdowns like 2020 again, but people (like me) are shutting themselves down, wearing their N95 masks when out as little as possible, and actually cooking at home. Nonetheless, we are seeing inflation rates at 40-year highs. Consumer prices rose 7% in December 2021, versus December of 2020. Which is natural, since 2020 was the first year of the pandemic and we hadn’t yet figured out Door Dash. But consumer prices in 2021 were only 8.3% higher than in 2019 - our last “normal” year. Which means that the CPI has risen 4.15% per year for the past two years, on average. Still twice what the Federal Reserve wants to see (its target inflation rate is 2%) but not quite as earth-shattering.

The Fed has determined that it will stop goosing the economy this year, and will also start selling its ginormous portfolio of bonds and mortgages. That alone will put upward pressure on yields. But then it will also start raising rates, adding more pressure. It clearly believes that higher rates will slow inflation, as they traditionally have. Should it have acted sooner? Well it actually started cutting back on bond purchases this past fall. And the Fed is a behemoth of an organization, which is not easily turned around. I’m not saying the Fed Governors and Chairman Powell have done a great job, just acknowledging that their job is not easy.

Yields of government bonds are now at the highest rates we’ve seen since January/February of 2020. Just two years ago, but lots has happened. These creeping interest rates are caused by lots of people expecting rates to rise and selling their bonds in anticipation. Selling forces prices down and yields up.

Aside from bond yields rising, we’re also seeing value stocks take over market leadership. In periods of higher inflation, growth stocks (like tech stocks) underperform because their balance sheets are sensitive to higher interest rates. Value stocks (like manufacturing companies) do better in an inflationary environment because their products have a more constant demand. Sometimes growth and value will move together, but often they will move separately. Although all of the major U.S. equity indices are off their record highs, the Nasdaq Composite Index, which is more heavily tech-centric is down by 8.7% since November, while the Dow Jones Industrial Average (home of big value stocks) is lower by 2.3%. The Standard & Poor’s 500, which combines both tech and value, and is the broadest of the indices, is down 3.3% from November.

So far in 2022, oil prices have risen more than 10%. Part of that is due to world economies opening up along with vaccinations, causing oil consumption to exceed production for the past six quarters. But the Department of Energy is now predicting that prices will stabilize or fall slightly over the next year to two. Energy stocks are considered value stocks because of the relatively low-tech nature of the industry, and the constant demand for its output. During the early pandemic, the demand was not so constant, and we were shocked not only by the relative halt of transportation (cars, ships, airplanes, trucks), but also by the negative oil price that we saw in April of 2020. At that time, there was such a glut of fuel that owners were paying buyers to take it because there were not enough storage facilities available.

While the U.S. economy is heating up (evidenced by rising prices, a hot labor market, and a Fed ready to try to cool it down), the Chinese economy is slowing.  In 2021, their economy grew by 8.1% overall (an admirable accomplishment that we take with a grain of salt), but growth was weakening toward year end so that in Q4, the economy was only 4% higher than the year before. The Chinese government, which has enforced several severe shutdowns, is now lowering interest rates, hoping to jolt economic activity. Unlike the U.S. where consumers LOVE to spend, in China people love to save. This is exacerbated by their male-heavy population, which is the result of decades of one-child social engineering. It is assumed in China that a young man will need to save for and buy an apartment before he can marry, and the shortage of young women makes this even more important. China changed to a two-child policy in 2016, and a three-child policy last year.

For the week ending on January 14th, the S&P 500 closed at 4,662, the Dow Jones at 35,911, and the Nasdaq at 14,893. the yield on the ten-year Treasury Note finished at 1.77%.  U.S. crude oil cost $83.83 per barrel, N.Y. gold cost $1,816.50 per ounce, and one Euro was worth $1.14.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) USA Today, The Washington Post, The New York Times, The Wall Street Journal, Barron’s, The Economist, Yahoo Finance, Business Insider, Reuters, CNBC, CNN, The Associated Press, and Investor’s Business Daily. If you have questions, please call us at 203.458.5220 or reply to this email to reach me, Liz Cook.

A “potentially hazardous” asteroid will fly close by Earth this week. The asteroid is longer than the tallest building in the world, and is considered dangerous because it crosses Earth’s orbital path. The asteroid will be 1.2 million miles away from Earth this afternoon, traveling at 43,754 miles per hour. The last time it was closer was in 1933, and the next time it will be as close is in 2150. If the asteroid struck Earth, it would destroy everything within a 25-mile radius. Calling Ben Affleck and Bruce Willis!