MARKET RECAP

It was a somewhat flat week, stocks did hit a record on Thursday but a pullback dropped the US by 0.34% and international markets by 0.20%.

GDP grew at a 6.5% annual rate in the second quarter, up from 6.3% in the first quarter. The size of the economy is now greater than its pre-pandemic level. But while growth is expected to be maintained, the future is more cloudy as the Delta variant is spreading quickly, prompting the CDC to recommend wearing masks indoors.

Average home-prices increases set a record in May, up by 16.6% compared to last year, up from the 14.8% growth rate the prior month, as measured by the S&P CoreLogic Cash-Shiller National Home Price Index. The median home price in June was $363,300, up by 23.4%, according to the National Association of Realtors. These number make it even more absurd that the Fed continues to keep interest rates extra low by buying $120 billion a month in Treasurys and mortgage bonds.

The Fed did hint this week that those purchases would be evaluated soon, in a statement, the Fed said, “the economy has made progress towards these goals…[and would] assess progress in coming meetings.” But Powell made it clear that raising rates was not on the table, “It’s not something that is on our radar screen right now.”

A key inflation indicator eased slightly this week. Consumers surveyed by the University of Michigan expect inflation five to 10 years from now to be 2.9% down from 3% in May and closer to the 2.8% average in surveys from 2000 to 2019. And the recent fall in interest rates seems to indicate that bond investors are not worried either. However, on the other hand, inflation has been the big topic on earnings conference call. According to Bank of America Global Research, inflation was discussed at a rate 10x higher than last year.

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MARKET RECAP

The market fell hard on Monday, dropping over 2%, but after that the bulls took control. The market was up by 2.28% for the week and closed at another high. The Dow broke the 35,000 barrier. The market scare on Monday was due to fears of a spreading Covid Delta variant and its potential slowdown of the economy. The virus tripled in case count over the previous two weeks. The 10-year yield dropped to a stunning 1.13% yield.

But then the “buy the dip” investors got to work, investing about $7 billion in ETFs. That stock market rally coincided with the 10-year returning to where it closed the week before, at a 1.30% yield, just off by one basis point. Strong earnings also helped. 85% of the 110 companies that have reported earnings have beaten forecasts.

The IHS Markit US manufacturing purchasing managers index hit a record high, powered by a surge in new orders. On the job front, the reports were mixed. On one hand, the number of people receiving jobless payments hit a post-Covid low, but new applicants rose by 51,000. The increase in new applicants was blamed on the auto industry due to supply constraints, mainly chips.

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MARKET RECAP

The S&P 500 was up 1.1% for the week. On Thursday, the market had its biggest decline since June 18th, but the Friday rally put the market at another record close. Bond yields fell during the week. The 10-year treasury yield closed at 1.354% on Friday  and got as low as 1.287% on Thursday, that was down from 1.434% last week.

Individual investors are “all-in” when it comes to investing in the stock market. According to Vanda Research, individual investors purchased $28 billion of stocks in June, the most since 2014. Investors also opened more than 10 million new accounts so far this year, about equal to what was opened in all of 2020, according to JMP Securities. But the enthusiasm is not equally shared with professional investors, who are still positive on the market for the most part, but uneasy with high valuations, the threat of inflation, and an eventual pullback by the Fed. While this bull market seems to have broken all the rules, in the past, mass participation by individual investors has sometimes signaled market tops.

Treasury yields tumbled to multi-month lows as Fed minutes indicated the Fed was in no rush to stop purchasing bonds and the fast-spreading Delta variant might slow down, at least to some degree, the fast improving economy. Notes released from a Federal Reserve meeting showed that some Fed officials were not as confident about the economic outlook and therefore want to maintain its massive purchases of government bonds. And an Israeli study showed that while the variant does provide a good level of protection against the variant, it is more like 65% than 95%.

The Labor Department reported on Wednesday that at the end of May there was 9.2 million job openings, the most ever. There are currently 9.3 million Americans unemployed that are actively seeking work.

President Biden issued an executive order to increase competition in the economy targeting agriculture, technology, and drugs. Biden said that “The heart of American capitalism is a simple idea: open and fair competition.” We actually agree with many parts of the Biden initiatives, over the last 30 years or so it has become harder and harder to start and grow a small business in the United States, hurting aspiring entrepreneurs, prospective employees, and consumers.

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MARKET RECAP

US stocks continued their march forward, closing at a new high on Friday, up 1.22% for the week. International stocks fell by 0.87%. The S&P 500 has set a new high for seven days in a row, the longest such streak since 1997, and it has gained more than 5% for for five quarters in a row, that was last done in 1954. Bonds rose by 0.57%.

Household wealth in the US increased by $13.5 trillion last year, a simply incredible number given that the economy was more or less shutdown at different points. A higher stock market drove half of the increase. One-third of the increase went to the top 1% and more than 70% went to the top 20% of income earners. Huge government benefits also drove the increase, especially for lower income workers. Higher prices for homes were also a factor.

In April, home prices increased by the fasted rate ever, up 14.6% year over year, as measured by the S&P CoreLogic Case-Shiller National Home Price Index. That was up from 13.3% the previous month. The index dates back to 1987. Exploding house prices makes it difficult for many to afford a home, especially first-time buyers. Not to mention, out of control prices for homes was a major factor leading to the 2007/08 collapse. Which makes one wonder why the Federal Reserve continues to buy $40 billion per month in mortgage securities while the economy is growing at a real rate of 7% and inflation is coming in at 4% plus.

Business added 850,000 jobs last month, better than the consensus estimate. Weekly jobless claims fell to a pandemic low last week, dropping to 364,000 down from 415,000 the prior week.

130 countries have agreed do a global minimum tax rate for international companies. The Biden administration pushed this plan. There will now be a 15% minimum tax rate in each country, thereby minimizing opportunities to avoid tax. It was the biggest change to international taxation rules in a century.

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MARKET RECAP

US stocks were up by 2.97%, turning in their best week since February, and closing at a new high. Month-to-date, the market is up by 2.22%, and 12.34% for the year. International stocks were up by 1.55% for the week and are up by 0.48% for the month and 9.87% for the year. On Thursday, Microsoft became the second company with a valuation in excess of $2 trillion.

The rally this week was counter to last week, when stocks fell by 1.96% when the Fed indicated it might move up the timeline to raise interest rates. But investors were cheered when there was bipartisan agreement on a $1 trillion infrastructure plan aimed at the electrical grid, roads and bridges, and other types of traditional infrastructure. The agreement is not law yet, it will go to vote next month. $559 billion of the plan is financed by unused past spending authorizations. The financing of the remainder has yet to be determined.

Meanwhile, the Federal Reserve continues to buy $120 billion of securities each month while interest rates remain close to zero, despite the fact that the economy is almost in “boom” mode and inflation has been jumping higher. Unfilled job openings are greater than nine million. Several Fed Governors have indicated that they lean toward a quicker tightening of monetary policy, but not Powell, who thinks that the inflation surge is temporary and is sticking with the current game plan.

MARKET RECAP

US stocks fell by 0.26% while international markets were up by 0.54%, bonds were flat.

Economic reports were good this week. The IHS Markit Composite Index had off-the-chart numbers, coming in at 68.1 up almost 5 points from last month and much higher than the 50.0 that separates expansion from contraction. The service sector scored 70.1, and manufacturing activity was 61.5, both all-time highs. Unemployment claims were down by 34,000 to 444,000 last week. That was the lowest number since March of 2020. However, economists’ expectations are catching up with the data. However, housing starts were lower than anticipated and the pace of mortgage applications slowed from the prior month. The Citibank Economic Surprise Index has been falling steadily and is at 14.7 now down from about 80 earlier in the year.

Fed minutes released this week alluded to the possibility of slowing the pace of asset purchases sooner rather than later. Currently, the Fed is buying $120 billion a month in securities and most economists did not expect that to be cut back until 2022 without even a mention of it until the August meeting. But in light of it being discussed at the April meeting, the possibility now exists that later in 2021 is on the table. Massive Fed purchases have kept interest and mortgage rates artificially low, pumped up asset prices, led to excess speculation, etc. It also has helped invigorate the economy and reduce unemployment. But the economy has been steadily improving for months now and the longer we are on the medicine the harder and more painful it will be to get off it.

One area of crazy speculation, helped by too much money in the system, is cryptocurrencies. Bitcoin and its cohorts might make up the biggest bubble ever, or maybe it is the future of money, depending upon who you ask. Bitcoin was up by about 600% in the last year back in April but has since fallen 41% to $37,339/coin (as of Saturday). On Wednesday alone, bitcoin dropped by 40% from the previous day at one point. A big argument in favor of bitcoin is its limited supply. While the US and other countries seem to do everything possible to devalue their currencies by issuing more of it, bitcoin’s supply is limited. The problem though is that there is an unlimited supply of potential cryptocurrencies that can simply duplicate bitcoin. There can be Bitcoin 1, Bitcoin 2, etc. In fact, there are already hundreds of alternative currencies that people speculate in that are not even limited in supply. While Bitcoin flattened out before its recent fall, other cryptos were still flying higher day by day. So there is not limited supply. And obviously, there is no intrinsic value in a made-up electronic currency. Having said that, there are lots of very smart investors that believe in Bitcoin as an asset class for the long term.

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MARKET RECAP

As someone once said, “be careful what you wish for, you just might get it.” Well, the Fed has gotten their wish, at least so far, the biggest inflation cheerleaders saw it rise by 4.2% in April, the biggest increase since 1981, and much higher than expected. The Fed isn’t worried though, thinking the increase is transitory, lets hope they are right because we do not want a 1970s replay. Stocks were down by 1.4% on the week on the news.

In the last two weeks, inflation had a big overshoot and hiring a big undershoot. Of course, one month is not a trend and there are good explanations for all of this, but inflation and unemployment together go by the nightmarish name of stagflation.

If inflation continues to increase at an unexpectedly high rate it could force the Fed’s hand on interest rates, which would lead to lots of unintended consequences.

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MARKET RECAP

US stocks increased by 0.71% and international markets were up by 1.47% as the incredible rally rolls on.

The US added only 266,000 jobs in April, way short of the consensus estimate of 1,000,000. The unemployment rate increased to 6.1% from 6.0%. While the economy is certainly growing, some businesses remain hesitant to hire and many say they simply can’t find employees. Prospective employees are still worried about the virus, some stay home because of child-care responsibilities, and others receive unemployment benefits that are high enough to offset the need to go back to work. The demand for help has pushed wages higher, rising by 21 cents to $30.17 per hour and the average workweek increased to 35 hours. The labor-force participation rate hit its highest level since August at 61.7%.

GDP increased by 6.4% in the first quarter. Excluding the increase in Q3 of last year, it was the fasted rate of growth since 2003.

The service sector in the US grew at a record pace in April. The US Services Purchasing Managers Index was 64.7, up from 60.4 in March.

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Highlights:

• The Federal Reserve held its key interest rate near zero and said it plans to continue supporting the economic recovery, while acknowledging recent progress in growth and employment.
• The Fed said “Inflation has risen, largely reflecting transitory factors.”
• A burst of growth brought the U.S. economy to just a hair below its pre-pandemic size in the first quarter, extending what is shaping up to be a rapid, consumer-driven recovery this year.
• Gross domestic product, the nation’s broadest measure of goods and services, grew at a 6.4% seasonally adjusted annual rate in January through March, the Commerce Department said Thursday. That left the world’s largest economy within 1% of its peak, reached in late 2019 before the corona-virus pandemic hit the U.S.Congress responded quickly, approving several packages totaling about $5 trillion in aid for households and businesses. The Federal Reserve pushed its benchmark interest rate to near zero to lower borrowing costs.

MARKET RECAP

Stocks were flat for the week but the “Everything Up” market is still in command. Lumber, residential homes, stocks, bitcoin, dogecoin, Gamestop, SPACs, etc, if not at an all-time high, these assets were just recently. The rallies can continue, there is lots of momentum, lots of dollars floating around, and about the easiest Fed that anyone can remember.

But there are some factors that might at least put a pause on the rally. Biden’s proposed capital gains tax is one, he proposed upping the tax on wealthy Americans to 43.4%, higher than the rate on wage income.

Both bitcoin and US stocks took a minor hit on the announcement, although stocks recovered by the weekend.

Excessive leverage in the system is a threat. Sometimes it shows up out of nowhere. Investments that went against Archegos Capital Management, which was wildly leveraged across multiple firms, caused $10 billion in losses. How many other Archegos’s are out there? How much leverage is tied up in bitcoin? What about in stocks?

Total margin debt closed out February at an all-time high. The 49% increase, year over year, was the fastest increase since 2007.

But on the plus side, the economy is beginning to boom. Of course, it has been helped by trillions in government and Fed stimulus. Morningstar, in line with other forecasts, just upped their read GDP for estimated growth to 6.2% this year.

And unemployment claims are starting to fall fast.

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