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Key Points for the Week
Big economies tend to recover from recessions about as quickly as semi-trucks accelerate from stop lights. In other words, recovery tends to be slow. That may not be the case this time.
Everything in this economic cycle is happening at great speed. That is in part a reflection of the scale of economic stimulus. One big fiscal package seems set to follow another. A $1.9 TRILLION package was just passed and a $3 TRILLON infrastructure bill is being discussed.
Economic recovery has helped push stock prices higher, and concerns about inflation have pushed bond prices lower and yields higher. Here are a few highlights from the first quarter of 2021:
Vaccine debates pepper small talk. Social media posts feature tips about finding appointments, as well as inoculation selfies and photos of vaccine cards. So far, about 31 percent of Americans have received one dose of a vaccine and 18 percent are fully vaccinated, reported the Centers for Disease Control.
Vaccine progress, in tandem with stimulus payments and easing business restrictions, helped lift consumer confidence. The Conference Board Consumer Confidence Index® rose from 88.9 in January to 90.4 in February. The March number exceeded even the most optimistic economic forecasts, reported Payne Lubbers of Bloomberg, rising to 109.7.
Jobs, jobs, jobs
In March, the employment report exceeded expectations, too. The U.S. Labor Department reported 916,000 new jobs were created. That was higher than the 675,000 jobs forecast by a Dow Jones survey of economists, reported Jeff Cox of CNBC. Leisure and hospitality sectors, which were hard hit by the pandemic, were job gain leaders in February and March.
An improving rate of job creation was welcome news. By government measures, the unemployment rate was about 6 percent. However, in early March, Treasury Secretary Janet Yellen told PBS News Hour, “We still have an unemployment rate that, if we really measure it properly, taking account of all the four million people who've dropped out of the labor force, it's really running at 10 percent.”
Bond yields rise
For more than a decade, professional money managers have been predicting the end of the 40-year bull market in bonds – and they have been wrong. Since 1981 when rates on 10-year Treasuries were almost 16 percent, Treasury rates have trended lower.
That changed during the first quarter. Alexandra Scaggs of Barron’s reported:
The Treasury market just posted its worst quarterly performance in more than 40 years, with investors betting on a strong U.S. economic recovery from COVID-19…In theory, the selloff in Treasuries should have left markets that trade at a yield premium to Treasuries, such as corporate debt, in a better position…Yet higher-rated and safer corporate bonds posted losses for the quarter as well, because of their high levels of duration or sensitivity to Treasury yields.
Alexandra Scaggs, Barron’s
Stock market boom
During the first quarter, sectors that were unloved in 2020 gained favor. In the Standard & Poor’s (S&P) 500 Index, Energy, Financials, and Industrials delivered double-digit gains, reported Carleton English of Barron’s. Major U.S. stock indices finished the quarter higher.
The stock boom also included tremendous enthusiasm for so-called meme stocks (inexpensive stocks with relatively weak fundamentals) which realized gains because of investors’ enthusiasm rather than intrinsic value, reported Bailey Lipschultz of Bloomberg.
The U.S. jobs market roared back to life in March. The economy added or reclaimed 916,000 jobs, shattering expectations of a 150,000 increase. Workers being recalled or hired to fill openings at restaurants and bars contributed 176,000 jobs to March’s gains. Previous months were revised higher by 156,000.
Wages dropped slightly as the large employment gains primarily consisted of lower-paying jobs, pushing employment up but wages down. Some workers returned to the labor force, but even more already in the labor force were hired, so unemployment dipped to 6.0%.
In other economic news, housing prices increased 11.2% in major metropolitan areas over the last year as a shortage of homes for sale spurred a price boom. U.S. manufacturers continue to recover. The US ISM Manufacturing Purchasing Managers Index rose to 64.7, the highest level since 1983.
The U.S. stock market rose on the news. The S&P 500 gained 1.2%, closing up 4.4% for the month and 6.6% for the first quarter. The MSCI ACWI index added 1.1% last week. The broad index of global stocks rose 2.7% for the month and 4.6% for the quarter. The Bloomberg BarCap Aggregate Bond Index edged up 0.2% last week but dipped 1.2% for the month and sagged 3.4% for the quarter as the strengthening economy pushed rates higher.
The Biden Administration has announced its first proposal of several anticipated tax hikes. This tax hike was widely telegraphed as Biden proposed raising the corporate tax rate from 21% to 28%. The extra taxes are designed to fund:
Other tax hikes that are being considered include:
During COVID lockdowns almost all of us have spent more time at home than normal. Staring at the same four walls prompted many of us to notice they needed to be painted or some other remodeling project needed to be done. The retail sales category that includes home improvement stores has risen 14.2% since last year. Other people reprioritized and are content where they are. Whatever the reason, people aren’t putting homes on the market and home prices have increased rapidly in recent months.
Last week the S&P CoreLogic Case-Shiller Home Price Index showed that home prices in major metropolitan areas have increased by 11.2% over the last 12 months, the highest increase since February 2006. The surge in prices was seen across the country, with some metro areas, such as Phoenix and Seattle, seeing price hikes of 15.8% and 14.3% respectively. The rate of increases over the past six months is even faster than during the subprime lending boom that led to the global financial crisis. This surge can be attributed to simple economics — demand has surged while supply has tumbled.
Several factors have led to the increase in demand for homes. First, mortgage rates have fallen dramatically since the beginning of the pandemic, with the national average for a 30-year mortgage dropping below 3% for the first time ever. Also, more millennials are reaching their 30s, which is considered prime homebuying years. At the same time, members of Gen Z are reaching their early 20s and beginning to enter the buyers’ market.
While more and more buyers have entered the market, the inventory of available homes has decreased to record lows. National inventory dropped to a little more than 1 million units in January 2021, the lowest level since 1982. Fewer people are willing to sell their houses because of the uncertainty caused by the pandemic, and more potential sellers are deciding to take advantage of the low rates to refinance their homes and stay where they are. New homes are also becoming more expensive due to rising material costs and slowed supply chains.
Not only has the decrease in available houses for sale led to higher prices, but it has also caused potential homebuyers to deploy some unusual tactics as they try to jump on new listings. The number of buyers who admitted to making “sight unseen” offers, those made without seeing the property in person, has more than tripled from 20% in 2018 to 63% in 2020. Also, the percentage of homebuyers who requested remote video tours increased from 1% to 10%. Both trends can be attributed to the emphasis on social distancing since last March and are also signs of the lengths to which buyers will go when inventories are so low.
One factor that may cool off the housing market is potential mortgage rate hikes. The 30-year fixed-rate mortgage average has already increased from a low of 2.65% on January 7, 2021, to 3.18% on April 1. While the increase will have a more immediate effect on refinances, which are more sensitive to rate increases, over time the increase in rates can affect affordability, especially at these elevated price levels.
The improving jobs numbers from March will contribute to additional demand. As people return to work and more normal activity resumes, demand for homes could increase even more. But the problem is supply. If more homes don’t become available for sale, higher prices may slow the recovery as buyers are priced out of the market.
The American Rescue Plan Act excludes up to $10,200 of unemployment compensation paid in 2020 from gross income. If married, this exclusion applies to both spouses. If a taxpayer's Modified Adjusted Gross Income (MAGI) is $150,000 or more, the exclusion is not available.
According to updated instructions recently issued by the IRS, unemployment income is not included when calculating MAGI for purposes of the unemployment compensation exclusion. This is a reversal of the IRS's original interpretation of the provision. The exclusion is calculated using the Unemployment Compensation Exclusion Worksheet. Taxpayers filing Form 1040-NR are not allowed an unemployment compensation exclusion for their spouse.
For more information, please see www.irs.gov/forms-pubs/new-exclusion-of-up-to-10200-of-unemployment-compensation.
The IRS and Security Summit have issued a warning regarding a new text message scam which cites the availability of an economic impact payment. The goal is to have the recipient reveal bank account details. If you have any questions about this scam, please contact us.
April 8, 1974: Hank Aaron Breaks Babe Ruth’s All-Time Home Run Record
On April 8, 1974, Hank Aaron of the Atlanta Braves hit his 715th career home run, breaking Babe Ruth’s legendary record of 714 homers. A crowd of 53,775 people, the largest in the history of Atlanta-Fulton County Stadium, was with Aaron that night to cheer when he hit a 4th inning pitch off the Los Angeles Dodgers’ Al Downing.
Henry Louis Aaron Jr., born in Mobile, Alabama, on February 5, 1934, made his Major League debut in 1954 with the Milwaukee Braves, just seven years after Jackie Robinson broke baseball’s color barrier and became the first African American to play in the majors. In 1957, with characteristically little fanfare, Aaron, who primarily played right field, was named the National League’s Most Valuable Player as the Milwaukee Braves won the pennant. A few weeks later, his three home runs in the World Series helped his team triumph over the heavily favored New York Yankees. Although “Hammerin’ Hank” specialized in home runs, he was also an extremely dependable batter, and by the end of his career he held baseball’s career record for most runs batted in: 2,297.
Aaron hung up his cleats in 1976 with 755 career home runs, a record that stood until 2007, when it was broken by controversial slugger Barry Bonds (Bonds admitted to using steroids in 2011). Aaron's achievements didn't end when his career did, though. He went on to become one of baseball’s first African American executives, with the Atlanta Braves, and a leading spokesperson for minority hiring. Hank Aaron was inducted into the Baseball Hall of Fame in 1982. He died on January 22, 2021, at age 86.
Success is the sum of small efforts repeated day in and day out.
Robert Collier, American Author
You’ve got to get up every morning with determination if you’re going to go to bed with satisfaction.
George Lorimer, American Journalist and Author
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Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold, or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future.
Any expression of opinion is as of this date and is subject to change without notice. Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. Diversification and asset allocation do not ensure a profit or guarantee against loss. There is no assurance that any investment strategy will be successful.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as "The Dow" is an index used to measure the daily stock price movements of 30 large, publicly owned U.S. companies. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007, the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
The Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented.
Please note, direct investment in any index is not possible. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
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