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Key Points for the Week

  • Federal Reserve Chair Jerome Powell signaled the Fed would reduce its bond-buying programs sometime later this year.
  • Personal expenditures grew just 0.3% as spending on goods dropped 1.1% from the previous month. Household income rose 1.1%.
  • Existing and new home sales were nearly flat in July compared to a surge of demand last year.

Last week, Federal Reserve (Fed) Chair Jerome Powell’s words helped grow the week’s equity market returns. In his speech at the Economic Policy Symposium in Jackson Hole, Wyoming, Powell confirmed that the United States economy had made substantial progress toward the Fed’s maximum employment and price stability goals. Consequently, the Fed is likely to slow and eventually stop the bond purchases that have been ensuring smooth market functioning during the pandemic.

Powell also offered assurance that the target range for Federal funds rate, which is one of the Fed’s tools for influencing short-term interest rates, will remain unchanged until “…the economy reaches conditions consistent with maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time.

Investors were delighted by the Fed’s stance, as well as positive data on second quarter’s economic growth and corporate earnings. The Bureau of Economic Analysis reported that gross domestic product (GDP), which is the value of all goods and services produced in the United States, increased 6.6 percent from April through June. That was an improvement on the January to March quarter when the economy grew by 6.3 percent.

Corporate earnings, which reflect companies’ profits, were also strong during the second quarter. Companies had relatively easy year-over-year comparisons to 2020’s dismal second quarter and, with almost 98 percent of companies in the S&P 500 reporting in, earnings for companies in the S&P 500 are expected to be 95.4 percent higher, year-over-year, and 79.9 percent higher when the energy sector is excluded, reported Tajinder Dhillon and Thomas Alonso of Refinitiv.

This Week in the Markets

Federal Reserve Chair Jerome Powell joined the chorus of Fed officials signaling the U.S. central bank would reduce its bond-buying program designed to keep long-term interest rates low and sustain the economy during the pandemic. After two strong jobs reports and generally positive economic news, Fed officials seem ready to reduce bond purchases later this year.

The pace of reductions will likely be slow, and interest rate increases aren’t expected anytime soon. Personal spending grew just 0.3% last month even though incomes rose 1.1%. Rising COVID-19 cases limited increases in spending, and goods spending dropped 1.1%. Housing demand remains strong. Last month, existing and new home sales increased 2% and 1% respectively from already elevated levels. Goods spending and housing demand both accelerated early in the pandemic, making comparisons more difficult.

Stocks reacted positively to Powell’s communication, and the S&P 500 reached another all-time high. August’s monthly employment report leads the list of economic releases this week.

Measuring Up

For today’s young adults, keeping their finances in order is likely more difficult than it was when today’s retirees were the same age. Social media has made it easier to compare our lives to a wider range of people. Rather than keeping in touch with some friends from high school and seeing the rest every five years at a reunion, we can get regular updates of our friends’ lives by following them on social media.

Not only are comparisons easier to make, but social media also creates unrealistic comparisons. What people share on social media is an idealized version of their lives that reflects their best experiences as they want them to be seen. That makes it a difficult comparison. And compare we must. According to social comparison theory, humans like to evaluate how they are doing, and when no objective measures exist, they will compare themselves to other people.

Investors can face the same challenge on a regular basis with performance numbers. Even though companies and markets are global, a tendency toward home bias causes many investors to compare their global portfolios to the performance of a domestic stock index, like the S&P 500.

When the S&P 500 is the dominant market performer, some investors start questioning how well their portfolio is performing even when its results remain solid compared to the global index. This year, the S&P 500 has gained more than 20%, while global stocks have climbed only 15.3%. But global stocks include the U.S. When the U.S. is stripped out, the MSCI ACWI ex U.S. has only increased 8.3% this year. Much of the poor international performance comes from China and its decision to tighten information sharing to the detriment of Chinese social media companies. The MSCI China Index has dropped 15.1% this year. These comparisons can also be more difficult when portfolios include bonds. The Bloomberg U.S. Aggregate Bond Index is down 0.7%, and that causes performance to drop more quickly as risk declines.

Rather than think about bonds hurting returns, investors should consider them as diversifying. Diversification is a key tool for managing risk, and bonds are doing a great job diversifying the risk in stocks. In 2021, taking risk in stocks, especially in the U.S., has been richly rewarded. But taking risks means other outcomes are possible. Stocks have profited because the economy bounced back quickly. Bonds are essential to managing downside risk.

Whether it’s your portfolio’s performance or your own perception of financial success, be careful you aren’t comparing yourself or your portfolio to an improper benchmark. People tend to compare themselves to people who are better off than they are. Doing so leaves them with more negative feelings, higher stress, and lower satisfaction. Comparisons to a broader and better set of benchmarks can lead to a more accurate reflection of how well you are doing and a better outcome.

Did you Know? This Week in History

August 31, 1997: Princess Diana Dies in Car Crash

Shortly after midnight on August 31, 1997, Diana, Princess of Wales, affectionately known as "the People’s Princess," died in a car crash in Paris at the age of 36. Her boyfriend, the Egyptian-born socialite Dodi Fayed, and the driver of the car, Henri Paul, died as well.

Princess Diana was one of the most popular public figures in the world. Her death was met with a massive outpouring of grief. Mourners began visiting Kensington Palace immediately, leaving bouquets at the home where the princess, also known as Lady Di, would never return. Piles of flowers reached some 30 feet from the palace's gate.

Diana and Dodi, who had been vacationing in the French Riviera, arrived in Paris earlier the previous day. They left the Ritz Paris just after midnight, intending to go to Dodi’s apartment on the Rue Arsène Houssaye. As soon as they departed the hotel, a swarm of paparazzi on motorcycles began aggressively tailing their car. About three minutes later, the driver lost control and crashed into a pillar at the entrance of the Pont de l'Alma tunnel.

Like much of her life, her death was a full-blown media sensation, and the subject of many conspiracy theories. At first, the paparazzi hounding the car were blamed for the crash, but later it was revealed that the driver was under the influence of alcohol and prescription drugs. A formal investigation concluded the paparazzi did not cause the collision.

Diana’s funeral in London, on September 6, was watched by over 2 billion people. She was survived by her two sons, Prince William, who was 15 at the time, and Prince Harry, who was 12.

Weekly Focus

Keep your face always toward the sunshine and shadows will fall behind you.

Walt Whitman, Poet

How is it possible to expect that mankind will take advice, when they will not so much as take a warning?

Jonathan Swift, Satirist