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Key Points for the Week
Investors were feeling bullish.
Last week, the Standard & Poor’s 500 (S&P 500) Index closed at a record high for the 68th time this year. That’s the second-highest number of record closes in a single year. The highest number occurred during 1995, when the S&P 500 had 77 record highs, reported Reuters. That was the year the Dow Jones Industrial Average passed 4,000 for the first time and then rose above 5,000, reported Wayne Duggan of Benzinga.
The market deserves to celebrate. [COVID] brought death and dislocation, but we tend to pay too little heed to what didn’t happen. If vaccines hadn’t changed the pandemic’s trajectory, the U.S. would have suffered nearly 1.1 million additional deaths and 10 million more hospitalizations – according to an epidemiological model by the Commonwealth Fund cited this past week in the Journal of the American Medical Association.
Bill Alpert, Barron’s.
That may be the case, but investors were likely focused on expectations for consumer sentiment, economic growth and corporate earnings.
The Conference Board reported that the consumer outlook for income, business and labor market conditions improved significantly in December, rising from 90.2 to 96.9. A growing share of survey respondents plan to buy houses, cars and major appliances during the next six months. The number of people planning vacations increased, too, reported Lucia Mutikani of Reuters.
Consumer optimism could bode well for economic growth, which was robust in 2021, up 6.3 percent in the first quarter of the year, 6.7 percent in the second quarter, and 2.3 percent in the third quarter. The U.S. Bureau of Economic Analysis reported, “From the second quarter to the third quarter, spending for goods turned down (led by motor vehicles and parts) and services decelerated (led by food services and accommodations).”
Despite the July to September slowdown in GDP, corporate earnings remained unusually strong. Earnings are a measure of companies’ profitability, Analysts estimated that the corporate earnings growth rate for 2021 is 45.1 percent, year-over-year. That’s well above the trailing 10-year average annual earnings growth rate of 5 percent, reported John Butters of FactSet.
All sectors of the S&P 500 Index are expected to have had positive year-over-year earnings growth in 2021. Energy, Industrials, Materials, Consumer Discretionary and Financials sectors have experienced the strongest growth.
We hope the new year is filled with good health and prosperity.
The PCE price deflator confirmed inflation remains a strong challenge for the U.S. economy, rising 0.6% last month and 5.7% in the last 12 months. The annual increase was the highest since 1982. Core PCE inflation rose 0.5%, suggesting food and energy prices rose only slightly more than broad consumer prices.
Prices have risen rapidly in the housing market. Existing home sales increased 1.9% last month and supply dropped 13%. The median price for an existing home rose to $354,000 and the median price for a new home is now $417,000.
Stock market volatility has increased. The S&P 500 moved by 1% more often in the past four weeks than in any other four-week period this year. Fortunately, the moves were primarily to the upside. The S&P 500 index added last week and eclipsed the previous all-time high. The MSCI ACWI gained as well, while bond yields rose and bond prices fell. Data releases are light this week as the PCE data came out one week early.
During this holiday week, we’ll answer a couple of the questions we’ve received about how the market is responding to the current environment.
Will the market go down or get more volatile because interest rates are rising?
The Federal Reserve normalizing rates can increase risk and volatility. Recent history suggests rate hikes don’t have as much immediate impact as we might think. The last time the Fed reversed direction and increased rates was 2015, with a single hike in December. It waited another 12 months for the next hike in December 2016 and then hiked rates three times in 2017 and four times in 2018. S&P 500 returns were a little below average during those four years, with stocks rising about 7% per year. In 2017 the market earned more than 20%, and the S&P 500 had a mere eight moves of more than 1%. The 2004-2006 period included 18 interest rate hikes; yet, stocks fared decently. Returns were similar to the most recent rate-hike cycle, rising 6.6% each year.
In both cases the rate hikes had to be at least partially reversed as economic conditions changed. Signs the economy was slowing precipitated three rate cuts in 2019. The Fed cut rates again to support the economy during the COVID-19 pandemic. Rates were very low in 2004 because they had been cut to support the economy as the technology bubble unwound. Rates were too low and led to speculation in the housing market which then contributed to the global financial crisis.
We counsel patience during periods like this one:
Why do the CPI and PCE price deflator show a gap of more than 1%?
The Consumer Price Index or, more technically, the CPI for All Urban Consumers (CPI-U) and Personal Consumer Expenditures Price Index both measure inflation but use different methodologies. Each measure also has a “core” version that excludes food and energy price changes. The Federal Reserve prefers to use the core PCE inflation index for the following reasons:
The high inflation rate has been reducing benefits that would normally accrue to workers, an important point to note in this season of giving. The Fed’s tighter money supply combined with less federal spending and the normal workings of capitalism should start to push the inflation rate lower soon.
Beeple, the Ever Given and Billionaire in Space
If you had to describe 2021 with a single word, what would you choose? Innovative? Frustrating? Too much? Something saltier? It certainly wasn’t an easy year. As we say goodbye to 2021, let’s not forget:
Beauty is in the eye of the beholder. Non-fungible tokens were among the manias that gripped the global community during 2021. Consider the case of Beeple, a digital artist from Wisconsin who is also known as Mike Winkelmann. Before 2021, the highest price commanded by a Beeple print was $100, reported Jacob Kastrenakes of The Verge. Then his collage, The First 5000 Days, became the first digital artwork offered for sale by a prestigious auction house. It sold for more than $69 million.
Commenting on a picture in the collage, the visionary digital artist said, “It’s a picture of my Uncle Jim, who I nicknamed Uber Jay. I probably would have spent more time on this, had I known it would eventually be part of a piece auctioned by Christie’s!”
Misadventures of the Ever Given. Global trade was disrupted last March when one of the world’s largest cargo ships became wedged in the Suez Canal, blocking all of the ships trying to access the canal for six days. After it was freed, the ship was impounded for three months while reparations were negotiated, reported the BBC.
Its predicament briefly transformed international shipping into a spectator sport. Azmi Haroun of The Insider reported, “Social media users were quick to find deeper meaning in the ‘Big Engine That Couldn’t.’”
Billionaires in Space. Jeff Bezos and Richard Branson journeyed into space along with various guests, courtesy of their respective space programs. Elon Musk’s private spaceflight company shuttled NASA astronauts to the International Space Station (ISS). Japanese entrepreneur (and former drummer in a punk rock band) Yusaku Maezawa become the first billionaire on the ISS. He journeyed by Russian rocket, reported the BBC.
In 2016, Musk explained his focus on space travel. “History is going to bifurcate along two directions. One path is we stay on Earth forever, and then there will be some eventual extinction event…The alternative is to become a spacefaring civilization and a multi-planet species, which I hope you would agree is the right way to go.”
By the way, Dictionary.com chose ‘Allyship’ as its word of the year. The Oxford Languages chose ‘Vax,’ and Australia’s Macquarie Dictionary chose ‘Strollout’ (in recognition of the country’s slow vaccine rollout).
December 27, 1932: Radio City Music Hall Opens
At the height of the Great Depression, thousands turned out for the opening of Radio City Music Hall in New York City. Radio City Music Hall was designed as a palace for the people, a place of beauty where ordinary people could see high-quality entertainment. Since its 1932 opening, more than 300 million people have gone to Radio City to enjoy movies, stage shows, concerts and special events.
Radio City Music Hall was the brainchild of John D. Rockefeller, Jr. Rockefeller owned a $91 million mortgage on a block of real estate in Manhattan when the American economy collapsed after the 1929 stock market crash. His original plan was to build an opera house, but was eventually changed for a more “populist” option.
The famous Great Stage, measuring 60 feet wide and 100 feet long, resembles a setting sun. Its sophisticated system of hydraulic-powered elevators allowed spectacular effects in staging, and many of its original mechanisms are still in use today.
In its first four decades, Radio City Music Hall alternated as a first-run movie theater and a site for gala stage shows. More than 700 films have premiered at Radio City Music Hall since 1933, and beginning in the late 1970s, the theater changed its format and began staging concerts by popular music artists. The Radio City Music Hall Christmas Spectacular, which debuted in 1933, draws more than a million people annually. The show features the high-kicking Rockettes, a precision dance troupe that has been a staple at Radio City since the 1930s.
Being president is like running a cemetery: You’ve got a lot of people under you and nobody’s listening.
Bill Clinton, 42nd President of the United States
People say money is not the key to happiness, but I have always figured if you have enough money, you can have a key made.
Joan Rivers, Comedian
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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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