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Key Points for the Week
If you skimmed the headlines last week, you may have seen that retail sales – the purchases we make from stores in-person or online – declined 1.9 percent in December. The statistic may have raised questions about the strength of the economy. After all, how could retail sales move lower during the holiday season?
Media headlines speculated that the spread of the Omicron variant, rising inflation, and consumer grumpiness were to blame. Economists had other ideas, according to Logan Moore and Megan Cassella of Barron’s. “Consumers had long been expected to pull forward their holiday shopping to get ahead of any supply chain backlogs, economists say.”
As you think back on when you did your holiday shopping, there is another important question to ask: What time frame does the 1.9 percent capture?
The retail sales report showed that sales were:
So, back to the original question: is the economy doing well, or not?
If you are judging based on retail sales – or any other piece of economic data – your conclusion is likely to depend on the time frame the data reflect.
For instance, if retail sales are down 1.9 percent from November to December, it tells a different story than if retail sales are up 19.3 percent for the year. The story may also be affected by the fact that 2021’s retail sales gain built on 2020’s gain. Retail sales rose 3.1 percent from 2019 to 2020, despite the pandemic.
Of course, the story of the dip in month-to-month numbers could be that we are at an inflection point. Barron’s reported:
While the December report showed an unexpected drop in retail sales from the catapult in spending that November data showed, the slowdown is expected to be short-lived. Put more simply: ‘Don’t panic’…
Inflation remains a challenge to the U.S. economy. CPI rose 0.5% in December and surged 7.1% during the last year. It wasn’t all food and energy prices. Core inflation, which excludes those more volatile elements, increased 0.5% as well.
Retail sales moved in the opposite direction of inflation, falling 1.9% last month. It was the second largest drop of 2021. Much of the fall can be attributed to the Christmas shopping season concluding sooner. Internet retailers experienced an 8.7% decline relative to November. Sales were strong in October, suggesting delivery concerns moved purchases forward and October’s gains made up for December’s decline.
Stocks continued to slide lower, with some investors selling appreciated stocks in the new year. The S&P 500 index dipped last week while the MSCI ACWI gained as international stock markets made up for the slight decline in the U.S. The Bloomberg U.S. Aggregate Bond Index declined slightly as inflation readings pointed toward higher rates and the need for more compensation for bond investors bearing inflation.
More than 220 U.S.-listed companies with market capitalizations above $10 billion are down least 20% from their highs. While some have bounced from their lows, many remain in bear-market territory. They include S&P 500 behemoths like Walt Disney Co., Netflix Inc., Salesforce.com Inc. and Twitter Inc. as reported by the Wall Street Journal.
The tech-heavy Nasdaq Composite has been particularly turbulent. Around 39% of the stocks in the index have at least halved from their highs, according to Jason Goepfert at Sundial Capital Research.
December CPI jumped 0.5%. Prices leapt 7.1% during 2021, reaching the highest levels since inflation started declining in 1982. Core inflation increased 0.5% in December and rose 5.5% for the year.
Inflation was high even though every sector wasn’t contributing. Food prices rose in line with the overall increase. Sectors benefiting from reopening or plagued with labor shortages from COVID-19 contributed to the high inflation reading. Prices for new vehicles, used vehicles, airline fares, household goods, and hotels all increased faster than the broader index. Energy prices declined last month; otherwise, the overall rate would have been even higher.
Inflation challenges have become a global challenge, although they are impacting the U.S. more than other developed nations. Eurozone CPI rose 5.0% last year and reached an all-time high. Core eurozone inflation increased just 2.7%.
Why is inflation higher in the U.S. than Europe and what factors are likely to push it lower?
A stronger economy and more stimulus are two reasons U.S. inflation has been higher than in Europe and other areas. The last U.S. employment report pegged U.S. unemployment at 3.9%. Europe’s unemployment rate is at 6.5%, and some countries, such as Spain, have double-digit unemployment. The number of people lacking work has likely slowed wage increases in these countries. Americans also received more money from the government. According to data from Statista, Europe’s aid package for the pandemic was half the size of U.S. support. More robust aid has contributed to the faster recovery in the U.S. but has also likely fueled inflation.
The U.S. has also reversed some policies that kept inflation in check. Higher tariffs on goods reduce competition and allow prices to climb. Energy prices for carbon-based fuels have increased because of increased demand and reduced supply. Drilling has been curtailed, which means that supply hasn’t moved to fill the gap as quickly because projects with long life cycles may not make investment sense with the push for renewable energy and the curtailment of drilling and fracking.
What will help control inflation are changes in policy and the underlying strength of disinflationary trends. Interest rates are likely to increase multiple times this year, slowing economic growth. High government debt levels have also become a concern and limit prospects for additional fiscal spending. We’ve seen reticence by some lawmakers to support more spending because of its inflationary effects.
Long-term trends also act to reduce inflation. Our nation and the world are getting older, and as people age, saving rates typically climb. Capitalism encourages companies to find ways to improve efficiencies. Some of those gains accrue to the company in the form of higher profits. As more companies adopt the same methods, prices often become constrained or edge lower. When those long-term factors become strong enough, the steady beat of high inflation will likely reverse, perhaps more quickly than many expect.
The coronavirus has made cosmetic counters far less enticing than they once were, a change in circumstance that led beauty companies to develop new strategies for delivering personalized beauty experiences, reports Jennifer Kingson of Axios.
Beauty companies are teaming up with technology firms that specialize in artificial intelligence (AI) and augmented reality (AR) to develop apps that let people try on makeup virtually, according to Daniela Morosini of Vogue Business.
In recent years, activity in the beauty [mergers and acquisitions] sector was often focused on larger cosmetic conglomerates buying up independent beauty brands. Now, the pendulum is swinging towards Silicon Valley – a tech ‘arms race’ is underway.
Daniela Morosini, Vogue Business
The trend isn’t limited to makeup. One fragrance and cosmetics firm acquired a company with technology that interprets fragrances through images and patterns of colors.
“Customers love playing with these apps so much that companies see big revenue boosts after introducing them,” reported Axios. The new technology may change the way people shop for makeup, fragrance, and other beauty products.
As part of the American Rescue Plan passed in March 2021, many taxpayers began receiving advanced payments of their 2021 child tax credit. Recipients of advance Child Tax Credit payments will need to compare the amount of payments received during 2021 with the amount of the Child Tax Credit that can be claimed on their 2021 tax return.
Those that received less than the amount they are eligible for when they file their 2021 income tax return can claim a credit for the remaining amount on their 2021 income tax return. Those that received more than they are eligible for will need to repay some or all of the excess amount.
The IRS has started sending Letter 6419 to taxpayers to provide the total amount of advance Child Tax Credit payments that were received in 2021. Note, that if you are married, both you and your spouse will receive separate letters.
Please monitor your mailboxes for those receiving these letters and provide them with your 2021 tax organizers to your tax preparer. If you do not receive the letter or would like to verify the amounts you received in 2021, please access the IRS’s Child Tax Credit Update Portal here.
Filing season for 2021 income tax returns begins January 24, 2022, and while last year’s tax season led to many of its own difficulties as a result of COVID-19, this year faces its own set of challenges. As of December 2021, the IRS had a paper backlog of 10.3 million unprocessed returns, about 5 million pieces of taxpayer correspondence backdated to at least April, and is understaffed.
For taxpayers, there are number of new complexities, including pandemic-relief programs such as the advance child tax credit and stimulus checks. The IRS is attempting to minimize any potential discrepancies by sending notices to taxpayers who receive these payments. Please provide your tax preparer with any notices received in regards to these payments.
January 18, 1919: Post-World War I Peace Conference Begins in Paris
On January 18, 1919, in Paris, France, many of the most powerful people in the world met to begin negotiations to end the First World War.
Leaders of Allied powers, France, Great Britain, the United States and Italy, would make most of the crucial decisions in Paris over the next six months. During the conference, U.S. President Woodrow Wilson struggled to gain support for his idea of a “peace without victory” to ensure that Germany, the leader of the Central Powers and the major loser of the war, was not treated too harshly. In direct opposition of this approach, Prime Ministers Georges Clemenceau of France and David Lloyd George of Britain argued that punishing Germany adequately was the only way to justify the immense costs of the war. In the end, Wilson compromised on the treatment of Germany.
Representatives from Germany were excluded from the peace conference until May, where they were presented with a draft of the Versailles Treaty. Having put great faith in Wilson’s promises, the Germans were deeply frustrated and disillusioned by the treaty, which required them to forfeit a great deal of territory and pay reparations. Even worse, the infamous Article 231 forced Germany to accept sole blame for the war. This was a bitter pill many Germans could not swallow.
The Treaty of Versailles was signed on June 28, 1919, five years to the day after Austrian Archduke Franz Ferdinand was killed and sparked the beginning of World War I. The treaty was met with much resentment and anger in Germany, which in turn led extremists like Adolf Hitler of the National Socialist party to capitalize on these emotions to gain power, and the exact thing Wilson and the other negotiators in Paris in 1919 had wanted to prevent, a second, equally devastating global war.
Argue like you’re right and listen like you’re wrong.
Adam Grant, American Author and Organizational Psychologist
A man wrapped up in himself makes a very small parcel.
John Ruskin, English Philosopher and Writer
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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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