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Key Points for the Week
On Wednesday, May 11th at 6:00 PM, we will be hosting a virtual town hall to discuss what the latest stock market turbulence means for you. Our panel of tax-integrated advisors will break down the facts and answer your questions.
Panelists include President & CEO Edward G. Sella, as well as Matthew Gilchrist, Jason Davis, Leo Martinic, Elise Weinstein, Rory McGlynn, and Bradley Lipman.
To-date, economic, coronavirus-related, and geopolitical events have taken a toll from stock and bond markets, as well as the U.S. economy. For example:
Recession fears were top-of-mind last week when the Bureau of Economic Analysis reported that U.S. gross domestic product (GDP) – the value of all goods and services produced in the country – contracted 1.4 percent during the first quarter of 2022. Greg Daco, chief economist of EY-Parthenon, wrote in Barron’s:
To the untrained eye, such a GDP contraction would raise concern that the economy is headed toward a recession…paradoxically, the main reason GDP contracted in Q1 is that the U.S. economy grew faster than its peers. Robust private sector activity driven by solid consumer outlays, accelerating business investment, and inventory restocking pulled in imports at an extremely rapid pace while a sluggish global economy meant exports fell back.
Greg Daco, chief economist of EY-Parthenon
Major U.S. stock indices fell last week. The Standard & Poor’s 500 and Nasdaq Composite Indices are in correction territory, down more than 10 percent for the year, and the Dow Jones Industrial Average is close to a correction, reported Ben Levisohn of Barron’s.
Market volatility continued last week as global markets tried to digest a slew of earnings reports and economic updates. Likely the biggest release was the U.S. GDP report for the first quarter, which showed the U.S. economy contracted by an annualized 1.4% over the first three months of the year. While the market initially responded positively, it was obvious by the end of the week that equity markets were nervous.
Adding to the apprehension were earnings releases that forecasted lower profits than expected for future quarters.
Home prices for the Case-Shiller indexes remained elevated in February, not just in the largest markets but nationwide. Meanwhile, new home sales fell 8.6% in March as inventory remained low and mortgage rates continued their rise.
PCE inflation remains stubbornly high, with the headline figure up 6.6% year-over-year and 0.9% month-over-month. The core number fell slightly to 5.2% year-over-year. The market will be paying close attention to the Federal Reserve this week as it meets May 3-4.
On the surface, the first quarter U.S. GDP report looked disappointing. The market expected an annualized increase of 1% but was greeted with an annualized decline of 1.4% instead. This came after 2021 showed strong growth throughout the year and was ended with 6.9% growth in the fourth quarter.
So why was this report seen as relatively positive? Two factors were significant drags on growth, both of which tend to be volatile: change in private inventories and net exports. The change in private inventories is a quirky calculation. It was reported as -0.8% since last quarter, but inventories increased during the quarter. The reason it’s negative is inventories didn’t rise by as much as the previous quarter when they increased 5.3%. In other words, Q1 was being compared to a huge number from Q4 2021, which it couldn’t keep up with even though it was still positive.
On net exports, there was a large shift in the amount of goods exported to other countries. The reason for this is twofold. First, demand for goods and services around the world declined over the first quarter because of the conflict between Russia and Ukraine, so there was less demand by foreign consumers to buy U.S. goods. Second, the goods and services produced in the U.S. got more expensive for international buyers because the U.S. dollar strengthened in the first quarter. These two factors led to net exports declining by 1.2% annualized.
Other than those two components, the report was largely positive. U.S. consumption remains strong, with demand for durable goods and services showing large gains. The increase in durable goods is important because it shows the production of larger items, especially vehicles, is increasing. That should help some of the inflationary pressures that come from scarcity. Similarly, the increase in services demand is positive because it indicates some COVID-19 fears have faded, meaning people are more likely to go out and spend money on experiences rather than things.
Another strong aspect of the report was business investment, which increased 2.2% from last quarter. This means businesses are spending to increase their capacity through information technology, machinery, and building out intellectual property, which should help alleviate some supply chain issues and allow them to keep up with demand.
Overall, the report indicates the U.S. consumer is still strong and companies are doing what they can to keep up with demand while relying more heavily on imports.
Many are wondering whether we are heading into a recession. In any given year there is a 14% chance that a recession will occur. Given the conflict in Ukraine, the continued supply chain issues, inflationary pressures, and the fact that an interest-rate-hike cycle is beginning, the likelihood of recession is higher than average, around 20%-25%. However, what’s keeping a recession from being the base case, or most likely scenario, is strong demand in the U.S. While the headline number from the GDP report may have added to some anxiety, underlying strength is keeping the economy on solid footing.
For more than a decade, interest rates in the United States have been very low. During this time, growth stocks, which benefit from low rates, have outperformed value stocks. As of last Friday, the MSCI All-Country World Index (ACWI) Growth, which measures the performance of growth stocks, was up 9.51 percent for the last decade. The MSCI ACWI Value, which measures the performance of value stocks, returned 4.47 percent, over the same period.
It looks as though that may be beginning to change.
Growth stocks are shares of companies that are expected to grow more quickly than other companies. These companies often do not pay dividends. Instead, they reinvest any profits to grow the company quickly. The valuation of growth stocks may seem expensive; however, if the company grows fast the valuation may seem low and the company’s share price may rise. Many technology companies fall into this category.
In 2022, growth stocks have languished. “High-growth technology stocks that sparkled in the coronavirus crisis have entered a bear market as shifting consumer habits and the prospect of sharp U.S. interest rate rises force investors out of one of the most lucrative trades of recent years…the prospect of rate rises has hurt low-profit, high-growth technology stocks because those companies’ future cash flows look relatively less attractive,” reported Laurence Fletcher of the Financial Times.
Value stocks are shares of companies which trade at valuations that are lower than company fundamentals – earnings, dividends, sales, cash flow, and other metrics – suggest they should trade at. Often these are mature companies that pay dividends. Some might even have been growth companies at one time.
Historically, there have been periods when value has outperformed growth. For example, this year, through last Friday, value stocks (MSCI ACWI Value, -6.69 percent) delivered better returns than growth stocks (MSCI ACWI Growth, -20.03 percent).
Recent performance doesn’t mean it’s better to own value shares than growth shares or vice versa, as Saira Malik of FT explained. “Of course, there have been times when value has beaten growth and vice versa – sometimes by wide margins and for extended periods. But betting on one style over the other based on the magnitude or duration of its past outperformance in any given timeframe is not a sound strategy for maximizing returns. The reason is simple: performance drivers are period-specific, hard to predict and unlikely to be repeated.”
A good choice is diversification. Holding a well-allocated and diversified portfolio won’t eliminate losses, but it can help investors manage risk during periods of market volatility.
The IRS is reminding taxpayers to be vigilant and watch out for IRS impersonation scams intended to trick them into providing their personal and financial information. Some of the schemes included text message, e-mail, and phone scams. The IRS also warns people to be aware of potential unemployment fraud.
Text Message Scams
If you receive an unsolicited text message claiming to be from the IRS or a program linked to the IRS, take a screenshot of the message and email it to firstname.lastname@example.org with the below information:
E-mail Phishing Scams
Please be aware that the IRS does not contact taxpayers by email to request personal or financial information. Most of the time, the IRS will contact taxpayers through regular mail delivered by the United States Postal Service. Similar to a potential text message scam, report the email to email@example.com by sending the suspicious email as an attachment.
The IRS (and its authorized private collection agencies) will never:
Organized crime rings have started using stolen identities to claim unemployment or other benefits for which the taxpayer never applied. Victims of unemployment identity theft may receive:
For information on necessary steps to take for suspected unemployment fraud, taxpayers can visit the U.S. Department of Labor’s fraud page here.
The IRS focuses on tax-related identity theft and suggested taxpayers take the below steps if they feel their Social Security number has been compromised:
If you have any questions about this information, please contact us.
May 2, 1933: Loch Ness” Monster Sighted for First Time, Igniting Modern Legend
The modern legend of the Loch Ness Monster after a local couple claimed to have seen “an enormous animal rolling and plunging on the surface.” The story of the “monster” (a moniker chosen by the Inverness Courier editor) quickly became a media phenomenon, with London newspapers sending correspondents to Scotland and a circus offering a 20,000-pound sterling reward for capture of the beast.
After the April 1933 sighting was reported in the Inverness Courier newspaper on May 2, interest steadily grew, especially after another couple claimed to have seen the animal on land.
The search for the Loch Ness monster has continued for decades by both amateurs and professional investigators, with several universities launching solar expeditions to the lake. While nothing conclusive has been found, throughout the years difference sonar operators have detected some type of large, moving, underwater objects. In 1975, a photo was taken that seemed to resemble a giant flipper of an animal living in the lake.
Further sonar expeditions in the 1980s and 1990s resulted in more inconclusive readings. Revelations in 1994 that the famous 1934 photo was a complete hoax has only slightly dampened the enthusiasm of tourists and investigators for the legendary beast of Loch Ness.
In the long run, we shape our lives, and we shape ourselves. The process never ends until we die. And the choices we make are ultimately our own responsibility.
Eleanor Roosevelt, Former First Lady
Live as if you were to die tomorrow. Learn as if you were to live forever.
Mahatma Gandhi, Indian Political Ethicist
Investment advisory services offered through SPC Financial® (SPC). *Tax services and analysis are provided by the related firm, Sella & Martinic (S&M), through a separate engagement letter with clients. SPC and S&M do not accept orders and/or instructions regarding your investment account by email, voicemail, fax or any alternative method. Transactional details do not supersede normal trade confirmations or statements.
Any information provided is for informational purposes only and does not constitute a recommendation. SPC and S&M, including their owners or employees may own securities mentioned in this email or options, rights, or warrants to purchase or sell these securities.
SPC does not provide tax or legal advice. Before making a legal, investment, or tax decision, contact the appropriate professional. Any tax information or advice contained in this message is confidential and subject to the Accountant/Client Privilege.
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.
Third-party links are being provided for informational purposes only. SPC and S&M are not affiliated with and do not endorse, authorize, sponsor, verify or monitor any of the listed websites or their respective sponsors, and they are not responsible or liable for the content of any website, or the collection or use of information regarding any website's users and/or members. Links are believed to be accurate at time of dissemination, but we make no guarantee, expressed or implied, to the accuracy of the links subsequently.
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