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Key Points for the Week
Markets hate uncertainty, and recently there has been plenty of it. Some of the questions plaguing economists and pundits include:
Why aren’t people returning to work? Americans, like people in other parts of the world, have not been rejoining the workforce at the pace many had anticipated. One of the most frequently cited theories was explained by The Economist:
In America businesspeople, almost to a pinstripe, are convinced that the $300-a-week boost to unemployment insurance explains the shortages. However, pundits do not agree on whether stimulus handouts really lead people to shirk. The evidence is hazy elsewhere, too…Australia ditched its job-protection scheme in March, and shortages have worsened.
The unemployment data has inspired many theories about why jobs aren’t filling more quickly. These include fear of contracting COVID-19, low hourly pay, and lack of dependent care, to name a few. Some states recently modified unemployment programs, so there soon may be new data to help clarify the situation.
Is the Federal Reserve thinking about raising interest rates or slowing bond purchases? In June 2020, Fed Chair Jerome Powell famously said, “We’re not even thinking about thinking about raising rates.” Some are wondering whether that has changed. The minutes from April’s Federal Open Market Committee meeting, which were released last Tuesday afternoon, included a statement that raise questions. It said:
A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.
A statement included in minutes frmo April's Federal Open Market Committee meeting
Of course, the economic picture isn’t as robust as it was in April. Since then, we’ve seen a weaker-than-expected employment report and higher-than-expected inflation data. While one month does not establish a trend, investors, economists, and pundits will be watching economic data releases closely for clues about economic recovery.
Will inflation prove to be transitory or will it persist? Investors also are worried the Federal Reserve will keep rates low for too long. James Politi of Financial Times reported:
The Fed has argued that strong monetary support for the economy is still needed because of the risk of a slowdown in the recovery and the shortfall in employment compared to pre-pandemic levels. Nor does it expect the current spike in consumer prices to last, arguing that it is being fueled by supply chain bottlenecks and the economic reopening.
James Politi, Financial Times
Others aren’t so sure the Fed is right. Last Tuesday, former U.S. Treasury Secretary Lawrence Summers said the Fed’s latest forecasts suggest it is misreading the economy and encouraging complacency, reported Greg Robb of MarketWatch.
Last week, the Standard & Poor’s 500 and Dow Jones Industrial Indices moved slightly lower while the Nasdaq Composite moved slightly higher.
S&P 500 earnings were expected to be strong and turned out to be phenomenal. When the final 5% of companies report, first quarter earnings are expected to have increased 51.9%. When the quarter began, earnings growth was expected to be less than 25%. Strong earnings from consumer discretionary companies, financials, and the communication services sector all supported rapid earnings growth. Earnings are the underpinning for stock market valuation for a company and the market as a whole.
Initial unemployment claims aren’t showing the same progress as earnings, but they are sliding lower. Last week, 444,000 people claimed initial unemployment. While high relative to pre-COVID data, it represents a new post-COVID low. Twenty-one states have announced they will be eliminating the enhanced unemployment benefit from the federal government as business continue to report challenges keeping up with a surge in demand.
Two formerly fast-growing economic segments slowed down. In the U.S., existing home sales fell to 5.85 million last month as increasing prices and scarce supply are slowing sales. China’s retail sales increased 17.7%, and industrial production rose 9.8%. Both numbers missed expectations and indicate China’s economy isn’t bouncing back as quickly as some expected.
Markets calmed after several days of volatility. The S&P 500 edged lower last week and the MSCI ACWI index gained. The Bloomberg BarCap Aggregate Bond Index recouped some of the previous week’s decline.
Chinese retail sales and industrial production headline economic data being released this week. The Federal Reserve will release the minutes from its latest meeting. Given the big increase in U.S. consumer prices, similar data releases in the eurozone, the United Kingdom, and Japan will garner extra attention.
Big entertainment events have struggled during COVID, but leave it to Garth Brooks to put a surge back into the entertainment industry. Rather than focus on large indoor concerts, Brooks decided mega-sized events at football stadiums were the way to go. The concerts will have fans in low and high places as they flock to buy seats. One stadium, which hadn’t hosted an event in 34 years, sold 70,000 tickets in 47 minutes.
World economies and markets are experiencing their own highs and lows. The two largest economies, the U.S. and China, are experiencing some of the strongest recoveries. The U.S. Purchasing Managers Index (PMI) shot to 68.1 and zoomed past expectations of 63.7. Services were the strongest segment, reaching 70.1 on a program that gauges what percentage of companies are experiencing an expansion or contraction. The data would have been better if not for supply shortages and difficulties finding labor.
China’s economy also is bouncing back from COVID. The country’s severe lockdown caused retail sales to crash 15% lower, when compared to the previous year. After bouncing back 34.2% in March from the worst lockdown period a year ago, April retail sales gained 17.7%. Expectations were for 25% growth, so the result indicated China’s consumers are not returning as quickly as some expected.
China’s industrial prowess remains impressive. Industrial production dropped much less during the lockdowns than it did in other countries; yet, it still managed to rally 9.8% last month.
European economies are also rallying compared to the peak of COVID restrictions from last year. British retail sales jumped 42.4% as the economy reopened. Clothing sales gained 70%. Europe’s ability to sustain an economic recovery and expand its vaccination program will likely play a key role in the ongoing recovery.
By contrast, the world’s third largest economy, Japan, is experiencing economic lows. Japan’s first-quarter GDP slipped 1.3% as private consumption sank 1.4%. Japan’s most pressing problem is a COVID surge that pushed new cases to a near record. An outbreak early in the fourth quarter led to increased new cases in January and a new lockdown. Another recent jump in cases created a similar response. As we have seen around the world, when economies limit mobility, economic activity declines.
What the data tell us is much of the global economy is bounding back when compared to the COVID lockdowns of 2020. As those lockdowns drop off the one-year data, growth moves lower. Any sustained recovery will need countries to open up additional activities in order to regain some jobs. Many eyes will be on Japan as it seeks to fill stadiums in late July and early August at the postponed 2020 Olympics. Hopefully, Japan will make rapid strides for the health of its citizens and for athletes and fans from around the world.
The Taxpayer Advocate Service (TAS) has stated that it is aware that taxpayers are experiencing more refund delays this year than usual. Typically, the IRS processes electronic returns and pays refunds within 21 days of receipt. However, the high-volume of 2020 tax returns being filed daily, backlog of unprocessed 2019 paper tax returns, IRS resource issues, and technology problems are causing delays. Once a return is processed by the IRS and loaded onto the agency's systems, TAS may be able to assist with delayed refunds if taxpayers meet case acceptance criteria. TAS has a case criteria tool that can be used to determine if TAS may be able to offer assistance. www.taxpayeradvocate.irs.gov/can-tas-help-me-with-my-tax-issue/.
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.
May 28, 1961: Appeal for Amnesty Campaign Launches
On May 28, 1961, the British newspaper The London Observer published British lawyer Peter Benenson’s article “The Forgotten Prisoners” on its front page, launching the Appeal for Amnesty 1961, a campaign calling for the release of all people imprisoned in various parts of the world because of the peaceful expression of their beliefs. The movement later became Amnesty International.
Benenson was inspired to write the appeal after reading an article about two Portuguese students who were jailed after raising their glasses in a toast to freedom in a public restaurant. At the time, Portugal was a dictatorship ruled by Antonio de Oliveira Salazar. The article also drew attention to the variety of human rights violations taking place around the world, and coined the term “prisoners of conscience” to describe “any person who is physically restrained (by imprisonment or otherwise) from expressing any opinion which he honestly holds and does not advocate or condone personal violence.” The following year, this movement would officially become the human rights organization Amnesty International.
Amnesty International took its mandate from the United Nations Universal Declaration of Human Rights, which holds that all people have fundamental rights that transcend national, cultural, religious and ideological boundaries. By the 10th anniversary of the Appeal for Amnesty 1961, the organization it spawned numbered over 1,000 voluntary groups in 28 countries, with those figures rising steadily. In 1977, the organization received the Nobel Peace Prize.
Today, Amnesty International continues to work toward its goals of ensuring prompt and fair trials for all prisoners, ending torture and capital punishment and securing the release of “prisoners of conscience” around the globe.
It does not do to leave a live dragon out of your calculations, if you live near one.
J.R.R. Tolkien,_, _Author
Life is 10% what happens to us and 90% how we react to it.
Dennis Kimbro, Motivational Speaker
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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.
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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.
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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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