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Key Points for the Week

  • Home prices surged 13.2% over the previous year. Will the first quarter increase in mortgage rates slow down this growth?
  • Personal income fell 13.1%, and disposable income fell 14.6% in April. Income dipped sharply because the previous month included the impact of the stimulus checks. Employee compensation rose 0.9%, reflecting growing demand for employees.
  • The PCE Price Index rose 0.5% and has now increased 3.6% over the last year. Core prices, which exclude food and energy, increased 3.1% over the same period.

One side effect of the pandemic was a collapse in demand for oil, which led to “the largest revision to the value of the oil industry’s assets in at least a decade,” reported Collin Eaton and Sarah McFarlane of The Wall Street Journal.

Last week brought another reckoning for big oil as a court ruling and shareholder influence made it clear companies need to revisit their strategies for emissions reductions and clean energy. Here’s what happened:

  1. Do it faster. In the Netherlands, a court ruled an Anglo-Dutch oil producer would need to lower its emissions by 45 percent from 2019 levels by 2030, far more quickly than the company had intended.

    Analysts said the…ruling could set a precedent for similar cases against the world’s biggest corporate polluters, which may now face related lawsuits and be forced to overhaul their business models

Derek Brower and Anjli Raval, Financial Times.

  1. Change direction. For weeks, a large U.S. oil company had done battle with an investment group that holds 0.02 percent of its shares. The investment group wanted the company “to gradually diversify its investments to be ready for a world that will need fewer fossil fuels in coming decades” rather than focus on carbon capture and storage solutions, reported Sarah McFarlane and Christopher Matthews of The Wall Street Journal.

    To that end, the investment group nominated four outside board-of-director candidates stating, “A Board that has underperformed this dramatically and defied shareholder sentiment for this long has not earned the right to choose its own new members or pack itself in the face of calls for change…shareholders deserve a Board that works proactively to create long-term value, not defensively in the face of deteriorating returns and the threat of losing their seats.”

    Other shareholders agreed and, in a highly unusual outcome, two of the four candidates were elected to the board, reported Ben Geman of Axios.

  2. Less is more. Two other multinational energy companies experienced shareholder uprisings recently, reported Sergio Chapa and Caroline Hyde of Bloomberg. Shareholder proposals to aggressively reduce emissions and limit pollution by a company’s customers were approved despite the companies’ boards urging shareholders to vote against the changes.

Major stock indices in the United States finished last week higher.

This Week in the Markets

U.S. home prices continued to march higher and have surged 13.2%. The 20-city index has increased slightly more as cities just out of the top 10, such as Phoenix, San Diego, and Seattle have experienced very rapid price appreciation. The annualized gains are in line with the 2013 peak as housing prices recovered after the financial crisis. During that rally, the 10- and 20-city indexes experienced more rapid gains than the overall index, indicating smaller cities and towns didn’t participate at the same rate. In this rally, the move toward smaller towns and away from larger cities has boosted the national index above the 10-city index.

In other economic news, personal income fell 13.1%, and disposable income dropped 14.6%. The drop occurred because the previous month’s data reflected the latest government stimulus. More importantly, employee compensation rose 0.9% in one month as more people returned to work and wages moved higher to lure reluctant former employees back to their jobs.

Inflation rose 0.5% last month, based on the PCE Price Index. Shortages of semiconductors and other inputs are pushing prices higher for key goods. Inflation is expected to moderate as the year-ago comparisons move past the period of very stringent lockdowns and supply chain challenges moderate.

Markets returned to rally mode as the S&P 500 and global MSCI ACWI indices jumped. The Bloomberg BarCap Aggregate Bond Index added rebounded after last week’s decline.

The U.S. employment report will be this week’s headline. After an extremely disappointing report last month, this week’s report will indicate whether last month was an aberration or was the possible start of a new trend.

In Gratitude

The Memorial Day holiday is always special, as we take time to acknowledge the men and women who died protecting our country. We thank those that put everything on the line to provide us with the freedoms that we enjoy today.

Based on the success of U.S. vaccination efforts, this Memorial Day also represented a transition to a reopened America. People got back on the move and celebrated with friends and family. When looking at their lives compared to one year ago, things are improving for many Americans.

International

Memorial Day also serves to remind us that Americans can get too self-focused and lose track of key events in the world that may become issues at home.

International markets offer a few points of key concern. Vaccination efforts in other countries have trailed the United States, and that has left them vulnerable to outbreaks and variants. A variant of the virus in India has caused a surge of cases in that country. At one point, India was reporting nearly 400,000 new cases each day. Australia’s social distancing efforts have been very successful throughout the pandemic, but its vaccination efforts have lagged. Less than 10% of Australians have been fully vaccinated. Australia’s second most populous state recently announced a snap seven-day lockdown as new cases increased. In the global supply chain, a lockdown in one place can disrupt entire industries.

International political incidents are also a risk we are watching. On May 23, Belarus forced a commercial flight between Greece and neighboring Lithuania to land when the plane was over its airspace. A 26-year-old journalist who had shown videos of protests against the Belarusian president was removed from the plane.

Russia, has been linked to computer hacking attempts. Colonial Pipeline was the victim of a cyberattack, believed to have originated in Russia. The disruption in shipments created gas lines and other inconveniences on the East Coast. More recently, JBS, a major meat producer, was also a victim of a cyberattack. The disruptions caused by these attacks are inconvenient to many but also may force companies to re-evaluate their just in time delivery of raw materials

Trade friction seems to be increasing even as supply chains are stretched. Lumber price increases have raised the cost of new homes in the U.S. Yet, the Biden administration announced plans to raise the Canadian timber tariff from 9% to 18%. The new administration has left in place the tariffs President Donald Trump put on China. With inflation rising, it seems government policies may contribute to the further increases in prices.

As America continues to progress toward more freedom of movement and association, keeping a focus on the challenges abroad can keep your portfolio better balanced. The risks can also represent opportunity. One bright spot: Widened availability of vaccines in other countries can contribute to faster growth overseas and more trade opportunities for American companies.

Budget Proposal

President Biden presented his $6 TRILLION budget proposal this week. There are a slew of spending priorities and proposed tax law changes. This has generated multiple articles and commentaries. Please note that this budget proposal is aspirational and the future budget is in the hands of Congress. Between now and the final bill, there are certain to be numerous changes. We will monitor the progress of the Budget and provide insight and updates, as appropriate.

Delays in Tax Refunds

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/.

Be Aware of Text Message Scam

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.

Did you Know? This Week in History

June 2, 1935: Babe Ruth Retires

On June 2, 1935, Babe Ruth, one of the greatest players in the history of baseball, retired from baseball after 22 seasons, 10 World Series and 714 home runs. The following year, Ruth, a larger-than-life figure whose name became synonymous with baseball, was one of the first five players inducted into the sport’s hall of fame.

George Herman Ruth was born February 6, 1895, into a poor family in Baltimore. As a child, he was sent to St. Mary’s Industrial School for Boys, a school run by Roman Catholic brothers, where he learned to play baseball and was a standout athlete. At 19, Ruth was signed by the Baltimore Orioles, then a Boston Red Sox minor league team. It was here that he was given his famous nickname “Babe.” Ruth would later acquire other nicknames, including “The Sultan of Swat” and “The Bambino.”

Ruth made his Major League debut as a left-handed pitcher with the Red Sox in July 1914 and pitched 89 winning games for the team before 1920, when he was traded to the New York Yankees. After Ruth left Boston, in what became known as “the curse of the Bambino,” the Red Sox didn’t win another World Series until 2004. In New York, Ruth’s primary position changed to outfielder and he led the Yankees to seven American League pennants and four World Series victories. Ruth was a huge star in New York and attracted so many fans that the team was able to open a new stadium in 1923, Yankee Stadium, dubbed “The House That Ruth Built.”

Many of the records Ruth set remained in place for decades. His career homerun record stood until 1974, when it was broken by Hank Aaron. Ruth’s record of 60 homeruns in a single season (1927) of 154 games wasn’t bested until 1961, when Roger Maris knocked out 61 homers in an extended season of 162 games. The Sultan of Swat’s career slugging percentage of .690 remains the highest in Major League history.

Ruth died of throat cancer at age 53 on August 16, 1948, in New York City. His body lay in state at Yankee Stadium for two days and was visited by over 100,000 fans.

Weekly Focus

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.

Adam Smith, Economist and Philosopher

Only I can change my life. No one can do it for me.

Carol Burnett, American Actress