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Key Points for the Week

  • Stocks surged and sagged after interest rate hikes and comments from the U.S. and U.K. central banks produced far different market reactions.
  • The U.S. economy produced 428,000 jobs in April, beating expectations and reassuring investors the economy remains relatively strong. Unemployment held steady at 3.6% and labor force participation dropped 0.2%.
  • Demand for labor remains robust as job openings and quits set record highs in March.

Be Aware of Identity Theft

We have recently seen an uptick in various forms of identity theft. Please be vigilant in protecting your personal and financial information from potential scams. In order to reduce your risk of identity theft, please review our list of prevention tips here. If you have any questions or think you may be a victim of identity theft, please contact us.

Economic Update

In recent weeks, economic and financial market data have been telling different stories – and that makes it tough for investors to know where the United States economy is headed. Since stock markets move up and down based on what investors think will happen in the future, markets have been volatile. Here are some of the issues that have contributed to recent uncertainty.

  • Is economic growth slowing? At the end of April, the advance estimate for gross domestic product (GDP), which is a measure of economic growth, showed the U.S. economy contracted (-1.4 percent, annualized) during the first quarter of 2022. It was a puzzling piece of information because consumer spending, which accounts for more than two-thirds of economic activity rose by 2.7 percent during the period – after being adjusted for inflation – which suggests the economy is strong. A discrepancy between imports (up) and exports (down) appeared to be the driver behind the decline in GDP. A contraction can be a sign that the economy is weakening.
  • Is economic growth continuing? Right now, workers are in demand, which can be a sign of economic growth. Last week’s unemployment report showed stronger-than-expected jobs growth in April. The unemployment rate was 3.6 percent, and average hourly earnings rose by 5.5 percent, annualized. However, the labor force participation rate – the percentage of people who are working or actively looking for work – ticked lower. This could be due to the latest wave of COVID-19, reported Patti Domm of CNBC.
  • Will the Federal Reserve make a mistake? The U.S. economy recovered from the pandemic quicker than expected. One consequence was that high demand and limited supply pushed prices higher. Then inflation was exacerbated by the Russia-Ukraine war and China’s COVID-19-related lockdowns, reported Jack Denton and Jacob Sonenshine of Barron’s.

Last week, the Fed continued its fight against inflation by raising the fed-funds target rate by 0.50 percent. On Wednesday, investors welcomed the move and U.S. stock indices moved higher. On Thursday, they changed their minds and markets dropped lower. “US stocks appear to be on a permanent rollercoaster ride as investors debate continued signs of a strong economy alongside rising rates,” stated a source cited by Barron’s.

Bond yields have risen along with interest rates. At the end of last week, the 2-year U.S. Treasury note yielded 2.72 percent and the benchmark 10-year U.S. Treasury yielded more than 3 percent. Higher bond yields are likely to affect stock markets, too, as investors can now find opportunities to invest for income with less risk.

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Source: FactSet, Federal Reserve, J.P. Morgan Asset Management. Data as of 5/5/22.

This Week in the Markets

Market volatility surged last week, although the end result for the S&P 500 was a decline of only 0.2%. Central banks were the main culprits for the volatility. On Wednesday, the Federal Reserve announced it would raise rates 0.5% and clarified plans on how it will shrink its balance sheet. In the subsequent press conference, Fed Chair Jay Powell announced there are no plans for rate increases of 0.75% in a single meeting. Those comments contributed to a sharp rally in the S&P 500, which increased almost 3% on Wednesday.

Thursday produced the opposite reaction. The Bank of England increased its key short-term rate to 1% from 0.75%, the fourth straight increase of 0.25%. The increase was smaller than expected and reflected the BOE’s expectation that British economic growth will slow throughout the year and ultimately contract in the fourth quarter. The BOE forecast anemic growth in 2023. The BOE also forecast inflation to move above 10% and suggested little can be done about it. The dour forecast and expectation of an economic decline were the equivalent of a central bank throwing in the towel. The S&P 500 dropped 3.6% on Thursday in response.

The U.S. also released a series of key jobs reports last week. The big news is the economy produced 428,000 jobs, according to the establishment survey. That beat expectations and indicates the economy continues to reclaim jobs lost during the pandemic. Unemployment held steady at 3.6%. A 0.2% decline in labor force participation raised concerns the supply of labor won’t expand to meet demand and wages could accelerate, contributing to inflation. Last month, wages rose 0.3%, which is a decline from prior reports. Labor demand remains robust. The March Job Openings and Labor Turnover Survey (JOLTS) indicated 11.5 million jobs remain unfilled and 4.5 million people quit their jobs last month. Both measures were record highs and suggest the economy can weather some of the planned rate hikes.

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Last week, the S&P 500 and the global MSCI ACWI both slid with European and Chinese stocks lagging in international markets. The Bloomberg U.S. Aggregate Bond Index also declined because long-term interest rates moved higher in response to the Fed scaling back rate hike expectations. The U.S. Consumer Price Index will be closely watched this week for signs of any change in inflation trends.

Bond Volatility

Many of us who watch markets on a daily basis felt pretty good after Fed Chair Jerome Powell wrapped up his press conference on Wednesday afternoon. The Fed did what was expected and raised interest rates 0.5%. It announced plans to shrink its balance sheet by $47.5 billion per month for three months and then double that amount thereafter.

The Federal Reserve is raising interest rates to try to slow inflation. Usually, the Fed moves 0.25% at a time, and this was the first 0.5% increase in 20 years. The faster-than-normal increase was designed to show the Fed is taking the inflation threat seriously.

Even though rates were moved higher, the Fed made reassuring comments that caused investors to send stock prices sharply higher immediately following the announcement:

  • There are no plans to raise rates by 0.75% based on the current environment, which reduces the risk the Fed will raise rates too fast and push the economy into a recession.
  • The Fed’s plan to reduce its balance sheet is faster than expected and was viewed positively as a way to reduce inflation without having to raise interest rates too quickly.
  • Powell stated the Fed is looking to raise rates when inflation is controlled, rather than raise them past neutral and force a recession to remove inflationary pressures.
  • The Fed remains confident it can engineer a “soft or softish landing,” meaning the economy would slow and avoid a severe recession.
  • The vote was unanimous.

In short, Powell’s press conference showed a united Fed cares about its core objective, provided clarity on the direction of policy, and displayed conviction it will work. However, this assurance was quickly discounted by the stock market as the stock market resumed its decline.

The Bank of England’s announcement the next day lacked these characteristics. The BOE raised rates 0.25%, which means rates are now at 1%. That part was expected. But the comments of Governor Andrew Bailey and the monetary policy report indicated a much dourer outlook than expected. Governor Bailey expects inflation to rise to around 10% this year and the economy to slow and even contract in the fourth quarter. The BOE offered no concrete plans to shrink its balance sheets, putting that decision off to the early fall. Three members voted against the move, as they favored a 0.5% increase in rates.

That a central bank head would do the equivalent of throwing in the towel is hard to imagine. Central banks are often too optimistic of what they can accomplish. Yet, Governor Bailey essentially said England will be entering a year-plus period of stagflation and there is little they can do about it. The pessimistic outlook from the BOE helped precipitate a more than 3% decline in the S&P 500 on Thursday.

Both central bank heads face difficult circumstances. Russia’s invasion of Ukraine pushed oil prices higher and contributed to a surge in energy prices. China’s lockdowns mean supply chains won’t heal as quickly as they would otherwise. These supply shocks and the subsequent inflation are difficult for central banks. As Powell noted in his most recent press conference, the central banks’ tools are designed to reduce demand and don’t work as well against supply shocks.

They also have their own specific challenges. Powell left rates too low for too long, and excessive fiscal stimulus and the unknowns of a pandemic leave the Fed trying to balance the goal of catching up with current inflation reality while not choking off the recovery. Bailey’s challenges are even greater. Great Britain’s economy isn’t as strong as the U.S.’s. The pandemic was the second supply shock, as Brexit also unsettled supply chains. Britain also trades more with continental Europe, which is heavily affected by sanctions on Russian oil and uncertainty from Russia’s invasion of Ukraine.

When faced with so much uncertainty, investors should keep in mind things can and often do change. We expect rates to keep rising, but the Fed is “data-dependent.” If it looks like its actions are slowing the economy too much or, alternatively, not effective enough, it will change the pace of rate increases.

In periods of uncertainty, investors should also be data-dependent. The Fed has a mandate of keeping inflation and employment at the right levels. Your financial plan may also have a mandate of providing future spending for you and others. Daily fluctuations, like those experienced last week, can be unnerving, but don’t let them force you into changes when your plan is doing just fine.

Are You Living the American Dream?

In a late March survey, conducted by an accounting technology firm, small business owners were asked if they were living the American Dream. Two-out-of-three small business owners said they were, although they thought the “American Dream” was changing. Small business owners said their American dream includes:

  • Being self-made,
  • Owning a business,
  • Being financially comfortable, and
  • Providing for their families.

They also want to:

  • Provide for the future,
  • Pay off a mortgage,
  • Push for good causes,
  • Give employees health and retirement benefits, and
  • Pay employees higher wages.

According to the IRS Small Business and Self-Employed Division, there are 57 million small business owners and self-employed taxpayers that have businesses with less than $10 million in assets.9 Over the past 25 years, small businesses have accounted for two of every three jobs created in the United States, reported the Small Business Administration.

If you’re a small business owner and you would like some help with spending, saving, tax, or retirement strategies, let us know. We’re happy to help.

Did you Know? This Week in History

May 10, 1860: Transcontinental Railroad Completed, Unifying United States

On May 10, 1869, the presidents of the Union Pacific and Central Pacific railroads met in Promontory, Utah, and connected their railroads, making transcontinental railroad travel possible for the first time in U.S. history. Prior to the railroad, travelers heading west had to take a long and dangerous trip by wagon train.

For over thirty years, there had been a determination that the two coasts needed to be connected for quicker travel. It was not until 1853, though, that Congress appropriated funds to survey several routes for the transcontinental railroad, but increasing tension between the North and the South prevented Congress from determining where the line would begin.

After the passing of the Pacific Railroad Act in 1862 and a year after the Civil War began, the Union Pacific and Central Pacific railroads began work in 1866 from Omaha and Sacramento, forging a northern route across the country.

Harsh winters, staggering summer heat and the lawless, rough-and-tumble conditions of newly settled western towns made conditions for the Union Pacific laborers, mainly Civil War veterans of Irish descent, miserable. The overwhelmingly immigrant Chinese work force of the Central Pacific also had its fair share of problems, including brutal 12-hour work days laying tracks over the Sierra Nevada Mountains. On more than one occasion, whole crews would be lost to avalanches, or mishaps with explosives would leave several dead.

For all the adversity they suffered, the Union Pacific and Central Pacific workers were able to finish the railroad–laying nearly 2,000 miles of track by 1869. The railroad actually finished ahead of schedule and under budget, and journeys that had taken months by wagon train or weeks by boat now took only days. The years following the construction of the railway were years of rapid growth and expansion for the United States, due in large part to the speed and ease of travel that the railroad provided.

Weekly Focus

There are no forms in nature. Nature is a vast, chaotic collection of shapes. You as an artist create configurations out of chaos. You make a formal statement where there was none to begin with. All art is a combination of an external event and an internal event…I make a photograph to give you the equivalent of what I felt. Equivalent is still the best word.

Ansel Adams, Photographer

If you always put limits on everything you do, physical or anything else, it will spread into your work and into your life. There are no limits. There are only plateaus; and you must not stay there, you must go beyond them.

Bruce Lee, Martial Artist