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Key Points for the Week

  • The number of open U.S. jobs pulled back to 10.4 million but remained at very elevated levels. Approximately 4.3 million people quit their jobs in August.
  • Consumer prices rose 0.4% as food and energy prices increased. Core inflation, which excludes food and energy, rose 0.2%.
  • Retail sales jumped a higher than expected 0.7% last month and are up 13.9% over the last year.

Barron’s Big Money Poll is an exclusive survey of market sentiment among professional investors. Last week, Nicholas Jasinski reported on 2021’s findings:

America’s money managers are optimistic about the long-term outlook for the economy, the financial markets, and the recovery from the [COVID-19] pandemic. It’s the short-term prognosis that concerns them. Monetary and fiscal policies are in flux. Supply-chain bottlenecks and labor shortages are igniting inflation and threatening corporate profit margins, and the economic recovery from 2020’s recession, so robust until now, is decelerating. Add pricey stock valuations and rising bond yields, and the immediate future suddenly looks more challenging than the recent past.

Nicholas Jasinski, Barron's

Among those surveyed by Barron’s, half are bullish about prospects for the next 12 months, down from 67 percent last spring. Twelve percent are bearish, up from seven percent last spring, and the rest are neutral. Fifty percent said stock markets are fairly valued at current levels, and 80 percent anticipate a stock market correction, a drop of about 10 percent from a recent high, during the next six months.

Market corrections are not all that unusual. The average correction lasts a few months, reported James Chen on Investopedia. That’s long enough, though, for loss aversion to kick in. Research has found that, psychologically, the pain from loss is twice as powerful as the pleasure from gain. As a result, when markets decline, loss aversion causes some investors to wonder whether they should make changes to their investment strategies and that can have a negative impact on long-term financial goals.

Corrections in the stock market happen and have not been correctly or accurately predicted ahead of time. There is no way to know whether a correction is ahead. If a potential stock market downturn has you wondering about your investment strategy, please get in touch. We can discuss whether changes should be made.

This Week in the Markets

Three economic data points released last week indicated the economy continues to rebound despite lingering challenges from the Delta variant. Job openings, which lag other measures by one month, fell to 10.4 million. Declines in demand for leisure and hospitality jobs pulled the openings back from July’s all-time high. Workers are showing increased confidence in either their finances or their ability to find a new job, as a record 4 million people quit their jobs.

Consumer prices continue to moderate slowly. Core inflation rose 0.2%. Overall inflation rose 0.4% as food prices climbed 0.9% last month and energy prices surged 1.3%. Used car prices, which had been a major contributor to core inflation, dropped 0.7% in August after falling 1.5% in July.

Retail sales jumped 0.7% as a strong job market and healthy personal balance sheets supported additional spending. Purchases at hobby and sports stores contributed to strong gains. Spending at restaurants and bars rose just 0.3%, indicating the Delta variant depressed sales last month.

Markets seemed to like the news. The S&P 500 and MSCI ACWI both surged. The inflation data was viewed positively by the bond market. The Bloomberg U.S. Aggregate Bond Index added as well. Third quarter earnings announcements will be a major focus in addition to key Chinese economic data released this week.

Halloween

Americans expect to spend more than $10 billion on Halloween this year, according to the National Retail Federation. That’s about $103 per consumer, although families with children spend well-above average.

Not all of them pay full price, though.

A purveyor of discounts dug deep into its data graveyard and unearthed the states that are most possessed by Halloween spirit.

The spookiest section of the United States is the South, where residents purchased 37 percent of the Halloween coupons sold across the land. Southerners jumped at the opportunity to buy costumes, ghost hunts, haunted house tickets and haunted tours at low, low prices. The epicenter of the devilry was Louisiana, which accounted for 29 percent of the company’s coupon sales. The Bayou State also is home to New Orleans, which is purported to be one of the most haunted cities in the world.

The South has a taste for spooky estates to rival that of the West. Californians howl for haunting, having purchased the majority discounted ghost tours sold in the western U.S. and one of every five sold in the entire nation. The Sunshine State is also home to the infamous Winchester Mystery House, an architectural wonder that was under construction from 1886 to 1922, when its owner, Sarah Winchester, died. Rumor has it, the firearms heiress expanded continuously to keep her fear of ghosts at bay.

Sarah Winchester was originally from the Northeast, a region with a frugal reputation, although its residents purchased less than a quarter of the Halloween coupons sold across the country. Of course, if you crack the code, you’ll discover the chilling truth…Northeasterners purchased the most coupons per capita over the last five years!

The real secret, though, is that a district, not a state, is the biggest consumer of Halloween discount offers. That’s right, on a per capita basis, Washington D.C. consumes more spooky coupons than any state in the country.

Notably, the Midwest had relatively little hunger for Halloween coupons. That may be because trick-or-treating isn’t quite the same when a costume must fit over, or be covered by, a winter coat.

Four Reasons Bonds Have a Role in Most Portfolios

Many of the challenges that investors face stem from emotional reactions to changing market conditions. Sometimes these changes are caused by outside events that are difficult to predict. Other times, the seeds that grow into emotional reactions are planted by the investor’s behavior during good times.

The current market environment can certainly be considered good times. The S&P 500 has rocketed 20.4% this year and is up more than 30% over the last 12 months. Those returns alone can entice investors into taking more risk by reducing bonds in favor of other investments with higher potential returns and higher risk. Bonds also have relatively low yields. Because the price of bonds moves inversely with changes in yield, any increase in bond yields would push prices lower.

Nothing in the previous paragraph is wrong, but the analysis misses four key points reviewed below.

  1. Bonds are most often used to manage risk, and the yield is an extra benefit. Bonds reduce the impact of most downward market moves because they are less volatile than stocks. They are included in portfolios with the primary goal of limiting the effect of a market decline on the portfolio. When investors focus too much on yield and too little on risk, they are sowing the seeds for a potentially bad outcome.
  2. Intermediate- and long-term bonds offer more protection and higher yield than short-term bonds. Most of the time, long-term bonds offer a higher yield than short-term bonds. When markets drop in anticipation of an economic slowdown, yields often fall and bonds go up in price. The longer-maturity bonds typically see the biggest change in price. These bonds also tend to have a negative correlation — bond prices move in the opposite direction of equity prices — so they may offer more protection and higher yields than short-term debt.
  3. Bonds still offer protection and pay investors at the same time. Other forms of risk reduction often require the investor to pay for the protection. Bonds pay investors. Over the long run, getting paid while being protected can be a big advantage to long-term portfolio performance.
  4. Bonds can still provide superior returns to cash if rates move up slowly. Some investors like to point out interest rates have been declining for 40 years and have to go back up. Of course, 10 years ago investors argued the same thing and would only have to change the “40” to “30.” The key point: Just because a market has been doing well doesn’t mean it has to sharply adjust in price. Yields could go lower. Compared to Europe and Japan, U.S. bonds are attractive. Rates also could go up slowly enough for the yield advantage to matter. Yields rose last quarter, but the yield on the Bloomberg U.S. Aggregate Bond Index was sufficient to overcome the yield increase, and bond investors earned a profit.

Each investor’s circumstances are different, and the role bonds play in portfolios may vary. Regardless of the role, focusing on the risk characteristics of bonds rather than yield can help maintain the right risk level for a portfolio and not sow the seeds of future discontent.

Did you Know? This Week in History

October 18, 1867: U.S. Takes Possession of Alaska

On October 18, 1867, the U.S. formally took possession of Alaska after purchasing the territory from Russia for $7.2 million, or less than two cents an acre. The Alaska purchase comprised 586,412 square miles, about twice the size of Texas, and was championed by William Henry Seward, the enthusiastically expansionist secretary of state under President Andrew Johnson.

Russia wanted to sell its Alaska territory, which was remote and difficult to defend, to the U.S. rather than risk losing it in battle with a rival such as Great Britain. Negotiations between Seward and the Russian minister to the U.S., Eduard de Stoeckl, began in March 1867. However, the American public believed the land to be barren and worthless and dubbed the purchase “Seward’s Folly” and “Andrew Johnson’s Polar Bear Garden,” among other derogatory names.

Public opinion of the purchase turned more favorable when gold was discovered in a tributary of Alaska’s Klondike River in 1896, sparking a gold rush. Alaska became the 49th state on January 3, 1959, and is now recognized for its vast natural resources. Today, 25 percent of America’s oil and over 50 percent of its seafood come from Alaska. It is also the largest state in area, about one-fifth the size of the lower 48 states combined, though it remains sparsely populated. The name Alaska is derived from the Aleut word alyeska, which means “great land.” Alaska has two official state holidays to commemorate its origins: Seward’s Day, observed the last Monday in March, celebrates the March 30, 1867, signing of the land treaty between the U.S. and Russia, and Alaska Day, observed every October 18, marks the anniversary of the formal land transfer.

Weekly Focus

We make up horrors to help us cope with the real ones.

Stephen King, Author

If you cannot do great things, do small things in a great way.

Napoleon Hill, Author