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Key Points for the Week

  • Retail sales jumped 0.7% last month, beating expectations.
  • Consumer prices rose 0.3% and core inflation rose just 0.1%, continuing the recent trend toward lower inflation.
  • Chinese retail sales disappointed, rising just 2.5% compared to expectations for 7.0% growth.

Every month, Bank of America (BofA) surveys global asset managers. The most recent survey, which was conducted in early September, showed that fewer managers remain optimistic about prospects for global economic growth (13 percent) or corporate profitability (12 percent). That’s half the number in the previous survey and the lowest percent since April 2020, reported Katie Martin of Financial Times.

When optimism declines, managers typically retreat to safer investments by reducing their portfolio exposure to stocks. That hasn’t happened this time. About one-half of the global asset managers surveyed, in early September, by BofA, were overweight stock. Cash allocations were rising slowly and there appeared to be little appetite for government bonds, according to Financial Times.

The BofA survey also reported on the concerns of global asset managers. “Inflation is the biggest tail risk for markets, followed by taper tantrum, and COVID-19 Delta variant,” reported Bloomberg. Tail risk is the chance that a loss will result from an unusual event.

Rapidly changing conditions in China also may be a concern for investors. The Chinese government’s recent regulatory enforcement actions during 2021 have negatively affected market values of companies in education, technology, entertainment and home building sectors.

Last week, a number of financial bloggers and commentators were arrested in China, and many financial websites and blogs were scrubbed from China’s social media platforms. The change could help reduce fraud with the unwelcome side effect of eliminating non-government viewpoints, reported Financial Times.

The uncertainty hovering over China now includes threats of tougher regulation, higher tax rates, greater charitable giving and government influencing business decisions.

Financial Times

A China expert cited by the newspaper commented:

All of that just leads to the fundamental question of what happens to that excess return that you used to be able to get as an investor in China, and how much is that disappearing or eroding in this new environment…

A China expert cited by the newspaper

Uncertainty also is an issue in the United States where another debt-ceiling crisis appears to be looming. Jack Hough of Barron’s explained:

As rising partisan rancor has turned everyday legislating into a death struggle, politicians have grown more willing to use the debt ceiling as leverage. A standoff in 2011 resulted in a credit downgrade to the U.S. government, a brief but angry slide in stocks, and a temporary move higher for bond yields, which accountants later said cost the U.S. government billions of dollars in added interest. The outcome was a shaky compromise, which fell apart in 2013, but Congress hadn’t yet regained its appetite for another round of fiscal chicken, so it suspended the ceiling. There have since been many extensions, the last of which expired at the end of July. Without action from Congress, America will default by mid-October.

Jack Hough of Barron’s

This Week in the Markets

Two U.S. economic reports provided reassuring news about the economy. The inflation trend moderated in August. Consumer price inflation (CPI) rose 0.3%, down from 0.5% the previous month and below estimates of a 0.4% increase. Excluding food and energy, prices increased just 0.1%.

Consumer demand remained strong. Retail sales jumped a surprising 0.7%. Economists expected retail sales to drop by 0.7%. Demand moved from in person to online. Sales would have grown even more if motor vehicles and parts hadn’t dropped 3.6% from the previous month.

The strength in U.S. data contrasts to weakness in China. Chinese retailers experienced growth of just 2.5%, missing forecasts for 7%. The reemergence of strict lockdowns in China pressured sales.

Stocks dipped for the second straight week as the S&P 500 and MSCI ACWI both slid. The Bloomberg U.S. Aggregate Bond Index was roughly unchanged for the second straight week. The Federal Reserve meets this week to determine whether to slow purchases of government bonds this year or wait until next year.

Where Are You?

If you were virtually dropped into another country, do you think you would recognize where you were?

In 2013, Swedish information technology consultant Anton Wallén created a game around an internet company’s street-view maps. Players are dropped into a street view within a country and must identify the location. The person who guesses correctly the most times, scores the most points and wins.

The game also provides data about which parts of the world are most easily recognized. The Economist used information from the online geography quiz to build a ‘recognizability index.’ The index evaluates which places are most recognizable and who recognizes them most easily. The newspaper balanced correct guesses against incorrect guesses and determined:

  • The most readily identifiable countries are Japan (64 percent correct guesses, 9 percent wrong guesses) and the United States (79 percent correct guesses, 40 percent wrong guesses), followed by Russia, Italy, Brazil and Britain.
  • The most misidentified country was the United States. “…18% of players who reckoned they had been dropped in America were actually in Australia. Spain and Mexico were also frequently mixed up. Not all of the guesses made sense: at least one person mistook Luxembourg for Mongolia.”
  • The people who are best at identifying geographic locations live in Germany, Switzerland and France.
  • The people who are worst at identifying geographic locations live in Turkey, Russia and America.

There is an important caveat that accompanies these findings. Not every country or street in the world is included the street-view maps used in the game. For example, coverage of Germany is limited because of privacy concerns and significant parts of China are missing.

Tough Decision

When the Federal Reserve meets this week, its members will face a difficult choice on whether to start reducing purchases of bonds this year or continue to support the economy at current levels. The Fed currently buys $120 billion of government-backed bonds each month — $80 billion in Treasury debt and $40 billion in mortgage-backed securities. The goal of the purchases is to push long-term interest rates lower, making it cheaper for corporations and homebuyers to borrow money or refinance loans.

The weak jobs report two weeks ago raised some uncertainty about whether the economy was strong enough to warrant removing some of the support. Last week’s reports on inflation and retail sales gave the Fed more options as the pressure from inflation abated while retail sales were strong.

CPI rose only 0.3% last month, and the trend is slowing. Inflation rose 0.5% in July and 0.9% in June. Core inflation, which excludes the more volatile food and energy categories, rose a scant 0.1% as several mobility-related items dropped in price. Price declines in airline tickets, rental cars, and hotels all helped to keep inflation under tighter control. Used car prices also declined.

The slowing trend reduces the pressure on the Fed to taper, even though inflation has still increased 5.2% over the last year.

Retail sales give the Fed reasons to slow bond purchases. The gain of 0.7% shows the economy remains relatively strong. Rather than curtail purchases in the face of increased COVID-19 cases and benefit reductions, people transferred their spending online. Retail sales would likely have been stronger if auto manufacturers had been able to adequately supply inventory.

The Fed seems likely to guide the market toward bond tapering at the beginning of the year. The slowing inflation trend gives the Fed reason to pause. The Delta variant seems likely to slow some activity, and retail sales data don’t seem strong enough to overcome the weak jobs report. The Fed could surprise us, but it seems focused on doing all it can within reason.

While markets are focused on what the Fed will do, another question is: How much does it matter? Last week’s data points make it easier to say “Not much.” Inflation seems to be moving toward a reasonable level. Retail sales show the consumer remains strong. A slight decrease in bond purchases is unlikely to derail this economy.

The decision on whether to taper or not may cause short-term volatility. Investors may have become too reliant on the Fed and fear how other investors could respond to a less friendly interest rate environment. In the intermediate term, the decision on when to taper is unlikely to be a key driver of your portfolio’s long-term value.

Did you Know? This Week in History

September 23, 1875: Billy the Kid Arrested for First Time

On September 23, 1875, Billy the Kid was arrested for the first time after stealing a basket of laundry. He later broke out of jail and roamed the American West, eventually earning a reputation as an outlaw and murderer and a rap sheet that allegedly included 21 murders.

The exact details of Billy the Kid’s birth are unknown, other than his name, William Henry McCarty. He was probably born sometime between 1859 and 1861, in Indiana or New York.

Billy the Kid, who had a slender build, prominent crooked front teeth and a love of singing, went on the lam and began his outlaw’s life by stealing cattle and horses, gambling and killing people. His crimes earned him a bounty on his head and he was eventually captured and indicted for killing a sheriff during the Lincoln County War. Billy the Kid was sentenced to hang for his crime; however, a short time later, he managed another jail break, murdering two deputies in the process. Billy the Kid’s freedom was brief, as Sheriff Pat Garrett caught up with the desperado at Fort Sumner, New Mexico, on July 14, 1881, and fatally shot him.

Although his life was short, Billy the Kid’s legend grew following his death. Today he is a famous symbol of the Old West, along with such men as Kit Carson, Jesse James, Wild Bill Hickok, Doc Holliday and Wyatt Earp, and his story has been mythologized and romanticized in numerous films, books, TV shows and songs. Each year, tourists visit the town of Fort Sumner, located about 160 miles southeast of Albuquerque, to see the Billy the Kid Museum and gravesite.

Weekly Focus

The greatest glory in living lies not in never falling, but in rising every time we fall.

Nelson Mandela, Statesman and Philanthropist

Spread love everywhere you go. Let no one ever come to you without leaving happier.

Mother Teresa, Catholic Nun and Missionary