What to know as markets look forward.
Are you having a tough time keeping track of inflation's mixed signals? You’re not alone.
Consumer prices in July climbed at their fastest rate since August 2008. Worse, producer prices, which can be an indicator of future price changes at the consumer level, rose at the highest rate since tracking began.
However, in recent weeks, the stock market has shrugged off the inflation news, believing that the worst is over and rising prices will moderate in the future.
It’s important to remember that the stock market is a discounting mechanism, which means it’s always looking forward. Put another way, the stock market’s price today represents all available information about current and future events. How far forward is the stock market looking? Most would agree it’s “discounting” activity six to nine months into the future.
Does that mean inflation will be lower in six to nine months? That’s what the stock market is suggesting. But the stock market also has a less-than-perfect record as a discounting mechanism, largely because the future is somewhat unknowable.
Inflation is just one factor to consider when making adjustments to a portfolio. But if you’re unsure, thanks to the mixed messaging I've seen lately, please reach out. We’d welcome the chance to hear your perspective.
You've got plenty of choices these days.
Have you ever heard the Wall Street expression, "markets climb a wall of worry?"
It's the idea that financial markets are constantly on edge. Traders fret about how long a market rally can continue before it runs into trouble. Worry shifts from one news event to the next as traders attempt to build a case whether it's time to go "risk-off" with a portfolio strategy.
If you're looking for something to worry about, you've got plenty of choices these days: the Delta variant, inflation, jobs, vaccines, Fed policy, taxes, unemployment, and so on. There's no shortage of headlines to help boost investors up the wall.
But by early August, the Standard & Poor's 500 index notched its 42nd record closing of 2021. And while past performance is no guarantee of future results, it's important to keep in mind the S&P 500 has moved higher despite the wide range of economic and financial concerns.
Our role as financial professionals is to help guide and equip clients with the tools they need regardless of what news "worries" the financial markets. We work with professionals who monitor the economy and interpret how the recent news may influence the overall trends.
If you find yourself worried about the financial markets, please reach out. We'd welcome the chance to hear your thoughts.
In this month’s recap: Stocks notched a solid gain as investors looked past higher inflation and new COVID-19 cases
Last month, the stock market posted a solid gain, overcoming investors’ fears of higher inflation and an increase in COVID-19 cases.
The Dow Jones Industrial Average picked up 1.25 percent, while the Standard & Poor’s 500 Index gained 2.27 percent. The Nasdaq lagged, climbing 1.16 percent.
A Wall of Worry
Climbing a wall of worry, investors weathered a choppy month as markets digested a jump in consumer prices and the continued spread of the Delta variant.
Inflation, which has been an increasing concern, hit levels not seen in decades. Consumer prices in June rose 5.4 percent, the biggest monthly gain since 2008. Meanwhile, producer prices, often a harbinger of future consumer prices, surged 7.3 percent from a year earlier. But both reports were primarily met with a collective shrug by investors.
More troubling, however, was the global spread of the Delta variant. Throughout the month, investor anxiety grew around fears that a resurgence of COVID-19 cases could stall further economic recovery.
As July closed, 221 Standard & Poor’s 500 companies had reported earnings, with 91 percent of those companies beating Wall Street’s estimates. Companies also reported strong sales, topping estimates by nearly 24 percent.
Stocks took a breather in the final week, despite the Federal Reserve's renewed assurances that its near-zero interest rate policy would remain in place.
Energy was the only industry sector that fell last month, declining 5.68 percent. Otherwise, gains were posted in Communication Services (+1.92 percent), Consumer Discretionary (+3.26 percent), Consumer Staples (+2.82 percent), Financials (+0.77 percent), Health Care (+4.76 percent), Industrials (+1.92 percent), Materials (+1.94 percent), Real Estate (+3.47 percent), Technology (+3.84 percent), and Utilities (+5.02 percent).
What Investors May Be Talking About in August
The rise in global COVID-19 cases last month unsettled investors, who worried about what it could mean for economic growth.
Some expect the recent surge to peak in August, while others see a peak in mid-September to early October.
Any new surge is unlikely to mirror the experience in 2020. However, some investors may remain watchful as local, state, and federal entities weigh further restrictions.
Have you talked to your spouse or partner about your retirement goals? This is vital. See how your individual visions of retirement correspond or differ.
The MSCI-EAFE Index trended higher, picking up 1.60 percent in July. However, different parts of the globe showed mixed results.
In Europe, France was under pressure, dropping 1.69 percent, while Germany (+0.09 percent) and the U.K. (+0.07) posted modest gains.
Australia rose 1.09 percent to lead the Pacific Rim markets. But Hong Kong dropped 9.94 percent as Chinese regulators continue their push to rein in large companies for reasons that include data security, corporate behavior, financial stability, and curtailing private-sector power.
Gross Domestic Product: The economy grew by an annualized rate of 6.5 percent in the second quarter. The growth rate, however, was well below economists’ expectations of 8.4 percent.
Employment: Employers added 850,000 new jobs in June, marking the most significant increase since August 2020. However, the unemployment rate ticked higher to 5.9 percent due to a larger number of Americans seeking employment.
Retail Sales: Retail sales rose 0.6 percent, despite a two percent decline in auto sales. Sales were particularly strong at restaurants, bars, and clothing stores.
Industrial Production: Industrial production increased 0.4 percent, though manufacturing output declined due to reduced automobile production.
Housing: Housing starts rose 6.3 percent in June, exceeding economists’ expectations. Sales of existing homes rose 1.4 percent after four consecutive months of declines. Inventories ticked higher, while demand softened a bit.
New home sales slumped 6.6 percent, suggesting that high prices are cutting into demand.
Consumer Price Index: Consumer prices jumped by 5.4 percent in June, registering the highest 12-month rate of change since August 2008. The core CPI, which excludes the more volatile food and energy sectors, increased by 4.5 percent.
Durable Goods Orders: New orders for durable goods rose 0.8 percent in June. This is the thirteenth month out of the last 14 in which durable goods orders registered a gain.
“Believe you can and you’re halfway there.”
The Federal Reserve reaffirmed that its monthly bond purchase program would continue until the Fed sees substantial progress in its inflation and employment goals.
“Our asset purchases have been a critical tool,” Fed Chair Jerome Powell stated. “They helped preserve financial stability and market functioning early in the pandemic and, since then, have helped foster accommodative financial conditions to support the economy.”
Some analysts have suggested that the Federal Reserve’s assessment of economic progress was potentially a hint that the tapering of bond purchases may be close.
Sources: Yahoo Finance, July 31, 2021.
The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid.
Gary G. Blom | Financial Advisor
Michael Howell CFP® | Financial Advisor
Address: 3340 Tully Rd. Ste B4, Modesto, CA 95350
Office: (209) 857-5207 | Fax: (209) 857-5098
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This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSEurofirst 300 Index comprises the 300 largest companies ranked by market capitalization in the FTSE Developed Europe Index. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. Established in January 1980, the All Ordinaries is the oldest index of shares in Australia. It is made up of the share prices for 500 of the largest companies listed on the Australian Securities Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The FTSE TWSE Taiwan 50 Index is a capitalization-weighted index of stocks comprising 50 companies listed on the Taiwan Stock Exchange developed by Taiwan Stock Exchange in collaboration with FTSE. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The Mexican Stock Exchange, commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The U.S. Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.
How to keep track of your savings bonds’ maturity dates.
Did you buy U.S. Savings Bonds decades ago? Or did your parents or grandparents purchase them for you? If they’re collecting dust in a drawer, you may want to take a look at them to see if any of your bonds have matured. If your bonds have matured, that means they are no longer earning interest, and it also means you may want to consider cashing them in.
This article is for informational purposes only. It’s not a replacement for real-life advice, so make sure to consult your tax professional when you’re considering any move with a U.S. Savings Bond.
You want to keep track of the maturity dates, the yields and the interest rates on your bonds, as that will help you to figure out what bond to redeem when. Fortunately, you’re able to check the maturity dates online now so it’s relatively easy to determine if it's time to cash-in your bonds.
Use savings bonds for educational purposes. If you’ve been holding onto Series EE or Series I savings bonds, the interest paid is tax-exempt, so long as the money is used to pay for qualified educational expenses. There are other considerations, so if you discover you have these types of bonds to cash in. A tax professional may be able to provide some guidance.
Interest accumulated over the life of a U.S. Savings Bond must be reported on your 1040 form for the tax year in which you redeem the bond or it reaches final maturity. This must be done even if you (or the original bondholder) chose to have the interest on the bond accumulate tax-deferred until the final maturity date. Failure to report such interest may lead to a federal tax penalty.
Remember, U.S. Savings Bonds are guaranteed by the federal government as to the payment of principal and interest. However, if you sell a savings bond prior to maturity, it could be worth more or less than the original price paid.
U.S. Savings Bonds are taxed in one of two ways. Bondholders choose to defer the tax until the bond matures. Once they redeem the bond, they report the interest through a 1099-INT form. Some choose to pay the tax annually prior to cashing the bond in, reporting the increase in the value of the bond as taxable interest each year.
What if you find out you have held a U.S. Savings Bond for too long? Another note about reporting interest: if a U.S. Savings Bond has matured and you have failed to redeem it, you will not find a Form 1099-INT for it in your records. Only redemption will bring that 1099-INT your way. (The accumulated interest for the bond should have been reported to the IRS regardless.) After you cash in that old bond, you will thereafter receive a 1099-INT. It will record that the interest on the bond was earned in the year of the bond’s final maturity.
Plan ahead & keep track. U.S. Savings Bonds were issued on paper for decades and were often purchased on behalf of children and grandchildren. Now, U.S. Savings Bonds are issued electronically. While the interest on U.S. Savings Bonds is taxed by the IRS, it is exempt from state and local taxes.
COLA and Social Security.
The news keeps getting better for Social Security recipients.
It's now projected that benefits will increase 6.1% in 2022, up from the 4.7% forecast just two months ago. That would be the most significant increase since 1983.
It’s all about inflation. Social Security cost of living adjustments (COLA) are based on the consumer price index, which rose 5.4% in June — its largest 12-month increase since 2008. The official announcement is expected in October and, once it’s confirmed, the revised payment will go into effect in January 2022.
More than 65 million Americans receive Social Security, and the annual cost of living adjustments are designed to help recipients manage higher costs. At the start of 2021, recipients saw a 1.3% increase.
The average monthly benefit is $1,544 for retired workers. So a 6.1% increase amounts to $94 more a month. That might not be quite enough for a car payment, but it’s double the 3% raise being given to U.S. workers in 2021.
Social Security can be confusing. One survey found only 6% of Americans know all the factors that determine the maximum benefits someone can receive. If you have any questions, please reach out. We have a number of resources at our fingertips that you may find helpful.