July marked the best month for the markets since November 2020.

What happened, after the rout of the first half? Some ideas:
​

• It’s a bear market rally sparked by better-than-expected earnings
• Inflation has really peaked or is near a peak, and the Fed is newly dovish after September, with lower rate increases in November and December and a decrease (!) mid-2023

​The fly in the ointment? That pesky second quarter GDP contraction that could be interpreted as a sign that we are in or near a recession. But there is other, more positive data too.

Let’s get into the data:

• GDP decreased at an annual rate of 0.9 percent in the second quarter of 2022 according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 1.6 percent. The decreases were business-investment driven – consumers are still spending
• The personal consumption expenditures price index (PCE) rose 6.8% in June, the biggest 12-month move since the 6.9% increase in January 1982. This is the Fed’s preferred measure of inflation data
• The employment cost index rose 1.3% in the second quarter, and 5.1% on a 12-month basis, the highest increase since 2002. This measure is also closely followed by the Fed
• University of Michigan Consumer Sentiment Index rose to 51.5 in July. This is an improvement over the historical June low of 50
  
  

What Does All of That Data Add Up To?
Determining whether we are in a recession is the province of the National Bureau of Economic Research (NBER). They don’t just look at GDP, and they are very measured in calling a recession. Given a broader range of data, including increasing GDI (gross domestic income), strong labor markets, and continued (if slower) wage growth, it’s possible they could reach a conclusion we’re not in a recession.

This is the view of Fed Chairman Powell, from his remarks after the 75 basis point increase at the FOMC at mid-month. Even if we are in a recession, or if one is likely in the upcoming months, it could be mild and short. Chairman Powell telegraphed a likely 75 basis point increase in September but opened the “data dependent” door to potentially lower rate increases for the rest of the year.

The Fed is aware of the pain that fighting inflation is causing, but once it has achieved some “slack” in the economy – interpreted as lower employment – it may be willing to reassess future rate increases.
Remember, the Fed only has demand tools in its arsenal. It raises rates to lower investment, which puts downward pressure on growth, which impacts both jobs and wages, and eventually lowers inflation.

Inflation isn’t just demand-based. There is a big supply component, and that is still hostage to things like the money supply (which increased massively during 2020), the invasion of Ukraine and ongoing supply chain disruptions.

Chart of the Month: GDP vs GDI: The Trajectories are Diverging
Gross domestic income (GDI) paints an expansion picture, and GDP signals a contraction. Economists look at an average of the two. They are both subject to revision, which usually puts them back on a parallel path. Research from the Fed has found that since the 1990s, initial GDI growth estimates tend to predict eventual revisions to GDP.

Measures of Economic Growth

Equity Markets in July

• The S&P 500 was up 9.11%, bringing its year-to-date return to -13.34%
• The Dow Jones Industrial Average gained 6.73%, for a year-to-date return of -9.61%
• The Nasdaq Composite was up 12.4%, but remains in bear territory YTD at -20.80
  
  

Source: All performance as of July 29, 2022

Earnings results and guidance were a big part of the rally. As of month end, 278 issues have reported, with 209 beating estimates (75.2%) and 67.9% beating estimates on sales. Overall Q2 earnings are expected to post a 7.3% increase over Q1 2022.

Bond Markets
The 10-year U.S. Treasury ended the month at 2.66%, down from 2.98% in June. At year-end 2021, this rate was at 1.51%. The 30-year U.S. Treasury ended July at 3.02%, down from 3.19%. The Bloomberg U.S. Aggregate Bond Index ended July with a return of 2.44% but is still down year-to-date with a return of -8.16%. The Bloomberg U.S. High Yield Index returned 5.90%.

The Smart Investor
The Fed uses the phrase “data dependent” to indicate that it will be revising its position on interest rate increases as the economy responds to the increases it has already enacted.

Fed Chairman Powell stated that the 25-basis point increase in March, a 50 basis point increase in May, and 75 basis point increases in June and July that have raised the Fed funds rate to 2.25%-2.50% may have created more economic slowing than is reflected in the current economic data. He termed it “in the pipeline.”

For the Fed, this means it may decrease rate increases if inflation declines and the job markets show more signs of loosening.

But what does that mean for you?

• Even if the Fed slows the pace of rate increases – rates are still going up
• Investors are seeing a bounce in asset values, but the overall amount of volatility has increased, and that makes planning more challenging
• And as consumers, goods still cost more, and any type of loan or debt is still more expensive
  
  

How should you prepare yourself for this to continue, at least to the end of the year?

Think about three dimensions of wealth planning:

1. Budgets and cash flow planning. Keep expenses on track or lower them, and tie income closely to short- and long-term goals. If you don’t have a cash flow plan, now is the time to get one in place
2. Taxes. You want to keep as much income as possible. Tax-loss harvesting, charitable giving, and Roth conversions are all measures to consider
3. Potentially avoid making big swings in your allocation – but look at incremental changes to rebalance risk or take advantage of opportunities
   
   

And finally, one big thing about mental and emotional health. Keep in mind that bear markets are generally short, and recessions end. Once you’ve done the necessary advance planning, don’t let the market volatility interrupt your life.

May Recap and June Outlook
 
In reference to the Wizard of Oz, the Fed lion has found the courage to increase interest rates drastically, the inflation tiger is still ambushing the economy, and now the stock market is flirting with bears. The question for investors is: Are we still deep in the forest? Or is that the Emerald City on the horizon? To extend the metaphor – that wizard wasn’t much help, and the solution to the problem turned out to be a liquidation.
 
Just to be clear, they melted the witch. We’re not suggesting melting your portfolio.
 
Let’s recap the recent data releases as we head into the big one – May inflation – which will be released on June 10th
 

• The National Association for Business Economics reported a lower projection for GDP. The median forecast for inflation-adjusted gross domestic product (real GDP) for the fourth quarter (Q4) of 2022 is an increase of 1.8% from Q4 2021, compared to a median forecast of 2.9% in the February 2022 survey.
• The survey also addressed respondents' outlook on recession. More than half (53%) of respondents assign a more than 25% probability of a recession occurring within 12 months.
• The Bureau of Labor Statistics released the May non-farm payrolls on June 3rd. The economy beat expectations and created 390,000 jobs.
• A key manufacturing sector index is still positive. The Institute for Supply Management Purchasing Managers' Index for May was 56.1. Any number above 50 indicates expansion, while numbers below 50 show shrinkage.
• And consumers are still spending. The Conference Board said on May 31st that its consumer confidence index dipped to 106.4 in May, from 108.6 in April. This is still a strong reading. 

 
What Does All of That Data Add Up To?
 
The Fed is trying to contain inflation by slowing economic growth. The key inputs are consumer demand for goods, which of course, is driven by strength in consumer balance sheets. And that is driven by full employment and rising wages. The Fed is increasing interest rates, which makes money more expensive.
 

• Business investment depends on access to capital. Less capital means less growth and fewer jobs.
• Mortgage rates have increased more than 200 basis points. This has already slowed the booming housing market, which will have a knock-on effect on several job sectors.
• Consumer credit is more expensive, which should result in a slowdown in consumer demand.

 
The Fed is aggressively raising rates at a stated – and unusual -- pace of 50 basis points at each of the next several meetings. Even before rates go up, the market begins to price in where rates will be months down the road.
 
That's part of what is contributing to the pullback in equities we've seen this year. The market is also reacting to uncertainty. There's no way to know if the Fed will be successful.
 
Lowering Inflation Requires Slowing Economic Growth – But How Slow Is Too Slow?

The Fed’s stated belief is that the long-term potential growth rate of the U.S. is around 1.8%. Growth at this level would be likely to keep inflation at the Fed’s preferred level of approximately 2%.
 
How Did the Markets React?
 
After tickling the bear mid-month, the S&P 500 managed to close in positive territory by a hair of 0.01%. After seven consecutive weeks of declines, the index saw the best weekly performance since November 2020.
 
All eyes are on inflation. After declining slightly last month, markets will be looking for more evidence that the Fed’s aggressive rate moves are working. Gas prices have bounced back up to levels not seen since the first weeks of the Ukraine invasion. Headline CPI includes energy – so the pressure is on.
 
It’s probably hard to understate the impact of the inflation number as a market mover. The belief that the Fed would need to be even more aggressive in raising rates – with a potential 75 basis point increase – was in part responsible for the sustained negativity about equity markets. With even a small decrease in inflation, market sentiment moved back to positive as investors displayed more confidence that rate increases would be at the levels the Fed has outlined.
 
Chart of the Month: Manufacturing is Still Expanding
 
Institute for Supply Management – Purchasing Managers Index

April Recap and May Outlook
 
COVID concerns took a definitive backseat as mask mandates on flights ended, and the concerns about the economy turned to how bad things will get. The concerns over the disruption of the ongoing war in Ukraine, 40+ year record inflation, and the resulting amping up of the Fed’s intentions on rate increases moved distinctly into the foreground. Let’s look at some headlines:

• The IMF released projections for the impact of the war in Ukraine. Global growth will likely slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January.

• The war isn’t just impacting growth. The IMF also reported that war-induced commodity price increases and broadening price pressures have led to 2022 inflation projections of 5.7% in advanced economies and 8.7% in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected last January.

• In remarks at a panel discussion at the IMF on April 21st, Chairman Powell reiterated that it is appropriate “to be moving a little more quickly” on rate hikes. That translated into guidance on the first 50-bps rate increase in 22 years.

• Economists began talking about “stagflation.” Stagflation is high inflation, high unemployment, and slow or negative real economic growth. Stagflation fears rise out of the potential for the Fed to overshoot and tip the economy into recession. Another way to think of stagflation is a circular firing squad. In stagflation, the moves the central bank makes to rescue the economy push it further into recession.

 
Chairman Powell Steps Up to the Plate – and the Mic
 
We’ve come a long way from a Federal Reserve that would speak as obtusely as possible, and exclusively to economists and bond market people.
 
Powell spoke “directly to the American people” in his remarks. He was clear about his view of where inflation is and what the Fed’s intention is: "Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down.”
 
Powell was also careful to stake out what the Fed sees as under its purview, as opposed to governmental control: "It's really the Fed that has responsibility for price stability."
 
How Did the Markets React?
 
The increasingly negative numbers all months speak for themselves. And it wasn’t just equities – bond market prices suffered as yields hit levels they haven’t seen in years. However, there were some bright some spots.
 
There is some indication that the 8.5% March inflation number may be the peak. Core inflation, which is CPI ex food and energy, fell in March. The Atlanta Fed tracks what they call “sticky-price” inflation. This is a weighted basket of items that change price relatively slowly. It increased 5.8 % annualized in March, following a 6.5 % increase in February.
 
So even though inflation is up, “sticky” inflation is trending down. Added to a strong labor market and an economy that is still growing, even if slower, the potential for both stagflation and a prolonged recession – or any recession – may be lower than headlines are shouting now.

After the rate increase on May 4th, and Powell’s remarks, the market initially reacted positively as rate increases of 100 basis points over the next two meetings were not as drastic as some feared. As rates continue to climb, and we see how inflation responds, volatility will continue to be with us.
 
However, it’s important to keep in mind that the market overall, especially as measured by earnings, is healthier than many might think. Q1 2022 earnings are up 8.5% year-over-year, although lower than Q4 2021. The market is down from the all-time high seen in January, but it’s still higher than it was prior to the pandemic.

Chart of the Month: Yields Are Sharply Up as the Fed Increases Rates
​

Equity Markets
 

• The S&P 500 was down 8.80% in April, bringing its YTD return to -13.31%
• The Dow Jones Industrial Average lost 4.91% for the month and returned -9.25% YTD
• The S&P Mid-Cap 400 decreased 7.18% for the month resulting in a -12.02% YTD return
• The S&P Small-Cap 600 declined 7.87% in April, putting the YTD return at -13.34%

Source: All performance as of April 30, 2022; quoted from S&P Dow Jones Indices.
 
The S&P 500 traded in a high/low range of 11.38%, compared with the pre-COVID-19 historical monthly average of 6.86%. The index ended the month with its worst one-day return (-3.63%) since June 11, 2020, and is in correction territory. Intra-day volatility is up, trading volume is down, and breadth not only declined, but it also turned negative as only 05 issues gained, compared with March’s 315 gainers.
 
Bond Markets
 
The 10-year U.S. Treasury ended the month at 2.93%, and the 30-year U.S. Treasury ended at 3.00%, up from last month’s 2.45%. The Bloomberg U.S. Aggregate Index was down, returning -3.79. As represented by the Bloomberg Municipal Bond Index, Municipal bonds returned -2.76%. High yield corporate bonds struggled with rising rates, with a return of -3.55% for the Bloomberg U.S. High Yield Index.
 
The Smart Investor
 
One point that has been consistently made over the past decade-plus of record stock market returns is that the market has been boosted by artificially low interest rates. Rates had not recovered to normal levels after the Global Financial Crisis, and the pandemic resulted in a second slashing of rates and an enormous increase in the Fed’s balance sheet asset, which pushed long-term yields down.  

With the 10-year U.S. Treasury at just below 3%, mortgage rates at more than 5%, and the market pricing in a short-term rate of nearly 3% by year-end, normalization is happening fast. What does that mean for investors?

Well, some basics: Higher interest rates mean that profits now are more valuable than more-illusory profits in the future. And all that venture capital money sloshing about? That sound you hear is the collective shriek of start-up workers realizing that firm outings to Coachella maybe weren’t the best way to spend the cash, because there might not be as much of it in future. What is back in style? As old school as it gets: Berkshire Hathaway bought $51 billion of stocks in the first quarter.
 
As for the other workhorse of long-term investing, S&P Global reports that dividends continue on a slow upward trend, with few decreases and measured increases.
 
Volatility is likely making itself at home, but strong employment, a growing economy and a more engaged and accountable Fed may mean we stave off or control recession, along with inflation.

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.

U.S. Markets
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.
 
Corporate Profits
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.
​
Sector Scorecard
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.

World Markets
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.

Indicators
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.

The Fed
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.

Gary G. Blom | Financial Advisor
Michael Howell CFP® | Financial Advisor
Address: 3340 Tully Rd. Ste B4, Modesto, CA 95350
Website: www.blomandhowell.com
Office: (209) 857-5207 | Fax: (209) 857-5098

Know someone who could use information like this?
Please feel free to send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)

Various factors drive used car prices.
 
Inflation is defined as the general upward price movement of goods and services in an economy. The key word is “general.” Inflation tends to be uneven and affects the price of some items more than others.
 
If you’ve been in the market for a used car, you’ve learned a critical economic lesson about the “uneven” side of inflation. The overall rate of inflation has been 5% for the past 12 months. Meanwhile, the average price of a used car is up 30% from a year ago.
 
Various factors drive used car prices, but most of the trouble links to the global microchip shortage.
 
Demand for used cars may well slow later this year as automakers return to normal production levels. As the market shifts, some people who bought used cars may learn another key economics lesson: they might owe more for their car than what it’s worth as prices return to historical levels.
 
The most important takeaway is that inflation touches our lives in different ways. Gasoline prices are up sharply from a year ago, but you might not feel the increase if you work from home or are retired. However, at the grocery store, all shoppers are paying higher prices for everything from beef to pork to milk.
 
If all the recent inflation talk has you uneasy, please contact our offices. We'd welcome the chance to hear about your experience with higher prices.

U.S. Markets
Stocks moved higher last month as investors looked past accelerating inflation and the Fed’s pivot on monetary policy.

The Dow Jones Industrial Average slipped 0.07 percent, but the Standard & Poor’s 500 Index rose 2.22 percent. The Nasdaq Composite led, gaining 5.49 percent.
 
Inflation Report
The May Consumer Price Index came in above expectations. Prices increased by 5 percent for the year-over-year period—the fastest rate in nearly 13 years. Despite the surprise, markets rallied on the news, sending the S&P 500 to a new record close and the technology-heavy Nasdaq Composite higher.
 
Fed Pivot
The Fed indicated that two interest rate hikes in 2023 were likely, despite signals as recently as March 2021 that rates would remain unchanged until 2024. The Fed also raised its inflation expectations to 3.4 percent, up from its March projection of 2.4 percent. This news unsettled the markets, but the shock was short-lived.

News-Driven Rally
In the final full week of trading, stocks rallied on the news of an agreement regarding the $1 trillion infrastructure bill and reports that banks had passed the latest Federal Reserve stress tests.
 
Sector Scorecard
Industry sector performance was mixed. Gains were realized in Communication Services (+2.96 percent), Consumer Discretionary (+3.22 percent), Energy (+1.92 percent), Health Care (+1.97 percent), Real Estate (+3.28 percent), and Technology (+6.81 percent). Losses were suffered in Consumer Staples (-1.95 percent), Financials (-3.84 percent), Industrials (-3.34 percent), Materials (-5.92 percent), and Utilities (-2.78 percent).
 
What Investors May Be Talking About in July
Second-quarter earnings season is near, and investors will see whether Corporate America can build upon its first-quarter results.

Earnings are expected to increase 61 percent, in part driven by a nearly 20 percent growth in sales. In the first quarter, earnings rose 52 percent on an 11 percent increase in sales.

First-quarter earnings didn’t move the market, so it’s uncertain whether second-quarter numbers will be a catalyst.
​
But if earnings miss the mark, analysts may find themselves evaluating stock valuations over the next few months.

World Markets
Overseas markets were mixed in June, with the MSCI EAFE Index falling 0.33 percent.6
European markets, however, edged higher. France picked up 0.93 percent, Germany tacked on 0.71 percent, and the U.K. rose 0.21 percent.
 
In the Pacific Rim, Australia was among the standouts, gaining 2.11 percent. Hong Kong lost 1.11 percent, and Japan dropped 0.53 percent.

Indicators

Gross Domestic Product: The final reading of first-quarter GDP growth was unchanged at 6.4 percent.

Employment: Nonfarm payrolls increased by 559,000, dropping the unemployment rate to 5.8 percent. The leisure and hospitality sector experienced the largest gain, with 292,000 jobs added.

Retail Sales: Retail sales declined 1.3 percent in May as consumers shifted their spending from goods to services such as airline travel.

Industrial Production: Output at America’s factories, mines, and utilities rose 0.8 percent. It was the third consecutive month of expanded output.

Housing: Housing starts rose 3.6 percent as the high cost of materials hampered activity.

Existing home sales dropped for the fourth consecutive month, sliding 0.9 percent in May. Inventory shortages and declining affordability continue to weigh on the market.

 Sales of new homes fell 5.9 percent as the median sales price rose to a record $374,400.

Consumer Price Index: The prices of consumer goods surged in May, hitting levels not seen in almost 13 years. The CPI rose 0.6 percent from April 2021.

Durable Goods Orders:  Orders for long-lasting goods rose 2.3 percent, which represented the largest month-over-month gain since July 2020.

The Fed
Following its June meeting, the Federal Open Market Committee indicated that two interest rate hikes in 2023 were likely. The Fed also raised its inflation expectations to 3.4 percent, up from its March projection of 2.4 percent.

However, Fed officials continue to maintain that price increases will be transitory even though there has been no indication of when or by how much the Fed may begin tapering its monthly bond purchases.

Gary G. Blom | Financial Advisor
Michael Howell CRPC | Financial Advisor
Address: 3340 Tully Rd. Ste B4, Modesto, CA 95350
Website: www.blomandhowell.com
Office: (209) 857-5207 | Fax: (209) 857-5098

Know someone who could use information like this?
Please feel free to send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)

Advisory services offered through Blom & Howell Financial Planning, Inc.​

As inflation climbs, the Fed reacts.
 
At its June meeting, the Federal Reserve confirmed what many of us have suspected for some time: prices are rising. In fact, prices are climbing faster than many expected. In response, the Fed raised its inflation expectation to 3.4%, up from its March projection of 2.4%, effectively raising its inflation expectation by 42%.
 
The Fed’s course correction on inflation expectations and planned interest rate hikes unsettled the financial markets, with further volatility felt after St. Louis Fed President James Bullard said that the first interest rate hike could be as soon as 2022.
 
The Fed also indicated that two interest rate hikes in 2023 were likely, despite signals last march that rates would remain unchanged until 2024.
 
So, what’s an investor to do?
 
It’s important to remember that inflation is just one of the factors considered when creating a portfolio. If inflation trends higher than expected for some time, adjustments may need to occur.
 
Fed Chair Jerome Powell also said at the June meeting that he believes that inflation will be transitory. But as evidenced by the recent changes, the Fed remains ready to update its outlook as economic data continues to accumulate.
 
If you’re concerned about inflation, please reach out. As the economy continues to strengthen, economic trends and themes are evolving quickly. We’d welcome the chance to hear your thoughts.

U.S. Markets
Stocks traded in a narrow range in May, with technology and other high-valuation companies under selling pressure.
The Dow Jones Industrial Average gained 1.93 percent while the Standard & Poor’s 500 Index rose 0.55% percent. The Nasdaq Composite, home for many technology and high-growth companies, dropped 1.53 percent.1
 
Solid Earnings
Stock prices moved erratically throughout May as investors digested more solid corporate earnings reports, accelerating inflation and mixed economic signals.

With 95 percent of S&P 500 constituent companies reporting, 86 percent reported positive earnings surprises. The estimated earnings growth rate was 51.9 percent, the highest rate since the first quarter of 2010.2,3
 
Inflation Story
The emerging inflation story, however, dampened investor optimism and weighed on the stock market. The latest Consumer Price Index report was particularly unsettling to investors, as consumer prices rose 0.8 percent in April 2021 and jumped by 4.2 percent year-over-year. A 6.2 percent year-over-year spike in the Producer Price Index followed, representing the most significant jump since 2010.4,5

Any acceleration in inflation fans investors' fears that the Federal Reserve will adjust its monetary policy.
Particularly hard hit during the month were technology and other high-growth stocks. Investors appeared to reduce positions on concerns that higher inflation may lead to higher interest rates, and that combination could reduce the value of future earnings.

​Sector Scorecard
The majority of industry sectors were positive in May, with gains in Communication Services (+3.60 percent), Consumer Staples (+2.79 percent), Energy (+7.58 percent), Financials (+5.92 percent), Health Care (+0.47 percent), Industrials (+2.96 percent), Materials (+5.01 percent), and Real Estate (+1.51 percent). Losses were posted in Consumer Discretionary (-2.98 percent), Technology (-3.61 percent), and Utilities (-1.34 percent).6
 
What Investors May Be Talking About in June
The inflation worries that roiled the stock market in May are likely to persist as investors try to gauge whether inflationary pressures are truly transitory, as the Fed believes, or if they will become a more permanent feature of the economic landscape.7
 
Investors may expect to keep a close eye on the Consumer Price Index, the Producer Price Index, the Personal Consumption Expenditures Index, and the wage growth component of the monthly employment report that captures job growth and the unemployment rate.
 
Recent news that some companies have hiked wages to attract workers has intensified concerns that rising wages may spark sustained inflationary pressures. Such costs typically pass on to the consumer.

​
World Markets
A pick-up in vaccination efforts in Europe led to broad global gains, with the MSCI-EAFE Index picking up 2.50 percent in May.8

European markets led the gains in overseas markets. France rose 2.83 percent, Germany added 1.88, and the United Kingdom tacked on 0.76 percent.9

Pacific Rim stocks joined the rally. Australia gained 1.93 percent while Japan edged higher, adding 0.16 percent. Argentina’s volatile Merval index jumped 20.82 percent.10

Indicators

Gross Domestic Product: The second estimate of the first quarter’s GDP growth remained unchanged at 6.4 percent.11

Employment: Employers added just 266,000 jobs in April, a figure well below expectations. The unemployment rate ticked higher to 6.1 percent.12

Retail Sales: Retail sales were flat in April, following stimulus check-funded increases in the previous month.13

Industrial Production: Industrial output rose 0.7 percent, despite a substantial decline in auto production due to a chip shortage.14

Housing: Housing starts declined 1.5 percent. Year-over-year, housing starts were 39.2 percent higher.15
Existing home sales fell 2.7 percent as rising prices and declining inventory continued to crimp sales.16
Sales of new homes dropped 5.9 percent as the median price surged by 20.1 percent from a year earlier.17

Consumer Price Index: The prices of consumer goods surged in April, jumping 0.8 percent month-over-month and posting a 4.2 percent increase over last April's prices. Strong consumer demand, supply chain kinks, and comparisons to the previous year's pandemic-induced price declines contributed to the spike in prices.18
​
Durable Goods Orders:  Durable goods orders fell 1.3 percent, registering the first monthly decline in 11 months. The shortage of semiconductor chips weighed on auto production, which contributed to April’s decline.19

​The Fed
The Federal Open Market Committee (FOMC) released the minutes of its two-day April 2021 meeting.
The minutes showed that a number of committee participants had raised the idea that—if the economy continues to make progress—it might be appropriate to adjust the pace of the Fed’s monthly bond purchase program. But for now, there was no change in the purchase program.20
“In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals,” Fed officials said in a prepared statement.21
“These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.”21

Gary G. Blom CRPC | Financial Advisor
Michael Howell MBA | Financial Advisor
Address: 3340 Tully Rd. Ste B4, Modesto, CA 95350
Website: www.blomandhowell.com
Office: (209) 857-5207 | Fax: (209) 857-5098

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​CITATIONS:
1. The Wall Street Journal, May 31, 2021
2. FactSet.com, May 21. 2021
3. FactSet.com, May 21, 2021. The estimated, or blended, figure combines actual results for companies that have reported and estimated results for companies that have yet to report.
4. CNBC.com, May 12, 2021
5. CNBC.com, May 13, 2021
6. Sectorspdr.com, May 31, 2021
7. CNBC.com, April 28, 2021
8. MSCI.com, May 31, 2021
9. MSCI.com, May 31, 2021
10. MSCI.com, May 31, 2021
11. BEA.gov, May 27, 2021
12. The Wall Street Journal, May 7, 20201
13. The Wall Street Journal, May 14, 2021
14. MarketWatch, May 14, 2021
15. CNBC.com, May 18, 2021
16. CNBC.com, May 21, 2021
17. Reuters.com, May 27, 2021
18. The Wall Street Journal, May 13, 2021
19. FoxBusiness.com, May 27, 2021
20. CNBC.com, May 19, 2021
21. FederalReserve.gov, May 19, 2021

U.S. Markets
Stocks were mixed in January, giving up much of the month’s gains in the final days of trading, as unprecedented activity in a handful of companies roiled markets.

 The Dow Jones Industrial Average dropped 2.04 percent and the Standard & Poor’s 500 Index fell 1.11 percent. By contrast, the Nasdaq Composite gained 1.42 percent.1
 
Mixed Signals
The stock market stumbled at the start of the month, retreating amid the slow pace of vaccine distribution and concerns that the economic recovery might take longer than anticipated.

However, stocks regained some upside momentum on news of strong manufacturing data, firmer oil prices, and hopes for an additional fiscal stimulus.
 
“Act Big,” Says Yellen
After touching record highs, stocks drifted lower again, weighed down by rising interest rates, which caused some concerns over current stock valuations.

Market sentiment improved after testimony from incoming Treasury Secretary Janet Yellen to the Senate Finance Committee that lawmakers needed to “act big” on fiscal stimulus, thereby raising hopes for substantial federal spending.
​
Earnings Season
Investor enthusiasm was further supported by a strong start to the fourth-quarter earnings season. With 37 percent of the S&P 500 index companies reporting at month-end, 82 percent reported a positive earnings surprise.
 
Nonetheless, quarterly reports haven't always translated into higher stock prices. In fact, the share prices of the companies that reported positive earnings surprises fell an average of 1.2 percent in the two days preceding and following the earnings release.2,3,4
 
Lesson in Short Selling
Stocks closed the month on a volatile note as many retail investors were introduced to the concept of short selling and how it can influence a stock’s price. This unexpected buying activity roiled markets and fueled a sharp rise in several stocks.
 
To sell short, investors are required to open a margin account. Selling short is not suitable for everyone, as margin trading entails greater risk, including the risk of unlimited losses in a position and the incurrence of margin interest debt. You should consider your financial situation and risk tolerance before trading on margin.
 
Sector Scorecard
Sectors were also mixed, with Energy (+3.75 percent), Health Care (+1.4 percent), Consumer Discretionary (+0.77 percent) and Real Estate (+0.55 percent) posting gains. Consumer Staples (-4.98 percent), Industrials (-4.27 percent), Materials (-2.42 percent), Communication Services (-0.89 percent), Financials (-1.8 percent), Technology (-0.84 percent), and Utilities (-0.88 percent) closed lower.5

What Investors May Be Talking About in February
In the month ahead, expect President Biden to continue outlining his agenda. A newly elected president’s first 100 days often set the tone for the next four years.
​
Investors will be looking at his initial priorities as well as how he and Congress will work together. Policy changes can sometimes introduce uncertainty into the markets even as companies wait to learn of new businesses and investment incentives.

World Markets
​Overseas markets were mixed at the start of the year, with the MSCI-EAFE Index gaining 0.56 percent.6
In Europe, France lost 2.74 percent while the United Kingdom slipped 0.82 percent. Germany provided a spark, picking up 5.21 percent.7

The Pacific Rim markets performed better. Hong Kong gained 3.87 percent and Japan added 0.80 percent. Australia tacked on 0.31 percent.8

Indicators

Gross Domestic Product: The nation’s economy grew by 4.0 percent in the fourth quarter. For the full year, GDP dropped 3.5 percent.9

Employment: Total nonfarm payrolls declined by 140,000, led by losses in the hospitality and leisure sectors. The unemployment rate remained steady at 6.7 percent.10

Retail Sales: Retail sales fell 0.7 percent. Excluding motor vehicles and gasoline, consumer purchases fell a more substantial 2.1 percent.11

Industrial Production: Industrial production jumped 1.6 percent, well ahead of consensus estimates of a 0.5 percent increase.12

Housing: Housing starts increased by 5.8 percent, powered by a 12.0 percent jump in single-family homes.13

Existing-home sales reached their highest level in 14 years, with an increase of 0.7 percent in December. Sales were 22 percent higher than in December 2019.14

New home sales rose by 1.6 percent as the median price of new homes surged by 8.0 percent from a year ago.15

Consumer Price Index: Consumer prices rose 0.4 percent in December, driven by an 8.4 percent jump in gasoline prices. The inflation rate for 2020 came in at 1.4 percent.16

Durable Goods Orders:  New orders for long-lasting goods increased 0.2 percent. Although it was the eighth straight month of gains, the figure was below expectations, reflecting the general economic softness in December.17

The Fed
Fed officials believe that economic weakening due to the resurgence of COVID-19 cases is temporary. They also noted that despite the hiccups in the vaccine distribution, they would wait and see how the rollout proceeds in the weeks ahead before considering any actions.18
​
“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals,” Fed officials said in a prepared statement at the conclusion of their two-day meeting on January 27, 2021.19

Gary G. Blom CRPC | Financial Advisor
Michael Howell MBA | Financial Advisor
Address: 3340 Tully Rd. Ste B4, Modesto, CA 95350
Website: www.blomandhowell.com
Office: (209) 857-5207 | Fax: (209) 857-5098

Know someone who could use information like this?
Please feel free to send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)

Advisory services offered through Blom & Howell Financial Planning, Inc.
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.
CITATIONS:
1. The Wall Street Journal, January 31, 2021
2. FactSet Research, January 22, 2021. “Earnings Insights.”
3. FactSet Research, January 29, 2021
4. FactSet Research, January 25, 2021
5. FactSet Research, January 31, 2021
6. MSCI.com, January 31, 2020
7. MSCI.com, January 31, 2020
8. MSCI.com, January 31, 2020
9. The Wall Street Journal, January 28, 2021
10. BLS.gov, January 8, 2021
11. The Wall Street Journal, January 15, 2021
12. The Wall Street Journal, January 15, 2021
13. CNBC.com, January 21, 2021
14. The Wall Street Journal, January 22, 2021
15. Reuters.com, January 28, 2021
16. The Wall Street Journal, January 13, 2021
17. The Wall Street Journal, January 27, 2021
18. The Wall Street Journal, January 27, 2021
19. FederalReserve.gov, January 27, 2021