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Posts tagged ‘US Economy’

Return to Rationality?

As the worst pandemic in more than a generation is winding down in the U.S., people are readjusting their personal lives and investing worlds as they transition from ridiculousness to rationality. After many months of non-stop lockdowns, social distancing, hand-sanitizers, mask-wearing, and vaccines, Americans feel like caged tigers ready to roam back into the wild. An incredible amount of pent-up demand is just now being unleashed not only by consumers, but also by businesses and the economy overall. This reality was also felt in the stock market as the Dow Jones Industrial Average powered ahead another 654 points last month (+1.9%) to a new record level (34,529) and the S&P 500 also closed at a new monthly high (+0.6% to 4,204). For the year, the bull market remains intact with the Dow gaining almost 4,000 points (+12.8%), while the S&P 500 has also registered a respectable +11.9% return.

The story was different last year. The economy and stock market temporarily fell off a cliff and came to a grinding halt in the first quarter of 2020. However, with broad distribution of the vaccines and antibodies gained by the previously infected, herd immunity has effectively been reached. As a result, the U.S. COVID-19 pandemic has essentially come to an end for now and stock prices have continued their upward surge since last March.

Insanity to Sanity?

With the help of the Federal Reserve keeping interest rates at near-0% levels, coupled with trillions of dollars in stimulus and proposed infrastructure spending, corporate profits have been racing ahead. All this free money has pushed speculation into areas such as cryptocurrencies (i.e., Bitcoin, Dogecoin, Ethereum), SPACs (Special Purpose Acquisition Companies), Reddit meme stocks (GameStop Corp, AMC Entertainment), and highly valued, money-losing companies (e.g., Spotify, Uber, Snowflake, Palantir Technologies, Lyft, Peloton, and others). The good news, at least in the short-term, is that some of these areas of insanity have gone from stratospheric levels to just nosebleed heights. Take for example, Cathie Wood’s ARK Innovation Fund (ARKK) that invests in pricey stocks averaging a 91x price-earnings ratio, which exceeds 4x’s the valuation of the average S&P 500 stock. The ARK exchange traded fund that touts investments in buzzword technologies like artificial intelligence, machine learning, and cryptocurrencies rocketed +149% last year in the middle of a pandemic, but is down -10.0% this year. The Grayscale Bitcoin Trust fund (GBTC) that skyrocketed +291% in 2020 has fallen -5.6% in 2021 and -48.1% from its peak. What’s more, after climbing by more than +50% in less than four months, the Defiance NextGen SPAC fund (SPAK) has declined by -28.9% from its apex just a few months ago in February. You can see the dramatic 2021 underperformance in these areas in the chart below.

Inflation Rearing its Ugly Head?

The economic resurgence, weaker value of the U.S. dollar, and rising stock prices have pushed up inflation in commodities such as corn, gasoline, lumber, automobiles, housing, and a whole host of other goods (see chart below). Whether this phenomenon is “transitory” in nature, as Federal Reserve Chairman Jerome Powell likes to describe this trend, or if this is the beginning of a longer phase of continued rising prices, the answer will be determined in the coming months. It’s clear the Federal Reserve has its hands full as it attempts to keep a lid on inflation and interest rates. The Fed’s success, or lack thereof, will have significant ramifications for all financial markets, and also have meaningful consequences for retirees looking to survive on fixed income budgets.

As we have worked our way through this pandemic, all Americans and investors look to change their routines from an environment of irrationality to rationality, and insanity to sanity. Although the bull market remains alive and well in the stock market, inflation, interest rates, and speculative areas like cryptocurrencies, SPACs, meme-stocks, and nosebleed-priced stocks remain areas of caution. Stick to a disciplined and diversified investment approach that incorporates valuation into the process or contact an experienced advisor like Sidoxia Capital Management to assist you through these volatile times.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME, AMC, SPOT, UBER, SNOW, PLTR, LYFT, PTON, GBTC, SPAK, ARKK or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 1, 2021 at 3:30 pm 4 comments

Consumer Confidence Flies as Stock Market Hits New Highs

As the economy starts reopening from a global pandemic that is improving, consumers and businesses are beginning to see a light at the end of the tunnel. The surge in the recently reported Consumer Confidence figures to a new one-year high (see chart below) is evidence the recovery is well on its way. A stock market reaching new record highs is further evidence of the reopening recovery. More specifically, the Dow Jones Industrial Average catapulted 2,094 points higher (+6.2%) for the month to 32,981 and the S&P 500 index soared +4.2%. A rise in interest rate yields on the 10-Year Treasury Note to 1.7% from 1.4% last month placed pressure on technology growth stocks, which led to a more modest gain of +0.4% in the tech-heavy NASDAQ index during March.

Comeback from COVID

With a combination of 150 million vaccine doses administered and 30 million cumulative COVID cases, the U.S. population has creeped closer toward herd immunity protection against the virus and pushed down hospitalizations dramatically (see chart below).

**Source:** *Centers for Disease Control (CDC)*

Also contributing to investor optimism have been the rising values of investments and real estate assets thanks to an improving economy and COVID case count. As you can see from the chart below, the net worth of American households has more than doubled from the 2008-2009 financial crisis to approximately $130 trillion dollars, which in turn has allowed consumers to responsibly control and manage their personal debt. Unfortunately, the U.S. government hasn’t been as successful in keeping debt levels in check.

Spending and Paying for Infrastructure Growth

Besides focusing on positive COVID trends, investors have also centered their attention on the passage of a $1.9 trillion stimulus bill last month and a new proposed $2.3 trillion infrastructure bill that President Biden unveiled details on yesterday. At the heart of the multi-trillion dollar spending are the following components (see also graphic below):

$621 billion modernize transportation infrastructure
$400 billion to assist the aging and disabled
$300 billion to boost the manufacturing industry
$213 billion to build and retrofit affordable housing
$100 billion to expand broadband access

With over $28 trillion in government debt, how will all this spending be funded? According to The Fiscal Times, there are four main tax categories to help in the funding:

Corporate Taxes: Raising the corporate tax rate to 28% from 21% is expected to raise $730 billion over 10 years

Foreign Corporate Subsidiary Tax: A new global minimum tax on foreign subsidiaries of American corporations is estimated to raise $550 billion

Capital Gains Tax on Wealthy: Increasing income tax rates on capital gains for wealthy individuals is forecasted to raise $370 billion

Income Tax on Wealthy: Lifting the top individual tax rate back to 39.6% for households earning more than $400,000 per year is seen to bring in $110 billion

Besides the economy being supported by government spending, growth and appreciation in the housing market are contributing to GDP growth. The recently released housing data shows housing prices accelerating significantly above the peak levels last seen before the last financial crisis (see chart below).

Although the economy appears to be on solid footing and stock prices have marched higher to new record levels, there are still plenty of potential factors that could derail the current bull market advance. For starters, increased debt and deficit spending could lead to rising inflation and higher interest rates, which could potentially choke off economic growth. Bad things can always happen when large financial institutions take on too much leverage (i.e., debt) and speculate too much (see also Long-Term Capital Management: When Genius Failed). The lesson from the latest, crazy blow-up (Archegos Capital Management) reminds us of how individual financial companies can cause billions in losses and cause ripple-through effects to the whole financial system. And if that’s not enough to worry about, you have rampant speculation in SPACs (Special Purpose Acquisition Companies), Reddit meme stocks (e.g., GameStop Corp. – GME), cryptocurrencies, and NFTs (Non-Fungible Tokens).

Successful investing requires a mixture of art and science – not everything is clear and you can always find reasons to be concerned. At Sidoxia Capital Management, we continue to find attractive opportunities as we strive to navigate through areas of excess speculation. At the end of the day, we remain disciplined in following our fundamental strategy and process that integrates the four key legs of our financial stool: corporate profits, interest rates, valuations, and sentiment (see also Don’t Be a Fool, Follow the Stool). As long as the balance of these factors still signal strength, we will remain confident in our outlook just like consumers and investors are currently.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

April 1, 2021 at 2:10 pm Leave a comment

GDP Figures & Election Jitters

Ever since the beginning of 2020, it’s been a tale of two cities. As renowned author Charles Dickens famously stated, “It was the best of times and worst of times.” The year started with unemployment at a “best of times” low level of 3.5% (see chart below) before coronavirus shutdown the economy during March when we transitioned to the “worst of times.”

With the recent release of record-high Gross Domestic Product (GDP) figures of +33.1% growth in Q3 (vs. -31.4% in Q2), and a +49% stock market rebound from the COVID-19 lows of March, a debate has been raging. Is the re-opening economic rebound that has occurred a V-shaped recovery that will continue expanding, or is the recovery that has occurred since March a temporary dead-cat bounce?

For many people, the ultimate answer depends on the outcome of the impending presidential election. Making matters worse are the polarized politics that are being warped, distorted, and amplified by social media (see Social Dilemma). Although the election jitters have many stock market participants on pins and needles, history reminds us that politics have little to do with the long-term direction of the stock market and financial markets. As the chart below shows, over the last century, stock prices have consistently gone up through both Democratic (BLUE) and Republican (RED) administrations.

Even if you have trouble digesting the chart above, I repeatedly remind investors that political influence and control are always temporary and constantly changing. There are various scenarios predicted for the outcome of the current 2020 elections, including a potential “Blue Wave” sweep of the Executive Branch (the president) and the Legislative Branch (the House of Representatives and Senate). Regardless of whether there is a Blue Wave, Red Wave, or gridlocked Congress, it’s worth noting that the previous two waves were fleeting. Unified control of government by President Obama (2008-2010) and President Trump (2016-2018) only lasted two years before the Democrats and Republicans each lost 100% control of Congress (the House of Representatives flipped to Republican in 2010 and Democrat in 2018).

Even though Halloween is behind us, many people are still spooked by the potential outcome of the elections (or lack thereof), depending on how narrow or wide the results turn out. Despite the +49% appreciation in stock prices, stock investors still experienced the heebie-jeebies last month. The S&P 500 index declined -2.8% for the month, while the Dow Jones Industrial Average and Nasdaq Composite index fell -4.6% and -2.3%, respectively. It is most likely true that a close election could delay an official concession, but with centuries of elections under our belt, I’m confident we’ll eventually obtain a peaceful continuation or transition of leadership.

Regardless of whomever wins the presidential election, roughly half the voters are going to be unhappy with the results. For example, even when President Ronald Reagan won in a landslide victory in 1980 (Reagan won 489 electoral votes vs. 49 for incumbent challenger President Jimmy Carter), Reagan only won 50.8% of the popular vote. In other words, even in a landslide victory, roughly 49% of voters were unhappy with the outcome. No matter the end result of the approaching 2020 election, suffice it to say, about half of the voting population will be displeased.

Despite the likely discontent, the upcoming winner will be working with (or inheriting) an economy firmly in recovery mode, whether you are referencing, jobs, automobile sales, home sales, travel, transportation traffic, consumer spending, or other statistics. The Weekly Economic Index from the New York Federal Reserve epitomizes the strength of the V-shaped recovery underway (see chart below).

It will come as no surprise to me if we continue to experience some volatility in financial markets shortly before and after the elections. However, history shows us that these election jitters will eventually fade, and the tale of two cities will become a tale of one city focused on the fundamentals of the current economic recovery.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 2, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFS), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

November 2, 2020 at 12:28 pm Leave a comment

Pedal to the Metal Leads to Record Rebound

Like a race car pushing the pedal to the metal, the stock market sped to its best quarterly stock market gains in decades. The +20% rebound in the 2nd quarter S&P 500 index was the best result achieved since 1998. Moreover, the Dow Jones Industrial Average saw its largest quarterly gain (+18%) since 1987, and the technology-heavy NASDAQ index (+31%) saw the most appreciation since 2001. While a snap-back after a shockingly dismal 1st quarter should come as no surprise to many investors, the pace of this rebound is unlikely to be sustainable at this trajectory, given the challenging economic backdrop and COVID public health crisis.

Racing Ahead Via Re-Opening

After experiencing six months of the coronavirus pandemic, the country has been re-opening across all 50 states at differing paces. We can see the benefits of a V-shaped recovery in various indicators, such as the following:

Airline Traffic

Hotel Occupancy

Gasoline Consumption

Thanks to unprecedented support from the Federal Reserve in the form of trillions of dollars in stimulative money printing that has been injected into the economy (see chart below), and trillions of government support (including 4.8 million PPP [Payroll Protection Program] loans totaling $519 billion), the economic benefits of the re-openings have been tangible. Not only did the economy unexpectedly add 2.5 million jobs last month, but economic growth is also projected to rebound in the back-half of 2020. More specifically, Treasury Secretary Steven Mnuchin recently testified in front of Congress that 3rd quarter economic growth (GDP – Gross Domestic Product) is currently projected at +17%, and 4th quarter at +9%.

The Stubborn Virus Remains

Many Americans feel liberated from the lifting of stay-at-home orders, but if the re-openings are not handled with proper precautions, the consequences can result in an economic equivalent of serious speeding tickets or jail time. We have experienced this phenomenon firsthand as a surge of new COVID-19 infections has spread predominately across the Southern and Western states, skewed towards younger Americans.

Now that the economic genie has been released out of the bottle, it’s going to be very difficult for state governors and city mayors to stuff the genie back in. Even if the new surge in COVID-19 cases continues, we are more likely to see required health guidelines instituted (e.g., mandatory mask wearing) or rollbacks in certain re-opening phases (e.g., closures of bars, restaurants, and other large gathering establishments). For instance, Disneyland (ticker: DIS) hit some speed bumps when the company just announced its re-opening originally scheduled for mid-July has been delayed indefinitely.

Although COVID infections have been on the rise, driven in part by complacent or irresponsible younger individuals not adhering to social distancing and mask-wearing recommendations, the healthcare treatment regimens have kept the level of deaths at a flat rate (see chart below) and national hospitalization rates at a relatively stable level (see chart below).

The Bridge to a Vaccine

Despite the recent rise in COVID-19 cases, investors have been focused more on the half-glass full developments relating to the pandemic. Approved therapeutics, such as remdesivir by Gilead Sciences Inc. (GILD) and dexamethasone, have proven effective in treating COVID. In addition, ventilator and PPE (Personal Protective Equipment) supplies have become plentiful; virus testing has risen dramatically (see also COVID Comeback); and contact tracing is slowly improving. If you layer in the more than 100 vaccines being developed, including expected Phase 3 trials this year by Pfizer Inc. (PFE), Moderna Inc. (MRNA), Astrazeneca PLC (AZN), Glaxosmithkline PLC (GSK), and Johnson & Johnson (JNJ), there is room for optimism. With all these developments, coupled with more stringent guidelines by governors/federal government/health agencies, and more responsible behavior by individuals (i.e., social distancing, personal hygiene, mask wearing), especially in hot spot regions, there is a credible bridge to managing the virus until a vaccine is approved.

The stock market has been racing ahead at an amazing pace in recent months (+41% since late-March), but with the COVID public health crisis starting to overheat the engine with rising COVID cases, investors should not be shocked to see the driver tap the economic brakes a little in the coming months. For long-term investors like my clients, Sidoxia Capital Management will continue to take advantage of opportunities, while pushing to safely avoid the risky potholes, during these highly volatile times. In periods like these, when your race car has created a large lead, it’s perfectly okay to reassess your circumstances and temporarily take your foot off the pedal before the next turn.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (July 1, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GILD, MRNA, PFE, JNJ, AZN, GSK, and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

July 1, 2020 at 3:23 pm 2 comments

The COVID Comeback

Rocky Balboa (“The Italian Stallion”) the underdog boxer from the movie, Rocky, was down and out until he was given the opportunity to fight World Heavyweight Champion, Apollo Creed. Like the stock market during early 2020, Rocky was up against the ropes and got knocked down, but eventually he picked himself up and rebounded to victory in his rematch with Creed.

The stock market comeback also persisted last month as the COVID-19 pandemic health situation continued to stabilize and the broader economy accelerated business re-openings. For the month, the Dow Jones Industrial Average increased +4.3% (+1,037 points to 25,383), while the S&P 500 index bounced+5.3%, and the NASDAQ catapulted the most by +6.8%.

How can the stock market (i.e., the Dow) rebound +39%, or more than 7,100 points, from the March 2020 lows? The large move is even more surprising once you consider 41 million people have lost their jobs since the epidemic hit American soil (see chart below), and COVID-19 related deaths have climbed to over 100,000 people.

Getting Back to Fighting Shape

By the time we reached Rocky VI, Rocky Balboa was retired and recovered from brain damage. But Rocky is no quitter, and he trained himself into championship fighting condition and got back into the boxing ring. With unemployment rates approaching Great Depression levels, the U.S. economy has been experiencing challenging circumstances as well – a self-induced coma (shutdown). Fortunately, our country has been slowly recovering day-by-day, and week-by-week. The economy may not be back to peak fighting shape, but activity is slowly and consistently getting better.

There are many different perspectives in looking at this extremely complex, unprecedented coronavirus pandemic. The speed and pace of selling stocks during February and March reached radically-high panic levels, as measured by objective indicators like the Volatility Index (i.e., the VIX – or Fear Gauge). However, like a coiled spring, the stock market sprung back up during April and May as stay-at-home orders and quarantine measures around the world significantly bent the curve of COVID-19 infections and deaths (see chart below). As you can see, with the exception of a few countries globally (e.g., Brazil and Russia), the number of daily confirmed deaths has been broadly declining for many weeks.

Estimated infections have been coming down as well, according to the Institute for Health Metrics and Evaluation (IMHE). IMHE estimates also show the number of daily infections has consistently been coming down over the last couple months.

In addition to the stay-at-home orders and social distancing protocols, what has also contributed to the declines in COVID-19 deaths and infections? Two words…”increased testing.” Although, arguably COVID-19 testing got off to a rough start, as seen in the chart below, nevertheless daily tests have risen dramatically over the last couple months from about 100,000 per day to roughly 500,000 per day (see chart below). Increased testing capacity has and will continue to help better control the spread (or lack thereof) of the virus.

Not only has the spread of the coronavirus been substantially mitigated, but the fighting economy has also received an adrenaline shot in the form of trillions of dollars of fiscal and monetary support as I described in my previous article ( see also Recovering from the Coma).

Investors Need to Keep Guard Up

Like Rocky Balboa, the U.S. is a strong, respected fighter but even though strength is being regained, the economy and stock market is susceptible to a surprise upper-cut punch or hook. What could potentially hurt the financial comeback?

Flare Ups & Second Wave: As cities, counties, and states carry on with expanded business openings, we could experience “flare ups” of COVID-19 infections or a “second wave.” But the good news is, we should be in much better shape to handle these scenarios thanks to expanded stockpiles of ventilators; larger supplies of PPE (Personal Protective Equipment) for frontline workers; increased production of therapeutic drugs like remdesivir from Gilead Sciences Inc. (GILD); and improved contact tracing from the magnified number of tests. And this analysis doesn’t even contemplate the more than 100 vaccines being developed (i.e., a potential cure) for COVID-19, which could be available in limited quantities as early as the end of this year.
Social Unrest: The death of George Floyd, an African-American man who died after a Minneapolis police officer forcefully restrained George by keeping his knee on his neck, which triggered lethal complications to the victim. As a result, nationwide racial injustice protests and disruptive violence have erupted, thereby forcing government intervention with the hope of limiting violence and damage caused by non-peaceful protesters.
Strained Relations with China Due to Actions in Hong Kong: Recent political actions mandated by the Chinese government to strip autonomy from Hong Kong has strained relations with the United States, and progress made with the previous U.S. – China trade deal could erode.
Inflation: Despite no near-term evidence of rising prices, the unparalleled increase of trillions of dollars in fiscal debt and deficits has the credible long-term potential of creating incendiary inflation that could burn through consumers’ buying power.

Rocky Balboa faced many formidable foes in the boxing ring, including Clubber Lang (Mr. T) and Russian Ivan Drago, but Rocky survived and persevered. The stock market is bound to face future punches from unforeseen challengers in the form of impending known and unknown threats, but the alarmist calls for a COVID knockout appear to be overstated.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GILD and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 1, 2020 at 1:26 pm 1 comment

Are Stocks Cheap or Expensive? Weekly Rant and the Week in Review 4-7-19

The Weekly Grind podcast is designed to wake up your investment brain with a weekly overview of financial markets and other economic-related topics.

Episode 7

Weekly Market Review and This Week’s Rant: Are Stocks Cheap or Expensive?

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