The stock market does not perform well in the year leading up to midterm elections. This year’s election may just add to the overall woes besetting equities. Historically, the average annual return of the benchmark S&P 500 Index in the 12 months before the November 5 election is 0.3%, versus the historical average of 8.1%. in non-mid-term years. In 2022, of course, with the S&P 500 down more than 20%, those historical numbers look fairly good. Unfortunately, volatility also tends to rise before and after midterm elections. Will midterm elections cause a market dip in 2022? But this year is…
Insights & Advice
The Retired Advisor
Natural gas prices fall, but for how long?
Only recently have investors’ focus shifted from $120/BBL. (barrel of oil) to the soaring price of natural gas. Given the many uses of natural gas, from heating and cooling and generating electricity to the production of plastics and petrochemicals, the direction of prices could be critical to our economic well-being. On Wednesday, June 8, 2022, natural gas prices fell over 10% after a fire at a Texas liquified natural gas (LNG) export terminal shut down the Freeport LNG facility for at least three weeks. The terminal accounts for 16% of U.S. export capacity. Gas prices fell, because for a brief…
June still looks good for market growth
Thus far, the markets in June seem poised for a further bounce higher. That does not mean we are in the clear throughout the summer, but let’s take it one month at a time. Here is what I see: Between now and June 17, 2022, I am betting for another move up in the equity indexes. We could see a rally that takes us up to the 4,300-4,400 level on the S&P 500 Index. It will likely be the kind of surge that floats all boats higher as it rises. The stocks that have been hurt the most this year…
The wealth effect impacts consumer spending as inflation and interest rates climb
Understanding the wealth effect Economists know that consumers spend more when their wealth increases, even if their income remains the same. However, if wealth decreases, the opposite occurs. The concept, known as the wealth effect, has spurred the economy for well more than a decade as savers’ 401(k)s and other retirement accounts increased year-after-year. At the same time, real estate values have also risen. Of course, most of the time these gains are only paper profits unless you sell your house or withdraw money from your portfolios. Nonetheless, there is a behavioral element to this concept. People tend to spend…
Interest-only mortgages are risky in a rising interest rate environment
Over the past decade, as interest rates declined, some homebuyers gravitated towards interest-only loans. However, times are changing, and borrowers should be careful in considering this kind of mortgage loan. During the past two years, many financial lenders have tightened credit standards across most loan types. The combination of the Coronavirus pandemic, supply shortages, inflation and the impact of the Ukraine war has created a drag on the U.S. economy. A slowing economy increases the risks of lending, thus tighter standards emerge. Fannie Mae and Freddie Mac, the two government-sponsored enterprises that back most mortgages, exclude interest-only mortgages. And while…
Investors prepare for the Fed
Investors are preparing for the Federal Open Market Committee (FOMC) scheduled for Wednesday, May 3-4, 2022. Stocks have been sold down to a level that may have discounted some of the bad news most expect. Is it enough? Could a couple of days around May 4th see a re-test of this year’s lows? It depends on how hawkish the Fed is prepared to be. Expectations are now for a 50-basis point hike in the week ahead, and two more in the next two monthly meetings. The markets are also expecting a substantial reduction in the Fed’s multi-trillion-dollar balance sheet. That…
Does this look smaller to you? Shrinkflation is here.
By now, you may have noticed that something doesn’t look quite right on your grocery shelves. Could it be that bag of chips, or maybe that roll of toilet paper, seems to have shrunk? Let me assure you it is not your eyes; we have all come down with a bad case of shrinkflation. Shrinkflation is an actual term, according to Wikipedia, which means “a rise in the general price level of goods per unit of weight or volume, brought about by a reduction in the weight or size of the item sold.” I must admit that, until recently, the…
Earnings matter, but the Fed trumps everything
The first quarter 2022 earnings season kicked off this week with mixed results. Thus far, the standouts were Netflix and Tesla. The two companies’ results could not have been more different, but in the end it didn’t matter. Netflix disappointed, reporting its first loss in subscribers in recent memory, while investors were expecting a gain in subscriber growth. There were many reasons for this including the loss of 700,000 Russian customers as a result of the Ukraine War. At last count, the stock lost 37% of its worth in three days and took the NASDAQ index down along with it….
The U.S. dollar hits two-year highs
The Federal Reserve Bank’s tightening of monetary policy has driven up interest rates, while causing investors to sell stocks. It has had another impact—a steep rise in the U.S. dollar. The U.S. bond market has already priced in a 96% chance of a 50-basis-point rise in the Federal funds rate at the next FOMC meeting in May 2022. The fixed income markets are expecting a cumulative 2.15% rise in interest rates by the end of 2022. In the meantime, the U.S. 10-year Treasury yield hit 2.90% this week on its way to 3%. As interest rates continue to rise, so…
Food, famine, and global unrest
More than a decade ago, the Arab Spring roiled the Middle East from Tunisia to Egypt to Yemen. Massive protests demanding freedom, equality and bread were met with repression and conflict. Could today’s growing scarcity of food spark another Spring of discontentment? The origins of the name “Spring,” whether Arab or otherwise, was a term historians used to describe the Revolutions of 1848, known as the “People’s Spring.” It was a series of upheavals that swept through Europe at that time. Republican revolts took place first in Sicily, spreading to France, Germany, Italy, and the Austrian Empire. They all ended…
The Fed tightens further
It is called “Quantitative Tightening,” or QT, a term used to describe how momentary authorities are planning to shrink an $8.9 trillion balance sheet. The U.S. Federal Reserve is the only central bank in the world (and in history) that has attempted to implement a reduction in assets. The first time they tried, things did not go so well. “Quantitative Easing,” or QE, may be a more familiar concept to readers since we have been experiencing some form of QE (monetary stimulus) since the Financial Crisis of 2008. QT is the opposite. The Fed first tried to reduce its balance…
A new defense stock cycle
Defense stocks have soared since the outset of the Ukraine-Russia conflict. That is a typical reaction to geopolitical strife. Frequently, investors bid up the sector only to sell these stocks once peace returns. This time may be different. Vladimir Putin has put the world, and specifically Europe, on notice that he is bound and determined to resurrect the formal might of the USSR, no matter how long it takes. His actions have caused a sea of change in Europe’s decades-long freeze on defense spending. Germany is a prime example of what analysts believe will be the beginning of a new…
Markets are too frothy
Speculation is not quite rampant but it’s getting there. Volume is trailing off and the short covering that has boosted this market higher is fizzling. These are signs that beg for a nice sharp pull back that is overdue. As I have been suggesting (hoping) over the last two weeks, negotiators from Russia and Ukraine are making progress. Investors are beginning to hear more positive statements from both sides. A combination of factors are pressuring negotiators to cut a deal that would be acceptable to both heads of state. I expect that to happen soon. Remember that we are now…
Housing headwinds
The red-hot housing market is cooling off. A combination of higher interest rates and supply chain shortages are squeezing homebuyers. If these trends continue, the spring selling season may find buyers between a rock and a hard place. The total value of the private residential real estate in the U.S. increased by a record $6.9 trillion to $43.4 trillion in 2021. Since the lows of the post-recession market, the value of housing has more than doubled. By this time in 2023, Zillow expects the typical U.S. home will be worth more than $400,000. This year, demand for housing will remain…
Markets needs to consolidate
Commodities continue to run. Interest rates are hitting new highs, and stocks are holding their gains from last week. Nothing has changed on the geopolitical front and all eyes are once again focused on the Fed and its’ next meeting in May 2022. What else is new? Stocks have been surprisingly resilient this week in the face of dire predictions that a recession is just around the corner. Many investors, and those who preach to them, are convinced that the Federal Reserve Bank is intent on hiking interest rates to a level where the economy will collapse as inflation continues…
U.S. shale producers can’t rescue us
Oil prices are up 70% since last year. Prices at the pump are well over $4.25/gallon. Everyone from President Biden on down is scrambling to find a way to reduce energy prices. Why, therefore, aren’t we looking at our own domestic oil producers? Unlike Saudi Arabia or the United Arab Emirates, which can increase the global oil supply with a flick of a switch, the shale energy community would need to increase spending in areas such as exploration, drilling and production. That is something they are not willing to do for a variety of reasons. For years, shale drillers have…