Lessons Learned from the Past

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Other Economic News

for the Week Ending 12-23-2021

Treasury Yields rose at almost all points along the US Treasury curve last week as continued uncertainty regarding the latest COVID strain suppressed risk appetites, settling at 1.495%. Also on Thursday, personal incomes were seen rising 0.4% in November but personal consumption outpaced this with a 0.6% gain. Over the past year, income has risen 7.4% but spending has raced ahead 13.5%. The personal consumption expenditure (PCE) index prices expanded 0.6% in November, and are up 5.7% from a year ago. Core prices, excluding food and energy, rose 0.5% in November and are up 4.7% from a year ago. Close attention is expected to remain on inflation numbers such as these into the Federal Reserve’s January 25-26 and March 15-16 meetings especially after the Federal Reserve chose to double the pace at which it is winding down its pandemic bond-buying program in its December meeting.

It is possible that the bond-buying program could be wound down as soon as March 2022 at which points markets will be highly interested in any possible first-half of 2022 interest rate increases. 

Lessons learn from the Past

Life is a journey of lessons. If you don’t learn the first time around, they often come back with a more dramatic impact. For those of you that were participating in the market back in 2000 and in 2008, I’d like you to think of all of the Euphoria about the markets. Does it seem familiar to today’s environment? Do you remember how painful it felt when your account value dropped to extreme lows?

Here is some data to consider, If you entered the market in 1999 at the height of the NASDAQ and was invested in an index fund, it would have taken you 15 years to break even. In 2007 the S&P index fund would have taken you 7 years to break even. Our point, we will refer to Bob Farrell on his 3^rd rule There are no new eras – excesses are never permanent. The major averages are at or still flirting with record highs, yet more than 40% of the components of the major indexes are in correction territory (down at least 10% or more from recent peaks). Take a look at Peloton down 70% this year.  Clearly the markets still believe in the Fed coming to the rescue. Will the Fed tolerate a market collapse? The poor decisions of the past 10 plus years of artificially suppressed interest rates will have its day of reckoning and it may just be around the corner. History tells us that the odds of the Fed pulling off a “soft landing” (controlling inflation without causing a recession) are miniscule. 

While it is true that the equity markets may still rise in the face of the first or even second Fed rate hike, a close look at those historical circumstances reveals that the economy was experiencing rapid growth, but that’s not today’s situation. The Fed’s tools are blunt, designed to control the demand side, and act with an unknowably long and variable lag (a lag which appears to change as the economy evolves), tightening cycles almost always lead to recessions. Scott Minerd of Guggenheim Partners reported a mid-December forecast of a 2023 recession. We think that we may see the sliding begin sooner.

Equity markets can rise in the early stages of a Fed tightening if economic growth is strong. It’s true that Fed Chair Powell has praised the strength of today’s domestic and worldwide economies, this from his most recent post-Fed meeting press conference, the data we see doesn’t seem back that narrative. 

Here are a few points as to why we are not in agreement:

The “shortage” narrative pulled holiday shopping forward, early. Survey reports indicate that 60% of holiday shoppers shopped way early this year. October’s seasonally adjusted Retail Sales rose a strong +1.8% M/M, but November’s were a disappointing +0.3%. “Super Saturday” sales were -19% lower than 2019’s. This doesn’t portend well for December, but we’ll see when those numbers are released soon. 

Omicron has also had a negative impact. At Thanksgiving, restaurant sales were about equal to those of 2019, but the latest post-omicron data show them now at a -12%. Keep in mind how many restaurants closed during the pandemic, it not like restauranteurs are running to open new concepts with the continued uncertainty in this environment. In addition, the latest weekly data from TSA indicates passenger volumes are down -18% from the same 2019 week. Note that none of this occurred due to government mandates; it was all consumer choice! Given continued uncertainties, it is more likely that consumers will remain cautious than it is that they will open their wallets. This past weekend thousands of flights were cancelled so the stability of traveling somewhere and getting stuck may remain high during the first Qtr of 222

The global economy is weakening. This is being led by China’s imploding real estate sector and weakening retail (see “China Job Cuts Mount Under Curbs,” https://www.wsj.com/articles/in-china-job-cuts-mount-in-sectors-hit-by-tighter-regulations-11639915203 ). The Chinese government has now locked down the city of Xi’an (13 million population) due to its zero tolerance Covid policy; this just weeks before the Beijing Olympics (620 miles to the north). U.S.A. will not participate!

The U.K. looks certain to fall back into recession, in Europe German data has been softening. Inventories of natural gas in the Eurozone are woefully low with natural gas prices fluctuating wildly based upon the latest long-term winter weather forecasts. Once again, in the face of uncertainty, it is normal for consumers to hunker down.

In the emerging market space, the rapid fall in commodity prices (due to the slowdown in China, the world’s biggest consumer of raw commodities) can only have a negatively impact as commodities are major exports for many of these economies. We note that the Baltic Dry Index, which measures the cost of shipping bulk commodities, is down more than -60% from its nearby peak, a sign of flagging demand.

Within the U.S., we observe the following:

In the latest NY Fed Survey, the average full-time job offer fell to $56,036 (November) from $58,469 (July). You wouldn’t know that from media reports.

The Chicago Fed National Activity Index (a comprehensive index of more than 80 variables) was .37 in November, less than half its .75 October level (the consensus forecast was .50, so a big miss).

Continuing Unemployment Claims (CCs), those claiming benefits for more than one week, and Initial Unemployment Claims (ICs), a proxy for new layoffs. CCs appear to have ratcheted up slightly as Q4 has progressed.   Similarly, ICs have also shown increases. Layoffs are still well above their pre-pandemic norm.

Lastly Corporate stock buy backs have had a huge impact on S&P 500 returns. It appears that corporate leaders believe that it is more efficient to use corporate cash to raise company stock values via buy-backs than it is to expand plant and equipment via new investment (capex). All the Regional Fed surveys show capex intentions at extremely low levels, let me repeat this capex is at low levels meaning that CEO’s have a downbeat view of future economic growth, a view that appears to have grown over the past decade. 

In a low interest rate environment this is where corporations should be taking time to innovate, create new products. So as the Fed embarks upon a new tightening cycle, rising interest rates will only exacerbate that slowing capex trend.

The problem with today’s information is how it is delivered, framed and the agenda of the messenger. Listening to the financial news you’ll find a number of optimistic professionals that will take bits of information and puts an optimistic twist on it, simply because they want to collect more money. Unfortunately, this is the main focus of most advisor and money managers. You need to decide if you want an advisor that manages the risk or just throws your assets into a bunch of Index and ETF funds and lets your money “ride” ?

Source Bob Barone Ph’D Economist

The Week Ahead

As 2021 comes to an end, the economic calendar is light and trading volumes are likely to be low. That doesn’t mean volatility isn’t possible, especially given potential reduced liquidity with many traders away from their desks. Investors will continue to focus on omicron variant developments and President Biden’s spending agenda. The U.S. calendar is sprinkled with several relatively low impact announcements, starting on Tuesday with the Richmond Manufacturing Index and the House Price Index. Wednesday brings trade balance data, monthly wholesale inventories, and pending home sales. Chicago PMI and jobless claims round out the domestic schedule on Thursday. Outside of the U.S., most of the news comes from Asia. Today Japan releases industrial production numbers and core CPI figures. Later in the week China’s December PMIs will drop. Friday is a full trading day in the U.S., but no economic announcements are scheduled

This article is provided by Gene Witt of  FourStar Wealth Advisors, LLC (“FourStar” or the “Firm”) for general informational purposes only. This information is not considered to be an offer to buy or sell any securities or investments. Investing involves the risk of loss and investors should be prepared to bear potential losses. Investments should only be made after thorough review with your investment advisor, considering all factors including personal goals, needs and risk tolerance. FourStar is a SEC registered investment adviser that maintains a principal place of business in the State of Illinois. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about FourStar’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov/