BOND YIELDS AND FED RESOLVE:  When you buy a bond for $1,000, and it pays a 3% interest rate, it will immediately “yield” 3%.  But, if the value of that bond goes down to, say $950, then that bond will now yield 3.16%.  If you sell it for $950, whoever purchases it, and collects the 3% interest on the original $1,000 par value, will be making 3.16% on his $950 purchase.  From this example, you can see that as the value of bonds go down, their yields go up.  Why do values go down?  Generally it is because interest rates are rising.  If interest rates go from 3% to 4%, why are investors going to buy your 3% bond for par value ($1,000) when they can get a new one paying 4%.  And so, with rates rising all year, the value of bonds have been going down all year.  Yields on Treasury Bonds peaked in June.  With yields increasing all year, what do you think happened to the value of the bonds?  The Bloomberg U.S. Aggregate Bond Index decreased 11.5% from January 1 to June 16 of this year, a remarkably bad half of a year for the bond market.  Since then, and until earlier this week, yields have been coming down based on fairly solid U.S. economic data, a belief that inflation may have peaked, and the belief that the Fed was softening its stance on how tight it had to get with monetary policy to stem inflation.  And so, from mid June to last week, the yield on the ten year U.S. Treasury went from 3.49% to 3.03%.  It actually got down to as low as 2.67%.  Remarks made during the Fed’s last meeting in July seemed to indicate that the Fed might start slowing their aggressive rate raising policies.  What has happened since that time?  The Federal government has, through legislation (the Inflation Reduction Act) and executive action (forgiving student loans) committed the government to a significant new round of borrowing/deficit spending.  The economic data since mid-June has not indicated any decisive trends (but see Leading Economic Indicators below).  But something made Fed Chair Jerome Powell decide he needed to give the country some strong medicine.  On Friday, Powell gave a short public speech where he went out of his way to tell the American people that the Fed will not shirk its duty to tame inflation,  He acknowledged that higher interest rates and tighter money supplies will hurt consumers and businesses in the short term.  But, “[t]hese are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”  This caused the markets, both stocks and bonds, to tumble on Friday.

FED-INDUCED SELL OFF:  On Friday the S&P dropped 3.4% and the NASDAQ nearly 4% in response to the strong remarks by Fed Chairman Jerome Powell.  This capped two weeks of market declines.  The S&P 500 is still up 11% from its low this year.  The gains had been fueled by generally solid corporate earnings reports and economic data and the belief, perhaps naïve, that the Fed would start to soften its rate rising.  The Fed was late in addressing inflation, thinking it was “transitory.”  Chairman Powell cited the 1970s stating that when the Fed is too accommodating during a cycle of inflation because it is worried about its effects on the job market, you end up making both inflation and the job market worse.  The Fed now wants to make it clear its top priority is price stability, even if it causes short term harm.

LONGER-TERM PERFORMANCE:  Below are the annualized three-year and five-year numbers for these same indices.  

LEADING ECONOMIC INDICATORS:  The Conference Board tracks several economic data points that tend to show where the economy is going, so they are called “leading” indicators.  Their “Leading Economic Indicators” are a well respected signal as to where the economy is heading.  For the fifth straight month, those indicators are moving in a negative direction.  Some of the declining indicators are consumer pessimism, equity market volatility, slowing labor markets, housing construction and manufacturing new orders.  It is just such a general slowdown that the Fed seems to want to engineer so that demand will decrease enough to tame inflation. It is a balancing act, and the Fed wants to make it clear it may take awhile.

MEANWHILE THE U.S. LABOR MARKET CONTINUES TO ROAR:  It remains hard to fill jobs. We see it, We all hear about it.  The data shows it.  The amount of people filing initial unemployment claims decreased last week by a couple of thousand, still in a very healthy range (243,000).  In a routine revision of the labor market figures for the first half of the year, the Department of Labor revised the average amount of new jobs created each of the past six months up by about 39,000.  Continuing unemployment claims, meaning people who don’t have jobs and are struggling to find a job, is at a lower point than it was in 2019.  People who lose their jobs in this economy are finding new jobs at a much faster rate than a year ago, and three years ago.  There continues to be nearly two jobs available for every job seeker.

PERSONAL INCOME INCREASED IN JULY:  In July, personal income in the U.S. increased by 0.2%.  Consumption, as measured by the PCE (Personal Consumption Expenditures) increased by 0.1%.
(Source: bea.gov/news/2022/personal-income-and-outlays-march-2022)

HOME OWNERS ARE NOT PUTTING THEIR HOUSE UP FOR SALE AS MUCH:  Last week, new listings, a measure of sellers putting existing homes up for sale, were down 12% from one year ago. This week marks a seventh straight week of year over year declines in the number of new listings coming up for sale and a second consecutive week with double digit declines, suggesting that homeowners are less eager to list homes for sale compared to last year.  Today’s median listing price is more than 14% higher than a year ago. Inventory is still increasing due to less demand, but inventory growth has slowed due to fewer new listings. This could delay the return to more normal inventory levels.  Keep in mind that there remains a record number of houses being constructed which should begin to help soon.
(Source: calculatedrisk.substack.com/p/the-sellers-strike-and-housing-inventory)

DON’T TAKE IT FOR GRANTED:  I used a ridesharing company this past week.  The driver spoke great English, but had an accent of some sort.  He had an American Flag anchored in his console.  At one point, he said something about when he came to this country, so I asked him where he came from.  He came from Sierra Leone.  He told me how his family was devastated by the civil war in that country (1991-2002).  He and his family lived several years in refugee camps in Liberia.  That is where he met his wife.  She somehow got to the U.S, and he followed (with her help).  He told me that too many Americans take for granted what we have here.  “You can lose it, and I know what that’s like.”  He loves it here and seems to be thriving (he picked us up in his Land Rover) with his wife and three daughters aged 12, 10 and 5.

DALLAS BOUND:  I took Deb with me to Dallas this weekend to go see a couple of clients.  It’s hot here in August!  You can’t help but think, any time you come to Dealy Plaza, “what if?”  What if the assassin missed and JFK delivered that speech?  What if our politicians continued to give speeches like that?

Have a great week!

“As is a tale, so is life: not how long it is, but how good it is, is what matters.”  Seneca

“I know that there is nothing better for people than to be happy and to do good while they live.” Ecclesiastes 3:12 (NIV)

SOURCES: 
 BOND YIELDS:  https://www.wsj.com/articles/treasury-yields-rise-on-bet-that-recovery-will-last-longer-11661389328?mod=hp_lead_pos3 AND https://www.wsj.com/articles/feds-jerome-powell-set-to-speak-on-economic-outlook-at-jackson-hole-11661476059?mod=hp_lead_pos1&mod=hp_lead_pos1
LEADING ECONOMIC INDICATORS: https://thebusinesstimes.com/leading-index-signals-increasing-risk-of-recession/
MEANWHILE THE U.S. LABOR MARKET CONTINUES TO ROAR:  https://www.wsj.com/articles/job-market-stronger-than-previously-reported-data-show-11661364957 AND https://www.dol.gov/ui/data.pdf ANDhttps://www.wsj.com/articles/the-surprise-in-a-faltering-economy-laid-off-workers-quickly-find-jobs-11661333405

(c) 2022 A.D., Stonecrop Wealth Advisors, LLC, All Rights Reserved

*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets. 
*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States. 
*Bloomberg Barclays U.S. Aggregate: This is a measure of the U.S. bond markets.