Emotions, Mixed Economic Signals, and Dinner on the Beach









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July 10, 2022

WHERE ARE WE IN THE CYCLE OF MARKET EMOTIONS?:  There is an oft-used graphic of the emotions behind stock market cycles.  At the top of the market (January of this year), the emotion is euphoria.  Regardless of how you felt about the economy or the news in general, you were probably feeling pretty euphoric about your portfolio balance.  As markets drop, the sequence of emotions are first anxiety, then denial, followed by fear, desperation, panic, capitulation, and despondency at the bottom.  As markets recover (but are still low), investors remain in a general state of depression, followed by (as markets continue to recover) hope, relief and optimism.  Which of these words best describe you?  Are you at “fear” or “panic”, “denial” or despondency?”  Are we at the bottom of the market, two thirds of the way, half way?  Will we stay in this lower range for a month, six months, a year, two years?  Your emotional state probably depends on how you predict the answer to those questions.  It may also depend on whether you are young or old, working or retired.  The activity in governments in creating this recession (in response to COVID) makes this recession, recovery, and market responses more difficult to diagnose and predict.  Every time is different, but this one seems more different.  There are many fundamentals of good investing strategy that have consistently fared well in the past and will likely serve investors well through this cycle.  Guard your emotions and make sure you have a strategy that allows you to balance your emotions with the rational, logical side of your brain.

STRONG JUNE JOBS REPORT:  The U.S. economy added another 372,000 new jobs in June, The unemployment rate remained 3.6% for the 4th month in a row. The worst jobs recession since World War II is close to being over.  28 months later the jobs level is almost back to where it was at the onset.  Leisure and hospitality, which added 67,000 jobs, remains the lagging category.  Excluding that category, the economy has 800,000 more jobs than pre-pandemic. 
(Source: bls.gov/news.release/empsit.nr0.htm)

REPRIEVE:  Once again the S&P 500 got close to down 20% year-to-date, and once again, it bounced.  The S&P 500 had a short week of strong gains giving investors a reprieve. Some investors were out seeking bargains during the holiday-shortened week, and much of that shopping was in the tech sector.  The tech-heavy NASDAQ Composite index is on a five day winning streak, its longest of the year.  The positive June jobs report cut both ways.  It indicated continued economic strength, but will also scare investors that the Fed will add another 0.75% increase in interest rates at its next meeting.

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

TREASURY YIELDS: A “yield” on a bond is how much the bond is earning in relation to its price.  If you buy a $1,000 bond with a 5% “coupon” or interest rate, your yield is 5%.  If that price of that bond on the open market decreases to $900, then the person who buys that bond gets a “yield” of 5.6%.  He gets the same $50, but he paid less to get that income stream.  Often, when stock prices drop, prices for Treasury bonds rise as investors flee risky assets for safe government-backed securities.  But this year, with inflation rising and the Fed coming in late to contain it, bond prices have gone down along with stocks.  This has really hurt the traditional 60% stock/40% bond portfolio.  As the Fed has accelerated its rate increases, many investors have begun to worry about inflation.  Now the yields on 2-year Treasury notes are higher than yields on 10-year Treasury notes.  When short-term yields are higher than the longer term yields, this is called the “inverted yield curve.”  An inverted yield curve is often a predictor of recession.  That is because it is an indication that investors expect high rates now and lower rates later.  Those “lower rates later” are because the Fed will cut key rates to stimulate demand in a flagging economy.  In other words, investors are “predicting” a weak economy ahead.  At the close of trading on Friday, the yield on the 2 year Treasury Note was 3.004%.  The yield on the ten year was 2.985%.

HEAVY TRUCK SALES ARE HEALTHY:  The blue shaded areas below indicate recessions.  Notice that before recessions, heavy truck sales take a nose dive. Truck sales decreased to 308 thousand at the beginning of the pandemic.  In the last few months, they have been hovering in very solid territory, around 475,000 or better.  To those predicting a recession, this is a contra-indicator.

MORTGAGE RATES MODERATE:  After reaching 6.28% on June 14th, the average rate for a 30-year mortgage in the U.S. decreased to 5.50% last week according to Mortgagenewsdaily.com.

THE STRONG DOLLAR:  The U.S. dollar is almost on parity with the euro (one cent away) for the first time in twenty years.  The dollar is the strongest it has been versus the yen since 1998.  U.S. economic growth relative to other economies has been strong.  The soaring price of natural gas helped as Germany and Japan are energy importers, and the U.S. is essentially self-sufficient in energy.  This has made the U.S. more competitive globally, improving trade, and strengthening the dollar.  This will help U.S. consumers be able to buy cheaper imports, but it makes exporting harder and reduces foreign profits for American companies.  The Fed is prepared to keep raising rates (which will likely further strengthen the dollar).  The Bank of Japan says it will not raise rates.  Europe’s central bank says it will, but has not yet.

GIVING UP YOUR HEALTH FOR MONEY:  I was asked to join a “quick hits” panel sponsored and led by Dr. Robyn Odegaard last week.  The question:  “How much would you have to be paid to consciously sell your physical health?”  See how I answered this along with my two co-panelists in this unscripted dialogue by clicking here.

DINNER ON THE BEACH:  For an anniversary dinner, we did dinner on the beach!  A little windy, but a pleasant and memorable experience to commemorate a wonderful event.

Have a great week!

Our mission is to help you see the objective, find the path, and navigate past the obstacles to a more prosperous future.

Douglas R. MacGray, J.D., C.F.P. ®
President
Stonecrop Wealth Advisors, LLC

Direct | Cell | Fax
(610) 628 4545
dmacgray@stonecropadvisors.com

“That power is found in the people. I am able to overcome any kind of challenge so long as I am working together with the people.” Shinzo Abe

“Success is the result of clear goal, unshakable confidence, proper planning, enthusiastic action and consistent persistence.”  James Caan

“Blessed are those who mourn, for they will be comforted.”  Matthew 5:4

SOURCES: 
TREASURY YIELDS: wsj.com/livecoverage/us-jobs-report-june-2022-unemployment-rate/card/treasury-yields-fall-ahead-of-jobs-report
MORTGAGE RATES MODERATE: mortgagenewsdaily.com/mortgage-rates/30-year-fixed
HEAVY TRUCK SALES ARE HEALTHY:  calculatedriskblog.com/2022/07/heavy-truck-sales-solid-in-june.html
THE STRONG DOLLAR:  wsj.com/articles/strong-dollar-wins-the-inflation-battle-in-new-spin-on-currency-wars

(c) 2022 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. 

Investment advisory services offered through Stonecrop Wealth Advisors, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission. 
 
 
SDG

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  • AUTHOR

    Doug MacGray

  • DATE

    July 11, 2022

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