Inflation Buzzkill and Makonen Returns









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September 18, 2022

THE MONTHLY INFLATION NUMBERS DID NOT SOOTHE ANYONE:  According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 0.1% in August, a very muted overall rise.  However, the 12-month figure only decreased to 8.3% from 8.5%.  It was 9.1% the month before.  This did not go down as much as many economists thought and investors wanted, but it still went down.  However, the overall number caused gloom, and hit the markets hard.  Despite the fact that this outcome continues a downward trend, albeit slower than people want, there were other problems with the data.  Much of the downward pressure on inflation came from gasoline and fuel oil, two very volatile commodities that are coming down from significant highs.  Costs for shelter rose a full 0.7%.  Health care costs rose 0.8%.  Food rose by 0.8%.  Utilities went up both for electricity (2.1%) and natural gas (3.5%).  So, while we are paying less for gasoline, other items went up, and it is not likely that lower gas prices will bail out the CPI data point again in the months to come, at least not to this degree.  Because this news was not reassuring, the next conclusion is that the Fed will continue to be aggressive, a very fair conclusion.  Markets don’t like that either.
(Source: bls.gov/news.release/cpi.nr0.htm)

INFLATION DATA AND CORPORATE SLOWING CAUSES MARKET DECLINE:  With the inflation data for August coming in above expectations, markets reacted quickly and decisively on Tuesday in a negative direction.  The S&P 500 dropped 4.3% in one day.  As the week progressed, negative news and guidance from some members of the S&P 500 pushed stocks down further.  FEDEX announced that due to slowing demand it is closing offices.  General Electric said that supply chain issues continue to be a drag on earnings.  Goldman Sachs announced that it is prepared to cut jobs.  And so the continuing fear of inflation slowing earnings growth and the Fed’s likely actions to stem inflation are driving this market cycle.

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

U.S. RETAIL SALES UP IN AUGUST:  Last month, retail sales rose by 0.3% from the prior month.  August retail sales came in 9.1% higher than a year ago.
(Source: census.gov/retail/marts/www/marts_current.pdf)

PAST HISTORY OF THE PERIOD AFTER A BIG ONE DAY DROP:  Last Tuesday, the S&P 500 dropped 4.3% and the NASDAQ Composite dropped 5.2%.  Past performance is no guarantee of future results, but I thought it still might be interesting to look at past history related to such an event.  Since 1928, the S&P 500 has delivered returns of 5.9% on averages three months after daily drops larger than 4%.  Six months after, the average return is 7.6%.  After one year, the average return is 15%.  There have been 156 such drops since 1928.  One year after such a drop, the S&P 500 has been positive 58.4% of the time.  Over 40% of the time, the S&P 500 has remained in negative territory a year after the drop.  Since the modern formation of the S&P 500 in 1957, the positive percentages listed above have been even higher.

INDUSTRIAL PRODUCTION DECREASES IN AUGUST:  Industrial production includes mining, manufacturing and utilities.  Production from utilities decreased 2.3% in August which caused a 0.2% drop for industrial production generally during the month.  Manufacturing activity increased by 0.1% and mining increased by 0.6%.
(Source: federalreserve.gov/releases/g17/Current/default.htm)

WEEKLY UNEMPLOYMENT CLAIMS DROP AGAIN:  The amount of people who applied for first time unemployment benefits last week was 213,000, a 5,000 decrease from the week before.  The 4-week moving average dropped by 8,000 to 224,000, very healthy labor market numbers.
(Source: dol.gov/ui/data.pdf)

14-YEAR HIGH:  Mortgage rates hit a 14-year high last week.  According to Mortgage News Daily, the average 30-year fixed rate mortgage in the U.S. hit 6.3%.

CONSUMER SENTIMENT EDGES UP:  According to the University of Michigan’s index of consumer sentiment, consumers were feeling a bit better in August.  This is largely due to the very visible, and falling gas prices which had caused consumer sentiment to sink.  The index hit a low in June of 50, and has since been edging back up.  In August it hit 59.5, up from 58.2 in July.  Unfortunately, the CPI number we just got is not going to help consumer sentiment for September.

SUCCESSION PLANNING:  Ever since I hit my late 40s and early 50s, I have been getting the question:  “So how much longer are you going to be doing this?”  It’s a fair question.  I didn’t like it when my doctor of many years suddenly retired, and I didn’t like his replacement.  My doctor just suddenly burned out and moved on to something else.  In my field the average age of a financial advisor is in the mid-50s.  A large amount of advisors are now in their 60s and 70s, and many of these advisors have no succession plan.  They have no successor to fill their shoes, and no prospect for selling their business.  Many of these advisors just eventually lose their clients through attrition.  I was reading about these trends about a decade ago and decided to do something about it.  That is why I have developed two younger advisors who have now worked with me for many years.  Now we have grown to a point where we need more people to join us.  We are currently looking for administrative help, and for an assistant financial advisor to help Cassie and Logan (and me).  And, the important thing for our clients to know is that we plan to never sell externally.  Continuity of service is crucial, and generally when an advisor sells, the transition is too quick and often unsatisfactory.  Not that long ago, I was approached by an 82-year old woman whose advisor, a sole practitioner, was older than her.  After years of asking for his succession plan, she finally decided his neglect of this issue was neglect of her needs, and she decided to move on.  She is now a client of Stonecrop. If you are not a client of Stonecrop, ask your advisor about his/her succession plan. It is a fair question.

SPEAKING OF SUCCESSION PLANNING:  The average age of a member of Congress in the U.S. just keeps getting older.  Political leaders have always been older, on average, than Americans.  In the early 1800s, the median age in America was 17, and the median age of a member of Congress was 44.  In the centuries that followed, the country has gradually aged as has the Congress.  But in the early 1990s the Congress began getting much older, much faster than America in general.  Currently, about a quarter of Congress is over 70, the highest percentage ever (by far)  The average age is 61.5.  

MAKONEN RETURNS:  In September 2017, I had the privilege of meeting Makonen Getu.  His story is compelling, and I have told it twice in this newsletter over the past several years.  In paraphrase, as he describes it, 

“I was born in Ethiopia in a remote area. I almost died from bad overall health several times in my early years, and at the age of 5, when it was clear that I was healthy, my father sent me out to herd cattle. This was to be my life long career. But one day my uncle, a merchant, visited, and he had a book with him. No one in my family could read, and we had no books in our home. The symbols on the pages fascinated me, and my father noticed and decided to send me to school. School was a one hour walk from our home, which of course I traveled in bare feet. I didn’t get my first pair of shoes until I was 12.”

His story only gets more fascinating after that, including a year when he was in his twenties when he never slept in the same place two nights in a row because the government wanted to kill him.  One night he stayed in the home of a prostitute because he had no other options, and he did what lot of people at the end of their rope do, he prayed the so-called foxhole prayer, “God if you get me out of this I’ll believe in you….” 

After a prolonged absence from seeing Makonen (because of COVID), I got to see him again in Uganda last May, and he was in the U.S. last week.  He is a Ph.D. in global economic development, and is now Chief Transformation officer at Edify, an organization Stonecrop Wealth Advisors supports.  Edify seeks to help transform developing nations by helping certain locally created, low cost, private schools become more effective and sustainable. We held an event at the Creamery in Kennett Square last week.  It was a fun 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

“How wonderful it is that nobody need wait a single moment before starting to improve the world.”  Anne Frank

“Man is a mere phantom as he goes to and fro. He bustles about, but only in vain; he heaps up wealth, not knowing who will get it.” Psalm 39:6

SOURCES: 
 PAST HISTORY OF THE PERIOD AFTER A BIG ONE DAY DROP:  money.com/stock-market-plunge-buying-opportunities/
14-YEAR HIGH:  mortgagenewsdaily.com/markets/mortgage-rates-09142022
CONSUMER SENTIMENT EDGES UP: barrons.com/articles/consumer-sentiment-september-inflation-worries-51663341404

(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. 

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

    Doug MacGray

  • DATE

    September 19, 2022

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