DIASTOLE ECONOMIC AND MARKET COMMENT
May 23, 2022

The technical term for what happened last week in stock markets is dumpster fire. Stocks slid all week and then bounced on Friday afternoon, but still finished down for the week. The Standard & Poor’s 500 and Nasdaq Composite Index have now fallen for seven weeks in a row, while the Dow Jones Industrial Index is down for eight straight weeks - its longest streak since 1932. 1932 - why does that ring a bell? Oh yes, it’s a year we don’t want to live through again. Ever.

Meanwhile, the Chicago Board Options Exchange’s Volatility Index (the VIX), which reflects fear in markets, briefly touched 32.9 on Friday before dropping slightly. The VIX rises during tumult, and jumped well above 40 during the market selloffs in 2008, 2011, and 2020. Does that mean we’re NOT at a market bottom because the VIX is below panic levels? Maybe. We don’t know. At this exact moment, markets are rising (on Monday morning), but no guarantees that last week’s bottom is THE bottom.

Inflation is being felt throughout the economy, and the Fed is promising to raise rates further to dampen consumer demand. If inflation is caused by too many funds chasing too few goods, and the Fed can’t do much to increase supply, then it is clearly going to have to work on reducing demand. Will a sliding stock market do it? Will rising prices? We will see.

Oil and gas are a good example of what’s going on. Gas prices just surpassed $4 per gallon in all fifty states, and are still headed upward. We first think of the Russian invasion of Ukraine as causing an oil and gas shortage, as the world (or most of it) boycotts Russian energy. But there are other factors. During the early years of the pandemic, demand for oil and gas cratered and producers cut back on their investments in drilling and refining capacity. Some of those producers are loathe to ramp back up right away, because they and their shareholders are enjoying the higher prices.

What is the top-performing sector in markets this year? Energy - which is up 49% year-to-date. The next best performing sector is utility stocks, which are higher by a whopping one percent. Utilities do well in inflationary environments because they pay attractive dividends, which makes them a good bond alternative. The third-best performing sector is health-care, which has lost 7.5%. It’s really been an ugly year.

In 2022 so far, the Dow (dividend-heavy value companies with conservative balance sheets) is down 13%. The S&P 500 (a blend of old-fashioned companies and tech) is down more than 17%. The Nasdaq Composite, which holds growth stocks (tech companies, and other firms that tend to pay no dividends and owe lots of money) is down 27%. The Nasdaq performed exceedingly well over the past couple of years as we all stayed home and ordered new computers and Pelotons. But consumer spending is now pivoting away from goods and toward services like travel, entertainment, and actual gym memberships.

Which is why retail stocks had such a bad week. First Target reported disappointing earnings (and the stock fell 25%), and then Walmart followed suit (and dropped 13% for the week until the market turned around at 1:30 on Friday). Both companies reported supply-chain issues and rising costs (including labor costs) as part of their problems, but especially too much inventory on hand as consumers are shopping less.

But retail spending rose 1.4% in March from February, and an additional 0.9% in April from March. Part of that is due to inflation, as the same goods cost more now. But getting back to what causes inflation (too much money, too few goods and services), how can we stifle demand? Prices rising should affect consumer spending. Inflation rates higher than wage growth should affect consumer spending. But households still have higher than usual savings left over from pandemic-era relief funds. It may take awhile longer for higher prices to bite at our wallets.

We are certainly seeing inflation in rare automobile auctions. Mercedes Benz just sold one of only two 300 SLR Uhlenhaut Coupe prototypes (with gull-wing doors!) for $142 million at RM Sotheby’s. The other prototype will remain in the Mercedes Benz collection. Mercedes says it will use the funds to establish a global scholarship fund. The prior most-expensive car sale ever was a 1963 Ferrari 250 GTO which sold in 2018 for either $48 or $70 million, depending on who is talking.

For the week ending May 20th, the S&P closed at 3,901, the Dow at 31,261, and the Nasdaq at 11,354. The yield on the ten-year Treasury Note finished at 2.79% as money flowed out of stocks and into bonds. U.S. crude oil cost $110.28 per barrel, N.Y. gold cost $1,842.10 per ounce, and one Euro was worth $1.06. Bitcoin was trading around $28,000 at the end of the week but is now back over $30,000.

Elizabeth E. Cook
Diastole Wealth Management Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) Business and Market Insider, The Wall Street Journal, Bloomberg, Yahoo Finance, CNBC, CNN, The New York Times, USA Today, The Washington Post, Barron’s, The Economist, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220 or reply to this email to reach me, Liz Cook.

Apparently there is an annual informal contest for the zaniest scientific discovery of the year. Contenders this year so far are the Japanese scientists who proved that cats can learn other cats’ names; the Australian scientists who proved that honeybees can learn to distinguish between odd and even numbers; and the German scientists who showed that stingrays can learn to add and subtract numbers up to five. And it’s only May!
DIASTOLE ECONOMIC AND MARKET COMMENT
May 31, 2022

Last week in the markets was pretty much the opposite of the prior week. The pendulum swung. For the week, the Standard & Poor’s 500, the Dow Jones Industrials, and the Nasdaq Composite Index all rose more than 6.5%. So what’s going on? 

There were indicators that inflation is slowing down and that the harshest measures of the Federal Reserve might not be needed - although of course this is speculation. There were signs that companies are performing well despite poor economic conditions. More than 75% of the 488 S&P companies that have reported this quarter have beat expectations for earnings, profits, or both. We saw that for the first time since March of 2020 (our last, brief, recession) corporate executives and officers are net buyers of their own stock. Surely they know the intrinsic value of their own shares?

Historically, the S&P drops an average of 29% during a recession, and recovers 40% in the first year after a recession low. The S&P has not dropped that far this year - only hitting down 18% while flirting with -20% intraday. That could mean that it has further to drop, or that this time will be different. My crystal ball is a little cloudy today - maybe it’s the heat. But the Nasdaq HAD dropped about 29% from its high in November before last week’s rally. The Nasdaq is full of smaller companies plus tech behemoths, both of which suffer when interest rates rise, and is still down 22% this year to date. The Dow, which contains old-fashioned value stocks which pay dividends, is only lower by 8.6% year-to-date. Apparently, cash is king again, and investors are more willing to buy and hold shares that throw off a cash flow now versus shares that might appreciate later.

The pandemic ebbs and flows also have something to do with the fall of tech stocks, since actual people are enjoying getting outside, dining outside, and traveling rather than buying more computers to use in winter darkness. (Which is good, because the CEO of Intel now says that our chip shortage will not resolve itself until the end of 2024.)

With the Fed raising federal-funds interest rates, you would expect that bonds in the marketplace would swing toward higher yields. And they did, briefly, but now have settled back down. The ten-year Treasury Note is yielding 2.74%, down from a recent high of 3%, as investment money has bought bonds, pushing prices higher and yields lower. A ten-year Note at 3%, or even 2.74%, is an interesting alternative to a stock with a 1-2% dividend. Sure, the stock has upside potential, but if you believe a recession is coming, not much.

Consumer spending, as I often remind you, accounts for two thirds of U.S. economic activity. In April, consumer spending rose 0.9%, which is a lot, but much better than March’s 1.4% rate. Year-over-year, April’s consumer prices rose by 6.3% - again high, but better than March’s 6.6%. The average price of a gallon of gasoline hit $4.60 on Thursday, up 51% over the same time in 2021. But lumber futures for July delivery have fallen 52% from the high they hit in early March.

That’s largely because mortgage rates have risen to the 5.1 - 5.2% area, causing new home sales to crater. Hence, lumber prices fall. New home sales dropped 16.6% from March to April, and 27% in April year-over-year. Existing homes are 15.9% more valuable than a year ago, and it takes Americans 38.6% of their income to afford a median-priced home, but applications for mortgages are down 8% versus last year. If you meant to sell your home for an astronomical price, you may have missed your chance.

I have previously discussed that the price of gas is not necessarily set by oil companies. But as gas grows more expensive, you may wonder why oil companies are not producing enough more to bring prices down. Well, thanks for asking. It turns out that oil and gas executives USED TO be paid more to produce more. That backfired when oil prices tanked in 2015, and was even worse when oil prices briefly went negative in March 2020 (too much oil! no place to put it!). Now oil and gas execs are incentivized by their pay structures to maximize shareholder return. And that means they are going to delay investments in greater energy production so as to milk current high prices. In the long term, this doesn’t work. It won’t be long, in the greater scheme of things, before we all switch to renewable energy sources to make our electricity. But for now, oil companies (and OPEC) are at odds with the rest of us over prices.

And the war in Ukraine makes the situation worse, as Europe tries to wean itself off of Russian energy, creating more demand for other energy sources. Russia is suffering under western sanctions, but its ruble is up 25% versus the dollar this year. Huh? Russia, not exactly a free-market country, now requires exporting companies to exchange half of their foreign currency earnings into rubles within 60 days of receiving it. That’s creating quite a demand for rubles.

Our hearts go out to the families of Uvalde, Texas. The massacre at the elementary school there was the 27th school shooting in the U.S. this year. As of 2020, automobile accidents are no longer the leading cause of death for American children - firearms are.

For the week ending May 27th, the S&P 500 closed at 4,158, the Dow at 33,212, and the Nasdaq at 12,131. The yield on the ten-year Treasury Note finished at 2.74%. U.S. crude oil cost $115.07 per barrel, N.Y. gold cost $1,851.30 per ounce, and one Euro was worth $1.07.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) CNBC, The Wall Street Journal, Bloomberg, The New York Times, The Washington Post, USA Today, CNN, The Economist, Barron’s, Reuters, and The Associated Press. If you have questions, please call Diastole at 203.458.5220 or reply to this email to reach me, Liz Cook.

In case you are worried that you’ve missed the market in NFTs, worry no more. The NFT of Jack Dorsey’s (founder of Twitter) very first tweet was purchased last year for $2.9 million. Last month it was put up for sale and the top bid was $280. 

Oh, and by the way, “wagyu” means “Japanese Cow”. You’re welcome!
DIASTOLE ECONOMIC AND MARKET COMMENT
June 6, 2022

The Federal Reserve is hoping to achieve a “soft landing” in its current attempts to reduce inflation. That means seeing economic data gradually grow less positive without dropping precipitously and causing a recession (at least two quarters of negative GDP growth) or stagflation (high inflation with high unemployment and stagnant demand). Whether the Fed can accomplish this or not is still uncertain.

We are still seeing rampant inflation in energy costs, which would be rising anyway as the world reopens and starts traveling again, but is further exacerbated by the global embargoes on Russian oil due to Russia’s invasion of Ukraine. Yes, OPEC+ has agreed to increase its oil production by 648,000 barrels per day for the next two months, but that isn’t enough to make up for the Russian oil that the European Union has forsworn. 

We are still seeing increasing inflation in food, which is due to several factors including disruption of Ukrainian and Russian wheat flows, worker shortages, and other supply chain issues. Anything that runs on computer chips is more expensive, as chip shortages are expected to persist into 2024, per the CEO of Intel. That especially means cars, which are also in greater demand due to the great reopening. Computers would be more expensive, but we bought all of the tech that we needed when we were locked up, and so demand has fallen.

Americans are turning away from goods and toward services, especially vacation services, so demand and prices are up for all kinds of travel - especially airfares and rental cars - even while supply is falling. Over the Memorial Day weekend, for example, U.S. airlines cancelled almost 3% of all flights, as they faced worker shortages in call centers and cockpits. Airfares rose 33% in April versus the previous year, and 11% versus pre-pandemic 2019. Rental car prices are 70% higher than before Covid.

But at the same time, deflation has begun in other sectors. The pivot to experiences from things has left retailers with too much inventory and too much of the wrong inventory. Department stores are full of sweat pants that no one wants and decor items that no one needs, so markdowns will be coming. 

The price of lumber, which soared while people were moving into new homes in which they could more comfortably work from home, has dropped in half since March. This is higher interest rates at work, because a move from about 2.9% in 30-year mortgages to over 5.0% currently has cooled down housing starts and housing sales. Even though housing is still higher than it was pre pandemic, we expect to see those prices stabilize and then fall as higher rates cause higher payments and reduce the amount of home that borrowers can afford.

In other areas, the rate of inflation is moderating. In May, the economy added 390,000 new jobs - which was slightly higher than economists expected, but considerably lower than we saw in 2020 as we recovered from the brief Covid recession. Wage growth was 5.2% in May versus 2021, but that was lower than the 5.5% we saw in April. 

Stock markets were on track for their second positive week on Friday, until that May jobs report dropped. In a classic good-news-is-bad-news scenario, stocks fell at the moderately-strong jobs news in fear that it would incite the Fed to raise rates quicker. But even though it felt like the markets tanked last month, in fact, the Standard & Poor’s 500 ended the month within one point of where it began. The Dow Jones Industrials actually finished 70 points higher than at the beginning of May. The Nasdaq, which has taken/caused the brunt of this year’s markets’ rout, lost 2.1% in May.

In bonds, we have been watching the pushmi-pullyu of interest rates and market forces. (Thank you to otherwise unpleasant Hugh Lofting for creating the pushmi-pullyu in the Doctor Doolittle books.) As stocks rise in price, investors sell bonds and buy stocks, causing bond prices to fall and yields to rise. The opposite is also true. When investors sell stocks and buy bonds (as in a market correction) money flows into bonds and lowers yields. Stocks and bonds are eternally seeking a balance point at which the pricing for each reflects anticipated future value. Right now, the ten-year Treasury Note is yielding about 3% - which pretty much mirrors the expected future rate of inflation as forecast by the Fed for next year.

The Fed also just began its Quantitative Tightening (QT) - which is the program by which it will reduce the amount of bonds and mortgages it owns, over time. As the Fed fails to roll over $47.5 billion per month (through August) and $95 billion per month (after that), they will remove the biggest purchaser in the market and rates will naturally rise to attract other buyers.

You will no doubt remember the recent events concerning Terra and Luna cryptocurrencies, which fell to near zero in value last month, losing investors $60 billion. Terra and Luna were created by Terraform Labs, which was funded by the mysterious Do Kwon. It turns out that Do Kwon has played this game before. In 2020 he created an algorithmic stable coin called Basic Cash, which, no surprise, became worthless. But - he used a pseudonym and investors and regulators did not connect Terra/Luna with Basic Cash and he got away with it again. Crypto is the Wild West, people!

For the week ending on June 3rd, the S&P 500 closed at 4,108, the Dow at 32,899, and the Nasdaq at 12,012. The yield on the ten-year Note finished at 2.96%. U.S. crude oil was higher at $118.87 per barrel, N.Y. gold cost $1,850.20 per ounce, and one Euro was worth $1.07.

Elizabeth E. Cook
Diastole Wealth Management Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including, but not limited to, The Wall Street Journal, The New York Times, Business and Market Insider, Barron’s, Fortune, Forbes, Yahoo Finance, The Economist, The Washington Post, USA Today, CNN, CNBC, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220.

Buick has revealed a new concept car called the Wildcat. In addition to its Jetsons-era good looks, the Wildcat has a special super power. If it senses that its driver has an elevated heart rate (road rage?), the car will dim the lights, switch on the massaging seats, and deploy integrated aromatherapy functions. What - no warm jetted bath?
DIASTOLE ECONOMIC AND MARKET COMMENT
June 13, 2022

On Friday, the Consumer Price Index for May was announced. The CPI is generally seen as a reflection of the inflation in the economy. From April to May, prices rose 1.0%, while year-over-year the CPI grew 8.6%. Both results were higher than expected as analysts had anticipated (hoped) that inflation had peaked in April.

The surprise inflation reading caused markets to drop and the yield curve to invert. The two-year Treasury briefly yielded more than the ten-year Treasury, which is just wrong. For the week, the Dow Jones Industrials lost 4.6%, the Standard & Poor’s 500 lost 5.1%, and the Nasdaq Composite Index lost 5.6%. Losses are continuing today.

Inflation is understood basically as too much money chasing too few goods (and services), causing prices to rise. So, if you want to reduce inflation, you can attack the supply-side problem of the too-few goods by producing more, you can reduce demand with higher prices or more expensive money (rising interest rates), or you can try to work both sides.

The three biggest contributors to the CPI numbers were energy, housing, and food. We have discussed in past weeks that increasing energy supplies is a problem due to the sanctions on Russia and the fact that most of the OPEC+ countries don’t have the capacity to ramp up production. In the U.S., oil producers cut back during the pandemic when demand for oil and gas cratered, and they are reluctant to increase production now because they believe that disdain for fossil fuels will continue once we are past our current difficulties.

As for food, the war in Ukraine, which is cutting global wheat supplies, plus the cost of diesel, which hurts truckers, plus various other supply-chain problems, are all contributing to higher grocery costs. Increasing supplies doesn’t look feasible right now.

Housing is its own distinct problem. During the great work-from-home (and due to record-low mortgage rates), housing was hot hot hot. Prices rose dramatically. Now as mortgage rates rise, demand is slowing, but prices are still high. Rents are also hitting record highs (we’re looking at you, Manhattan, where median rents just hit $4,000 per month, up 25% versus last year). Just when we wish there were more houses and apartments, higher interest rates are slowing down new construction.

So, if we can’t increase production of everything we want to buy, (which would bring prices down), can we reduce demand, which would also cause prices to fall? Sure - but it won’t be easy or pretty. As prices rise, they naturally cause demand to fall, but they have to rise pretty far before people stop buying. Picture the baby-formula shortage. People who need formula need formula. There is no real substitute (yes, we know, breast-feeding, but for most women using formula, that ship has already sailed). Likewise, other groceries and housing. Everyone needs shelter.

So the Federal Reserve, which will release its latest interest-rate determination on Wednesday, is expected to increase interest rates by at least 0.50% and maybe as much as 0.75%. Additional increases will come in July, and probably September too. Higher rates will dampen enthusiasm for borrowing money to buy stuff, but how high will rates have to go? Some analysts are calling for an additional four percent before the economy starts to slow down.

And then we have to beware that it doesn’t slow too much, causing a recession, which is two or more quarters of negative growth.

It’s a high-wire act in which the Fed must step very carefully, raising rates just as much as is needed, without halting economic activity. It’s called a “soft-landing” and we must fervently hope the Fed achieves it.

As goods and services become unaffordable, consumers resort to credit cards (consumer credit rose to a record $4.57 trillion in April, per the Fed) - which are an evil compounded by interest rates that soar above market rates and will only rise further. And the new bane of the budget-conscious: buy now pay later (BNPL). Apparently, it’s not just for furniture any more. Apple, in its latest release of new stuff, announced that Apple Pay will offer Apple Pay Later, which allows qualified borrowers to spread out payments over four months. The problem is that about 40% of consumers who take advantage of a BNPL plan then use a credit card to make their payments. And while average pay is higher than last year by more than 5%, it still falls short of inflation at 8.6%.

This coming Friday is the 50th anniversary of the Watergate break-in. Celebrate with your favorite burglar!

For the week ending on June 10th, the S&P 500 finished at 3,900, the Dow at 31,392, and the Nasdaq at 11,340. All three indices are lower today. The yield on the ten-year Treasury Note closed at 3.16%, but is higher today. U.S. crude oil cost $120.67 per barrel, New York gold cost $1,875.50 per ounce, and one Euro has dropped back to $1.05 as the dollar strengthens.

Elizabeth E. Cook
Partner, Diastole Wealth Management

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including, but not limited to, Forbes, Fortune, Barron’s, The Economist, Bloomberg, The Wall Street Journal, The New York Times, The Washington Post, USA Today, Business Insider, Markets Insider, CNBC, CNN, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220.

A Google engineer was placed on leave after claiming that an artificial-intelligence chatbot was sentient. The engineer said that the Google bot: Language Model for Dialogue Applications (LaMDA) “wants to be acknowledged as an employee… rather than as property.” Google says this is nonsense (in so many words).

And finally, two employees at a Mars Wrigley factory in Pennsylvania had to be rescued from a chocolate-filled tank into which they had fallen. The tank had to be cut open from the side to rescue the workers, who were taken to the hospital for treatment of their injuries. No word on how they happened to fall in to the waist-high, super-delicious chocolate. Perhaps it’s time to ask the Oompa-loompas?