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Weekly Commentary Letter 2.16.2021
Way back, when radio disk jockeys played 45-rpm vinyl single, the A-side of a disk was the song the record company was promoting and the other side – the flip side – held a song that sometimes had an equal or greater impact. For instance, the flip side of Queen’s We Are the Champions was We Will Rock You.1, 2
When it comes to the economy and financial markets, flip sides can have significant impact, too. For example:
• Stock market performance. Last week, major stock indices in the United States – the Standard & Poor’s 500, the Dow Jones Industrial, and the Nasdaq Composite – finished at record highs. That was happy news for investors.3
The flip side: Concern that share prices may not be sustainable. “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior…this bubble will burst in due time…,” wrote asset manager Jeremy Grantham of GMO in January 2021.4
• Vaccination acceleration. The pace of COVID-19 vaccinations has accelerated. Vaccinations are important to economic recovery because they are expected to restore confidence and increase economic activity, reported Janet Alvarez of CNBC.5
The flip side: Vaccines may not be as effective as many anticipate for two reasons: 1) Some Americans are reluctant to be vaccinated, and 2) Vaccines may not be effective against all strains of the virus.5
• Additional stimulus. A $1.9 trillion stimulus package is in the works, which could “…prevent unnecessary financial hardship and mitigate future economic risks,” according to Morning Consult economist John Leer.6
That seems particularly important since employment gains have slowed. Last week, Carleton English of Barron’s reported, “All told there were 20.4 million workers receiving benefits under programs for the week ending January 23, a 2.6 million increase from the prior week. At this time last year, there were 2.2 million workers receiving benefits.”7
The flip side: Too much stimulus could cause the economy to overheat, lead to inflation, and cause the Federal Reserve to raise rates. The bond market has already been pushing rates higher. Last week, the yield on 30-year U.S. Treasuries rose above 2 percent for the first time since February 2020.8, 9
• Infrastructure spending. Work has begun on a $2 trillion bipartisan infrastructure plan that is intended to create jobs and rebuild U.S. transportation networks, reported Ian Duncan of The Washington Post.10
The flip side: While many agree U.S. infrastructure needs repair, the cost may be paid through higher taxes. There is ongoing debate about whether tax increases impede or accelerate economic growth, according to Jim Tankersley of The New York Times. In addition, government spending of this type is another form of stimulus, which could heat up economic growth.3, 11
Last week, Colby Smith of Financial Times reported numerous economists have increased U.S. gross domestic product (GDP) growth estimates for 2021. Estimates ranged from 5.9 percent to 6.3 percent.12
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, MarketWatch, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
INNOVATIONS CAN BE DIFFICULT TO VALUE. Throughout history, inventions and new ways of doing things have changed the world:13
• The magnetic compass, which was invented in the 12th century, helped people navigate the world.
• The printing press, which was invented in the 1400s, made it possible to mass produce books, democratizing knowledge.
• Electricity and electric lights changed the rhythms of everyday life in the late 1800s.
• Currency, which was first used in the ninth century, eventually led to monetary systems, banking, and credit cards.
It would have been difficult to understand or estimate the long-term value of these innovations. It’s possible some of today’s innovations could have similar impact. One is machine learning. Machine learning uses algorithms to turn a data set into a model that can improve our understanding of a topic.14 For example, machine learning is being applied to:
• Scientific research. Researchers at the Massachusetts Institute of Technology (MIT) “…have now developed a machine-learning algorithm that helps them identify multiple possible structures that a protein can take…The researchers are now using this technique to study the coronavirus spike protein, which is the viral protein that binds to receptors on human cells and allows them to enter cells,” reported Anne Trafton of MIT News.15
• Smart cities. Data-collecting technologies are being deployed in a number of cities. Kim Hart and Aïda Amer of Axios reported these technologies include location beacons (which track smartphones), smart tolls, drone cameras, smart landfills, security cameras, streetlight sensors, and smart grids. While expectations for smart cities are high, public skepticism has slowed the pace of these projects.16
• You, your friends, and your family. “Much of the most privacy-sensitive data analysis today – such as search algorithms, recommendation engines, and adtech networks – are driven by machine learning and decisions by algorithms. As artificial intelligence evolves, it magnifies the ability to use personal information in ways that can intrude on privacy interests…,” explained Cameron Kerry of Brookings.17
Weekly Focus – Think About It
“There is no recipe, there is no one way to do things – there is only your way. And, if you can recognize that in yourself and accept and appreciate that in others, you can make magic.”
–Ara Katz, Entrepreneur18
* These views are those of Carson Coaching, and not the presenting Representative or the Representative’s Broker/Dealer, and should not be construed as investment advice.
* This newsletter was prepared by Carson Coaching. Carson Coaching is not affiliated with the named firm or broker/dealer.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage is often obtainable in commodity trading and can work against you as well as for you. The use of leverage can lead to large losses as well as gains.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
3 https://www.barrons.com/articles/the-stock-market-keeps-rising-the-reasons-to-be-hopeful-are-also-the-reasons-to-worry-51613179045?refsec=the-trader (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/02-16-21_Barrons-The_Stock_Market_Keeps_Rising-The_Reasons_to_be_Hopeful_are_Also_the_Reasons_to_Worry-Footnote_3.pdf)
7 https://www.barrons.com/articles/jobless-claims-continue-their-slow-climbdown-51613053832?mod=article_inline (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/02-16-21_Barrons-Jobless_Claims_Show_Uneven_Recovery-Footnote_7.pdf)
10 https://www.washingtonpost.com/transportation/2021/02/11/biden-senators-infrastructure/ (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/02-16-21_TheWashingtonPost-Biden_Meets_with_Key_Senators_to_Start_Bipartisan_Talks_on_Infrastructure_Spending-Footnote_10.pdf)
11 https://www.nytimes.com/2019/12/05/business/Elizabeth-Warren-tax-increases.html (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/02-16-21_TheNewYorkTimes-Could_Tax_Increases_Speed_Up_the_Economy-Democrats_Say_Yes-Footnote_11.pdf)
12 https://www.ft.com/content/a6d89494-9fac-49a8-8b0a-4f3f1870ace1 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/02-16-21_FinancialTimes-Markets_Brimming_with_Investor_Optimism_on_US_Economy-Footnote_12.pdf)