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Weekly Commentary Letter 11.22.2021
Thinking about the possibilities.
The Standard & Poor’s (S&P) 500 Index finished last week slightly higher and has gained about 6 percent during the past 25 days; however, investors have curbed their enthusiasm. The S&P 500 hasn’t experienced a move of one percent or more in 25 trading days. That’s the longest period without a move of that size in about two years, according to a source cited by Avi Salzman of Barron’s.1
It’s possible investors are taking time to think about the current mix of conditions and how the economy and financial markets may be affected. For example:
• Consumers have said they’re concerned about inflation. The University of Michigan’s Consumer Sentiment Index declined in early November on a year-to-year and a month-to-month basis. Survey participants indicated their outlook was negatively affected by inflation concerns, reported Surveys of Consumers Chief Economist Richard Curtin.2
• Retail sales were higher than expected. There was a difference between what consumers said and what they did. Despite inflation concerns, retail sales were up 1.7 percent from October to November and 16.3 percent year-over-year, reported Jeff Cox of CNBC.3
• Companies were very profitable during the third quarter. Supply chain issues and inflation were frequently mentioned by companies during earnings calls, but they didn’t affect corporate profits. The majority (82 percent) of companies reported higher than expected earnings per share. On average, company profits were up 39 percent year-over-year, which was the strongest growth since 2010, reported John Butters of FactSet.4, 5
• The oil shortage may already be over. Oil prices dropped last week. A surge of COVID-19 cases in Europe is expected to slow demand just as supplies may increase as some countries begin to release oil from strategic petroleum reserves, reported Avi Salzman of Barron’s.6 During the past decade, oil prices have accounted for about 56 percent of the price of a gallon of gasoline, according to the U.S. Energy Information Administration. As oil prices fall, gasoline prices also may move lower.7
The performance of major U.S. stock indices was mixed last week, according to Avi Salzman of Barron’s.1 The yield on 10-year U.S. Treasuries dropped last week.8
We hope you have a wonderful Thanksgiving
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; Federal Reserve Bank of St. Louis; 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.
INFRASTRUCTURE AND ECONOMIC GROWTH…The bipartisan Infrastructure Investment and Jobs Act (IIJA) was signed into law last week, and the Build Back Better Act (BBBA) passed the House of Representatives and moved on to the Senate.9, 10
For decades economists have tried to determine how spending on infrastructure – roads, bridges, canals, railways, broadband and other projects – contributes to economic growth. There are diverse opinions on the subject. Here are a few:
“Increasing infrastructure investment has significant macroeconomic benefits. Near term it has a large so-called multiplier—the increase in GDP for a dollar increase in investment. It is among the highest compared with other types of federal government spending and tax policy… In a full-employment economy, the GDP multiplier on traditional infrastructure is estimated to be 1.23 one year after the investment, and 1.12 for nontraditional infrastructure. It is higher when the economy is operating below full employment.”11
— Mark Zandi and Bernard Yaros, Jr., Moody’s Analytics, July 21, 2021
“Infrastructure spending by government can boost long-run economic growth by making an economy more productive, in part by improving connectivity – both physical and digital…The point here is that there can be diminishing returns from spending…I view infrastructure investment primarily as a way of boosting the economy’s speed limit. Government should focus on high-value projects.”12
— James Pethokoukis, American Enterprise Institute, April 2, 2021
“A new era of large-scale infrastructure investment would necessarily be less revolutionary than the railways and roads of the past. Yet it might nonetheless prove surprisingly transformative in its direct economic impact, its knock-on effects on private industry—and in the psychological spur it provides to a country that could do with a bit of reinvigoration and renewal.”13
— The Economist, May 1, 2021
“Finally, even if infrastructure investment had no impact on employment, productivity, and growth, it’d still deliver public goods that should be available to all but that may not be profitable to produce privately (such as rural broadband).”14
— Marcela Escobari, Dhruv Gandhi and Sebastian Strauss, Brookings Institute, March 17, 2021
The IIJA will invest approximately $1.2 trillion, including $550 billion in new spending, on infrastructure projects across the United States.15 IIJA is expected to increase the deficit by about $256 billion over the next 10 years, according to the Congressional Budget Office.16
Weekly Focus – Think About It
1. Which of the following holds the largest portion of the U.S. national debt?17
b. Social Security
c. Military Retirement Fund
* These views are those of Carson Coaching, not the presenting Representative, the Representative’s Broker/Dealer, or Registered Investment Advisor, 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 3:00 p.m. (London time) gold price as reported by the London Bullion Market Association and is expressed in U.S. Dollars per fine troy ounce. The source for gold data is Federal Reserve Bank of St. Louis (FRED), https://fred.stlouisfed.org/series/GOLDPMGBD228NLBM.
* 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.
1 https://www.barrons.com/articles/stock-market-earnings-season-inflation-51637374587?refsec=the-trader (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/11-22-21_Barrons_Stocks%20Are%20Up%208%20%25%20Since%20Earnings%20Season%20Started_1.pdf)
2 http://www.sca.isr.umich.edu (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/11-22-21_Surveys%20of%20Consumers_2.pdf)
6 https://www.barrons.com/articles/oil-prices-drop-on-bearish-supply-and-demand-signals-51637336738 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/11-22-21_Barrons_Oil%20Prices%20Drop%20on%20Bearish%20Supply%20and%20Demand%20Signals_6.pdf)
3 https://www.economist.com/finance-and-economics/2021/04/29/what-an-infrastructure-bonanza-could-mean-for-americas-economy (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/11-22-21_The%20Economist_What%20an%20Infrastructure%20Bonanza%20Could%20Mean%20for%20Americas%20Economy_13.pdf)