Wednesday, November 22, 2023

Market Commentary: No More Hangover

Markets & EconomyMarket Commentary: No More Hangover

November, December, and January tend to be the best three months of the year for stocks, which means February has a tendency of being a hangover month. I’m happy to share that the hangover is gone, and we’re once again entering a period of positive seasonal trends.  

Weekly Highlights

  • A return of 5.5% for the S&P 500 through early March is on pace with historical gains.
  • Bond yields have risen thanks to the Fed’s aggressive actions, and that has raise concerns about the relative attractiveness of stocks.
  • Analysis suggests the premium for investing in stocks (known as risk premium) over bonds remains attractive, albeit lower than it was pre-pandemic.

Since 1950, the S&P 500 has gained 1.1% in March, while April has been up 1.5%. But in a pre-election year, like we’re in right now, those returns go to 1.9% and 3.5%, respectively.

I am encouraged by how quickly investors have become bearish again. After a great start to the year, many bulls were getting loud, and some longtime bears were starting to sound bullish. I believe this increased the odds of the pullback we’re now experiencing.

Stocks and bonds are two of the better-known asset classes in the family of potential investments. Last week, they were in opposition.

Bond yields have been moving higher in anticipation of the Federal Reserve raising rates again. For a while last week, every maturity of Treasury – from the 1-month Treasury bill to the 30-year Treasury bond – boasted a yield above 4 percent. Some shorter-maturity Treasuries yielded more than 5 percent.

When bond rates move higher, borrowing becomes more expensive for companies. As the cost of doing business rises, the outlook for company earnings tends to moderate, pushing stock prices lower. Companies in the financial industry are an exception, as they tend to benefit from higher rates.

In addition, higher bond yields may lead to lower stock prices as investors who seek income, and prefer to take less risk, move some assets from stocks to bonds. For example, more conservative investors who have held dividend-paying stocks to help achieve retirement income goals might choose to move some assets into bonds.

“Rising Treasury yields can make stocks less appealing because they allow investors to park money in instruments that now earn an attractive return…investment grade bonds saw inflows for 10 consecutive weeks…the longest streak since October…,” reported Isabel Wang of Morningstar.

Like a younger sibling who refuses to follow the lead of an older brother or sister, stock markets ignored rising bond rates last week. It’s difficult to know which one is on the right track, which makes being selective more important, according to Carleton English of Barron’s.

“This is no longer a black-and-white, buy-or-sell stock market. The era of ‘There is no alternative’ to growth-oriented tech stocks is in the rearview mirror, and both stocks and bonds offer compelling opportunities, if you pick the right ones.”

The Markets

Major U.S. stock indices finished higher, ending a three-week losing streak.

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;; U.S. Treasury; 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.


Some Fed Governors spoke last week and addressed the hot economic and inflation data from January. They were concerned about the readings but also communicated that they didn’t want to overreact. The Fed will be closely watching inflation and employment data before their next meeting on March 21-22. Company commentary suggests that inflation isn’t coming down as fast as hoped, but labor markets are softening some.

Let’s break this down…

Inflation is not going down as fast as the Fed would like

“...recent data suggest that consumer spending isn't slowing that much, that the labor market continues to run unsustainably hot, and that inflation is not coming down as fast as I had thought." - US Federal Reserve, Governor Christopher Waller
“We must determine when inflation is irrevocably moving lower. We're not there yet. That's why I think we need to raise the federal funds rate to between 5-5.25% and leave it there well into 2024…there is more work—in the form of interest rate increases—to do." - Atlanta Fed, President Raphael Bostic

But the Fed doesn’t want to over-react to January’s data

"Given the data in the last month — higher inflation than we expected and a strong jobs report — these are concerning data points suggesting we're not making progress as quickly as we'd like. At the same time shouldn't overreact to one month of data even if the data is troubling." - Minneapolis Fed, President Neel Kashkari
“It could be that progress has stalled, or it is possible that the numbers released last month were a blip, perhaps associated with unusually favorable weather, and that forthcoming data will show that economic activity and inflation resumed their decline." - US Federal Reserve, Governor Christopher Waller

Upcoming data is critical

"Fortunately, we will get the next employment report and CPI release ahead of the March 21–22 FOMC meeting, information that will affect my assessment of the appropriate next step for monetary policy. If job creation drops back down to a level consistent with the downward trajectory seen late last year and CPI inflation pulls back significantly from the January numbers and resumes its downward path, then I would endorse raising the target range for the federal funds rate a couple more times, to a projected terminal rate between 5.1% and 5.4%. On the other hand, if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released." - US Federal Reserve, Governor Christopher Waller

Consumer spending is still strong

"I don't mean to disappoint you. But when we look at our data around the world globally, by country, by product, by consumer segment, it is remarkably stable…So resilient, stable, consistent, that's what we're seeing in our data around the world." – Visa, CEO Ryan McInerney
"...the consumer continues to be resilient, and it's one of the things which we are closely tracking is what is the strength of the labor market as part of this process. And we all know that the labor market, certainly in the U.S. but in various other parts of the globe is actually holding up pretty nicely, record low unemployment rates. And when people are employed, they generate paychecks, when they generate paychecks, they tend to spend money, and that's what we've been seeing thus far." – Mastercard, CFO Sachin Mehra
 "So it’s going well. We don’t see any particular change from all the trends that we talked about in Q4 on the January earnings call" - American Express Company, CFO Jeffrey Campbell

The market is pricing in higher rates

"Last month we received a barrage of data that has challenged my view in January that the Federal Open Market Committee (FOMC) was making significant progress in moderating economic activity and reducing inflation. I'm not the only one whose outlook has shifted. Since the end of January, financial market participants have revised their outlooks in a way that has led them to mark up their expectations for the federal funds rate at the end of 2023 by about a half percentage point." - US Federal Reserve, Governor Christopher Waller 

Additionally, there is more to discuss this week from global leaders in other sectors. Some of these comments are crucial to investment decisions, as they relate to energy, real estate, materials and transport, supply chains and more…


Supply chains are moving away from China

"...the Western world has woken up to the fact that they are overdependent on China from a manufacturing perspective. There's a customer of ours, the single largest market in the U.S. 92% of the sourcing, mark my words, 92% of the sourcing is in China. So we did the work with them where we moved $1 billion worth of manufacturing outside to Mexico and India. We had all these places. The Western world now says that we'll have to move, which means there will be a whole lot of change in the supply chain, new factories coming up in multiple different places" - Tech Mahindra, President of Americas Strategic Verticals Lakshmanan Chidambaram


Low-income consumers are under pressure

"We saw customers starting to pull back in late June, primarily in Nordstrom Rack, and this trend continued through the holiday season. Across both banners, the softening trend was more pronounced in customers with lower income profiles." – Nordstrom, CEO Erik Nordstrom
"In the past, I've stated that most of America has -- about 67% or so of Americans have a household income under $100,000...And the lower household income customers are pinched. Basically, at this point, 30% of that lower household income customer, their expenses today are greater than their income coming in. And 70% of them have curbed spending as a result of that" - Big Lots, CFO Jonathan Ramsden

Middle-income consumers are trading down

“I mean what we're seeing is the consumer making $80,000 a year is trading down. And that's -- timing is everything. We're doing better on so many fronts with a long way to go. They're having an experience they can relate to. But as far as planning for that in our outlook, no, we don't do that” - Dollar Tree, CEO Richard W. Dreiling

The rich keep spending more 

"Burberry’s got a challenge. The constant trend is people going for more and more and more premium items. The rise of the superbrands is getting absolute, so that middle ground of the market is becoming tougher and tougher." – Harrods, Managing Director Michael Ward

Tax refunds are smaller this year, but coming in earlier

"The tax refunds, while they're coming in maybe a little bit earlier this year than last year, they're about 10% to 15% less per refund than last year." - Big Lots, CFO Jonathan Ramsden


"AI is absolutely the hot topic today. Generally, I helped fuel it. AI is now basically at the top of every CEO’s agenda… It’s just talk. They figure they have to have AI in their messaging but don’t do a thing about it. It’s kind of curious" - C3 AI, CEO Tom Siebel

AI is a hot topic in corporate America

“And then the buzzwords of today is all about AI and ChatGPT, how exactly that will result into commerce use cases and when is to be seen” – Mastercard, VP Digital Solutions Jorn Lambert

Tech companies are scrambling to rebrand themselves as AI companies

"This is the milestone we’ve been waiting for to establish Qualcomm as an AI company. You want to generate any image that you want to share with somebody, you want to do it in real-time — think about what Microsoft is doing with search, and you want to chat with the search results. For you to make that happen, you can’t run everything in a data center, you’re going to have to bring the AI to the devices. The ability to create that much processing power in a smartphone and run that without compromising the battery life is something that only Qualcomm can do," – Qualcomm, CEO Cristiano Amon

Consumer electronics markets remain challenged

“The PC market remains challenged. From a historic 2021, the PC market slowed markedly in June and experienced a sharp decline in calendar Q4. Consequently, our fiscal Q4 CSG revenue declined 23% to $13.4 billion. It was a continuation of trends we've seen in recent quarters.” - Dell, Co-COO Chuck Whitten

Industrials and Transport

Ocean freight shipping times have improved

"...talking to the buyers a year ago, their estimate of just timing of getting things across the ocean was 70-plus days. Today, it's back down to 30-ish days. And so supply chain improvement across the board and rates, of course, coming down." – Costco, CFO Richard Galanti

Materials and Energy

Lithium demand is surging

"The EV revolution is driving tremendous demand for lithium with EVs expected to grow from 14% of new car sales in '22 to nearly half of sales by 2030. In January, we increased our lithium demand forecast once again, primarily due to the higher expected EV production as well as stronger demand for other lithium-ion battery applications like grid and mobility. We expect 2030 lithium demand of 3.7 million tons, up 15% from our prior forecast." – Albermarle, CEO Jerry Kent Masters
“For example, if you're talking about the battery cell, we really get involved with the mines of like where we're procuring the lithium, the cobalt, all that sort of stuff because we're procuring such high volumes of it” – Tesla, VP of Global Supply Management Karn Budhiraj

Renewable energy is driving large increases in demand for copper

"People focus on investments in carbon reduction, and that's going to be a big source of demand, the amount of copper that's going into electric vehicles, energy generation and the supporting infrastructure. 70% of copper goes into electricity in some form and all that's going to require more electrical infrastructure." - Freeport-McMoRan, CEO Richard C. Adkerson

Oil demand is expected to get back to pre-pandemic levels in 2023

"The IEA expects global oil demand to grow by 2 million barrels per day this year, taking oil demand above pre-COVID levels for the first time. Almost half of this growth is expected to come from China, with demand accelerating from the second quarter onwards, as the country opens up after three years of strict COVID-19 lockdowns." - Teekay Tankers, CEO Kevin Mackay

Real Estate

Rental rate growth is slowing as homeowners opt to rent homes rather than sell

"There's evidence of higher rental supply in our markets, partly caused by (inaudible) home sellers opting to rent at their homes given the challenging mortgage environment and having attractive legacy mortgages locked in place at very low rates. Taken together, the combination of strong demand but higher supply of rental listings over recent months has contributed to a moderation of rent growth on new move-ins, although rent growth in our same home portfolio remains strong by historical measures and has shown signs of strengthening into 2023." - Tricon Residential, CEO Gary Berman

The mortgage industry is reeling

"The mortgage industry faced an extremely difficult environment in 2022…To put the demand headwinds in perspective: The MBA's mortgage application index dropped nearly 70% in 2022, the largest intra-year drop in the history of the data set going back to 1990. At the same time, demand was falling, the mortgage industry faced excess capacity." - Rocket Companies, CFO Brian Nicholas Brown

Housing affordability is poor

"...housing affordability is painfully high. U.S. mortgage rates more than doubled from the mid-3% range to above 7% in 2022. Housing expense-to-income is now approximately 35% higher than last year." - New York Mortgage Trust, CFO Jason T. Serrano

Weekly Focus – The Power of Sunshine

“The first wealth is health.”

Ralph Waldo Emerson, Essayist and Philosopher

If you’re worried about the possibility of dementia, make sure you’re topped up with vitamin D. That’s the finding of an ongoing study from the University of Calgary’s Brain Institute in Canada, the University of Exeter in the United Kingdom, and the U.S. National Alzheimer’s Coordinating Center.

More than 12,000 people participated in the study. The average age of participants was 71, and none had dementia when the study began. Slightly more than one-third of participants received vitamin D supplements. Researchers noted:

“…taking vitamin D was associated with living dementia-free for longer, and they also found 40 percent fewer dementia diagnoses in the group who took supplements…While Vitamin D was effective in all groups, the team found that effects were significantly greater in females, compared to males. Similarly, effects were greater in people with normal cognition, compared to those who reported signs of mild cognitive impairment – changes to cognition which have been linked to a higher risk of dementia.”

Vitamin D is known as the sunshine vitamin. When you walk outside on a sunny day, ultraviolet rays from the sun interact with chemicals in your skin to produce the vitamin. The amount you produce depends on a variety of factors, including where you live, the time of day you’re outside, and your pigmentation, reported the Mayo Clinic.

About one billion people around the world are deficient in vitamin D. That number includes about 35 percent of the U.S. population. In the U.S., people who are older than age 65 and people who have darker skin are more likely to experience vitamin D deficits, according to the Cleveland Clinic.

Having too little Vitamin D can be a significant health issue because it may play a role in preventingcancer, multiple sclerosis, psoriasis,bone softness,muscle weakness, andosteoporosis.As people become more aware of the importance of vitamin D, the market for supplements is expected to grow.

Tom Martin, WMCP®
Tom Martin, WMCP®
Tom Martin, is a financial advisor at Vaylark Financial Services, based in Hartford, Connecticut. He practices in the area of private wealth management offering comprehensive financial planning, custom investment portfolios, tax reduction strategies, risk management, estate and legacy planning, as well as advises on executive compensation and business owner profitability.

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Tom Martin, is a financial advisor at Vaylark Financial Services, based in Hartford, Connecticut. He practices in the area of private wealth management offering comprehensive financial planning, custom investment portfolios, tax reduction strategies, risk management, estate and legacy planning, as well as advises on executive compensation and business owner profitability.

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