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OP-ED: U.S. Market Turbulence Looming

Published January 7, 2022

William RutherfordIn spite of rising numbers of virus cases and threats of interest rate increases fueled by inflation, the market has powered forward. For the first time in five years, the S&P 500 outperformed the Nasdaq. The S&P in 2021 posted a 26.89 percent gain.

Still, the virus has been disruptive in various sectors of the economy. Especially hard hit were travel, leisure and entertainment. Technology companies benefited, as businesses sought to operate more efficiently.

The world appears to be having difficulty vanquishing the COVID-19 viruses, and as soon as we get an upper hand, a new strain crops up. Perhaps that is to be the way of the future. A knockout blow appears to be elusive.

The mutating virus also is causing problems for logistics and planning, and thus cost increases. Prices for many things are going up. For a long time, the Federal Reserve considered those price increases as transitory, but the board eventually capitulated and decided to raise interest rates to counter inflationary pressures. The market does not like inflation, but it doesn’t like higher interest rates either.

The Federal Reserve previously raised interest rates late in 2018, in the waning days of the longest-lasting economic expansion in U.S. history. It didn’t take long for the Fed to rethink its increases, and it was forced to roll back the benchmark rate all the way to zero, as the economy went into a shocking tailspin. So, are we to see a repeat of the prior experience? Some people think the Fed can tighten things multiple times before the economy suffers. So far, the markets have been holding up. The coming rate increase has been well […]

January 10th, 2022|Categories: Daily Journal of Commerce|Comments Off on OP-ED: U.S. Market Turbulence Looming

OP-ED: Stock Market Rises Amid Negative Atmosphere

Published November 5, 2021

William RutherfordThe S&P 500 rose 6.9% in October in spite of negative news, its best October performance in six years. Disappointing earnings from the likes of Amazon and Apple could not overshadow the strength of the overall market, with more than 80% of stocks meeting or exceeding earnings forecasts. Supply chain interruptions are the cause of revenue misses at both Apple and Amazon, costing Apple $6 billion in sales in the quarter. Interest rates ticked up, but the yield curve did not invert (when short term rates become higher than long term rates), which is usually a sign of a recession. No such sign is apparent.

In short, there are many reasons to sell stocks, but one good reason to buy: stocks are going up. With the market up strong for October, it is now entering the historically best three months of the year for stocks.

Even the pandemic seems to be winding down. Nationally new cases dropped below 75,000, less than half the rate in August. While no cymbals are crashing, the virus appears to be subsiding. Will it experience an uptick during the northern hemisphere traditional cold and flu season? Is the virus becoming endemic and we learn to co-exist? Time will tell. President Biden’s economic package has yet to affect the economy, but if the stimulus comes, it should have a positive effect, in spite of the massive tax offsets. Employment numbers in October exceeded expectations, with many workers trading up to higher paying jobs, thereby increasing their purchasing power. Increased purchasing of things as opposed to services has resulted in supply chain disruptions and increases in prices for things, reversing a […]

December 20th, 2021|Categories: Daily Journal of Commerce|Comments Off on OP-ED: Stock Market Rises Amid Negative Atmosphere

OP-ED: Which Threat Do Investors Fear Most: The Virus Or The Fed?

Published December 10, 2021

William RutherfordA new strain of the coronavirus and rising interest rates are taking their toll on the market.

With the S&P 500 up 23.2 percent year to date through Nov. 30, the U.S. equity market hit a speed bump. At the end of November, the market dropped sharply, as fears about a new strain of the virus appeared. Although the market recovered in ensuing days, Federal Reserve Chairman Jerome Powell mentioned accelerated credit tightening and increased rates, just to put an exclamation point on the drop.

A new strain of virus is especially worrisome to the market because COVID has already demonstrated the damage it can do to the economy. Rising interest rates are negative for the market as well. It is often said that the job of the Fed is to take the punch bowl away at the end of the party. It is also said that bull markets don’t die of old age (ours is 11 years old), but that they are murdered in their bed by the Fed.

The Fed has been talking more about interest rate increases. Board members have removed “transitory” as a modifier for inflation. Increased virus activity could mean fewer workers and more friction in the supply system, resulting in more inflation. The Fed has pledged to give ample advanced warning for any rate increase. Fed futures are showing summer as a likely date for increased interest rates, so any rate increase signals should come soon.

The CPI reflected more inflation in November. The job market is tightening. The Department of Labor reported a 4.2 percent unemployment rate in November. Full employment is usually considered to be between 4 percent […]

December 13th, 2021|Categories: Daily Journal of Commerce|Comments Off on OP-ED: Which Threat Do Investors Fear Most: The Virus Or The Fed?

OP-ED: Market Experiences A Bumpy Ride, With Inflation Looming

Published October 8, 2021

William RutherfordStocks ended the most recent quarter with the worst month since March 2020 but recovered some lost ground on the first day of the new quarter.

Plagued by a host of issues, the S&P suffered its worst month in over 10 years.

The virus continues to confront the economy with no end in sight. As this virus continues to circulate and mutate, it will wear on the country. Other viruses will follow, as they always have. Exhortations from the central government will not be enough. The impact of this virus on the workplace and schools adds uncertainty to the economy, making Federal Reserve and budget decisions harder.

Interest rates are rising. That makes bonds more attractive to hold and diminishes enthusiasm for equities, causing a big sell-off in tech stocks.

Logistics become harder as the virus roils the workforce. Supply chains, in general, are disrupted due to factory closures and skilled labor shortages around the world. In particular, microchips, a necessary product of manufacturing today, are not being produced in quantities needed.

Inflation is haunting efforts to plan for the future. Federal Reserve Chairman Jerome Powell concedes that inflation will be with us longer than expected. Even dollar stores, which advertise everything for a dollar, are becoming dollar-and-a-quarter or dollar-and-fifty-cents stores, as the costs of goods rise.

Elizabeth Warren, a prominent Democratic senator, threatens to oppose Chairman Powell’s renomination. The financial markets do not like uncertainty, and Powell is a known quantity.

Congress has experienced stalemates over the deficit and debt ceiling increases and so is unable to plan for the budget, and budget goals cannot be met. Capital markets are very worried about a failure to increase the […]

October 11th, 2021|Categories: Daily Journal of Commerce|Comments Off on OP-ED: Market Experiences A Bumpy Ride, With Inflation Looming

OP-ED: Market’s Bounce From Pandemic Low Is Fastest In Several Decades

Published September 10, 2021

William RutherfordIt took the S&P 500, a proxy for the U.S. stock market, 354 trading days to double in value from its 2020 bottom. That was the fastest bull market double since WWII. Usually, it takes a bull market 1000 days to reach that milestone, according to CNBC analysis.

What powered the rally? Relief from the pandemic ignited the rally, as people ached to get out, liberate themselves from virus-related constraints (however misplaced) and spend money.

In 2020, the Federal Reserve slashed interest rates to near zero and released $120 billion in emergency bond purchases in response to the fastest drop in S&P 500 history. The federal government also injected trillions of dollars in COVID relief spending into the economy. The response of the Fed and the legislative and executive branches of government primed the pump and overwhelmed the sagging economy.

The resulting massive earnings comeback further fueled the rise. Corporate profits jumped off the pandemic bottom, with S&P companies reporting a 53 percent year-over-year growth in earnings in the first quarter and poised to post a 98 percent surge in the second quarter, according to Refinitiv market data services.

The second quarter of 2021 was characterized by not only a large number of beats but also an impressive magnitude of surprises, said David Kostin, head of equity strategy for Goldman Sachs. For example, the economy added 943,000 jobs in July, above the consensus estimate, but failed to follow through in August.

Can the market continue to move in this direction? Now, the Fed is reevaluating its easy-money policies and weighing whether to raise interest rates. The market has not had a sizable pullback in about 10 months, […]

September 15th, 2021|Categories: Daily Journal of Commerce|Comments Off on OP-ED: Market’s Bounce From Pandemic Low Is Fastest In Several Decades

OP-ED: Whistling Through The Graveyard

Published August 6, 2021

William RutherfordThe U.S. stock market bursts out to new highs. Big tech profits surge. Recent news gives reason for optimism … or does it?

Much of the current growth in the economy is based on various stimulus programs sponsored by the federal government. More than five trillion dollars have been poured into the economy, with perhaps more to come; in dollar terms, this equates to about 25 percent of the annual U.S. gross domestic product (GDP). No wonder the economy is steaming.

The forecast was for the GDP to rise 8 percent in the most recent quarter, but it managed to increase only 5 percent. Is the economy slowing down? Well, it has been growing at the fastest pace since 1983. Consequently, the Fed says the drop in GDP growth rate is nothing to worry about. The Federal Reserve’s view is that the reopening of the economy after the virus surge has been stronger than expected and caused bottlenecks in distribution. When that sorts itself out, things will get back to normal. Is this just whistling through the graveyard?

Inflation appears to be surging, but again the Fed posits that this is transitory and linked to reopening and related supply and distribution issues.

China is restraining segments of its economy, which appears to be having negative ramifications for China and the U.S. It started with censorship of children’s textbooks and spread to its large technology companies and related U.S. IPOs. The Chinese government says “it is helping these companies to grow properly.” (This reminds us of the most feared words in the English language: “I’m from the government, and I am here to help you.”) The microchip […]

August 9th, 2021|Categories: Daily Journal of Commerce|Comments Off on OP-ED: Whistling Through The Graveyard

OP-Ed: As Stocks Close At A Record Half-Year, Unease Grows

Published July 9, 2021

William RutherfordThe U.S. stock market closed out the first half of 2021 at a record. The market showed gains through July 1 for five consecutive quarters, the longest streak since 2017. Business confidence has rebounded. While it seems that stocks can only go up, the outlook is increasingly hazy.

Fears of inflation cloud the outlook. The Federal Reserve chairman says the inflation threat is transitory, the result of distribution bottlenecks from the resurgence of the economy. Investors are not so sure if the rate of inflation is transitory or more permanent.

Savvy investors are looking for sustainable earnings. Who will be the long-term winners?

The trajectories of value and growth stocks have disconnected. In a bull market, both categories would be moving up. Value stocks have been outperforming growth, indicating that investors are uncertain about market direction.

While corporate earnings have been stellar, many investors believe that the economy’s rebound has been priced in and that stocks, trading at high multiples, are priced to perfection. Stocks are now in the second year of a bull market and can be expected to be choppy and make more muted gains.

Interest rates have risen, as might be expected in inflationary times. The yield on the benchmark 10-year Treasury had been edging up, but then in July fell to its lowest level since February, and may go even lower. Still, rising interest rates could test the downward trend.
Rising rates would favor utilities and financials.

The U.S dollar is strengthening, which makes U.S. goods more expensive in international markets and results in difficulties for emerging market countries to repay their U.S. dollar-denominated debt.

The Federal Reserve now predicts 2021 U.S. economic growth of over […]

July 13th, 2021|Categories: Daily Journal of Commerce|Comments Off on OP-Ed: As Stocks Close At A Record Half-Year, Unease Grows

OP-ED: What To Do With Your Money Amid Deficits, Inflation And Economic Growth

Published June 11, 2021

William RutherfordWith the U.S. economy growing at 6.4 percent and current inflation estimated at 2.3 percent, investors are left to wonder what is happening.

Are we too late to invest? Are we too early? Is this an inflationary economy? Is it a Goldilocks economy (not too hot, not too cold)? Where should we invest? In precious metals? Bitcoin? What about bonds, stocks or commodities? Where does the COVID-19 virus fit into this scenario? These are all pertinent questions, for which there are no simple answers.

Similar to the mess that ensued from the financial crisis of 2008-09, the ramifications of the virus are omnipresent. First, inflation. Currently, the Federal Reserve estimates an inflation rate of 4.2 percent for calendar year 2021. This is no easy rate to peg. There is the rate at the store, or the gas pump, or the stated rate by the Fed, or the PCE inflator that the Fed prefers, but there is no one certain rate. Thus the published rate has many imperfections.

What is inflation and why does it matter? Inflation is the decline of purchasing power of a given currency over time. It matters because businesses and consumers make purchasing decisions based on the perceived rate of inflation: The higher the current rate of inflation, the more likely a business or consumer is to buy, thus fueling more inflation.

Also, the Federal Reserve makes interest rate decisions based on the rate of inflation. If inflation is higher, the more likely the Fed is to raise interest rates. The Fed does this because it does not want inflation to “run away.” Conversely, if inflation is too low, the Fed might lower […]

June 14th, 2021|Categories: Daily Journal of Commerce|Comments Off on OP-ED: What To Do With Your Money Amid Deficits, Inflation And Economic Growth

OP-Ed: With The Market Posting Strong Gains, What To Do Now?

Published May 7, 2021

William RutherfordAs of the end of April, the stock market is up 11.8 percent year to date and up 46 percent over the trailing 12 months, as measured by the S&P 500 on a total return basis. One wonders when the robust market climb will falter.

The strong gains seem to provide evidence that the economy is poised for rapid recovery following last year’s pandemic-caused recession. Economists now expect a rebound because of strong consumer spending, trillions of dollars of government support, a surge in pent-up demand and increased mobility due to vaccinations.

The government reported last week that the overall economy, as measured by gross domestic product, rose at a robust rate of 6.4 percent in the January-to-March quarter. Some economists believe that growth will be strong in the coming quarter, perhaps even topping 10 percent.

U.S. consumer spending grew at the fastest pace in nine months, reflecting billions of dollars of government support payments. Incomes surged a record-breaking 21.1 percent in March, after falling 7 percent in February when frigid winter weather disrupted sales. The surge came amid billions of dollars in relief payments from a nearly $2 trillion federal government support package.

Despite the spending increases, consumers squirreled away a lot of their incomes – the savings rate grew to 27.6 percent in March, from an already elevated 13.9 percent in February. Excess household savings now totals about $2.3 trillion over what economists estimate would have been the case without the pandemic. Analysts believe that consumers will spend this stockpile in coming months as vaccinations get them to return to stores and take long-awaited vacations.

Inflation appeared to be tame, rising 1.8 percent annualized, excluding […]

May 10th, 2021|Categories: Daily Journal of Commerce|Comments Off on OP-Ed: With The Market Posting Strong Gains, What To Do Now?

OP-ED: Federal Reserve Underpins The Equity Market

Published April 9, 2021

William Rutherford2021 began with a slow start. Seemingly it was not a good time for investing. Between January 1 and March 1, the market dropped 1.01 percent as the pandemic stretched on. In this column, I warned against short-term investing and encouraged investors to pay attention to the Federal Reserve and government fiscal spending policies. The Fed said it wanted low interest rates and the central government wanted a large stimulus package. A few months later, the Fed has had its way with interest rates and the government has its stimulus package. As a stream of economic data and corporate profits turned positive, the U.S. equity market experienced strong gains for the first quarter of 2021.

With 99 percent of companies in the S&P index reporting positive earnings and a decline in new COVID-19 cases, the market powered upward. The passage of a $1.9 trillion fiscal relief bill and the Fed’s assurance of a near-zero interest rate policy, coupled with continuance of the monthly bond purchase program, spurred the market on.

Concern about inflation expressed by the Federal Reserve chairman caused investors to rotate out of economically sensitive stocks and out of high-growth companies. Still, equities closed near their highs as the quarter came to a close.

Fear began to rise that inflation would take hold if the market recovered too much. Ten-year Treasury yields rose sharply, with stocks falling just as sharply. Things began to look grim for the equity market, but just as quickly, the market reversed course and began to recover. The result has been a solid start to the year with the S&P broad market index up 9.19 percent through April 5. […]

April 12th, 2021|Categories: Daily Journal of Commerce|Comments Off on OP-ED: Federal Reserve Underpins The Equity Market
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