Indices Mysteries

With no one to steer the course, a ship is like an unbridled horse.
Any system will rot to naught without a leader at the helm to direct
Valsa George “Captaincy”

Where is Jerome Powell? An inflation number was reported last week. Who cares? The Federal Reserve is meeting next week, and they may vote to raise interest rates further. Ho hmm. We were supposed to have had a banking crisis six weeks ago and since then the esteemed chairman seems to have gone missing. Certainly, things seem to have gone silent. The stock market couldn’t even make it to the front page of the Wall Street Journal’s April 28th edition having to settle for page B1 with the rather insipid headline “U.S. Stocks Advance for Two Months In a Row”. Insipid but nonetheless true as the S&P 500 rose 1.6% for the month making a new high for the year with a return of 9.2% for 2023 to date. Perhaps more than any year in recent memory though this is a market that is confoundingly difficult to measure with the Dow Jones Industrial Average rising 2.5% but the Nasdaq Composite barely positive with a return of only 1/10 %.

Temperature is measured by Fahrenheit or Celsius and distance by English or Metric systems, but the tools used to measure stock market performance are much more varied and potentially more confusing. For much of the past one-hundred years the Dow Jones Industrial Average was the preferred measure of US stock market returns but in the past several decades it has been superseded by the S&P 500 which is a “basket” of stocks actually numbering 503. Each of those individual stocks weighting in the index is based upon the current value of that company’s publicly traded shares, commonly referred to as capitalization, with the largest company in the index, currently Apple at 7.25%, and the smallest First Republic Bank at 1/300 of 1%, meaning that a price movement in Apple has 2,227 times the effect upon the S&P 500 than does First Republic Bank. The three most commonly used categories of stock market capitalization are large-cap, companies with a capitalization of $10 billion or more, mid-cap with companies between $2 billion and $10 billion and small-cap, companies from $300 million up to $2 billion. The shares of those three as a percentage of the total US stock market are 70%, 20% and 10% respectively. Note that the S&P 500 is composed of 84% large-cap and 16% mid-cap so as an index it modestly underweights mid-cap stocks and excludes small-cap stocks entirely.

The reason for taking this detour into the somewhat technical is that it leads to a rather large point which is that the indices we use to measure stock market returns are currently giving extremely varied rates of return and thus make it difficult to answer a seemingly simple question, “how is the stock market doing” and, more specifically, those indices became particularly confusing at two specific times, the release of an extremely surprising and positive employment number in early February leading to concerns about the likelihood of further fed interest rate increases and the “banking crisis” in mid-March. Examples abound but we’ll satisfy ourselves with the sharing of a modest number. A different variation of the S&P 500 is an equal cap weighted version with each stock in the index having an equal influence on its resulting value. From the start of the year through March 3rd the “normal” S&P 500 was +5.69% and the “equal weighted” version +5.56%. From that date through the end of April the returns are +3.29% and -2.74%. In the first paragraph the variances in the returns of the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite were noted. Year to date through month’s end those returns are 9.2%, 3.5% and 17.1%. Commonly used indices used to measure small-cap and mid-cap stock performance are the S&P 600 and the S&P 400 respectively. On February 2nd those indices were significantly outperforming the S&P 500 with returns of 13.8% for the 600, 12.3% for the 400 and 9% for the 500. From that date through April those returns are -12% for the 600, -7.6% for the 400 and -1.1% for the 500.

The variances in stock market returns also manifest themselves in the returns between different sectors of foreign markets and the US market as well. An index used to measure the performance of foreign developed markets (Japan, England, France, Switzerland, Germany etc.) is the MSCI EAFE. On January 19th EAFE was outperforming the S&P 500 by 5%. On February 6th those returns were virtually identical. On March 10th EAFE was again outperforming by 5%. On March 21st they were the same. As of the end of April EAFE is outperforming by 2.6%. German, French, Spanish and Italian stock markets are positive through April between 17.6% and 19.2% with French stocks outperforming the S&P 500 by 10%. China’s stock market was up 17.2% on January 27th, 11% more than the S&P 500%. Since that date through April China’s down 15.3% with the S&P 500 +3%. So, there we have it. If we knew what it all meant it wouldn’t be a mystery but it is and so we don’t. Though shrouded in mystery, our wager is still on the bullish side.

For 60 (equity)/40 (fixed income & cash) April was a walk on the mild side with the equity share +1.8% and the fixed income & cash returning -1% due to a modest rise in interest rates resulting in a +.40% for the month and approximately 3% year to date. For three months portfolios have acted like a teeter totter with moderate ups and downs leaving returns close to neutral.

Mark H. Tekamp/May 5, 2023

Going Without the Knowing

Every piece has a place that determines where you start
If a piece is missing from where the parts should meet
It distorts the whole picture and the puzzle can’t be complete – Anonymous

For investors focused primarily upon the behavior of the financial markets the first quarter seemed to offer a relatively normal recovery from a difficult 2022. Both bonds and stocks rose in value, so it wasn’t difficult to feel a sense of relief as last year’s 15% losses for 60/40 stock bond investors provided the welcome relief of 3 ¼ % profits. The onset of the new year offered the hope of something a bit better than that though as January represented close to the entirety of the quarter’s gains with February drawing down some portion of those profits and March restoring the greater amount of them with the S&P 500 rising 7.50% for the quarter and 3.7% for the month. The fixed income markets mirrored the equity markets by rising in January, falling in February and rising again in March. While a cursory glance of the equity markets might not reveal much in the way of the dramatic, a closer examination of the market exposes something a great deal more interesting.

The first hint of something interesting lying beneath the surface of the returns of the indices is by observing the dramatic variance in the returns of the indices themselves. The Dow Jones Industrial Average was up less than 1% but the Nasdaq Composite was up 17%. Of the eleven sectors of the S&P four, Utilities, Health Care, Energy and Financials, were negative. Three, Information Technology, Communication Services and Consumer Discretionary, were positive by double digits. Digging a bit deeper still one would discover that Information Technologies’ 21.6% return and its two largest companies, Microsoft and Apple, with a combined weighting of 44% of that sector and whose returns of 20% and 27%, representing 48% of that sector’s return, aren’t very far distant from one another. The truth that the stock market is back to riding on the returns of the “mega cap” technology companies is revealed by investigating the returns of the other two sectors. Second place Communication Services is dominated by the 38% weighting of Meta (Face Book) and Alphabet (Google) with respective returns for the quarter of those two companies of 76% and 17 ½%, explaining 76% of that sector’s return of 21%. Third place Consumer Cyclicals’ combined weighting in Amazon and Tesla is 34% and with returns of 23% and 68%, are responsible for 78% of that sector’s performance of 16%. So, we’re left confronting the reality of an entire index being dominated by the performance of six companies, representing 19% of the capitalization of the index, providing 69% of the S&P 500’s 7 ½% return for the quarter.

The onset of April brings showers, but it has also brought investors the welcome relief of the prospect of a Fed declaring victory over inflation and ending its rate rising cycle. In a world where debt is three times the size of the global economy, we’re well past the point of paying down the debt so we’re left with the need to refinance it by borrowing new money to issue new debt to replace the “old” debt as it matures. For the “treadmill” to continue to turn over the world depends upon the availability of collateral; the requirement for an asset to support the existence of the loan. The availability of that collateral is referred to as liquidity and since 2022, central banks, ostensibly concerned about levels of inflation, have caused global liquidity conditions to be a receding tide, leading to the inevitability of something in the global financial system breaking and indeed, the likely cause of the market declines in 2022. The current inverted yield curve, in which longer maturity securities pay lower rates of interest than those of shorter maturities, is an indicator of a lack of system liquidity. In March we had two banks in the United States requiring support to avoid the possibility of a larger problem in the banking system. Interestingly though, the onset of “the banking crisis” led to a recovery in the stock market as the S&P, whose year to date return had fallen to less than 1% on March 13th, added 6 ½% to that number by month’s end.

The future would now seem to be able to be seen with a bit more clarity. Until mid-month investors were caught up in a confusing mix of good economic news being bad financial market news due to the belief that the Fed wanted slower rates of economic growth in its quest for a lower rate of inflation. While the Fed denied that its response to “the banking crisis” at mid-month represented any sort of retreat from its policy, the reality of its response is likely to be characterized by a restoration of the pro-liquidity actions of its policy from the onset of the pandemic in early 2020 through 2021, as demonstrated by a dramatic narrowing of the yield spread between two year and ten year treasury rates from nearly 1% at the onset of the month to close to ½% at the month’s end. So, if we’re back to inhabiting a world in which good economic news is also good financial market news what should investors expect over the next several months?

The reality of a world characterized by very high levels of debt means that the provision of an adequate level of liquidity is the single most important determinant of the outlook for the stock market. As its insufficiency explains the negative returns delivered by the 2022 stock market, so is its restoration likely to be the source of the positive returns experienced by investors in 2023. Remember, debt is a global and not just a domestic phenomenon and with global capital flows of $170 TRILLION and the value of the US stock market $44 trillion a 5% change in the former represents a 20% change in the latter.

Mark H. Tekamp; April 10, 2023

Neither Teetering nor Tottering

I look like I’m stable; Like nothing can move me; I look like I’m steady, Like nothing will shake me; But really I teeter; To every work I flinch; But really I totter; To every change I break. Vishal Dutia, Teeter Totter

After making its 2022 lows on October 14th the S&P 500 provided investors a very nice recovery of nearly 16% from that date through February 14th. Marrying a much sunnier stock market to the economic and financial news was sufficient to provide investors the glimmerings of an early onset of Spring. A Fed near to done raising interest rates. Inflation cresting and on its way to lower levels. The economy showing a bit of a spark and our starting to hear talk of “soft landings”. Then came the release of the January payroll number on February 3rd with a figure of 517,000 shocking a market expecting a 188,000 number. The market became a bit more nervous seeing an onrushing hawkish Fed through its rear-view mirror wondering if it wasn’t about to crash the party. Then on February 14th came the release of the January Consumer Price Index number which, while in line with expectations, wasn’t good enough. The same day news of the highest rate of increase in personal spending in two years was sufficient to raise already elevated fears of a Fed, perplexed by the economy’s failure to submit to its will by revealing evidence of its deceleration, and so the S&P sacrificed 4% in the second half of a no longer quite so sunny February.

So, at this point let’s step back, look at the cards we’re holding, discuss how to best play the hand we’ve been dealt and see about the setting of expectations for what the rest of the year may be offering us. Demonstrating some measure of self- restraint, we’ll focus upon just three specific elements. That should provide us the luxury of covering each in sufficient detail that we should be able to walk away from this discussion in possession of some measure of clarity and light.

First, as has been mentioned in prior commentaries, the pandemic caused the inflation and it’s receding further back into time will be the cause of its decline. It was the pandemic that led to the “locking down” of the economy, its subsequent reopening, and the $2.3 trillion dollars the federal government paid many of us to stay home. That is $30,000 for a family of four. The economic consequences of closing down a $25 trillion economy are profound and even three years later those effects still linger. That is a piece of this particular puzzle often missing in the analyses of those who make it their business to study the subject and it contributes to the offering of prescriptions for a problem whose solution is likely not what they or the Federal Reserve are seeking to prescribe. Giving people lots of money while not providing its recipients the means of spending that money on the goods and services they would normally have sought to purchase created effects that have largely subsided but the current rate of inflation is a consequence that, while declining, is one of the effects that still linger.

Second, we come to the realization that the current vibrancy of our national economy is having a limited effect on the current level of inflation. Remember. It’s not the economy that is causing the inflation. It was the pandemic. The awareness of this removes the rationale for what the Federal Reserve is doing. As discussed in the first paragraph, the direction of the stock market was very clearly altered by the strength of the economic data which means the stock market is currently a believer of the following set of beliefs. The vibrancy of the economy is a significant contributor to the current level of inflation. Thus, the economy needs to slow down materially for the rate of inflation to decline. The Federal Reserve has been very aggressive in raising interest rates. The increases to date have failed to slow down the rate of economic activity making it necessary for it to raise interest rates for longer and to higher levels. Those rate increases will quite possibly push the economy into a recession leading to a decline in the level of corporate profits and the stock market. This is most likely not true, but most believe it is.

Our third point is that the price of something is what establishes the balance between supply and demand. When demand increases faster than supply the price of that something will increase. Financial markets are forward looking and react in the present to what they expect to experience in the future. The stock market made a low this past October and has since, even after February’s modest decline, recovered approximately half of its prior 22% decline. The current economic data showing an economy stronger than many expected is good news but does not match the very negative sentiment of investors towards the economy and the stock market resulting in the demand for stocks being currently low and thus their prices. As investors become increasingly aware that inflation has peaked and is declining and the economy will continue to be stronger than expected then the demand for stocks will increase and you, dear investor, will own an asset whose price will likely rise.

60 equity 40 fixed income and cash investors who celebrated the first month of 2023 with returns of 4.7% surrendered a bit less than half of those gains in February experiencing portfolio declines of 2.1% leaving a year to date return of 2.6%. The guiltiest party was the 3% decline in the equity markets with large cap value and foreign markets declining a bit more than that and small cap and large cap growth a bit less. The fixed income portion didn’t help though hurting less with losses of near 1% as rising interest rates made bonds worth a bit less than at the end of the prior month. The first half of the month actually added to January’s gains, so it was the market’s just over 4% decline in the month’s second half in which the damage was done.

Mark H. Tekamp; March 5, 2023

The Morn’ of the Foreign?

Nature’s first green is gold, Her hardest hue to hold…So dawn goes down to day. Nothing gold can stay.. – Robert Frost – Nothing Gold Can Stay

Investors may have been thrilled to realize that all that was necessary to restore the pre-2022 luster to the stock market was the simple matter of dropping the two at the end of the year and replacing it with a three. The Wall Street Journal enthused “Nasdaq Posts Best January Since 2001”. The S&P 500’s +6.28% return for the month was certainly a pleasure to experience but even better was the performance of small cap stocks (S&P 600) +9.49% and mid cap stocks (S&P 400) 9.23% returns. One quarter of the S&P 500’s return for the month actually occurred on the final day of the month with the market celebrating, from its perspective, the “good” news that working folks pay checks are starting to grow more slowly and the houses we live in are no longer increasing in value or at least not much. The market is clearly hoping that if the American people are able to demonstrate that the pain that the Federal Reserve has inflicted upon us is sufficiently great then maybe they won’t have to inflict much more of it upon us. We shall see.

The stock market took the month to remind those of us born in years when men named Eisenhower, Kennedy and Johnson were president that this is most definitely not the stock market we grew up with. Three of the eleven sectors of the S&P 500 were up 9% or more for the month. Leading the way was Consumer Discretionary returning 14.99%. One quarter of that sector is actually Amazon. Add Tesla into the mix and we’re at 38% of the total value of that sector in those two companies. Tesla, by the way, is worth ten times General Motors. Next up, Communication Services, returned 14.23%. Just under a quarter of that sector is Alphabet (aka Google) and with Meta (aka Facebook) we’re at 40%. In third place, Information Technology, returned 9.26% with Apple and Microsoft together representing 43% of that sector. It’s starting to look like déjà vu all over again. Big cap tech is back!

As pleasant as it’s been this month for investors in the good old red, white and blue, it’s the markets existing beyond our borders where returns for the month are so large it takes two numbers to represent them. Indices composed of the 50 largest Asian companies returned 12.48%, the 50 largest European companies 12.53% and the 40 largest Latin American companies 10.65%. Italian and German stocks were up over 12% and French and Spanish over 11%. Since September 1st of 2022 MSCI EAFE, an index of foreign developed markets, has returned 18.24%, dwarfing the S&P 500’s 3.46%. That is very interesting and well worth the taking of some of our time together to discuss both why and how long this may continue.

Once upon a time US investors could actually add to their overall portfolio returns by investing in foreign markets but that is getting to be quite a long time ago. The ten year average annual rate of return of the S&P 500 is 12.58%. Foreign developed markets have returned 4.96% and foreign emerging markets 1.49%. Returns in foreign markets, not to place too elegant a phrase upon it, rhyme with duck. Investors would have to had the life span of Bowed Whales and Giant Tortoises, together with perfect foresight, to view investing in foreign markets as having been a particularly good idea. Peering back through the mists of time we may recall a time when, prior to its becoming history’s longest lasting deflating asset bubble, the Japanese stock market was the world’s largest, thereby assisting foreign developed markets in their outperforming the US five fold from 1971 to 1988. From 1988 to 2002 the US matched Japan’s stock market’s deflation with our own inflation as the US outperformed foreign developed markets ten fold. For the five years, from 2003 to 2007, the US underperformed by half but since then, as previously noted, its been all USA all the time.

The extended and fairly dramatic variance in the performance of the two markets has left foreign markets valued at roughly 80% of the size of their economies in contrast to the US whose stock market is valued at just over twice that of our own. Not to get (hopefully) too “geeky” here but the contrasts in the valuation of the two market universes really are striking. Citing the US first and foreign developed markets second; Price/Earnings 16.92 vs 12.10; Price/Book Value (the liquidation value of a company) 3.20 vs 1.52 and dividend yield 1.88 vs 3.92. Before we wander off this path lets first define foreign developed markets which is one-third Japan and the United Kingdom. Adding in France and Switzerland gets us to half and tossing in Germany, Australia and the Netherlands to three-quarters. Emerging markets are two-fifths China and Taiwan. Add in India and South Korea and we’re at two-thirds. Add Brazil, Mexico and South Africa and we’re at 80%. So, just possibly, the variance in the valuation of the two markets has reached such extreme levels that this year may see a narrowing of that differential, not by the US’s failure to create favorable returns but by foreign markets creating returns more favorable still.

60/40 investors saw their portfolios experience returns of approximately 4 ½% for the month with the equity share contributing 6 ½% and the fixed income 1 ¼%. Investors’ portfolios, in the absence of significant deposits or withdraws, achieved their maximum values at year end 2021. The average investor experienced losses of 15% in 2022 so we’re now closing in on the need for an additional 10% to match their end of 2021 values and achieve new all time highs. The tail winds are growing stronger and the headwinds are likely to continue to abate so here’s hoping 2023 will be a year to celebrate!

Mark H. Tekamp; February 2, 2023

Not Believing But Seeing

What you see depends not only on what you look at, but also where you look from. – James Deacon

2022 will be memorialized for investors by market commentators by their use of tag lines such as “returns for 60/40 portfolio investors worst since 1871”. For those investors whom I’m best acquainted with, such as yourself, I’m looking at returns for the year in the negative 14% to 16% range, so maybe things haven’t been all that bad over the past one-hundred and fifty-two years. But one does recollect the Global Financial Crisis of 2007-2009 and that wasn’t this, thank heavens. So, it’s a new year and a good time to step back, size up last year and what it was, and do our best to take the rear view and turn it into a windshield so we can gaze into the year ahead and do our best to set expectations.

Two errors many observers of the financial markets may be making is their confusing cause with effect and their use of an incorrect starting point to begin their analysis. First, 2022 isn’t particularly difficult to explain. Interest rates began the year at exceedingly low levels and the increases in rates, if not that great in the absolute, were very great in relative terms as rates  on the ten year US Treasury rose from 1.52% to 3.88%;  sufficient to create losses of over 15% in those and similar investments at year’s end; not very far distant from the -18% return for the S&P 500 for 2022. The result was investors were left having nowhere to go to protect their capital outside of cash. The decline in the stock market isn’t difficult to explain either. The value portion of the S&P was down a modest 5.2% so it was growth’s decline of 30% causing the real damage. Markets discount future streams of financial benefits using a discounting factor based upon levels of interest rates. Rates go up significantly, so does the discounting factor used to value them, and growth stocks, which by definition are more dependent upon their prospect for future growth, get hammered as their valuations get marked down while value stocks survive relatively unscathed.

Interest rates went up substantially because of the Fed aggressively raising interest rates with the Fed Funds Rate rising from essentially zero at the start of the year to 4.50% at the end of it. 10 Year Treasury rates, as mentioned above, also rose but only by half that amount, leaving the interest rate markets in the extraordinary position of offering investors higher rates of return for lending to the US Treasury for one day than for thirty years. If you think that is unusual you are exactly correct. It is.

So next we ask, why did the Fed believe it was a good idea to raise interest rates so aggressively last year? You know the answer to that question as well. A word we hadn’t heard for awhile until last year. Inflation. So finally, we get to the single most important question of all; the cause that explains the effects we’ve discussed thus far. Why, after having gone AWOL for so many years, did inflation reappear in 2022 or, more accurately, in 2021? Now we need to get to the correct starting point for the various parts of our analysis to fall together into a hopefully neat and comprehensible narrative. THE PANDEMIC. Closing down the global economy was a very large deal. So large it had never happened before in the entirety of human existence. Exiling working people from the work force left tens of millions of us dependent upon the federal government for our financial support. But our uncle was not Uncle Scrooge but rather the most generous person whom you can imagine. So generous in fact, that it left American’s with $2.3 trillion more in their bank accounts after the lockdowns end than before it. For those counting, that is a 2.3 followed by ELEVEN zeroes. Even in an economy of $25 trillion that is a great deal of money.

We had all that money to spend but, outside of receiving visits from the Amazon truck, not many places to spend it. As the economy rose from the horizontal and struggled to go vertical there was an additional problem; supply chains. The stuff people wanted to buy either couldn’t get produced because of producers’ inability to get the stuff to make it or, even if they could make it, they couldn’t get it to you. So, if we connect the dots, the picture we see is a great deal of money available to buy things that had a great deal of difficulty being produced leading to…you guessed it. Higher prices, aka inflation.

Now, you may be thinking two things. The first being that if the pandemic caused inflation, then why did the Federal Reserve need to raise interest rates given that the pandemic (here we fold our fingers together in prayer) was a “one and done” event leading one to believe that inflation was going to go down even if the Fed had done nada? I really don’t know. If you would like to call the Federal Reserve and ask them their phone number is 1-888-851-1920. Really. The second thing you may be thinking is, “the pandemic will have happened three years ago in just a couple of months. Isn’t that getting to be kind of a long time ago?.” Again, you are correct. It is also correct that while the global economy is a very large lake, the shutting down of the global economy was a very large boulder to drop into the middle of it. To this very day its rippling effects continue to radiate outwards but with a steadily diminishing effect. So, we are getting back to life as it was pre-pandemic. The economy will grow. The markets will rise. Jerome Powell will cease his impersonation of your most mischievous family member. The sun is preparing to shine ever more brightly.

Mark H. Tekamp/January 8, 2023

Can I See Clearly Now?

Oh, yes I can make it now the pain is gone; All of the bad feelings have disappeared;
Here is that rainbow I’ve been praying for – lyrics from “I Can See Clearly Now”


Observers of the market entertained themselves for much of November debating what the stock market was most likely to view as good news. Signs of slower economic growth said some as that was what was necessary to get the Federal Reserve to cease and desist from its current interest rate rising cycle. Others though, more concerned about the possibility of economic recession, were looking for signs that the economy still possessed some semblance of a healthy heartbeat. So, the market’s reaction to the November employment numbers released on Friday, December 2nd was an event much anticipated. The release of the numbers at 8:30 am that day showing surprising strength in the numbers of people finding employment was greeted in the futures market with an unequivocable thumbs down. Shortly thereafter, the Dow Jones Industrial Average was down 500 points. That seemed to make matters clear. The market is more afraid of Fed Chairman Jay Powell than it is of a bad economy. At markets close however, that number was positive, albeit a modest 35 points. And so, the debate will continue.

Fortunately for investors though, there wasn’t any debate that November was a month to be thankful for. The equity portion of investor’s portfolio rose near 7% for the month and the foreign markets rose an eye popping 12 ½%. November succeeded October’s market with its 8.10% return on the S&P 500 (November’s return was 6.02%) so we now have a market that has come close to reducing by half the market’s low year to date on September 30th when it was down 24%.

For stocks, we have recently been grateful, but it has actually been the bond market providing the greater amount of entertainment value. Almost everyone understands the logic that committing one’s capital for a greater amount of time will normally be rewarded by the promise of a higher return. That simply rhymes with risk and return. If I’m going to buy a 30 year US Treasury bond I would expect that the interest I will be paid will be materially greater than if I purchase a 90 day Treasury bill. The current yield curve measuring maturity and interest rates at which the US Treasury is currently required to borrow, makes sense only if it is held in from of a mirror. The current 90 day Treasury bill rate is 4.37%. The 30 year Treasury bond rate is…3.80%. Quite literally the United State Treasury will now pay you more to lend them your money overnight than for close to a third of a century. To say that something doesn’t make sense is a good deal easier than trying to make sense of it, but let’s make a brief effort to do so. The financial markets and the federal reserve seemingly inhabit different planets, or at the least have very different perceptions of reality. The Fed is raising rates ostensibly to combat inflation but if the financial markets agree with the fed that inflation is likely to be persistent then why do we have the thirty year rate at 3.80%? Investors perhaps are better served listening to the bond market than the economists at the federal reserve.

Stock market bears are not yet an endangered species. A headline from today’s press headlines “From Bank of America to Morgan Stanley, Wall Street giants are expecting stocks to crash more than 20% next year.” The AAII (American Association of Individual Investors) survey of November 30th indicates that 24.5% of investors are bullish versus 40.4% that are bearish. A Google search reveals that there are 290 million references to a bull market contrasted to 653 million to a bear market. My last name isn’t Wilson, and I don’t work for Morgan Stanley, but allow me to offer a few tidbits of insight on this subject. For the past eighteen months, where the dollar has gone, so has the stock market gone, but in the opposite direction. Through most of this year it has been dollar up and stock market down. Since the market low of September 30th, US dollar is down 6.8% and the S&P 500 is up 13.9%. And the S&P 500 is actually a laggard. Small Cap stocks (the S&P 600) and Mid Cap stocks (the S&P 400) are both up 17% and Foreign Developed Markets (EAFE) is up 20%. Those aren’t rallies in a bear market. Those are market reversals. Enjoy the ride.
Year to date, investors have experienced three types of markets, those where both stocks and bonds were down, those where stocks were up and bonds were down and now, most recently, where stocks are up and bonds are flat. 60% stock and 40% bonds and cash portfolio investors have had their losses for 2022 at end of the 3rd quarter of almost 20% cut close to half with those losses now at 10%.

Let’s close with a few more words about the respective fortunes of the value and growth sectors of the S&P 500. Year to date value is now close to break even with a -1.4% return, contrasting with growth’s -23.6%. In the past three months those returns have been +7.8% and -1.4%. For November value returned 5.9% and growth 6.2%. The final day of the month, Tuesday the 30th, the S&P rose 2.8% with value contributing 2% but growth 4.4%. So, what do YOU think? If you could only own one or the other, which would it be?

Mark H. Tekamp/December 5, 2022

Goldilocks & The Three Scares

When confronted with a challenge, the committed heart will search for a solution. The undecided heart searches for an escape. Alpha Wolf Capital


The 3rd quarter certainly started off nicely enough with the S&P 500 rising 14% from July 1st to August 16th but the second half of the quarter was not nice declining 17% by quarter’s end delivering investors a -4.9% return for the quarter as a whole and now -24% for the year. Investors were in no mood for contrarian thinking as put volumes and premiums are setting records (wagers on additional market declines), portfolio cash levels are at their highest in twenty years and speculators are holding near record short positions in most major market indices.

The markets are clearly focused upon three concerns; inflation that they fear may continue to remain elevated and persistent, a Federal Reserve that seems intent on raising interest rates to the heavenly realms and an economy that responds to a hawkish fed by going into a recession with the accompanying harmful effects on corporate earnings. Why be a contrarian when seemingly there isn’t any reason to be contrary?

But there is. From April 2020 to January 2022 the S&P traded at levels of between 20 and 23 times earnings. Currently it is at 16 meaning that the market decline is attributable to valuation levels rather than lower earnings. The source of our current battle with rising prices is easy to explain. To offset the impact of having shuttered much of the national economy at the onset of the pandemic in March 2020 the federal government responded by an historically unprecedented bout of spending leading to a 26.4% increase in M2 money supply from April 2020 through year end 2021. For the past 9 months M2 has been rising at a miserly rate of just 2.3%. Commodity prices sniffed this out months ago. Both crude oil and copper are down 35%, echoing gold’s 22% fall since March.

Meanwhile consumers are in great shape. Much of that money that Uncle Sam spent hasn’t disappeared but is sitting in our bank accounts. Commercial bank deposits peaked at $3.2 trillion above their pre Covid levels and are still $2.7 trillion higher. That is an amount equal to more than 10% of the size of the US economy. The Atlanta Fed’s estimate for growth in the 3rd quarter is at 2.3%, a dramatic improvement over the near zero estimate of just several weeks ago. Remember, corporate earnings aren’t inflation adjusted so with inflation still tracking at 6% + levels, non-inflation adjusted GDP may well top 9%, significantly above its 6% average of the past 75 years.

Could it be that we’re near to being invited to share Goldilock’s “just right” bowl of economic and financial market offerings? Inflation past its peak and set to decline. A Federal Reserve near the end of its rate rising cycle and an economy poised to surprise to the upside. With this unfolding scenario marrying an equity market discounting a great deal of the negative, and very little of the possibility of the positive, maybe we should start to prepare ourselves to go bear hunting!

Perhaps the financial market exhibiting the most extreme forms of behavior is that of the global foreign exchange markets, with the value of the Euro and the Japanese Yen declining 14% and 20% respectively year to date, in relation to the US $. It is interesting that the Japanese market’s 26% and European market’s 29% declines are so similar to that of the S&P, but US investors returns are negatively impacted by holding assets valued in those currencies. For example, the Japanese TOPIX index is -7.65% year to date in Japan’s local currency terms. Should the dollar reverse course, the returns on foreign stocks could be particularly interesting for US investors.

The first three quarters of the year have been difficult for investors as bonds have followed stocks on their negative course. The 10 year US Treasury rate started the year at 1.52% and finished September at 3.83%. The dramatic rise in interest rates has damaged the market value of fixed income instruments with AGG, an index of the investment grade taxable US bond market, -15 ½% for the year. The result has been unpleasant declines in the value of investor’s portfolios with the equity shares -24.6% and the fixed income portion down approximately 18% leaving the 60/40 portfolio down 21.3% for the year.


Mark H. Tekamp/October 6, 2022


Life is like an ever-shifting kaleidoscope – a slight change, and all patterns alter. – Sharon Salzberg


The headlines of the various stories in the July 30th Wall Street Journal seemed to leave little doubt as to which direction this current version of the economic train was heading. “Recession or Not, the Recovery Has Ended.” “Are We in a Recession Now?” “Jobless Claims Hold Near Highest Level of the Year.” “Inflation Hits Fresh Four-Decade High.” “Heard on the Street: Recession Isn’t Necessary for Investors to Feel Bad.” With that by way of counsel another headline “S&P 500 Posts Best Month Since 2020 as Stocks Rally” seemed as out of place as a rose in a briar patch.

Certainly investors who, for much of the year, were long on suffering even as they were wishing they had been short on stocks, were grateful for the respite in their experience of a sea of red as the S&P 500 put in an 8% rise for July and 12.8% since the, don’t we hope, lows for the year on June 16th which, perhaps not coincidentally, was the day after a meeting of the Fed’s Open Market Committee where they voted to raise interest rates .75%. Curiously though, while with the one hand the Fed was raising the Fed Funds Rate, the interest rates set by the other hand, that of the financial markets, are declining. The high for the 2 Year Treasury Rate was 3.45% on June 14th. It currently rests at 2.85%. The 10 Year Treasury Rate peaked that same date at 3.49% and has since fallen to 2.68%. The financial markets, which, on June 14th, were predicting 90- day interest rates to reach 4.25% by year end now expect that rate to rise to just 3.50% at the beginning of December and then to begin to decline. In other words, the financial markets are predicting the Fed will be lowering interest rates before the end of the year. So, pray tell, what is going on here?

Could it be that the explanation is to be found in the news story headlines in the first paragraph of this commentary? The Fed is raising interest rates and those higher rates are threatening to, if not yet actually having already done so, push the economy into the purgatory of recession. Possibly, but not likely, as evidenced by a number of counterfactuals. Why is the stock market rallying? And not just that it is but how it is. The two best performing industries of the S&P 500 are, since June 16th through July 27th, Automobile Manufacturers +26.8% and Homebuilders +25.2%. And of the four sectors of the S&P 500 up the most in the month of July three of the four, Real Estate, Consumer Discretionary and Industrials (the fourth is, not surprisingly, Technology) are those sectors that tend to rally at the BEGINNING of an economic recovery. So truly we do have a collision of narratives here with headlines trumpeting recession and the stock market rally saying recovery.

Dare we say that it may be Goldilocks? The economy may be slowing enough to allow the Fed to hit the pause button on further interest rate increases after another likely .50% on September 21st that may allow an avoidance of notable damage to corporate earnings. Possibly there is another factor at work here as well. Inflation comes in two “flavors,” demand-pull and supply-push. The former is the classic “too much money chasing too few goods.” The latter, one less frequently commented upon, is a lack of supply leading to higher prices. The Fed can certainly reduce economic demand by raising rates sufficiently to push the economy into recession, but interest rate increases don’t do a thing to increase the output of gasoline or beef. Help though may be on the way. Producer Prices measure the cost of economic inputs, for instance the price of lumber as a cost of constructing a new house. The prices of Core Crude Goods, a rate excluding food and energy prices, is up 7.1% year over year and has been declining. The Headline rate, which does include those items, is up an eye watering 58% year over year but since June 1st energy and agriculture prices have fallen 7.45% and 10.24% respectively. So maybe it’s getting close to the time for the Fed to declare victory over inflation and to redirect its focus upon supporting economic growth rates.

If indeed Goldilocks is about to be served her meal just the way she likes it the good times for investors may be much closer to their beginning than their end. The S&P 500 is still negative 12.6% for the year, certainly a much better number than the low in mid- June of -22.5%, but corporate earnings are actually up for the year so the decline is solely attributable to a falling valuation level which is down to 17.2 times earnings, close to its historical average of 16. The story for Mid Cap and Small Cap stocks is a distinctly different one with their trading at 12.7 and 12.4 times their respective earnings. Also worth noting is that the US economy may, for the near future, be experiencing a rate of growth exceeding that of most of the rest of the world so, with their earnings being almost solely dependent upon domestic demand, which may be yet another characteristic in their favor.

So, some good news at last. For 60/40 portfolios the equity portion returned a cool 8% with Foreign’s 5% pulling that figure down below that of the S&P 500 but with small cap’s +9.60% partially offsetting it. Fixed Income contributed a modest +.50% aided by the month’s interest rate declines to overall portfolio returns of 4.5% reducing the negative year to date figure to -10.7%. Here is hoping for a hot August!


Mark H. Tekamp, August 1, 2022

Vision Decision

“Every man takes the limits of his own field of vision for the limits of the world.” Arthur Schopenhauer


As we reached the end of the month, the quarter and the first half of the year the commentary on the economy and the financial markets was, in a word, grim. “Brace for Recession Shock After Worst Rout in 52 Years” Bank of America warned. “Stocks End Lower, Capping Off The Worst First Half In More Than 50 Years” headlined. Blockworks Daily, not appearing to be certain how to answer the question asked, “Did we survive?” The first quarter’s -4.60% return on the S&P 500 now looks like a walk in the park compared to the second quarter’s -16.4% containing within its confines the two worst months of a not very good year’s -20% draw down with June’s -7.6% being exceeded only by April’s -9.0%.

Investors are left to wonder if it would be best to exit the market with the .80 cents remaining of their beginning of the year $1.00, rather than to risk further losses in their already depleted portfolios. Declining markets create their own reality. With everyone who has sold glad that they did, and with the barrage of negative commentary offering multiples of reasons to sell, why continue to remain invested in a market which has offered nothing but pain this past six months? Certainly, the mood of our fellow citizens is gloomy. The University of Michigan’s Consumer Sentiment Survey has been measuring the emotional state of this nation for many decades. We’ve known some less than happy times including May of 1980 when interest rates were at 20% with double digit rates of inflation and unemployment reflected in that index at 51.7%, and the Global Financial Crisis of 2008-2009 when it was 55.3 in December 2008. June 2022 though, marks the historical low of our spirits with it now at 50.0.

We are now one year into our cohabitation with inflation. In fact, last year’s near 5% market decline in September of that year was in response to the Federal Reserve’s going public with their plans to terminate their Quantitative Easing program in preparation for their commencing a cycle of their raising interest rates in what is now this year. If we could see that train coming down the track heading towards us, then why the increasingly negative response from the stock market as we’ve progressed through this year? Some might offer the one word response “inflation.” But, if we knew inflation was an issue one year ago and its level isn’t notably worse than anticipated then, to repeat, why the decline in the stock market? The answer is not the inflation but the Federal Reserve’s interest rate increases of which we’ve now experienced three.

The global financial system is a highly leveraged one and a system that has become increasingly more fragile as the level of borrowed money upon which it rests has risen. The Federal Reserve’s interest rate increases are applying additional stress to that system and the stock market, and financial markets globally are concerned quite simply that “the Fed” may continue to raise rates until something “breaks.” The bullish case rests upon the belief that if we know this, they know it as well and thus are looking for a reason to terminate further rate increases sooner rather than not. That excuse may be presenting itself right here and right now as the economy is displaying notable signs of deceleration, accompanied by increasing evidence that inflation has passed through its peak levels and is prepared to trend downwards. Evidence of this is not very difficult to find. Copper and wheat prices declined 14.4% and 16.1% respectively in June. Natural gas prices fell 28.23% from June 7th to 30th. Crude Oil (WTI) prices fell from $122.11 to $105.76 per barrel from June 8th t the 30th, a decline of 13.4%, and 10 year treasury rates declined from 3.43% on June 13th to 2.94% at months end. Those are very large changes and would seem to provide incontrovertible evidence of a slowing economy with significantly declining inflationary pressures. Quite likely we are approaching the time when the Federal Reserve will declare victory over inflation and choose the new war against the possibility of economic recession to which it will redirect its focus. When this happens, investors should not be surprised to see a notable reversal in the downward trend stock prices have been on this first six months of this year.

June was negative as we’ve discussed, but also interesting is the similarity of the numbers expressing that negativity. Accompanying June’s negative 7.6% read was growth’s -7.8% and value’s -7.5% with small cap stocks down 7.8%. If this is misery at least there’s company. 60/40 (equity/fixed income) investors received at least a small measure of relief with the stabilization and subsequent decline in interest rates as bonds delivered a near break-even performance. Investors in those portfolios find themselves negative 14.32% for the year with 10.5% of that negativity being realized in the second quarter. We all look forward to the better days to be experienced and we look forward to sharing that experience with you!


Mark H. Tekamp, July 7, 2022

Is Jay Your Pal (Powell)?

“Choice without alternative is only a sleight of hand, it is a magician’s force-play during which you believe you have free will, but your fate has already been decided.” – Garth Stein


Federal Reserve Chairman Jerome (Jay) Powell certainly left no chance for misunderstanding on where he stood on incarcerating our country’s least wanted intruder, inflation. Speaking at a meeting of the International Monetary Fund (IMF) on April 25th the estimable chairman offered up these comments. “Getting inflation back to the 2% goal is a critical policy imperative right now. It is absolutely essential to get price stability…”. True to his words the Federal Reserve increased interest rates by ½% on May 4th with some believing that another ¾% may be forthcoming at the conclusion of their next meeting on June 15th. These folks are serious!

The stock market year to date has been an unhappy companion on this journey towards placing the inflation genie back into his jar, closing out the month -12.8% year to date with the 10 Year US Treasury rate having started the year at 1.52% reaching 2.83% at month’s end. Still, if one peels back the veneer of the seeming reality created by those numbers, something VERY interesting is happening beneath the surface.

If the trade weighted value of the US Dollar acts as a thermometer measuring the health of the global economy, the patient has been in a feverish condition most of the year having risen by 9.5% by May 12th. That increase has since diminished to 6.4%. The S&P 500, which was down 5.5% for the month on May 19th, closed the month eking out a +.2% return. Perhaps most interestingly still, the 2 Year US Treasury rate, which had risen to 2.78% by May 3rd finished the month at 2.47%. So, when it comes to the future direction of interest rates, do the financial markets know something that Jay Powell doesn’t know, or at least is not saying? And does this explain the recent recovery in the stock market and the decline in the value of the US Dollar? Stay tuned.

The size of the US federal government debt just passed a nice round number this past month. $30 trillion. In 2021 the US Treasury spent $400 billion paying the interest on that debt at an average interest rate of 1.5%. At current rates that level would be near 3%. If The Fed raises interest rates to sufficient levels to push the country into recession, tax revenues go down appreciably, the deficit widens and the government needs to issue increasing volumes of debt at higher interest rates. Is this REALLY what “uncle” wants? Could “uncle” actually want perhaps a bit of a whiff of inflation to devalue that $30 trillion (and growing) while holding interest rates at levels that “uncle” can afford to pay? Is this “the sleight of hand” that the financial markets are starting to see with the resulting “hawkish” talk of The Fed but “the dovish” walk of the bond market?

Financial market commentators have begun to ask “does the Federal Reserve still love the S&P 500?” remembering fondly those days of yore when every banana peel the stock market would encounter on its journey to steadily higher levels would be met by “the cavalry” of another interest rate cut by the Federal Reserve. Investors should reassure themselves that the answer is most assuredly YES! though not perhaps for the reasons they suspect. An increasing percentage of income taxes are being paid by the wealthier cohort of our fellow citizens and a very large share of their “contributions” are not derived from ordinary income but rather from the realization of capital gains. It is interesting to look at a chart of the rise and fall of tax receipts and the year over year rate of return of the S&P 500. Rest assured. The US Government does care about the stock market.

It has been a challenging year for investors with very little in the way of “safe harbors” to preserve capital with the S&P -12.8% year to date and with interest rates having risen even the bond index (AGG) -9.3%. 60/40 stock/ fixed income investors are looking at losses of approximately 12%. Those losses have narrowed modestly the past several weeks but still investors wonder whether this will get worse and when will the financial markets start to rise rather than fall. The days since May 19th hopefully offer a harbinger of the better days to come with the S&P having risen 6% since then. We’re looking forward to better news in the months that follow!


Mark H. Tekamp, June 3, 2022