Weekly Update 1/17/2022

Your Weekly Update for Monday, January 17, 2022.

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Mike Elerath
CERTIFIED FINANCIAL PLANNERTM
CERTIFIED IN LONG-TERM CARE
Mike.Elerath@beaconrwa.com

Bill Roller
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CHARTERED FINANCIAL ANALYST
CERTIFIED FINANCIAL PLANNERTM
CHARTERED MARKET TECHNICIAN
bill.roller@beaconrwa.com

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Dr. Martin Luther King Jr.

Summary

Markets are closed today in honor of Dr. Martin Luther King’s birthday. Markets ended down last week. The Dow Jones Industrial Average fell 0.29% to 36,231.66 while the S&P500 ended down 1.87% to 4,677.03. The Nasdaq Composite fell 4.53% to 14,935.90. The annual yield on the 30-year Treasury was jumped 21.3 basis points to 2.118%.

Economic data for the week included continued historically-strong producer and consumer inflation readings, while retail sales came in weaker than expected.

U.S. equity markets fell back last week, as investor continued to digest tighter monetary policy and the impact of the Covid omicron variant. Foreign stocks fared a bit better, due to a weaker dollar. Bonds were mixed, with lower-rated bonds outpacing investment-grade, with yields moving slightly higher. Commodities gained in keeping with a weaker dollar and rising crude oil prices.

Economic Notes

(-) Retail sales for December fell by -1.9%, beyond the -0.1% consensus decline expected. Core retail sales, removing autos, gasoline, and building materials, fell a deeper -3.1%—despite expectations for no change. On the other hand, sales for ‘misc.’, building materials, and health/personal care all gained for the month. The weakest results originated from online sales, department stores, and furniture—all down between -5% and -10%—unusual for a holiday season. It’s possible that, due to fears of shipping delays, consumers pulled spending earlier into November rather than December. On a non-seasonally-adjusted basis, retail sales are so heavily tilted toward the year-end holiday season, that such changes can distort normal seasonal adjustments. Regardless, sales are up 17% from 12 months ago, representing solid recovery. However, it wouldn’t be surprising to see retail sales continue to temper in light of fading government stimulus.

(-) Industrial production declined by -0.1% in December, a sharp decline from November, and in contrast to expectations of a 0.2% rise. The manufacturing component fell by -0.3%, led by drops in auto manufacturing and business equipment. Utilities production fell back by over a percent, with a historically-warm month reducing heating needs, while mining (including petroleum extraction) rose by 2%. Capacity utilization declined by -0.1% to 76.5%. Production levels remain above pre-pandemic levels, but continue to run below needs to satisfy overall consumer demand.

(-/0) The Producer Price Index for December rose 0.2%, below the 0.4% expected by consensus, and well below November’s 1.0% gain. Overall, the headline figure was tempered by a -3% decline in energy prices, while food prices fell back as well. Removing those segment, core PPI gained 0.5%, which was closer to expectations. On a year-over-year basis, PPI was up 9.7% for 2021, led by an over-30% increase in energy prices, but also a 13% rise in food prices. Core PPI, less food and energy, gained a slightly less 8.3%. As with inflation generally, results remain extremely high, with PPI more heavily influenced by commodity prices than CPI.

(-) The Consumer Price Index for December rose by 0.5% on a headline level and 0.6% for core, removing food and energy. The single month result was driven higher by prices for shelter and used cars, while a backing off of energy prices helped offset. Apparel, furniture, and toys gained nearly 2% each along with focused holiday spending. Headline gains were a few tenths less than in November, while core prices were a tenth higher.

This caused year-over-year CPI to rise again to another multi-decade high, at 7.0% for headline and 5.5% for core, respectively. While the headline items of energy commodities (up 50%) and used cars (up 37%) are pointed to, other items in the market basket, including shelter, have shown gains of 3-4% over the year—high granted, but much less extreme. Much of Fed policy discussion and financial market concerns have been focused on inflation, due to the uncertainty over expected length and severity. Economist chatter is split as well, between: (1) the ‘transitory’ argument remaining popular, which will only be proven once manufacturing and transportation logjams improve; and (2) fiscal stimulus bubble, which points to the trillions in government pandemic payouts flooding the economy with excess cash. The latter is a tangible example of Milton Friedman’s ‘helicopter money’ theory from the late 1960’s, shown as a method of generating inflation. Resolution of the transitory type is far quicker than that of the latter variety. However, while some pandemic influences, such as productivity gains, may be persistent, longer-term demographic and technological influences are expected to have a continued dampening effect.

(-) The preliminary Univ. of Michigan index of consumer sentiment index for January fell by -1.8 points to 68.8, below the 70.0 level expected. Assessments of current conditions fell by a point, while expectations for the future fell by over -2 points. Inflation expectations over the next near rose by 0.1% to 4.9%, while those for the coming 5-10 years rose by 0.2% to 3.1% (highest level in a decade). As noted in the report anecdotally, lower- to middle-income households noted a sharp drop in sentiment, while higher income groups reported an increase. This was thought to be likely due to the impacts of inflation on day-to-day items such as food and gasoline, to which consumer sentiment has tended to be very sensitive.

(0) Initial jobless claims for the Jan. 8 ending week rose by 23k to 230k, above the 200k expected by consensus estimate. Continuing claims for the Jan. 1 week fell by -194k to 1.559 mil., below the 1.733 mil. expected. (In fact, this continuing claims result was the lowest reading since 1973—nearly 50 years.) Initial claims were mixed by state, with continued likely effects from end-of-year seasonal affects causing more volatility than normal.

(0) The Federal Reserve Beige Book of regional economic conditions and anecdotes for the year-end December period noted that activity continued at a modest pace around the country. Notably, continued supply chain disruptions and labor shortages kept a damper on activity that would otherwise be stronger, based on continued strong demand from consumers, which carried through to industry. However, consumer demand for leisure activity, including hotels and restaurants, pulled back toward year-end as the Covid omicron variant took hold. This kept a damper on sentiment looking ahead to early 2022, as expected. Demand for labor, marked by worker shortages, remains a nationwide problem, with gains in wages a growing side effect. Inflation remains a concern as well, but it was noted that prices for some goods have decelerated a bit from highs. Real estate activity picked up on the commercial side, while activity in the residential housing market may be flattening a bit in some recently strong geographies. Overall, it appears base economic demand is strong, with some of the inflationary and supply disruptions improving a bit.

Market Notes

Period ending 1/14/2022 1 Week (%) YTD (%)
DJIA -0.88 -1.13
S&P 500 -0.29 -2.11
NASDAQ -0.28 -4.79
Russell 2000 -0.79 -3.67
MSCI-EAFE 0.18 -0.11
MSCI-EM 2.57 2.09
Bloomberg U.S. Aggregate -0.29 -1.82

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2021 0.06 0.73 1.26 1.52 1.90
1/7/2022 0.10 0.87 1.50 1.76 2.11
1/14/2022 0.13 0.99 1.55 1.78 2.12

U.S. stocks experienced a negative week on net, with ongoing concerns over inflation and higher implied interest rates. Fed Chair Powell’s testimony before the Senate Banking Committee reiterated a strong tone in using whatever tools are necessary to bring down inflation, but, at the same time, noting that pressures should be easing by mid-year and this would be a ‘long road’ to normal (including a balance sheet runoff later in 2022, contrary to concerns of it happening sooner). Growth stocks, as seen in the Nasdaq, saw the most volatility as of late (along with their higher valuations), while value stocks earned positive returns last week.

By sector, energy stocks gained over 5% in keeping with rising crude oil prices. All other sectors were in the negative, led by consumer discretionary, utilities, and financials—the latter were hurt by disappointing outlooks (although decent earnings) as the Q4 reporting season began. Real estate fell back by nearly -2%.

Foreign stocks earned slightly positive returns in developed markets, helped by a weaker dollar, while emerging markets fared best, with gains of several percent. Easing commercial and travel restrictions in some European nations appeared to help sentiment, as did stronger economic and industrial production data.

U.S. bonds were mixed, with higher interest rates causing negative returns for treasuries and investment-grade corporates, while high yield and floating rate bank loans experienced gains. Foreign developed market debt gained, with help from a weaker dollar, while emerging market bonds were mixed for the week, depending on currency exposure.

Commodities rose across the board last week, with gains in energy and metals offsetting a minor decline in agriculture. The price of crude oil rose 6% to nearly $84/barrel, with production remaining below expected levels and continued unrest in Kazakhstan, and natural gas prices up over 8% with an upcoming winter storm. The key factor in pricing since 2022 has been a steady ramping up of crude oil demand (due to rising mobility since the depths of the early 2020 part of the pandemic), while production to meet this demand has been lagging, although steadily improving, albeit at a slower rate. Some of this has been due to low capex spending, partially related to governmental disincentives for petroleum. This has kept prices elevated.

Mortgage Rates

“Mortgage rates rose across all mortgage loan types, with the 30-year fixed-rate mortgage increasing by almost a quarter of a% from last week,” said Sam Khater, Freddie Mac’s Chief Economist. “This was driven by the prospect of a faster than expected tightening of monetary policy in response to continued inflation exacerbated by uncertainty in labor and supply chains. The rise in mortgage rates so far this year has not yet affected purchase demand, but given the fast pace of home price growth, it will likely dampen demand in the near future.”

The 30-year fixed-rate mortgage averaged 3.45% with an average 0.7 point for the week ending January 13, 2022, up from last week when it averaged 3.22%. A year ago at this time, the 30-year FRM averaged 2.79%.

The 15-year fixed-rate mortgage averaged 2.62% with an average 0.7 point, up from last week when it averaged 2.43%. A year ago at this time, the 15-year FRM averaged 2.23%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.57% with an average 0.3 point, up from last week when it averaged 2.41%. A year ago at this time, the 5-year ARM averaged 3.12%.

Mortgage Rates

Freddie Mac’s Primary Mortgage Market Survey® is focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20% down and have excellent credit. Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Borrowers may still pay closing costs which are not included in the survey.

Through our relationship with Prestige Mortgage Services Inc. dba Prestige Home Mortgage (NMLS#14216) in Vancouver, Washington we originate residential and reverse mortgages.

Selected Cryptocurrencies

Symbol Name Price 7d % 30d % YTD % Market Cap
BTC Bitcoin 42665.35 4.25% -9.11% -10.47% $808,323,291,416
ETH Ethereum 3257.76 7.72% -17.70% -13.48% $388,776,687,239
BNB BNB 472.9 12.35% -10.81% -10.09% $79,087,668,481
ADA Cardano 1.53 35.81% 22.44% 11.27% $51,366,695,412
SOL Solana 143.41 6.74% -21.08% -19.60% $45,091,978,354
LUNA Terra 81.71 18.67% 14.91% -10.39% $29,315,300,171
DOT Polkadot 26.44 12.18% 4.82% -7.44% $26,128,869,253
DOGE Dogecoin 0.1697 18.01% -1.46% -1.76% $22,552,057,913
AVAX Avalanche 88.99 5.36% -23.75% -22.03% $21,748,443,098

Information current as of 6:55 AM PST, Monday, January 17, 2022. Source: https://coinmarketcap.com/

Check us out at https://beaconrwa.com and our affiliated websites at https://reverse-mortgages.us and https://socialsecurityquestionsanswered4u.com.

Sources: Ryan Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.

Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.