Your Weekly Update for Monday, February 14, 2022.
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Mike Elerath
CERTIFIED FINANCIAL PLANNERTM
CERTIFIED IN LONG-TERM CARE
[email protected]
Bill Roller
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CHARTERED FINANCIAL ANALYST
CERTIFIED FINANCIAL PLANNERTM
CHARTERED MARKET TECHNICIAN
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Summary
Markets had a rough week last week. The Dow Jones Industrial Average fell 1.00% to 34,738.06 while the S&P500 ended down 1.82% to 4,418.64. The Nasdaq Composite fell 2.18% to 13,791.15. The annual yield on the 30-year Treasury rose 2.4 basis points to 2.257%.
In a light week for economic data, consumer price inflation came in higher than expected, again reaching new multi-decade levels. Consumer sentiment worsened, while jobless claims continued to show improvement.
U.S. equity markets fell back with continued high inflation readings and an assumed hawkish Fed response in coming months; foreign equities were mixed for the week. Bonds fell back across the board, in keeping with higher interest rates in the middle part of the yield curve. Commodities gained again, led by higher prices for crude oil and metals.
Economic Notes
(-) The consumer price index for January gained 0.6% on both a headline and core level, above the expected 0.4% for headline and 0.5% for core. Prices were led by 0.9% rises in energy and food, while other commodity prices gained 1.0%. Other areas of strength were used cars and apparelâboth up 1.0-1.5%. Shelter and other services were up 0.3-0.4%, with the former showing multi-decade strength and including a strong rise in actual rents, which had been depressed by government moratoriums in 2020-21.
On a year-over-year basis, headline and core CPI rose at 7.5% and 6.0%, respectivelyâa pace not seen since the early 1980âs. The 40% rise in the price of energy commodities obviously stands out on the headline side, although that trickles down to transportation and other costs in core areas. The price of new cars rose 12%, and used car prices were 41% higher, both of which have been well covered in the press due to the extreme visible impact on consumers. Shelter costs remained elevated, although to a lesser degree, up 4% from the prior year. While rents are assumed to be sticky through 2022, car prices are hinged upon production levels, and there, the shortage of semiconductors, which has persisted longer than expected. However, it seems the peak for the most difficult supply conditions may have peaked.
Itâs important to note that CPI is an artificially-constructed index. Other inflation discussion surrounds the composition of the CPI. Every two years, the weightings of various basket components are updated, in addition to seasonal adjustments, which affect a variety of economic data around the turn of each year. Increases in weighting were seen in new and used cars, as well as ownersâ equivalent rent. Based on some calculations comparing current inflation to the methodology used in the 1970âs, it would already be in the double-digits. The primary story is that inflation has become increasingly broad-based as it moves through the economy, although there remains debate about its persistence beyond 2022.
Logistical issues continue, although some easing has been seen until the last week when truckers in Canada (as well as in some other countries) have begun protesting Covid vaccine mandates. Since two-thirds of U.S.-Canada trade moves by truck, itâs obvious to see how these types of geopolitical events could perpetuate the inflation problem in the near-term.
(-) The preliminary Univ. of Michigan index of consumer sentiment for February fell by -5.5 points to 61.7, below the median forecast of 67.5. Assessments of current conditions and expectations for the future both declined (future worse than present), although it interestingly appeared to be driven by poor sentiment in the higher-income contingent (which implies an effect from Januaryâs stock market drawdown, although inflation readings have also been mentioned). Median inflation expectations for the coming year ticked up a tenth to 5.0%, while those for the next 5-10 years were flat at 3.1%.
(+) Initial jobless claims for the Feb. 5 ending week fell by -16k to 223k, below the 230k level expected. Continuing claims for the Jan. 29 week were unchanged at 1.621 mil., just above the median forecast of 1.615 mil. Initial claims rose in MI and FL, while falling back in KY, TN, and OH, showing mixed results from the manufacturing sector. Overall, the trend downward continues in keeping with strong employment metrics nationwide.
Question of the Week: What is âequity durationâ?
Itâs been popular again lately to adapt the fixed income concept of duration to equities. This may or may not be appropriate, since theyâre completely different animals. Regardless, the duration concept for both is based on the same conceptâsensitivity of an asset to changes in interest rates.
What is duration? Itâs a calculation of the weighted present value of future cash flows expected from a security, with the result expressed in years. Typically, these cash flows are bond coupon payments, but in the enhanced definition can be applied to stock dividends. In the standard bond duration formula, the larger the yield or shorter the maturity, the shorter the duration, since more cash flow is received sooner. Conversely, the lower the yield or longer the maturity, the longer the duration. For bonds or bond funds, itâs also served as a common shortcut for assessing interest rate risk (e.g. a duration of 5 years implies that a -1% decline in rates would result in a +5% increase in the bond price, and vice versa).
Equities also donât mature like bonds do, though, which alters the calculation. Instead of coupons being clipped over a set time frame, followed by a final payment of principal at maturity, stock dividends are theoretically paid in perpetuity. Dividends are assumed to last as long as the corporation does, or until conditions cause them to be raised or lowered. There are more elaborate formulas for figuring out equity duration, but no one agreed-upon method, although most require estimates of discount rates and risk premiums (any estimates leave room for error, which can be magnified for longer time periods). However, a simple technique is just inverting the current dividend yield. (Perpetual calculations actually tend to be easier since there is no ending payment on a specific date, as with a bond.) In that approach, a 2%-yielding stock would have a duration of 50 years. The general conclusion is that higher dividend yield or âvalueâ stocks have lower durations, so are less rate sensitiveâa 4% yield would imply only 25 years of duration. A âgrowthâ stock with only a 1% yield would imply a 100-year duration, so would be much more sensitive to changes in rates.
These equity durations are obviously not as precise as bond durations, and donât really give a true indication of what a stock would do under a particular interest rate move, but the just is that most stocks are just as or more sensitive to rates than are long-term bonds. It also provides a relative comparison between different stock groups. The results are intuitive, and have been applied a lot to early 2022 with value outperforming growth along with expected higher central bank rates. Value stock indexes tend to include cyclicals like financials, industrials, and energy, which have performed well in periods of economic recovery (and rising rates, matching their âlower durationâ). Conversely, growth stock sectors, such as technology and communications, have fared better in slower growth environments, when growth of any kind is prized and interest rates have been stable; these have lagged value at times when rates rise, in keeping with their âhigher durationâ.
Equity duration isnât really considered a critical fundamental measure compared to others commonly used, and thereâs been academic debate for years about whether itâs even meaningful. At best, it may provide some context about what performs better or worse in different phases of the business cycleâas it does for bonds. It also proves that if there isnât anything new to talk about, donât worry, theyâll invent something.
Market Notes
| Period ending 2/11/2022 | 1 Week (%) | YTD (%) |
| DJIA | -0.96 | -4.28 |
| S&P 500 | -1.79 | -7.16 |
| NASDAQ | -2.17 | -11.80 |
| Russell 2000 | 1.42 | -9.51 |
| MSCI-EAFE | 1.42 | -2.38 |
| MSCI-EM | 1.60 | 0.75 |
| Bloomberg U.S. Aggregate | -0.41 | -3.45 |
| 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 |
| 2/4/2022 | 0.23 | 1.31 | 1.78 | 1.93 | 2.23 |
| 2/11/2022 | 0.36 | 1.50 | 1.84 | 1.92 | 2.24 |
U.S. stocks fell back generally, with the exception of small cap, which moved higher. Results were mixed by sector, with energy and materials experiencing gains, along with strong commodity prices. All other sectors fell back, led by nearly -2% to -3% declines in technology, communications, and consumer discretionary. Real estate also fell back by -3%.
On Thursday, in reaction to another record-breaking CPI report, Fed Governor Bullard noted that 0.50% as opposed to 0.25% per meeting hikes might be appropriateâwith markets turning sharply negative in response. These inflation readings havenât been far different from expectations, but the steady worry behind the scenes is how long the elevated releases will last before receding. Concerns over a more imminent Russian incursion into Ukraine also kept sentiment down by Friday, with supposed warnings to U.S. personnel to vacate. Covid cases by week continue to improve from peak levels, which appears to have injected more optimism into risk assets when inflation isnât the main focus.
Small cap stocks, as represented by the Russell 2000 Index, have been notable underperformers as of late. Specifically, the index had entered -20% bear market territory by late January, while the S&P only dropped -10%. This is in keeping with tendencies for that size group to lag in periods where economic growth is positive but beginning to decelerate and a flattening yield curve, which occurs under those conditions. Additionally, profit margins for smaller firms are less than half (5%) of those for large caps (13%). The R2000 has more of a cyclical composition overall, compared to the tech-heavy S&P, which explains some of the economic sensitivity.
Foreign stocks were mixed, with declines in Europe and Japan offset by gains in the U.K., as discussion ramped up from the prime minister about a Covid restriction roll-back. Stronger earnings in Europe have been helping sentiment, although itâs been held back by inflation, growth challenges, and a closer proximity to Ukraine. With inflation less problematic, the ECB has been less âhawkishâ than other world central banks, with easier policy being bullish. Emerging markets were little changed on net, with gains in Brazil, Turkey, and Mexico offset by losses in India and Russia.
U.S. bonds fell across the board as a higher CPI resulted in higher interest rates in the 2-year to 5-year part of the curve, with the 2-year seeing its sharpest gain in over a decade, while the 10-year to 30-year segment was little changed on net, although the 10-year did approach 2% briefly. This in line with expectations for additional expected rate hikes over the next few years, as signaled by several Fed members. Interestingly, the recent auction of 10-year treasuries appeared to be oversubscribed by nearly 3x, as investors have been welcoming the higher yields for high-quality debt. Foreign bonds lost more ground than U.S. bonds in both developed and emerging markets, due to a stronger dollar.
Commodities saw minor gains on the week, with higher prices for agriculture, industrial metals, and precious metals. While natural gas prices fell back by nearly -15%, due to weather expected to be warmer than normal for the next several weeks. However, crude oil rose a percent on net to over $93/barrel, with a spike later in the week due to rumors picking up around a Russian invasion of Ukraine.
Mortgage Rates
âThe normalization of the economy continues as mortgage rates jumped to the highest level since the emergence of the pandemic,â said Sam Khater, Freddie Macâs Chief Economist. âRate increases are expected to continue due to a strong labor market and high inflation, which likely will have an adverse impact on homebuyer demand.â
The 30-year fixed-rate mortgage averaged 3.69% with an average 0.8 point for the week ending February 10, 2022, up from last week when it averaged 3.55%. A year ago at this time, the 30-year FRM averaged 2.73%.
The 15-year fixed-rate mortgage averaged 2.93% with an average 0.8 point, up from last week when it averaged 2.77%. A year ago at this time, the 15-year FRM averaged 2.19%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.80% with an average 0.3 point, up from last week when it averaged 2.71%. A year ago at this time, the 5-year ARM averaged 2.79%.
Freddie Macâs Primary Mortgage Market SurveyÂŽ 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 | $42,478.70 | -0.66% | -1.07% | -10.92% | $805,308,785,599 |
| ETH | Ethereum | $2,931.63 | -4.91% | -11.17% | -22.23% | $350,544,275,224 |
| BNB | BNB | $401.22 | -6.82% | -18.52% | -23.92% | $66,248,100,909 |
| ADA | Cardano | $1.05 | -11.79% | -17.31% | -23.99% | $35,159,696,130 |
| SOL | Solana | $95.29 | -19.33% | -34.18% | -46.55% | $30,442,871,249 |
| LUNA | Terra | $53.13 | -7.18% | -36.17% | -41.87% | $21,210,293,230 |
| AVAX | Avalanche | $80.95 | -1.97% | -10.37% | -28.97% | $19,890,450,026 |
| DOGE | Dogecoin | $0.15 | -7.08% | -22.16% | -15.37% | $19,427,269,667 |
| DOT | Polkadot | $18.65 | -16.07% | -31.19% | -34.74% | $18,420,945,668 |
| SHIB | Shiba Inu | $0.00003032 | 8.38% | -1.74% | -11.14% | $16,654,274,263 |
| MATIC | Polygon | $1.65 | -8.42% | -29.06% | -35.89% | $12,342,779,487 |
Information current as of 5:55 AM PST, Monday, February 14, 2022. Source: https://coinmarketcap.com/
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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 & Poorâs, 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.