Weekly Update 10/16/2023 – Beacon Rock Wealth Advisors

Your Weekly Update for Monday, October 16, 2023.

Beacon Rock Wealth Advisors is a dba of BR Capital, Inc. is a financial planning and registered investment advisory firm in Camas, Washington. We are always available to answer your finance questions. Give us a call at (800) 562-7096 or send an email to [email protected].

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Mike Elerath
CERTIFIED FINANCIAL PLANNER^TM
CERTIFIED IN LONG-TERM CARE
[email protected]

Bill Roller
NMLS #107972
CHARTERED FINANCIAL ANALYST
CERTIFIED FINANCIAL PLANNER^TM
CHARTERED MARKET TECHNICIAN
[email protected]

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Summary

Markets were flatly MIXED again last week. The Dow Jones Industrial Average rose 0.79% to 33,670.29 while the S&P500 ended up 0.45% to 4,327.78. The Nasdaq Composite fell 0.18% to 13,407.23. The annual yield on the 30-year Treasury fell 16.1 basis point(s) to 4.780%.

Economic data for the week included producer price inflation decelerating further on a year-over-year basis, while consumer prices remained somewhat sticky. Consumer sentiment also fell back, with higher inflation expectations.

Equities rose in the U.S. but were little changed overall in foreign markets. Bonds fared positively, as interest rates came back down from highs as investors sought a bit of safety. Commodities rose due to higher prices for crude oil and gold, related to geopolitical concerns in Israel and the Middle East.

Economic Notes

(0) The Producer Price Index for September rose 0.5%, which exceeded the 0.3% gain expected, but represented a -0.2% decline from the prior month. Removing food and energy, core PPI rose 0.3%, a tenth above consensus. From a product perspective, goods costs gained 0.9% in the month, while services costs rose 0.3%. Nearly half of the headline increase was driven by energy prices (up 3% in Sept., with gasoline up 5%), in addition to food up nearly a percent. Over the trailing 12 months, PPI ticked up a few tenths from the prior month to 2.2%. After removing food, energy, and trade, core PPI decelerated by -0.2% to 2.8%. Interestingly, 12-month core PPI has tracked in a tight range of 2.8-2.9% since May, at nearly half the pace of the prior summer. However, recent energy price gains may again place upward pressure on producer inputs looking ahead.

(0) The Consumer Price Index for September saw an increase of 0.4% on a headline level, a tenth higher than expectations, and 0.3% for core, removing food and energy, which was on par with consensus. On the headline side, energy commodity prices rising over 2% was a key driver. Within core, shelter prices strengthened again by 0.6%, in addition to hospital services, apparel, travel, and lodging, as well as car insurance (a reflection of higher car repair and wage costs). On the weaker side, used car prices fell over -2%, along with prices for furniture and appliances. While dozens of individual line items appear in the CPI release, prices for consumer goods continued to show a general weakening, while prices for services remained robust. On a trailing 12-month basis, headline and core CPI are up 3.7% and 4.1%, respectively. While the pace of headline inflation was unchanged from August, the core pace decelerated by -0.2%, which was good news, all considering.

(+) Import prices rose 0.1% in September, well below the 0.5% median forecast as well as a 0.6% gain the prior month. Removing petroleum, the index showed a decline of -0.3%, with industrial supplies and airfares showing rising prices, offset by price drops for food/beverages, autos/parts, and capital goods. This also represented promising news from an inflation standpoint.

(-) The preliminary Univ. of Michigan index of consumer sentiment for October saw a drop of -5.1 points to 63.0, below the median forecast of 67.0. Assessments of current conditions and expectations for the future both declined to similar degrees. Inflation expectations for the coming year rose a sharp 0.6% to 3.8%, while those for the coming 5-10 years ticked up by 0.2% to 3.0%. Anecdotally, it appeared the drop-off in sentiment occurred across all reporting groups, and was largely due to persistent higher price levels, including gasoline, which consumers in this index have traditionally appeared especially sensitive to.

(0) Initial jobless claims for the Oct. 7 ending week were unchanged at 209k, just below the 210k forecast. Continuing claims for the Sep. 30 week rose by 30k to 1.702 mil., above 1.676 mil. forecast of minimal change. There are some thoughts that seasonal distortions may cause a move higher in continuing claims in the coming months, but the extent remains to be seen.

(0) The September FOMC meeting minutes showed that ‘almost all’ participants felt that keeping policy unchanged was appropriate. The narrative alluded to the Fed remaining data-dependent and set to ‘proceed carefully.’ Though, while inflation has improved in their minds, it remains ‘unacceptably high.’ Interestingly, in public comments from Fed members more recently, they’ve noted that higher bond yields on the longer-end of the Treasury curve serve to tighten policy to at least a similar (or even greater) degree than do upward moves in the policy rate. These comments have been taken as a hint Fed funds would be left as is at the November meeting, in line with CME futures market probabilities, which agree. Plenty of uncertainty was noted, in regard to strength in economic growth and labor markets.

Question of the Week: What’s behind the recent accelerated rise in long-term U.S. Treasury yields?

There are a variety of potential reasons, several of which have evolved gradually, rather than appearing suddenly. At times, financial markets seem patient with the status quo narrative, while at other times, frustration can set in, and market prices begin to reflect acceptance of what seems to be a new reality. None of the elements listed below are new to markets, so perhaps the combination of several or all have contributed to the yield rise (some interest rate experts appear to be confounded as well). Treasury yields are fickle, so technical factors and flows can also cause rapid changes in either direction—resulting in overshoots and reversals. (A bit of a rate reversal back down happened last week, in fact, with geopolitical fears rising.)

The FOMC ‘dot plot’ released after the September meeting showed a path of more near-term rate hikes and a more careful path of lowering rates than markets expected.
The Federal Reserve, in no uncertain terms, has implied a rate path of a general ‘higher for longer,’ both in Q&A sessions after FOMC meetings and in other public commentary. Combined with the dot plot, this presumes the Fed funds rate could stay at an elevated plateau for longer than usual before it’s deemed necessary to ease—reducing hopes of rate cuts any time soon.
Inflation has remained far stickier than hoped. It has improved, but progress has been slow, and levels remain above the 2% core PCE target. Recent rising oil prices (+30% in Q3) may be frustrating markets as well, being a key input into producer prices.
Economic growth has stayed more resilient than expectations earlier in the year. So, odds of near-term recession have fallen again. (One can call it a ‘soft landing’ but it’s just kicking the can down the road really.) Importantly, though, most classic leading indicators continue to point to recession sooner than later. Run-of-the-mill recessions have been common and effective cures for inflation, due to their dropping demand enough that prices follow suit.
Labor markets have stayed robust. While wage growth and job openings have retreated from peak, they’re still high, and payrolls remain decent. As one of the Fed’s mandates, labor is evaluated as a special metric, not having rolled over yet.
On the demand side, there has been a removal of key bond buyers, notably the Fed itself. In prior years, ‘quantitative easing’ included the government intentionally buying a large amount of bonds—to artificially elevate prices and lower long-term yields. This is no longer in effect, as today’s ‘quantitative tightening’ lets bonds roll off and mature. A subtle pressure upwards in yields would therefore not be surprising.
Also on the demand side, foreign buyers seeking yield have other markets to choose from, as other central banks have also been tightening policy through higher rates. While U.S. Treasuries have remained the world’s primary safe haven asset, higher foreign government rates make their domestic bonds more competitive, without the currency hedging cost. In some less friendly nations, there have been political concerns about owning too many assets tied to the U.S. financial system, in the event of potential future sanctions that could be imposed. While U.S. assets and the dollar remain popular, with little competition for top status, this may affect yield conditions on the margin.
Larger U.S. government fiscal deficits have created a need for more financing. To bridge the gap, the needed pool of newly offered debt directly increases bond supply. From that, technicals dictate that prices decline, and yields rise to entice the marginal buyer.
Somewhat related has been the political difficulty in reaching much consensus in Congress, including the debt ceiling, near-government shutdown, and lack of agreement on budget priorities. These routine battles have caused S&P (over a decade ago) and Fitch (more recently) to downgrade U.S. Treasury debt from its coveted AAA status. While this hasn’t seemed to overtly impact the liquidity or desirability of U.S. debt, coupled with other inputs, a lower rating theoretically should enlarge the ‘spread’ compared to what it was before. At the same time, other developed nations have found themselves in similar conditions, with higher debt/GDP ratios that could pressure ratings.

What is the impact of higher long-term rates?

Along with a higher Fed funds rate, higher long rates serve to tighten financial conditions generally. If borrowing rates stay higher, the overall effect drains liquidity from the system and reduces leverage (which is the ultimate intention of a central bank in tightening policy).
Assuming the Fed funds rate eventually fall again, this helps the ‘re-normalization’ of the yield curve from inverted to a positive slope. Positive slopes are correlated to healthier economic and inflationary conditions looking ahead.
Compared to the past several years, U.S. government debt will become more expensive to finance (and re-finance), with nearly a third of outstanding debt coming due over the next year, and roughly half due in the next three years. While interest as a percentage of GDP remains low compared to prior decades, it’s becoming more top of mind.
On a happier note, bonds and cash are relevant again, with higher positive after-inflation real yields. This could imply the ‘TINA’ (there is no alternative—to stocks, that is) regime is behind us and makes bonds more attractive on a standalone basis and in asset allocations. Not only are current starting yields a good predictor of forward-looking multi-year bond returns, but a drop in rates would enhance price return due to the effect of duration. The latter is an example of why owning too much cash (despite the high yields) relative to longer maturities could be misguided from a diversification standpoint.

Market Notes

Period ending 10/13/2023	1 Week %	YTD %
DJIA	0.79	3.29
S&P 500	0.47	14.19
NASDAQ	-0.18	28.94
Russell 2000	-1.47	-1.18
MSCI-EAFE	0.97	6.12
MSCI-EM	1.51	1.69
Bloomberg U.S. Aggregate	0.95	-1.43

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2022	4.42	4.41	3.99	3.88	3.97
10/6/2023	5.63	5.08	4.75	4.78	4.95
10/13/2023	5.62	5.04	4.65	4.63	4.78

U.S. stocks began on a weak note, as the prior weekend’s Israeli/Gaza conflict brought up worries of greater regional instability (potentially including Iran), which has the potential of pressuring oil prices even higher. An escalation appeared to be passing financial threat, while a little-changed CPI report proved frustrating for stocks, although the S&P ended the week positively. Sectors were led by a sharp over-4% rise in energy, as well as utilities as interest rates fell back a bit; consumer discretionary, communications, and materials lagged with small declines.

Earnings season for Q3 has begun, with FactSet estimating little change on a year-over-year basis for the S&P 500. (To be exact, the expected change has improved from -0.3% to a positive 0.4%, based on expectations and the few companies that have reported.) Revenue growth is slower than average as well, with an expected gain of 1.9% for the quarter. By sector, earnings results remain quite divergent, ranging from the expected 20-30% gains in communications services and consumer discretionary; on the negative side, materials and energy earnings are expected to decline -22% and -38%, respectively. Of course, as the reporting season progresses, we could expect to see an evolution in these assumptions. Past this season, earnings growth for Q4 looks a bit more interesting, pointing to an 8% for the S&P, with revenue growth up 4%, with 2024 expectations even rosier than that. (Obviously, these appear to price in a reacceleration of growth, either avoiding or moving past a recession.)

Foreign stocks were positive on net in developed markets, with gains in the U.K. and Japan offset by declines in Europe. Japanese growth estimates were revised upward, while those for Europe were again pared back closer to recession-like levels. Emerging markets gained as well, with commodity-producing countries, such as Brazil gaining, while China saw declines—the latter with possible additional government stimulus forthcoming.

Despite the discussion above about recent strength in longer-term yields, bonds gained last week as interest rates declined. Treasury and investment-grade credit gains of about a percent each appeared to be somewhat related to geopolitical concerns. Foreign bonds, including emerging markets, also rose, albeit to a lesser degree due to a stronger U.S. dollar.

Commodities gained in several categories, led by energy and precious metals. Crude oil rose 5% last week to $88/barrel. During the week, the jump in oil prices was obviously tied to the Israel/Gaza conflict, where any sense of instability in the Middle East has brought on that response in recent decades, particularly if Iranian production were to be curtailed. Precious metals gold and silver also rose over 5% each, in keeping with geopolitical concerns historically.

Mortgage Rates

“For the fifth consecutive week, mortgage rates rose as ongoing market and geopolitical uncertainty continues to increase,” said Sam Khater, Freddie Mac’s Chief Economist. “The good news is that the economy and incomes continue to grow at a solid pace, but the housing market remains fraught with significant affordability constraints. As a result, purchase demand remains at a three-decade low.”

The 30-year fixed-rate mortgage averaged 7.57 percent as of October 12, 2023, up from last week when it averaged 7.49 percent. A year ago at this time, the 30-year FRM averaged 6.92 percent.

The 15-year fixed-rate mortgage averaged 6.89 percent, up from last week when it averaged 6.78 percent. A year ago at this time, the 15-year FRM averaged 6.09 percent.

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	24h %	7d %	Market Cap	Volume(24h)
BTC	Bitcoin	27819.82	3.64%	1.02%	$542,387,777,995	$13,913,115,260
ETH	Ethereum	1585.14	1.94%	-0.50%	$190,579,331,996	$4,742,442,014
BNB	BNB	212.96	2.86%	2.95%	$32,306,738,690	$423,647,332
XRP	XRP	0.4953	1.76%	-0.87%	$26,484,607,570	$676,127,202
SOL	Solana	23.14	5.96%	4.05%	$9,660,938,606	$303,605,207
ADA	Cardano	0.2522	2.23%	0.40%	$8,882,912,233	$116,238,836
DOGE	Dogecoin	0.06	1.30%	1.98%	$8,487,228,359	$164,322,813
TRX	TRON	0.08784	2.78%	0.94%	$7,811,859,848	$160,600,008
TON	Toncoin	1.97	1.94%	-1.93%	$6,748,473,467	$11,232,113
MATIC	Polygon	0.5242	1.63%	-2.50%	$4,878,066,003	$220,746,780
LTC	Litecoin	63.63	3.42%	0.71%	$4,694,512,893	$202,919,048
DOT	Polkadot	3.79	1.47%	-1.60%	$4,683,432,559	$64,695,990
WBTC	Wrapped Bitcoin	27759.33	3.39%	1.01%	$4,527,726,665	$76,850,334
BCH	Bitcoin Cash	228.76	7.06%	4.95%	$4,468,413,374	$185,303,969
LINK	Chainlink	7.57	3.00%	2.59%	$4,215,250,932	$192,952,135
SHIB	Shiba Inu	7.113E-06	1.69%	2.62%	$4,191,949,918	$102,454,921
LEO	UNUS SED LEO	3.73	1.45%	-0.49%	$3,468,279,144	$628,235

Information current as of 5:35AM PDT, Monday, October 16, 2023. 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 & 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.