Robert Krueger

Alexander Randolph Advisory Inc.

8200 Greensboro Drive, Suite 1125

McLean, VA 22102

703.734.1507

www.alexanderrandolph.com

Market Update
(all values as of 10.31.2022)

Stock Indices:

Dow Jones 32,732
S&P 500 3,871
Nasdaq 10,988

Bond Sector Yields:

2 Yr Treasury 4.51%
10 Yr Treasury 4.10%
10 Yr Municipal 3.40%
High Yield 8.92%

YTD Market Returns:

Dow Jones -9.92%
S&P 500 -18.76%
Nasdaq -29.77%
MSCI-EAFE -25.09%
MSCI-Europe -25.57%
MSCI-Pacific -24.27%
MSCI-Emg Mkt -31.16%
 
US Agg Bond -15.72%
US Corp Bond -19.56%
US Gov’t Bond -16.15%

Commodity Prices:

Gold 1,640
Silver 19.32
Oil (WTI) 86.83

Currencies:

Dollar / Euro 0.99
Dollar / Pound 1.15
Yen / Dollar 1.48
Canadian /Dollar 0.73
 

July 2021

Macro Overview

Financial global markets are draw­ing sup­port from the effectiveness of ongoing vaccinations and improving economic indicators. Consumer sentiment is re-evolving, resulting in rising consumer demand as pandemic worries wane. Pent up demand from the past year is thought to be driving the bulk of economic activity.

Ransomeware cyberattacks and internet crimes have been rising at an alarming rate according to the FBI, threatening companies, government entities and individuals. Digital currencies, such as bitcoin, are the primary form of payment utilized for ransom and extortion cases since payments can be made anonymously and are not traceable. The FBI encourages individuals, especially elders, to be aware of numerous online scams and phone calls by visiting its Common Scams & Crimes site https://www.fbi.gov/scams-and-safety/common-scams-and-crimes.

Escalating inflation concerns prompted Federal Reserve members to consider limiting purchases of Treasury and mortgage bonds, which is an indirect method of raising interest rates. The reduction in stimulus efforts, also known as tapering, last occurred in 2013.

The administration released a proposed $6 trillion federal budget for the upcoming fiscal year, expected to be funded by higher taxes for top earners and corporations. Analysts, as well as nonpartisan analysis, expect additional issuance of Treasury debt in order to help fund ongoing federal deficits.

Various states are ending supplemental unemployment benefits which were instituted during the early months of the pandemic last year. It is estimated that 3.7 million unemployed recipients will be affected. Some states eliminating unemployment benefits are instead offering financial incentives for individuals to find a job. The Department of Labor’s most recent data reveal that there were over 8 million unfilled job openings at the end of March, the largest number of openings since November 2018.

An increase in travel has spurred higher fuel costs for airlines and automobiles as pent up demand and the summer months propel prices higher. The average cost for a gallon of regular gasoline rose above $3 per gallon nationally in May, the highest since 2014. Crude oil prices, which directly affect the price of gasoline, have risen over 80% in the past year.

Sources: FBI, Federal Reserve, EIA, Dept. of Labor

 

Higher Commodity Prices Signal Global Growth Recovery – Commodity Overview

Rising demand for commodities worldwide has induced higher prices for crude oil, natural gas, gasoline and copper. Essential commodities for food products including wheat, corn, and soybeans have risen sharply in price, translating to higher consumer food costs.

Key commodity prices have risen steadily over the past few months, considered by economists as inflationary and possibly as a sign of an economic recovery. Commodities such as crude oil, gold, corn, and wheat have risen globally, as transportation and production bottlenecks have hindered supplies. The global pandemic is thought to be the primary culprit for constraints leading to higher prices.

Even though global economic expansion has slowed since the onset of the pandemic, the Worldbank estimates that vaccinations worldwide will help revive and stimulate expansion, primarily in the emerging economies. The Worldbank expects the global economy to expand by 4% in 2021, assuming that initial COVID-19 vaccinations reach hundreds of millions worldwide. In addition to widespread vaccinations, investment-enhancing reforms are essential to help expand the global economy. Excluding China, emerging market and developing economies are forecast to expand 3.4% in 2021 after a contraction of 5% in 2020. Among low-income economies, activity is projected to increase 3.3% in 2021, following a contraction of 0.9% in 2020.

Sources: worldbank.org, Federal Reserve

How Inflation Creeps Up On Consumers – Consumer Behavior

Over the past year, global economies went from a slow expansion at the beginning of 2020, to an abrupt halt with the onset of the pandemic in March 2020. Supply chain bottlenecks have become rampant as increasing demand has evolved from a slowly recovering global economy.

A lack of critical components for everything from automobiles to cellular phones brought about production shortages that led to decreases in supply simultaneously as demand fell across the globe. As demand has begun to rekindle, shuttered factories and supply chains have not been able to keep up with rising demand, resulting in order backlogs and higher prices. Some economists believe that current inflationary pressures may be temporary until production ramps up to meet current demand, while others believe that higher prices have become permanent for many products in order to maintain delicate margins.

Source: Bureau of Economic Analysis

 

Equity Indices Post Positive Second Quarter – Domestic Equity Markets

The 2nd quarter ended positively for major global indices, with the S&P 500 index posting gains for 10 of the 11 sectors. Top performing sectors for the quarter included technology, communications, healthcare, and financials.

The SEC said that it is closely monitoring frantic moves in the market caused by memes to determine if there have been any market disruptions, manipulative trading or other misconduct. It also said that it will act to protect retail investors if violations of federal laws are found.

Inflation, higher taxes, and the Delta variant are the focal point of concern for equity markets, especially at recent new highs. There is some momentum in revenue & earnings growth for particular sectors, but not on a broad level.

Sources: S&P, SEC, Bloomberg

Rates Cease Upward Trend – Fixed Income Update

Treasury bond yields stabilized in the 2nd quarter after rising earlier in the year. Short-term rates rose slightly resulting in a flattening yield curve, an indication of possible slower economic growth as the Fed considers raising rates higher.

Comments by St. Louis Federal Reserve member James Bullard indicated that the Fed may start increasing rates in 2022 via buying fewer bonds through their asset purchase program. A scale back on mortgage bond purchases is expected to occur initially before pullbacks on other government bonds.
Rates on mortgages stood steady at 2.98% for a 30-year fixed conforming loan as of July 1, 2021 as posted by FreddieMac. Other consumer loans also held steady as the Fed deliberated on possible future rate increases.
Source: U.S. Treasury, Federal Reserve, FreddieMac

Dollar Share Of Global Exchange Reserves Drops To 25 Year Low – Currency Market Update

For decades the U.S. dollar has been the most dominant of the reserve currencies in the world. The liquidity and transparency of the dollar versus other world currencies has made it the primary reserve currency for foreign governments and international trading entities.

Dollar supremacy has recently become more challenged as the U.S. struggles with a growing budget deficit and expanding Treasury debt, which can put downward pressure on a country’s currency. A weakening dollar may also become inflationary for U.S. consumers by limiting purchasing power as well as increased borrowing costs for the U.S. government.

The most recent data compiled by the International Monetary Fund (IMF) show the U.S. dollar representing 59% of global exchange reserves, down from 65% in 2016 and the lowest in 25 years. Other expanding economies, such as China’s, have seen their currency gradually increase as a reserve currency status over the past few years.
Sources: IMF Currency Composition of Foreign Exchange Reserves, Federal Reserve

 

Higher Home Prices Create Affordability Challenges For Buyers – Housing Market

Home prices rose at the fastest pace since 2005, rising 12.6% nationwide over the past year. All 50 states saw a rise in home prices with Idaho, Utah, Arizona, New Hampshire and Connecticut experiencing the largest appreciations. Data gathered by the Federal Housing Finance Agency collects price changes on single family home values from all 50 states and over 400 cities. The most recent data available is for the quarter ending March 31, 2021. Analysts expect additional price changes for the quarter ending June 2021 when data is released.

The upward trajectory of home prices has made it less affordable for many to purchase, forcing some would-be home buyers to rent instead. Unfortunately, rising home values have resulted in rising rent costs nationwide, as lacking home supplies have spurred increasing demand for rentals.

Adding to the challenge of higher prices is the threat of rising mortgage rates, which minimizes the affordability of a loan payment each time rates tick higher. Policy changes by the Federal Reserve may eventually affect the direction of where mortgage rates are headed.

Source: Federal Housing Finance Agency

COVID Is Making It Difficult For The IRS To Audit & Collect Taxes Owed – Fiscal Policy

As the pandemic has taken a toll on income for individual businesses, companies, and families across the country, it has also taken a toll on U.S. government income. The IRS releases a disclosure annually of the sources of income collected from taxes. Part of the revenue generated by the IRS is the enforcement of tax collections primarily via audits. The IRS report revealed that the number of audits in 2019 was among the lowest in decades for individual returns, the single largest source of income for the IRS.

Fewer audits means less revenue for the U.S. government, which has this year already issued over $3 trillion in debt since March of this year. The IRS collected roughy $28 billion in 2010 from audits, versus $11 billion that was collected in 2019.

This year has become that much more challenging, as IRS employees and agents have been removed from the field due to pandemic restrictions. The inability to perform face to face audits has made it that more difficult for the IRS to collect on taxes owed.

Source: IRS Annual Disclosure Report, IRS Data Book 2019 Releas