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The Latest from Our Blog

How Strong Is the United States Economy?

That’s the question investors were mulling after last week’s jobs report. More jobs were created in May than economists expected, and the labor force participation rate rose, meaning even more people are returning to work. Overall, the unemployment rate remained at 3.6 percent. However, unemployment rates varied by age, sex and race: Adult men: 3.4 percent Adult women: 3.4 percent Asian: 2.4 percent Black: 6.2 percent Hispanic: 4.3 percent White: 3.2 percent Teenagers: 10.4 percent From an inflation perspective, there was some good news in the employment report as earnings increased at a slower pace than in previous months. Apart from that bit of good news, “More jobs added and higher wages are signs of a strong economy…the concern is that inflation will remain close to its recent peak,” reported Joel Woelfel and Jacob Sonenshine of Barron’s.

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Investors Reassessed and Markets Bounced.

Last week, major U.S. stock indices moved higher for the first time in weeks. The Dow Jones Industrial Average gained 6.2 percent, the Standard & Poor’s 500 Index was up 6.6 percent, and the Nasdaq Composite rose 6.9 percent, reported Ben Levisohn of Barron’s. The change in investor attitude may have been influenced by a variety of factors, including: Strong corporate earnings (profits). Not only were U.S. companies profitable during the first three months of this year, but company leaders and market analysts also anticipate they will remain profitable throughout 2022. Ninety-seven percent of the companies in the S&P 500 have reported earnings so far, and the blended earnings growth rate is 9.2 percent. Over the full year, analysts anticipate profits will increase by 10.1 percent, reported John Butters of FactSet.

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Living With a Bear

In the survival series “Alone,” the tension ratchets higher whenever participants encounter bears. Some participants live warily alongside bears, while others tap out. A similar thing happens among investors when they encounter a bear market. What is a bear market? People define bear markets in different ways. Some people say a share price decline of 20 percent is bear market territory. Last week, the Standard & Poor’s (S&P) 500 Index was down 19.6 percent before Friday’s rally, according to Ben Levisohn of Barron’s, and the Nasdaq Composite was already down more than 20 percent. Other people say a bear market occurs when more investors are bearish than bullish. That’s certainly the case today. The Association of Independent Investors’ Consumer Sentiment Index found 49 percent of investors were bearish and 24 percent were bullish last week. Other sentiment indicators, including the Consensus Bullish Sentiment Index cited by Barron’s, also show that investors and investment professionals are feeling more bearish than bullish.

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There Is a Lot of Uncertainty in Financial Markets – and Markets Hate Uncertainty.

In recent weeks, economic and financial market data have been telling different stories – and that makes it tough for investors to know where the United States economy is headed. Since stock markets move up and down based on what investors think will happen in the future, markets have been volatile. Here are some of the issues that have contributed to recent uncertainty. Is economic growth slowing? At the end of April, the advance estimate for the gross domestic product (GDP), which is a measure of economic growth, showed the U.S. economy contracted (-1.4 percent, annualized) during the first quarter of 2022. It was a puzzling piece of information because consumer spending, which accounts for more than two-thirds of economic activity rose by 2.7 percent during the period – after being adjusted for inflation – which suggests the economy is strong. A discrepancy between imports (up) and exports (down) appeared to be the driver behind the decline in GDP. A contraction can be a sign that the economy is weakening. Is economic growth continuing? Right now, workers are in demand, which can be a sign of economic growth. Last week’s unemployment report showed stronger-than-expected job growth in April. The unemployment rate was 3.6 percent, and average hourly earnings rose by 5.5 percent, annualized. However, the labor force participation rate – th

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Correction and Contraction....

Investing during 2022 has been like running a forest trail and having unexpected obstacles appear every so often – a fallen tree, a swarm of biting flies, a bear with cubs – you get the idea. To date, economic, coronavirus-related, and geopolitical events have taken a toll on stock and bond markets, as well as the U.S. economy. For example: Prices were high as we entered the year and have continued to rise. Last week, the Personal Consumption Expenditures Price Index, a broad gauge of inflation across the United States, reported that inflation was 6.6 percent in March 2022, up from 5.8 percent in December 2021. The Russia-Ukraine War is pushing inflation higher. Russia and Ukraine are major exporters of energy and agriculture products, and exports have been limited by the war. Consequently, the World Bank’s Commodity Market Outlook forecasts that energy prices will rise by 50.5 percent and non-energy prices by 19.2 percent this year before moving lower again in 2023. China is locking down cities to fight a surge of COVID-19 and snarling supply chains. “Ships have been piling up outside Shanghai, the world’s largest port, and other container docks across China as authorities have forced multiple cities into lockdown to counter the country’s worst COVID outbreak since the pandemic began,” reported Eamon Barrett of Fortune. Cross-border restrictions on trucking have also created issues. The Federal Reserve began raising the fed funds rate to address inflation. The Fed is expected to raise rates significantly this year as it works to reduce demand and lower inflation. When interest rates move higher, the cost of borrowing increases, and economic activity slows. As a result, some investors are concerned about the possibility of a recession. Recession fears were top-of-mind last week when the Bureau of Economic Analysis reported that U.S. gross domestic product (GDP) – the value of all goods and services produced in the country – contracted 1.4 percent during the first quarter of 2022. Greg Daco, the chief economist of EY-Parthenon, wrote in Barron’s:

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TALKING ABOUT INFLATION

Here’s a riddle: How can inflation be 8.5 percent and 6.5 percent at the same time? The answer is that it depends on how you measure it. Determining how quickly prices are rising or falling – and where they may be headed in the future – is not simple. In the United States, millions of goods and services are bought and sold every day – shelter, food, transportation, energy, water, education, childcare, equipment and tools, medical care, furnishings, apparel, trash removal, and much more. The government relies on two indexes: the Consumer Price index (CPI) and the Personal Consumption Expenditures Index (PCE). Each index has two versions: headline inflation and core inflation. Last week, the Bureau of Labor Statistics (BLS) reported that CPI headline inflation was up 8.5 percent in March, and CPI core inflation was up 6.5 percent. The BLS does not collect every price in every part of the United States. It gathers prices in 75 cities, collecting data from about 6,000 households and 22,000 department stores, supermarkets, hospitals, gas stations, and other establishments. So, the CPI is a measurement that reflects the experience of urban consumers.

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