Personal Economics 101

An inverted yield curve is often seen as a warning that a recession is looming. Longer-term yields are usually higher than shorter-term yields because investors want to guard against the risk of unexpected inflation and rate increases. The yield on the 10-year Treasury note dropped to 0.78 percentage points below the two-year yield, the largest negative gap since 1981, before easing slightly. The inversion reflects both surprising positive news on inflation as well as the view that the Federal Reserve will continue to raise interest rates and keep them at elevated levels.

I guess my portfolio (13% Bond, 70% Stock and 17% Cash) isn't doing to badly, with a YTD return (including dividends) of 3%. About 25% of my stocks are either in, or were, in energy. I sold about half my holdings a few months ago and invested in income producing ETFs.

(Update 5/24: Since publishing this article (May 23), the price of Natural Gas increased to $8.81 per MMBtu or 8.6% on the NY Mercantile Exchange. The price of oil is $110.57 per barrel.) Since Biden was elected president with his declaration of war against fossil fuel production, the oil price has spiked from $60 a barrel to above $100 a barrel, an increase of about 70%. Gas prices at the pump have surged nationally at a similar pace, from $2.59 a gallon under Trump to about $4.59 a gallon last week.  But don’t fret, because the Biden White House is “doing everything we can to bring gas prices down.” Another energy crisis may be brewing, and that is a result of the surge of natural gas prices. (Don’t forget, natural gas is by far the number one source for electric power generation in America.) Here at home, those prices have climbed from less than $3 per MMBtu in 2020 to $7.40 as of last week. (See chart.) This is close to a 150% increase in price. James Grant from the Interest Ra...

The MBA Mortgage Application Index declined 6.3% last week, following the prior week's decrease of 6.8%. The fourth-straight weekly downturn came as a 9.9% drop in the Refinance Index was met with a 3.4% fall for the Purchase Index. The average 30-year mortgage rate extended its climb, rising 10 bps to 4.90%, and is up 154 basis points (bps) versus a year ago. Some sources, such as Mortgage News Daily , reported the 30-year fixed at 5.08%. In afternoon action, the Federal Reserve released the minutes from the Federal Open Market Committee's (FOMC) March monetary policy meeting, at which the central bank initiated its rate hike campaign.  The report showed that Members discussed and "generally agreed" to reduce the holdings on its balance sheet by a maximum of $95 billion—$60 billion in Treasuries and $35 billion in mortgage-backed securities—phased over three months, and likely starting in May. The move would double the rate of its last effort.  In addition, the Commi...

A bond selloff (lower prices means higher yields) is deepening after Monday's (March 21) comments from Jerome Powell, which said the Fed is prepared to act even more aggressively to tackle inflation. The yield on the 10-year Treasury has soared 20 basis points to 2.32% since the remarks, leading to the worst month for the asset class since 2016. Meanwhile, the 2-year Treasury yield broke above 2%, jumping almost 24 bps over the past 24 hours to reach 2.19%, as the yield curve hurtles towards an inversion (or one of the best indicators of a coming recession). Stocks are hanging in there despite the latest comments - closing in positive territory yesterday - while futures linked to the major averages are up another 0.4% Tuesday morning. Quote: "If we determine that we need to tighten beyond common measures of neutral (i.e. an interest rate that neither hinders nor fuels economic growth) and into a more restrictive stance, we will do that," Jerome Powell announced during a s...

Nonfarm payrolls rose by 678,000 jobs month-over-month (m/m) in February, above the Bloomberg consensus estimate of a 423,000 rise, while January's figure was adjusted higher to an increase of 481,000 from the initial reading of a 467,000 gain. Excluding government hiring and firing, private sector payrolls advanced by 654,000, versus the forecasted rise of 400,000, after increasing by 448,000, revised higher from the preliminarily reported 444,000 gain in January. The labor force participation rate ticked higher to 62.3% from January's unrevised 62.2% figure, where it was expected to remain. The unemployment rate declined to 3.8%, from 4.0%, with forecasts calling for it to dip to 3.9%. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—rose to 7.2% from the prior month's 7.1% rate. Average hourly earnings were flat m/m, below of projections calling for a ri...

The stock market scored an amazing comeback this week, initially selling off on the deteriorating Russia-Ukraine situation, then rallying on optimism that the conflict could have only a minimal impact on the U.S. economy.  The S&P 500 closed the week with a 0.8% gain after falling as much as 5.5%, the Nasdaq Composite increased 1.1% after plunging as much as 7%, the Dow Jones nearly broke even after losing 5.3% midweek, and U.S. West Texas crude oil pulled back after briefly topping $100 per barrel.  The turnaround came after President Biden issued targeted sanctions Thursday afternoon that did not affect Russia's oil and gas exports or block Russia's access to the SWIFT financial system, sparking the rebound that continued into Friday.  At the same time, the shock and uncertainty of a war in Europe could discourage the Federal Reserve from being aggressive about hiking interest rates, which had been weighing on stocks before Russia's invasion. Outlook : Western intel...

U.S. equities finished lower (see below), with the S&P 500 venturing further into correction territory for the first time since mid-2020, as the markets continued to fret over events in Ukraine.  After the movement of Russian troops into some of Ukraine's eastern regions, the country's Ministry of Digital Transformation said a mass cyberattack disabled bank and government websites, prompting further actions from Western governments.  President Biden cut off resources to the two regions and announced further sanctions on Russia, while meetings scheduled between the U.S. and Russia have been tabled. Moreover, Germany halted the certification of the potentially key Nord Stream 2 pipeline.  The markets also continued to grapple with elevated expectations of tighter global monetary policies, while digesting another round of earnings reports. Lowe's Companies rose following its quarterly performance and guidance, while Palo Alto Networks was higher on its report, though TJX...

Wholesale inflation in the United States surged again last month, rising 9.7% from a year earlier in a sign that price pressures remain high at all levels of the economy. The Labor Department said Tuesday that its producer price index — which measures inflation before it reaches consumers, or wholesale prices — jumped 1% from December. Excluding volatile food and energy prices, wholesale inflation rose 0.8% from December and 8.3% from January 2021. The Producer Price Index (PPI) showed prices at the wholesale level in January rose 1.0% month-over-month (m/m), above the Bloomberg consensus estimate of a 0.5% gain, and north of December's unrevised 0.2% increase.  The core rate, which excludes food and energy, gained 0.8% m/m, above estimates of a 0.5% rise and above the prior month's unadjusted 0.5% rise. Y/Y, the headline rate was 9.7% higher , the same as the prior month, but higher than projections calling for a 9.1% gain. The core PPI increased 8.3% y/y last month, above est...

The  Consumer Price Index  (CPI) rose 0.6% month-over-month (m/m) in January, above the Bloomberg consensus estimate of a 0.4% increase, and following December's upwardly-revised 0.6% gain. The  core rate , which strips out food and energy, also increased 0.6% m/m, topping forecasts of a 0.5% gain, and matching December's unadjusted rise. Compared to last year, prices were 7.5% higher for the headline rate—the fastest pace since 1982—above estimates of a 7.3% increase and an acceleration from the prior month's 7.0% rise. The core rate was up 6.0% y/y, above projections of a 5.9% increase, and following December's unrevised 5.5% rise. Weekly initial jobless claims  came in at a level of 223,000 for the week ended February 5, versus estimates calling for 230,000, and down from the prior week's upwardly-revised 239,000 level. The  four-week moving average  declined by 2,000 to 253,250, and  continuing claims  for the week ended January 29 was unchang...

February 8, 1971 Opening on Wall Street on this day in 1971, the Nasdaq stock market — originally an acronym for the National Association of Securities Dealers Automated Quotations — was the first fully electronic stock exchange in history. Today it is the second-largest exchange in the world, behind its primary competitor, the New York Stock Exchange (NYSE). Originally used to provide automated quotations about stock prices for investors, the Nasdaq eventually added trading and transactional systems. The completely electronic format was an alternative to the less-efficient structure of traditional marketplaces, which required live traders on an active and chaotic trading floor. In 1992, Nasdaq joined with the London Stock Exchange to form the first intercontinental link between financial markets. Six years later, the Nasdaq exchange was the first in the world to create its own website and begin trading securities online. This cutting-edge model has historically attracted high-tech, gr...

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, making no change to the Fed funds rate, as was widely expected. However, it hinted at the possibility of its first rate hike since 2018 being around the corner, saying, "With inflation well above 2% and a strong labor market, the committee expects it will soon be appropriate to raise the target range for the federal funds."  As well, in its statement of "Decisions Regarding Monetary Policy Implementation," the Committee said it expects its balance sheet reduction "will commence after the process of increasing the target range for the federal funds rate has begun." Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest article, The Fed's Policy Tightening Plan: A One-Two Punch, how beginning quantitative tightening soon after rate hikes is a big departure from the Federal Reserve's past policy. The FOMC also said it will continue to taper its...

 A 10 percent drop in any market means that market is in a correction. A drop of 20 percent is normally defined as a bear market.  The Dow Jones Industrial Average (DJIA) is down 5.25% from its high in early January. IWM, which tracks the Russell 2000, is down 16.5% since it's high in 2021. The NASDAQ 100 is down 15% since its high in November 2021. The S&P 500 index is down 5.87%. The drop in prices have been strongest in tech and small caps, with larger cap stocks not reaching correction status quite yet. 

Reports on CPI and PPI (Consumer and Producer Prices Indices) and Industrial Production will be out this week.  Payroll employment grew by much less than expected in December as employers only added 199,000 to payrolls. However, we continue to see signs of labor market tightness, with unemployment dropping to 3.9% and wages rising by a robust 0.6% m/m and 4.7% y/y. The durable rise in wages, as demand for workers far exceeds supply, has added a significant boost to the “sticky” inflation narrative as this week’s upcoming CPI report could show a whopping 7% y/y gain. Moreover, there may yet be room to run on wages.  Entering the new year, 21 states increased their minimum wage by an average of 41 cents, with many states approving incremental minimum wage increases for multiple years ahead. While only a small percentage of all workers earn the minimum wage, these increases have the effect of raising the wage floor for all low-wage employees.  Apart from these minimum wage i...

Certain ETFs used covered calls to generate extra income, which are returned to shareholders as dividends. With most of these ETFs, income is the priority; capital gains are secondary. One example of this type of ETF is QYLD , Nasdaq 100 Covered Call ETF. Some, such as QYLG and XYLG, only sell calls on about 50 percent of their holdings in order to increase the possibility of gains. One EFT, NUSI, also write puts, as a hedge against a bear market. (Note: The possibility of gains also increases the risk of losses, so judge accordingly.) If you're looking for income, you should consider one or more of these ETFs. Note that QQQ and SPY, which as pure equity plays, had great returns, but the markets were up last year. This would be different in a down year. Also note that these covered call ETFs are new enough that they have not been tested during a bear market.  Consider that the volume on some ETFs, such as XYLG, has a daily average volume of less than 10,000 shares. This will cause...

U.S. equities finished higher to extend yesterday's gains, after a better-than-expected Consumer Confidence report showed increasing optimism. Despite the improved outlook, investors continued to grapple with the uncertainties surrounding the omicron variant and its economic impact.  President Biden spoke on COVID yesterday afternoon, announcing plans to distribute free at-home COVID testing kits and dispatch 1,000 members of the military to support hospitals, while avoiding any mention of lockdowns.  In other economic news, existing home sales rose for the third consecutive month, albeit at a smaller-than-expected pace, Q3 GDP was revised slightly higher and mortgage applications declined. On the equity front, Pfizer’s Paxlovid oral pill was granted an emergency use authorization by the U.S. Food and Drug Administration (FDA) for treatment of COVID-19 disease in high-risk adults and pediatric patients,  CarMax posted upbeat quarterly results on record auto sales, while B...

U.S. equities began the holiday-shortened week on a down note, as uncertainty regarding the ultimate impact of the omicron variant persists. All the major sectors were in the red, led by Financials, Consumer Discretionary and Information Technology, while Health Care issues were also lower despite Moderna's announcement of positive results of its COVID booster against omicron.  The markets also grappled with dampened expectations (in my opinion, this should be positive) regarding the passing of President Biden's social spending and climate plan after Democratic senator Joe Manchin said he won't support the bill.  In economic news, leading indicators accelerated more than expected and posted the ninth-straight monthly gain. In other equity news, Oracle Corporation confirmed last week's reports that it agreed to acquire Cerner Corporation for an equity value of $28.3 billion.  Treasuries were mixed, and the U.S. dollar was little changed, while crude oil prices tumbled, a...

The bulls' attempt to extend yesterday's rally that was sparked by the Fed's decision to speed up the tapering of its asset purchases fell short, as U.S. equities did an about-face to finish lower amid continued worries over the omicron variant.  The markets also digested monetary policy decisions out of Europe, with the European Central Bank temporarily increasing its asset purchases and the Bank of England unexpectedly raising its benchmark interest rate.  Investors also sifted through a host of economic data that showed jobless claims modestly bounced off multi-decade lows, housing construction activity came in stronger than expected, manufacturing and services sector growth decelerated, and industrial production rose at a slightly smaller pace than anticipated.  In equity news, Lennar Corporation and Adobe traded lower following their earnings reports, while Accenture rallied in the wake of its earnings results and guidance.  Treasuries were mixed and the U.S. do...

Treasuries are mixed after seeing some pressure yesterday as the Federal Reserve expectedly announced that it will speed up the tapering of its monthly asset purchases. The yield on the 2-year note is declining 6 basis points to 0.61%, and the yield on the 10-year note is decreasing 3 bps to 1.43%, while the 30-year bond rate is ticking 1 basis point higher to 1.87%. Many stocks are up today as well.  Why? First of all, the market loves certainty. Knowing what to expect on the macroeconomic level next year goes a long way for investors that are closely watching their portfolios, as well as an assurance from the Fed that it is taking inflation seriously. Powell also balanced his rates outlook with a strong dose of optimism about demand and income, and confirmed that "we're making rapid progress toward maximum employment." Weekly initial jobless claims came in at a level of 206,000 for the week ended December 11, versus the Bloomberg consensus estimate of 200,000 and compar...

As the months drag on, it's increasingly clear that Covid is more of a supply shock than a demand shock to the U.S. economy. Do you remember the endless stories about supply chain problems after the 2007-08 financial crisis? Nope. Neither do I. Because they didn't exist. Did we have soaring prices after 9/11? Nope. Container ship shortages after the dotcom collapse? Of course not. All the recent crises we've dealt with have been negative demand shocks to the U.S. economy. And that has empowered the Keynesian approach of filling demand drops with government stimulus--or consumer spending, as in the case of 9/11, when President Bush famously told families to go about their lives ("fly on airplanes...travel...Get down to Disney World") in order to keep the economy from worsening.  So naturally, when Covid hit, and people worried about a second Great Depression, policy makers threw more stimulus at the problem than ever before. But Covid is more and more a supply shoc...