- Clint Carpenter
Market Commentary 03-18-2021
Clint Carpenter, Director of Operations
The main indices continue to see-saw - the S&P 500 is down slightly today but remains up by about 5.5% year-to-date. The NASDAQ is down over 1% today, but also remains up, by about 3.5% year-to-date. The DOW, our industrial index, is up well over 8% already, ytd. So, we have an interesting market that is breaking somewhat with recent trends.
Treasuries have climbed again, despite recent Fed commentary. The 1-year is paying .07%, the 10-year is yielding 1.7%, and the 30-year is all the way up to 2.4%. That has the country’s average mortgage rate at about 3.2% APR.
Oil, which has been on the rise recently mostly due to the reopening trend, is having a rough day today- it’s down 4% to about $62/bbl. There are some worries about vaccines in Europe slowing down their reopening process, but really, it’s also just common for a commodity to overextend itself when it rises this much, so a short-term decline isn’t much to worry about.
Last bit here on precious metals - Gold will cost you about $1,730/oz today and silver is continuing to hover at $26/oz.
Kris Venezia, Market Analyst
I really want to focus on the Fed and rates in my discussion because it's having such an big role in the markets and the overall economy right now.
The Fed has two major tools to control rates. One is its own Fed Funds rate, which I won't get into, but other interest rates like interest your bank pays you, mortgage rates or corporate borrowing rates are all influenced by it. The second way the Fed controls rates is by buying U.S. Debt, what you hear as "Treasuries", which, without getting into the nitty gritty, keeps rates low.
When times are tough, the Fed wants to keep rates low. They want to motivate people to go out and spend money to help juice the economy. When your checking account pays .01% interest, it motivates you to seek out other investments like riskier bonds or stocks or real estate.
When the economy is going well, the Fed, in the past, would raise rates because they don't want to the economy to overheat. If too much money is being printed and moving around, it can cause inflation.
At this moment in time, the Fed is in a very difficult spot. The Federal Reserve is keeping monetary policy really loose. They set their own rate at zero and are buying billions-of-dollars of Treasuries every week. They are telling investors that the economy is still in a shaky spot.
The problem is.. investors are looking ahead and see a good economy on the horizon. They believe people have saved money, received money through those stimulus acts and will be motivated to spend as we move out of this pandemic.
The reason this is a problem is that the global market and investors influence rates. Once again, without getting too much into the nitty gritty, rates are rising as investors re-position their portfolios for a booming economy.
When rates rise, it causes shifts in the markets. Companies that are trying to aggressively grow, like tech companies, tend to lag the broader market. The reason for this is because to grow quickly, those companies need to borrow money. If it gets more expensive to borrow money, it hurts their growth prospects.
When rates rise, there are certain areas of the market that perform well. Banks are the biggest winner because they lend money at higher rates. In this situation, where there is optimism about the economy, industrial companies also perform well. Honeywell, Deere and Caterpillar are some of those names that are outperforming as the economic outlook improves.
They key for us, as money managers, is to examine if rates are at a point where they will have a dramatic effect on the markets. I like to give my perspective by asking this question. The U.S. 10-year is at 1.7% which means you can give money to Uncle Sam, and you will get your money back in 10-years with 1.7% interest. Is that attractive to the average investor? Would you be happy if we called you every year and said we got you 1.7%? Mortgage rates are still around 3%. Is that going to stop someone from buying a house? If you've been alive for more than 10 years, you know that's still very low.
Daryl Eckman, President
I want to talk about inflation. The way inflation is measured is by examining different baskets of goods and seeing how those prices fluctuate over time. If those prices rise, we call that inflation.
We are not very concerned about inflation, but it is coming onto the radar. The Federal Reserve has been using different vehicles to keep interest rates low, and they do have tools to change policy and try and combat inflation if that becomes more of a reality.
As far as rates go, we see rates rising on the end of that yield curve. We are seeing 10 and 30 year Treasuries starting to pick up. The front end of the curve, those short term Treasuries, are staying very low.
Banks like higher rates because they get to lend money out at higher rates.
At this point, we are not overly concerned about interest rates or inflation. It is something we will monitor as the economy reopens to see if things overheat, but right now, we are not losing sleep over those issues.
We like to see some inflation, it shows that the economy is growing. We really don't like deflation which is when prices are dropping. A terrible example of that was back in the Great Depression when farmers were dumping milk because prices plummeted.
The goal is to be in that sweet spot where there's some inflation, but not too much inflation where consumer prices are getting out of control.
First, regarding taxes, the IRS has pushed the filing deadline to May 15. You’ll get an extra month to gather documents and reach out to us for assistance completing your tax return. The reason for delay leads me into my next point…
The Biden administration and congress have passed the $1.9 Trillion American Rescue Plan Act, known more colloquially as the “new stimulus bill”. The package includes direct stimulus payments of $1,400 to people within certain income thresholds - basically, single people making less than $75k or married couples making less than $150k will qualify for the full amount, it phases out from there until it disappears entirely above $80 or $160k. New this time around, you can receive an additional $1,400 for each of your dependents, regardless of their age.
Also, regarding stimulus payments from last year, if you think you should have received payments but didn’t, you’ll be able to indicate that on your 2020 tax return via the recovery rebate credit. The important thing here is that you can use your 2020 income to qualify. So, if you made less than you did in 2019, you might be owed some money.
If you received any unemployment income in 2020, the new bill excludes a portion of it from income taxation if you’re under certain income limits. If you already filed, the IRS says don’t file an amendment - they will likely correct this on their end and issue you any additional refund that you are due.
There are several other elements of the stimulus bill that I won’t detail here, but am happy to discuss if you feel they might apply to you. These include extended unemployment benefits, expanded child tax credits that you can receive now, in advance, and premium assistance on COBRA health insurance - that’s a big one. If you lost your job last year due to COVID and are on COBRA insurance, there is major assistance available to you. There are also new grants and loan programs available to small business owners. They’re complex, but we can help you understand them.
A lot of great information in today’s market commentary, you couldn’t be blamed for not catching it all. Rather than rewinding and listening again, just give us a call to discuss anything you need some extra help with. You’re welcome to email me, email@example.com, or give us a call at 888-545-4746.