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Market Commentary 06-17-2021

We took a different approach to this market commentary. We had several of our employees at First Choice Financial Solutions ask us questions and then we answered them. It gives a different flavor to the commentary.

Before the question and answer, Clint Carpenter, Director of Operations, gave an update on some areas of the market and how they have performed year-to-date.

Clint Carpenter: Several aspects of the market YTD are at or just slightly under all-time highs with the DOW up 12%, S&P 500 up 13% and Nasdaq up 9%.

When it comes to Treasuries, the 10-year paid you .9% in January and is now paying 1.5%. The 30-year started off at 1.6% and has settled on 2.2%

On commodities, WTI Crude oil, which began the year around $48/bbl has made it all the way up to just shy of $73. Gold is back to where it started this year, around $1,860/oz. Silver is up for the year, climbing from around $23/oz to close to $28 today. The price of lumber which has been on a wild ride this past year has settled somewhat in the past few days. Right before the pandemic you’d pay around $400 per thousand board feet, we then saw that skyrocket to a height of $1600 just last month, and it has come back down to about $1000 as of today.

I also thought I’d throw in some info on the median sales price of existing US homes - which started 2020 at $266k, climbed to $309k by the beginning of this year, and now sits at $342k. That’s a nearly 30% increase in a year and half.

Kris Venezia: Now for the question and answer from several of our colleagues.

Connor Burgess: There's been so many tax proposals and policy proposals from the Biden administration. How do you monitor those and how does it impact any decisions you make as you're building and handling portfolios?

Clint: I’d say it’s relatively simple for us to keep up with the proposals, but perhaps more difficult is to synthesize, you know, is this actually even going to happen and is it worth the time to dive into the details when we know they will change?

I think one thing about the recent spending proposals from President Biden is that they are very clearly coming from a place of negotiating 101 - meaning, come out with your biggest boldest plan knowing full well that it will never pass as is, and then negotiate down to what you’re actually okay with passing.

So that’s the interesting part is not wasting time prematurely.

There are certainly some bills that we pay a LOT of attention to, especially when they may affect retirement savings provisions or changes to investment taxation.

I would say that we are always very conscious of our clients' capital gain situations in taxable accounts, so even a major change to the capital gains tax rates wouldn’t cause us to make any major changes to our operating procedures because we’re already looking at it so closely to begin with.

Paul Donaldson: Debt levels are pretty high, businesses have taken on more debt since the pandemic. The U.S. government debt has risen with spending during the pandemic. How concerned are you with higher debt levels?

Daryl Eckman: We are concerned, we're always concerned.

The national debt is around $28 trillion and is obviously at record levels. The government is clearly spending more than it's bringing in from taxes. Now, this spending by the U.S. government has been going on for a long time. You can go back almost a century ago to FDR and how much spending happened during his years. Both Democrats and Republicans, while in power, have pushed their agendas which have pushed up the federal debt. The difference between the parties is where they want the money to go.

The Fed also has a role in this because they are keeping rates really low. The low rates are encouraging spending and borrowing by the government and businesses and even individuals. We are not overly concerned in the near term about the debt levels, but as we look further out, there becomes concerns about high levels of debt.

Annie Miller: There's been a lot of headlines on a semiconductor shortage, how is that impacting parts of the economy?

Kris Venezia: It certainly is having an impact on various parts of the economy. One of the biggest areas impacted is the automobile industry.

Chips are such a big part of cars today given all the electronics in new vehicles. When manufacturers can't get the chips, it delays the production of new vehicles. There is a ripple effect on car prices for consumers because the supply is not meeting demand.

The chip shortage is having some impact on the broader electronics space but the larger impact is in the automobile space. A big frustration with the chip shortage is that there's no clear timeline for when this chip shortage will be taken care of. There are some predictions for late this year or early next year, but a clear timeline would make life easier for car manufacturers.

Connor: Housing prices have really skyrocketed over the last year. What's causing this?

Clint: Yes, housing has been running quite wild. I think there are two great examples of simple supply vs. demand in this question.

The first is that housing supply is currently less than the housing demand, quite simply. You have a lot of people looking to buy because of low mortgage interest rates and desire for more space, and there just aren’t enough homes for sale to satiate that appetite.

Add to that the soaring cost of lumber and other materials, also another case of supply and demand, and suddenly it becomes harder to build your way out of that problem.

You can pile on top of that the facts that builder sentiment remains quite low and a lot of our major cities that are suffering the most in this housing crunch have really restrictive zoning laws.

Here in Seattle, for example, where we have quite an affordability problem, the city remains zoned in a way that prevents anything other than single family homes on 80% of the buildable land in the city.

That means the major multi-family housing new builds are concentrated in the most urban parts of the city, which are also the most expensive.

So building new condos here doesn’t help a whole lot. So, a pretty layered answer but it’s a pretty layered issue.

Paul: There's been changes to behavior because of the pandemic. For example, more people working from home. How do you pay attention to these changes in behavior and adapt to them?

Kris: The situation is so unique and we have to use some different data points to try and track how behavior is changing.

We have been using various sources to get information about consumer behavior habits. One example is OpenTable which puts out data on people going out to sit and eat at restaurants. It gives a way to track in real-time how behavior is changing across the country with people going out to eat. An interesting shift that has built up is people are eating out less on weekdays than on weekends.

We want to know how consumer behavior is changing because that means their dollars are going to different parts of the economy. If people are going out to eat less or working from home more, that will change how and where they spend their money. Google has put out mobility reports which helps us see which people are traveling back into an office and who are not. If people continue working from home post pandemic, businesses that benefit from people who work at the office will be impacted. A good example are coffee shops, like Dunkin' or Starbucks, who benefit from people grabbing coffees on their way to work or on office breaks.

The key going forward is to monitor these consumer trends through the summer to see what returns to normal and what does not.

Annie: It's easy to point out all of the risks and negatives out there, but as you look at the second half of this year, what are some of the positive signs you will be looking out for?

Daryl: There are so many things moving in the right direction in the U.S. economy. It is hard to be pessimistic right now.

The U.S. economy is moving along nicely on its recovery. We are seeing more people go back to work and get employment. We are seeing behavior start to get back to more pre-Covid times. The stock market has reflected this improving economy and has risen with the expectation that the U.S. economy will continue to improve.

Of course, we have to keep an eye on any potential negatives because there are always risks out there.

Kris: It feels like investors are so positive right now coming out of this recession. When you look back at history, investors didn't seem to be as positive coming out of the credit crisis or dot-com bubble. Daryl, what do you make of the investor sentiment right now?

Daryl: We do seem to have fallen into maybe a little bit of overconfidence in the markets. There are some expectations that might be a little too high.

Some investors might be used to double-digit returns and that might not be realistic year-after-year-after-year. There will probably come a time when financial conditions tighten that will make it harder for there to be gains in the portfolios.

I also don't think investor euphoria is as high as it was in, like '07 or during the dot-com bubble. The risk taking during those times was extremely high and investors were way too complacent.

It doesn't feel like anything too negative is just over the horizon, but the Fed tightening, for example, could put some pressure on the portfolios.


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