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Investing Jiu Jitsu: Using Tough Markets & News to Your Advantage

Investing Jiu Jitsu: Using Tough Markets & News to Your Advantage This week Dave and Jake tackle RMD’s, QCD’s, and Roth conversions, and how investors should take advantage of a depressed stock market to use as a tax benefit.

Investing Jiu Jitsu: Using Tough Markets & News to Your Advantage

This week Dave and Jake tackle RMD’s, QCD’s, and Roth conversions, and how investors should take advantage of a depressed stock market to use as a tax benefit.

Five Things You Should Know

  1. Equity Markets – were lower this week with U.S. stocks (S&P 500) down -3.99% while international stocks (EAFE) fell -3.06%.
  2. Fixed Income Markets – were lower with investment grade bonds (AGG) down -0.37% while high yield bonds (JNK) fell -1.56%.
  3. Powell sees Pain – in his widely anticipated speech this week at the Jackson Hole Central Banking Conference, Fed Chair Jerome Powell confirmed the Fed is prioritizing fighting inflation over all else and warned that “reducing inflation is likely to require a sustained period of below-trend growth”, and that it will be an unfortunate cost of restoring price stability. This was in-line with the Fed’s previous “raise-and-hold” messaging on rate increases and sends a strong signal that there is currently no consideration for rate cuts in the foreseeable future.
  4. Loan Forgiveness – after much back-and-forth President Biden announced this week his new student debt-relief package that forgives as much as $20,000 in loans for qualifying recipients. The package is expected to cost in the hundreds of billions and also includes a 4-month extension on the current student loan repayment moratorium and a plan to cap monthly student loan repayments at 5% of the borrowers’ monthly income.
  5. Key Insight – [VIDEO] This week Dave and Jake tackle RMD’s, QCD’s, and Roth conversions, and how investors should take advantage of a depressed stock market to use as a tax benefit. [ARTICLE] We discuss why today’s Jackson Hole announcement and subsequent market reaction are likely not telling the whole story about what may lie ahead for investors.

Insights for Investors

The Fed & Inflation

The long-awaited Jackson Hole meetings, and most importantly the speech from Chairman Powell finally occurred this week with his comments that rates will rise until the “job is done” fighting inflation, which sent risk markets down on Friday.

Those comments really shouldn’t come as a shock to people even if his comments around what a “neutral rate” may be and insinuation the Fed may hike rates past that number were a bit surprising.

At the end of the day, inflation itself is the real issue, and on that front, there was actually some good news this week with the Fed’s preferred metric Personal Consumption Expenditures (PCE) which dropped 0.1% in July and Core prices moderating to a year-over-year gain of 4.6%. Still above the Fed’s target of 2% but trending in the right direction.

As the next two charts from Guggenheim show, in addition to recent pullbacks in energy prices, two of the other large factors (supply chain stress and rents) in recent inflation numbers also appear to be cooling and could help bring inflation closer to the Fed’s goal sooner than many fear.

The other key metric that rarely gets talked about in the news we’ve been telling you to keep an eye on is the M2 money supply. As noted by Brian Wesbury, Chief Economist for First Trust, there was good news this week as he said, “the Federal Reserve released its monthly report on the M2 money supply for July. The best news in the report is that M2 growth has moderated year-to-date, up at a 1.8% annualized rate through the first seven months of 2022. That’s well below the 13.8% annualized growth over the same period in 2021, or the 35.4% annualized surge in the first seven months of 2020 as Congress and the Fed bypassed the fire hose and simply opened the stimulus hydrant to full blast. The moderation in M2 growth will help control inflation pressures from building even further, but past actions have the Fed continuing to battle from behind the curve.”

Scott Grannis, former Chief Economist at Western Asset Management, also called out the progress on the M2 stating, “the Fed released the July '22 M2 statistics, and they couldn't have been better. Year over year growth has fallen from a high of 27% in February 2021 (unprecedented!!) to now just 5.3%. On a 6-mo. annualized basis, M2 growth is a mere 0.6%, and on a 3-mo. annualized basis it's 1.0%. In other words, M2 has essentially flat-lined since last January, which was well before the Fed began to take tightening action. This means that the behavior of M2 is obviating the need for the Fed to pursue a typical tightening, which almost always ends with a recession.”

Do today’s comments from Powell mean that they are ignoring the above or merely wanting further confirmation? Only time will tell, but we still believe it will prove to be the latter.

Other Encouraging News

As shared by Apollo in the chart below, the US Consumer remains in a strong position. While the skeptic will point to the drawdown in some savings (see red below) the totality of pent-up savings still dwarfs any current drawdowns and suggest the consumer will be strong for some time to come.

Furthermore, the history around initial market rebounds after an “official” bear market is reached is also quite positive as highlighted in the Goldman Sachs chart below. In short, historically when the stock market is able to regain 50% of a bear market drawdown the average upside for markets over the next 12 months has been strong.

US equity returns historically have been asymmetric following a 50% recovery in bear markets, a threshold which was crossed earlier this month. In the 12 months following such retracements, the S&P 500 experienced significantly larger gains than losses, with downside periods averaging a modest -5% loss. While every bear market is different, the momentum of previous rebounds and a favorably skewed return profile suggest equities may sustain their rally.

On the valuation front, Neuberger Berman highlighted that, “Equity valuations have become more attractive since the start of the year. As of July 31st, 2022, the S&P 500 forward earnings yield is approximately 5.7%. The spread between the S&P 500 forward earnings yield and the 10-year Treasury yield is approximately 310 basis points. This represents the “equity risk premium” and is well above the 30-year average. The S&P 500 Index is currently trading at approximately 18x forward earnings. This is below where the market was trading in April 2020 when the economic outlook was significantly more uncertain.”

And last, but certainly not least especially for income investors like so many of you here at TEN, there is great news on the global dividend front where Janus Henderson reported that global dividends surged 11.3% to a new all-time high in Q2 of this year. (See short video).

For those of you wondering after today’s Fed news, “what does this all mean?” Remember successful investing does not rely on one’s ability to predict, but rather to be disciplined enough to follow a sound process such as the one that our High Income Series is founded on with seeking solid income from sources such as the global dividends highlighted above.

Enjoy your weekend and know we are always here for you!

Tim and the team at TEN Capital

Data, Just the Data

Data points this week included:

  • U.S. Jobless Claims – decreased by 2K to a claimant count of 243K for the week ending August 20th. The reading is far below the market estimates of 253K and is the lowest since July 23rd. The four-week moving average has increased by 1.5K to a count of 247K.
  • U.S. New Home Sales – contracted (12.6%) MoM to an annualized rate of 511K in July. This marks the lowest reading since January of 2016 and far below expectations of 575K. The median sales price of a new home shot up to $439.4K – higher than $406K from a year ago, while the average sales price came in at $546.8K.
  • U.S. Durable Goods Orders – new orders for manufactured goods remained unchanged from last month (a 2.2% rise), which was below the forecasts of a 0.6% increase. This marks the first of five months where orders recorded no growth. Excluding transportation, new orders rose 0.3%. Orders for non-defense capital goods excluding aircraft increased 0.4%.
  • U.S. PMI Composite Flash – reading came in at 45 for the month for August, which was slightly down from 47.7 in July. This marks the second consecutive monthly decrease in business activity (under 50) with manufacturers and service providers showing decreased output. New orders fell the most in two years and hiring efforts slowed to its lowest pace this year.
  • U.S. GDP – the second estimate for Q2 economic growth rose by 0.3% but remains negative at (0.6%). This upward revision was thanks to an increase in consumer spending and inventories. PCE grew 1.5% which was higher than the 1% estimate. No other notable estimates and revisions were found.
  • U.S. Personal Income & Outlays – increased 0.2% in July, a drop from the month’s previous reading of a 0.7% rise, and below forecasts of 0.6%. The primary driver is an increase in compensation through private wages and salaries. The Personal Consumption Expenditures Index, closely watched by the Fed, dipped from 0.6% to 0.1%, MoM and from 4.8% to 4.6%, YoY – both good signs for lowering inflation.
  • Eurozone PMI Composite Flash – dipped down to 49.2 this month after a reading of 49.9 the month previous and slightly above forecasts of 49. Like the U.S. this marks the second consecutive month of a reduction in activity after a 16-month period of growth. Production in manufacturing fell for the third month in a row as the service sector faltered as well. Business confidence has remained subdued and customer demand has taken a hit.
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