Bob’s Journal for 9/30
U.S. Household Net Worth Surges
Rising prices for stocks and homes have been good for the balance sheets of U.S. households, according to a quarterly report from the Federal Reserve.
The total net worth of all U.S. households increased by $5.8 trillion in the second quarter of 2021 to $141.7 trillion. The largest contributors to the increase were corporate equities and real estate, rising by a combined $4.7 trillion in the quarter.
But cash holdings jumped by $200 billion in the second quarter of 2021 and have increased by $4.3 trillion since the beginning of 2020.
Household net worth increased despite a 7.9% increase in debt during Q2 2021. This follows a 6.7% increase in debt in the first quarter of 2021.
The numbers are another reason to believe that strong economic growth will continue. Households have significant savings, which usually leads to steady retail spending.
In addition, salaries are rising at their highest rate in some time, which is another reason to expect spending and growth to continue for a while.
The Fed Redefines ‘Transitory Inflation’
As prices for goods and services increased steadily through 2021, Federal Reserve officials said that they expect the price increases to be transitory. Inflation will decline after a few months, they said.
In the spring, it was easy to point to sharp spikes in prices of lumber, used cars and a few other items. Those price increases were largely attributable to supply and demand imbalances that were likely to correct after a few months.
Now, those imbalances have largely corrected themselves. Yet, inflation continues to increase. The detailed monthly Consumer Price Index (CPI) reports reveal that price increases have been broad-based among both services and goods.
A year ago, Fed officials were forecasting that core CPI (excluding food and energy) would be 1.8% in 2021. That forecast will be off by a considerable amount.
Fed officials hesitantly increased their forecasts over the last 12 months, but their latest forecast anticipates only 2.3% inflation in 2022. That’s the highest forecast since Fed officials began them in 2007, but it’s still likely to be low. Six of the 18 Fed officials who make the forecasts believe inflation will be 2.5% or higher in 2022.
These higher forecasts are why Fed officials are now planning to reduce their buying of securities soon and eliminate the purchases by mid-2022. The Fed is likely to start raising interest rates in the second half of 2022.
Fed officials remain well behind the curve on inflation, and they’re doing it intentionally.
Strong economic growth is sustainable at this point. Healthy consumer balance sheets and incomes are making it difficult for businesses to keep up with demand. That’s going to keep incomes and prices increasing.
The Fed is more concerned about a recession and falling prices than it is about inflation. Officials are worried that there would be few tools available to contain or reverse a recession. Curtailing inflation is easier.
As officials have said, they’re comfortable letting inflation run above 2% for some time to make up for the extended period when inflation was below the Fed’s goal.
That’s why a basket of inflation hedges should be in every portfolio at this point. It’s also why traditional bonds are a high-risk investment.
Beware of Hot Investment Themes
Theme investing has been popular among a segment of investors for some time.
Investment themes can be found in a number of online forums that encourage people to buy certain individual stocks. Exchange-traded funds (ETFs) also tend to stress themes. A thematic ETF is one that intends to own stocks in a narrow sector of the economy, such as clean-energy companies and internet retailers.
The companies that attract theme investors tend to be small stocks that are considered disruptive to established industries or companies. But the stocks and ETFs also tend to have low trading volume.
A small company stock or an ETF with low trading volume can be extremely volatile. A few thousand individual investors who buy after reading encouraging reports online can cause a sharp increase in the stock when they place orders to buy at the market price.
After the theme investors have placed their orders, there is often little to support the stock or ETF. The price of the stock declines. A falling price causes more existing investors to sell, accelerating the price decline.
Some investors now call these PopNDrop investments. A surge of popularity causes the price to pop higher. But a month or so later, the price stagnates or drops. Another name for them is bubble stocks and bubble ETFs. Even the widely traded ARK ETFs became bubbles that burst.
There has been an increase in these bubbles since the early stages of the pandemic. The phenomenon continues. Too many investors fear missing the opportunity after an investment is making headlines because of rapid recent appreciation. That’s a dangerous time to invest, but a good time to sell.
The Data
The S&P Corelogic Case-Shiller Home Price Index increased 1.5% in July, following a 1.8% increase in June.
Over 12 months, the index increased 19.7%. That’s the largest 12-month increase since the index began in 2000.
Prices reached all-time highs in 19 of the 20 cities surveyed for the index. Phoenix had the highest rate of appreciation for the 26th consecutive month.
The FHFA House Price Index was similar, reporting a 1.4% increase in July and a 19.2% gain over 12 months.
New unemployment claims rose by 16,000 to 351,000 in the latest week. That’s the second straight week of increases after new unemployment claims reached a new pandemic low three weeks earlier.
Continuing claims also rose to 2.84 million.
About 7.5 million Americans stopped receiving benefits as the special pandemic unemployment benefits expired.
New home sales increased 1.5% in August from July’s level. But the August 2021 sales were 24.3% below the August 2020 level.
The year-to-date sales for 2022 are only 2.4% higher than at the same point in 2020. Since there was a surge in sales in the last part of 2020 that won’t be replicated this year, it looks like new home sales for 2021 will be less than in 2020.
The main problem seems to be that the rapid price increases over the last 12 months priced many potential first-time buyers out of the market.
The pending home sales index from the National Association of Realtors (NAR) increased by 8.1% in August after declining 2.0% in July and also falling in June. Over 12 months, pending home sales declined 8.3%.
The Kansas City Fed Manufacturing Index declined a little in September to 22 from 29 in August. The index level still indicates strong growth.
In Texas, growth in manufacturing is solid but dipped a bit in September, according to the Dallas Fed Manufacturing Survey.
The Production Index derived from the survey increased three points to 24.2. The Dallas Fed said that reading is well above average and indicates solid output growth.
Other indexes derived from the survey were mixed. The General Activity Index was reported at 4.6, down from 9.0 in August.
The Richmond Fed Manufacturing Index, which has been volatile this year, tumbled to negative 3 in September from 9 in August.
In its commentary, the Richmond Fed said this indicates “manufacturing activity softened slightly.”
Indexes for shipments and new orders declined below 0 for the first time since May 2020, but employment remained positive.
Durable Goods Orders surged 1.8% in August, and July’s numbers was revised from a decrease of 0.1% to an increase of 0.5%.
Core Capital Goods Orders, considered a good measure of business investment, increased 0.5% in August. July’s number was revised from no change to an increase of 0.3%.
The Leading Economic Indicators Index from The Conference Board increased 0.9% in August. July’s index was revised down slightly to a 0.8% increase from the 0.9% increase initially reported.
The economy slowed a little in the first half of September but still experienced strong growth, according to the mid-month PMI Composite Flash Index.
The Services Index declined to 54.4 from 55.1 at the end of August. The Manufacturing Index declined to 60.5 from 60.8 at the end of August. The Composite Index for the economy fell to 54.5 from 55.5.
Consumer Confidence, as measured by The Conference Board, declined to 109.3 in September from 115.2 in August (which was revised higher from the 113.8 initially reported.
This is a significant decline for this index, the third consecutive month of declines, and its lowest level since February. The Consumer Confidence Index has been much higher in 2021 than the Consumer Sentiment Index reported by the University of Michigan.
The Markets
The S&P 500 rose 0.02% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.12%. The Russell 2000 increased 2.04%. The All-Country World Index (excluding U.S. stocks) lost 0.86%. Emerging market equities added 0.18%.
Long-term treasuries lost 4.51% for the week. Investment-grade bonds fell 1.74%. Treasury Inflation-Protected Securities (TIPS) declined 0.88%. High-yield bonds retreated 0.47%.
In the currency arena, the U.S. dollar rose 0.64%.
Energy-based commodities increased 4.74%. Broader-based commodities rose 5.49%, while gold declined 2.40%.
Bob’s News & Updates
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