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Politics Whipsaws the Markets

Last update on: Jul 19 2021

Interesting changes continue to occur in the markets, and they show the importance of balanced portfolios.

Remember, after the election, the dollar and U.S. stocks rose. The rise in U.S. stocks was focused primarily in smaller, domestic-oriented companies. The larger U.S. companies with multinational activities suffered, while stocks of companies outside the United States also declined in value.

All of that has changed.

Recently, I pointed out that international stocks in general were doing better than U.S. stocks. Bespoke Investment Group took the analysis another step. It found that stocks of U.S. companies that generate a large portion of their revenues from outside the United States are outperforming stocks of companies that receive most of their revenue domestically.

Companies that earn 80% or more of their revenues outside of the United States are up 16% on average since Dec. 28. Those that earn 80% or more of their revenues inside the United States are up only 3.44%. The average U.S. stock is up 6.09%.

Of course, those trends could change again in the next few months. The fortunes of different investments are likely to rise and fall because of events and commentary from Washington. At times when the President’s agenda appears to be progressing, the pre-election trends are likely to be restored. Investors will favor U.S.-centric investments. When the agenda appears to be faltering, investments outside the U.S. are likely to rise in price.

Investors who changed their portfolios after the election based on anecdotes and forecasts have lagged, or they’ve had to adjust their portfolios again. There’s no need to be whipsawed by political events. Maintain a balanced portfolio that reflects factors that matter to the markets over time. You’ll earn safe, solid returns without having to worry about the latest headlines and political maneuvering.

The Data

Manufacturing continues to improve, according to the anecdotal Fed regional bank surveys.

The Dallas Fed Manufacturing Index registered 15.4 for its Production Index. That’s down from 18.6. The General Activity Index stayed about the same at 16.8. This is another strong report from the Dallas Fed, indicating the region is recovering from the energy price decline.

The Richmond Fed Manufacturing Index also had a strong report for the sixth consecutive month. It came in at 20.0 compared to 22.0 last month. The major weakness in the report was employment, with the number of employees declining and wages remaining the same.

We’re still waiting for these positive anecdotal reports to be reflected in the hard data. Durable Goods Orders increased a strong 0.7% for the month and 5.8% for 12 months. But after excluding transportation (which are mostly aircraft orders and vary from month to month), orders declined 0.2% for the month and are up 4.6% for 12 months. Importantly, the core capital goods component rose only 0.2% for the month and 3.0% for 12 months.

Existing home sales are taking off. They increased 4.4% in the last month after a 3.9% decline the previous month. The total homes sold reached its highest mark since February 2007 at the start of the post-crisis period. The 12-month increase was 5.9%. The median price also rose 3.6% for the month and 6.8% for 12 months.

New home sales also shot up to 621,000 from 587,000. This is the second-best month of the expansion, bested only by 622,000 in July 2016. The median price also increased 7.5% for the month.

Home prices are rising by other measures. The FHFA House Price Index rose 0.8% for the month and is up 6.4% for 12 months. The S&P Corelogic Case-Shiller Home Price Index, which is a month behind because of its data collection method, rose 0.7% for the month and 5.9% for 12 months. The home price reports caused some analysts to worry that the recent rate of increases isn’t sustainable.

The PMI Composite Flash index combines both the manufacturing and service sector indexes of economic activity. The composite is down a little to 52.7 from 53.2. Both components also were down a little.

Consumer Confidence, as reported by The Conference Board, remains high but declined to 120.3 from 124.9. These last two months are the best of the economic recovery for this measure.

New unemployment claims increased 14,000. That’s two substantial increases in a row. Last week’s 10,000 increase was revised down to 9,000. Even so, the weekly number and four-week average are near all-time lows and are substantially lower than one year ago.

The Markets

Stocks had a big bounce this week. The S&P 500 returned 2.11% for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 2.82%. The Russell 2000 soared 3.83%. The All-Country World Index gained 2.68%. Emerging market equities gained 3.13%.

Long-term treasuries lost 1.77%. Investment-grade bonds dropped 0.55%. Treasury Inflation-Protected Securities (TIPS) declined 0.32%. High-yield bonds rose 0.68%.

The dollar declined 0.72%.

Energy-based commodities fell 1.63%. Broader-based commodities lost 1.00%. Gold dropped 1.38%.

Bob’s News & Updates

Most retirees leave a lot of money on the table by not carefully considering how and when to take their Social Security benefits. Avoid that mistake by educating yourself about the choices. Start with my report, Secrets to Boosting Social Security Benefits.

You should read my latest book if you’re retired or planning to retire. It covers the latest strategies and research on all the financial issues of retirement and retirement planning. Learn more in the revised edition of “The New Rules of Retirement.”

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