Search

Kris Venezia, Market Analyst


I want to talk about cash and what people are doing with it.


I am going on vacation to New York and spending money on travel and going to a wedding so I'll be buying clothes and gifts and going out to eat in New York. There are certainly other people traveling, we know air travel is growing from April 2020, but, there are many consumers still reluctant to spend.


I would say most investors believed spending would come back in a huge way this summer. The expectations were really high, but we have not met those expectations so far.


Retail sales are improving but they are still having a choppy growth recovery. Consumer sentiment is still lower than what the data showed during more robust economic times.


We know from listening to bank earnings that clients of JP Morgan Chase, Bank of America and Wells Fargo have a lot of cash sitting in bank accounts. Clint, Daryl and myself also have found when talking to clients that we are noticing cash build ups in bank accounts.


The problem with all this cash sitting in bank accounts is monetary policy is punishing people who are hoarding that money at the bank. Rates are extremely low, with Clint pointing out that the average interest rate for a bank account is at .06%.


The reason central banks, like the Federal Reserve here in the U.S., keep rates low is to encourage spending. They are trying to pump up the economy following a bad year. central banks are saying, "Hey you, who saved more money than usual in 2020, go out and spend money, and if you don't spend money we're going to give you basically nothing in return."


This all leads to my final point which is something you will here from us at First Choice. We will most likely be advising you to get that cash to work. It can be a savings goal, like a new car, or it can be giving to charity, or, if you want to save it, let's look at ways to invest that money to find assets that offer better potential returns.


The money in that checking account will stay at the same number, but it will decrease in value (most likely) because of inflation.


Daryl Eckman, President


​The word on everyone's lips in our world is inflation. Another kind of thought is, is inflation temporary?

The CPI shows a high number which says that inflation is high. At the beginning of the shutdown, the number was low with inflation low. In the last three months, inflation has risen, the CPI is up around 8%.

Hardcore inflation really comes from printing too much money and that is the long term problem. Inflation is a monetary phenomenon. It is too much money chasing too few goods and services.

Question: What investments are good for protecting against high inflation?

Well, one of the things we have done is move a little out of the bond market. We have shortened the length on the bonds that we are going for as well. We have to worry about long term bonds because the value of the bond could go down if inflation is very high.

We might look to shift in the coming months more for protection. We have a good presence in the stock market which tries to protect and hedge against inflation.

Now, corrections happen and at some point there will be a down turn, but we believe the portfolios are setup to be more protective in this environment.

There are more investors looking at alternative investments. We pay attention to precious metals and commodities, but we think in the long term those assets have not performed as well as other areas.

We need to be content and patient and not over commit the portfolios in any direction.


Clint Carpenter, Director of Operations


We’ve seen several months of sustained wage growth, and if we look at the last quarter, that’s leading to an almost 6% pace of growth, when annualized. That’s substantially higher than the last economic cycle when we saw only about a 2.5% rate of growth.

Basically, employers are doing what they must do to address persistent labor shortages: they’re coughing up more money. We’ve talked plenty about how the reopening of the economy has fueled demand for goods and services, but businesses are struggling to meet that demand because current pay rates just aren’t attracting the qualified applicants that employers want.

There has been a lot of talk about how pandemic unemployment assistance has fueled some of this, but we’re seeing this across all areas of the job market, not just the lower-wage earners that may have made a bit more on unemployment than they did working.

Question: Are there any sectors, like construction, where there is higher wage growth compared to other industries?


It’s pretty interesting - basically, all major industries are pacing above 3%, even higher-wage areas like information, financial, professional and business services, which pay far and above the unemployment insurance levels to begin with. The industries that have seen the highest change in wages are in transportation and warehousing, but also more in the service industry - leisure, hospitality and retail. Those are obviously some of the most recent industries to reopen fully, and starting from lower wages to begin with, so that makes some sense. But, we’ve also seen large increases in construction and manufacturing and professional services, though, so it’s really just widespread.





35 views0 comments

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.

47 views0 comments

Clint Carpenter, Director of Operations


The markets have certainly ebbed and flowed as of late, but we’re still positive year-to-date in our main indices. The S&P 500 is at 4,110, up about 9.5% for the year, the DOW is just over 34,000, which is a YTD gain of 11%, and the star of last year, the NASDAQ, is only up about 2% so far this year, at about 13,100.

Treasury yields have come back down a bit since you last heard from us in April - the one-year is paying .05%, the 10 is yielding 1.6% and the 30-year is at 2.4%. The average 30-year mortgage will cost you 3% APR today.

WTI Crude is down to about $63/bbl, gold will cost you $1,826 per ounce and silver is at $27.


Kris Venezia, Market Analyst


I want to dig into what I have been finding as I go through through corporate earnings reports. We're in that window where companies give us their perspective on how they're doing. Corporate executives also take questions on what they see ahead which is helpful.

I won't dig into the nitty gritty, but I want to talk about the main general topics I have found as I look through these reports.

The big immediate takeaway is that earnings have really crushed expectations. We have seen a majority of companies report profits and revenue that was way better than anticipated to start the year. It tells us that the economy is coming back quicker than what was expected by a lot of analysts.


U.S. and Asia are doing better than Europe. Is this a surprise? No, but it is incredible when companies like Coca-Cola and McDonalds show how much Europe is lagging in its recovery.


The consumer is strong. Companies like Chipotle, Domino's, Apple and Amazon all highlight this as they report consumers not just buying from them, but spending more than they did in the past. People aren't just getting pizza, they're splurging on that cheesy bread too.

There are supply chain issues persisting. The car industry is the best example of this with Ford saying they're being forced to make less cars because of shortages of items like chips.


Daryl Eckman, President


Inflation seems to be on everyone's lips right now. We have been getting a number of phone calls from people asking us what we think about inflation.

I'm not going to spend a lot of time on inflation because I went through it on our last podcast. You can find it on our website if you want to get my opinion on inflation.


We are seeing issues with the supply chain. The semiconductor industry is working to deal with a shortage there that is impacting businesses.


I want to discuss market volatility. We actually like volatility because it gives us buying opportunities. Our clients hear this on a regular basis. Volatility gives us conviction to do some of the buying; honestly, we do not love buying when things are high. When the market performs really well, we tend to look for opportunities to take some money off the table.

We also are good at controlling our emotions when volatility comes up. It can be difficult to emotionally handle volatility and that is one of our strengths.

Bottom line, we want to use the volatility as an opportunity to find buying and selling opportunities. If you want more clarification on volatility, please reach out and we can go into more details.


Clint Carpenter


To wrap us up here, I thought I would touch just briefly on something that, second maybe to inflation, I’ve been receiving the most questions about - which is Biden’s plan to offset more than $4 trillion in spending proposals with higher taxes.

Specifically, we’re talking about the $2.3 trillion “jobs and infrastructure” package announced last month, as well as the $1.8 trillion “families” spending plan. The first and larger bill, it is proposed, will be paid for entirely by a hike in the top corporate tax rate from 21% to 28%- this was just cut down from 35% in 2017.

The second “families” bill, is planned to be funded by increasing enforcement at the IRS and by raising taxes on high-income Americans and investors. Namely, Biden’s proposal is to approximately double the amount of capital gains taxes paid by investors who earn more than $1MM annually - they say only about .3% of investors would be affected by that change.

Clearly, these proposals are brand new and will work their way through committees and negotiations with both parties, and we’ll end up with an entirely different version of the bill later. We’re paying very close attention to it, but there is little sense in reacting strongly now while it is still in its infancy. These types of bills, especially in today’s political climate and congressional stalemates are huge battles. So, know that we follow every detail of it, but can’t say what will ultimately pass through.

Thanks as always for listening today. If you’d like to discuss anything further about the earnings season, inflation, or these tax proposals, please don’t hesitate to give us a call or shoot us an email. Thanks and have a great day!

47 views0 comments