Morning Market Preview for September 17th, 2024

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Good morning, Heroes!

Here’s your Morning Market Preview for September 18th, 2024
Read, or listen relaxingly for a few minutes – whichever you prefer!

Key Economic Reports

• Housing Starts, previously 1.24 million, and the market expects 1.31 million in this report.
  
  
• Building Permits, previous 1.4 million, with an expected 1.41 small uptick.
  
  
• FOMC Interest Rate Decision, expected at 2:30pm Eastern.

Key Events & Earnings Reports Today

• Steelcase and Sang Technologies report today, but all eyes are on the Fed.
  
  
• Boeing is in the middle of a strike, and the company has frozen hiring and is discussing furloughs as well. The strike began on September 13th.

The Fed

• Today is the day we likely get our first rate cut since The Fed began hiking rates in March 2022. It was the fastest rate hike in American history. The market hasn’t seen a rate cut since March 2020.

Stocks

Year-to-Date Performance:

• Up Most: Although down just a bit in the last day, Tech leads the pack, up 25.01% this year. Utilities was also down just a tad, but is still the second-best on the year year, up 24.08%.
  
  
• Down Most: Important: no sectors are negative on the year. The smallest gain has been in Energy, up 3.05% this year. Second-to-last is now Consumer Discretionary, up 8.73% this year.

5 Day Moving Average: 

• Up Most: 100% of Energy Large Cap stocks are now above their 5 day average. Materials is close to the top position too, with 96% of its Large Caps above their 5 day average.
  
  

• Down Most: Real Estate stocks have had a bad 5 days, and only 26% of Large Caps are above their 5 day average. Next closest is Health Care at 49%.
  
  
• Overall, investors are trying to position themselves ahead of The Fed’s decision, and in light of some data that the economy is slowing.

Crypto

• Bitcoin: Over the past day, it is up about $60,155, which puts it at a staggering 43% gain on the year.
  
  
• Ethereum: It’s been a good day for Ethereum, and is up to about $2,358, which means a 2.15% gain on the year.
  
  
• Top Gainers Recently: Uniswap is up most as of this report, 7.14% on the day.
  
  
• Important to note: Crypto markets are always open and prices change constantly.

Bonds

• 2-Year Treasury Yield:  At 3.599%, it has continued its yield decline this year.
  
  
• 10-Year Treasury Yield: At 3.644%, it also continues its yield decline this year.

Gold

• Price: Gold was down about 50 basis points the last day, now about $2,569 per ounce, up 24.57% on the year.

Real Estate

• 30-Year Fixed Mortgage Rate: Down just a bit, now to 6.11%. The mortgage rate has dropped about 8.4% this year.

Geopolitical Aspects

• Tensions in key oil-producing regions impacting energy markets, with potential for new trade agreements influencing global economic stability.
  
  
• Europe: Economic recovery post-COVID, with a focus on green initiatives is affecting various industries.
  
  
• Asia: Growth in tech sectors, while facing challenges from supply chain disruptions due to geopolitical issues continues.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.

P.S. 

Some Simple Explanations of Key Concepts to Level Up Your Financial Education

• Economic Reports: These are snapshots of the economy's health. For instance, Retail Sales show consumer spending, crucial for economic growth. Industrial Production indicates manufacturing strength.
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• Federal Reserve (The Fed): This is like the economy's central bank in the U.S. They control interest rates, influencing borrowing costs, which can affect everything from your mortgage to stock prices. A rate cut typically means they want to stimulate economic activity.
  ‍
• 1 Basis Point (BPS) equals 0.01%. And here's why this is useful:

• Precision: Financial changes are often tiny. For example, if an interest rate goes from 3.50% to 3.51%, that's an increase of just 0.01%, or 1 basis point. It's easier to say "1 basis point" than "point zero one percent."
• Clarity: When discussing changes, especially small ones like those in interest rates, basis points avoid confusion. Imagine discussing if a rate changed by 0.1% or 0.01% over the phone. Saying "10 basis points" or "1 basis point" is clear.
• Consistency: It's a universal standard in finance. Whether you're talking about stock returns, bond yields, or central bank rates, basis points keep the conversation standardized.

Each of these elements interacts, creating the dynamic we call 'the market'.

Understanding these aspects of the investing arena can help investors in making informed investment decisions.

You’re the Hero.
    We’re the Guide.

Overview

This gem by Greg Ip is by far our favorite book about economics. Ip has an awesome sense of humor that really speaks to a lot of people because it keeps you engaged. His style is fun, easy to read, and easy to understand. He uses a lot of great examples to make his point, which drastically improves retention. I can walk around and talk about economics, or hear it discussed in the news and know what is meant after reading this book. You really don’t need another economics book, although more good ones are indeed out there. If you read just one economics book, this is it.

Note: Students, read this book first, then read your assigned books – give yourself a head start, an advantage.

Let’s dive in

First and foremost, we noticed that Greg Ip puts a healthy check on the government. He definitely supports the government's role in economics though. “This is not a book for PhD Economists, but for the citizens – the investors on Main Street,” he opens. And he sticks to that. It describes how China was economically at the top of the world pre-Industrial Revolution, but squashed private enterprise. In turn, its people were poorer in 1952 than in 1820. He wisely points out that one overcomes the law of diminishing returns with ideas, and he calls for “better recipes, not more cooking.” In this way, China let itself down. 

He points out that GDP comes down to population and productivity. The business cycle suffers from viruses that make it sick, but we can inoculate ourselves and keep GDP growing. But the trouble is that viruses mutate, so responses need to keep adapting. He feels that post-war economic expansions, however, were all “murdered” by the Federal Reserve (the Fed), not natural causes. He specifically calls out Reg Q here. He also calls out how the Fed raised rates before inflation broke out and slashed them before growth crumbled. In this way the Fed tried to create “soft landings.” Something it still does today. Something I am personally in favor of. 

Ip describes recessions too, and how defining them is an art for some and a science for others. The NBER (National Bureau of Economic Research) for instance declares recessions after the fact, so “it’s about as useful as an autopsy report is for an EMT.” Funny guy. He notes that data-wise, business cycles (here) average 5 years. Short ones are about 2 years, long ones are about 11 years (1990-2001). And they typically end when an industry boom busts and brings the rest of the economy down with it.

The 4 Engines of GDP

He describes well 4 engines of GDP: consumer spending, business investment, government spending, and exports. He notes that two-thirds of GDP is consumer spending, which acts as a ballast and steadies the economy – except for housing which is volatile and 5% of GDP. It’s no surprise that after 9/11 President Bush reassured people to keep living and spending. 

For business investment, inventories are the biggest quarterly variable, but buying, leasing, or building buildings and equipment also drives GDP. He points out that for investors the biggest driver within business is the sales outlook from analysts. If sales are down or projected to be down, then business investment’s contribution to GDP slows. 

Government spending accounts for 20% of GDP per Ip. (A quick search shows it currently at 30%, but spending is up recently so his data passes a simple sanity check.) He cites things such as “tanks and teachers” as being major players in government spending’s upward push of GDP. Funny guy. 

Lastly, exports. Export data comes mainly from the BEA (Bureau of Economic Analysis), the US Census, the Bureau of Labor Statistics, and some Fed data. He points out that since 1982 the number of Americans that want to work grew 42%! To me that’s amazing, but also fits the “latch-key kids” narrative we grew up with (when kids would let themselves inside their house after school because no parent was home since both parents began working). He also notes that jobs since 1982 have grown 47%, and that the two statistics move together. 

He points out that “the income ladder has grown much taller but the distance between rungs has grown bigger too.” Data-wise the high earners correspond with education and skill levels, but the top 1% is not education-based. And that the top 1% represents 24% of all income, which is the highest rate since 1928. This is both good and bad in our opinion. It is the result of new age robber barons, who create jobs… and shows that we have been down this road before. But there are economic problems with stretching out incomes, economic problems with re-compressing it too quickly or forcefully, and economic problems with ignoring it. All in all, timely and appropriate action is key to creating soft landings, instead of hard landings.

Inflation and money supply

Ip goes into detail about inflation and money supply too. He points out that printing doesn’t equate to inflation, which most people think. To make the point he says that $1-trillion dollars printed and put under your mattress doesn’t create inflation. As unlikely as it is for 100% of printed money to be held and not circulated, he makes a good economic point. 

We’d add that this is part of the concern with China holding massive amounts of US dollars; the US government operates with the money in circulation, but what if massive amounts were quickly released? Ip continues and explains how “voters hate inflation” more than unemployment. He gives examples of how the former gets people voted out of office but the latter less so. Also of note, he points out that a bit of inflation is stabilizing, but too much is destabilizing.

Deflation is covered too, and Ip describes it as destructive. In the US, inflation wasn’t a problem during The Great Depression, but unemployment and deflation were.

Ip writes really well about imports and exports. He discusses comparative advantage and its role in international trade. He points out that since 1950 global trade has outpaced world GDP by 50%, or 6% versus 4%, and even US exports moved from 5% to 11% of GDP in that time. We are exporting more and it’s a larger percent of our GDP than it was in 1950. But we import more too now. 

It’s the relationship between importing and exporting nowadays that concerns people. When giving an example of comparative advantage, Ip points out how households import a nanny’s services from abroad (aka outside the household) so that they can go to work. So the import of the child-watching service enables more production because it is cheaper than doing it yourself (cheaper than not working).

Ip describes imports and exports as one of the few economic topics that is straightforward. Yet it remains controversial, nonetheless. He estimates that 25% of our jobs could be done offshores, and that this idea terrifies people. Astutely, he then points out the importance of our infrastructure and legal system. They are critical because they make it worth keeping jobs inside the US. You may be able to do a job overseas at a lower cost, but how risky and complicated is it at that point? Companies tend to overdo or underdo their overseas endeavors. 

For whatever reason it is tough for them to keep properly balanced, likely because the more abroad you go the more dynamic things get, which creates vulnerabilities in supply chains, management, diplomacy, and so on.

He points out how trade can reward the top and erode the middle class. For instance, Apple is rich, but the jobs needed to make their products are lost to the US middle class. So it ends up as a net plus, but if the middle class evaporates then that effect is worse than the gain because it alters our fiber and complicates our economics. Interestingly, no one company really feels at fault for the erosion of the middle class, similar to how no one contributor of the GFC (Great Financial Crisis) felt guilty and few were held accountable. 

Everyone was just playing their part in a very big thing. We see how an industry bubble can form, pop, and pull the entire economy down. Ip finishes this section by saying that voters don’t like imports en masse because the negatives are obvious and the positives aren’t. So you have obvious negatives competing with obscured, nuanced, or second-order positives. 

There are actually a lot of examples of how a gross net positive does not work for individuals because it is not a positive for them personally. A government (economy) is not a household, as the saying goes.

Currencies

Greg Ip describes current accounting deficits (aka financing deficits) well too. He explains that current accounting deficits means one must borrow or sell assets, but that action enables investment opportunities that exceed the value or usefulness of saving.

He describes how driving down one’s own currency value boosts exports, and that China used to have excess savings (from a governmental, macroeconomic point of view) but eventually boosted its exports by buying US Treasuries, which strengthened the US dollar by “retiring it” and therefore weaken Chinese currency relative to the US dollar. That buying also spent the “excess” Chinese savings, drove down the value of the Chinese currency (Yuan) and therefore improved exports (as the value of your currency means either imports or exports are more attractive). You have to decide which game you want to be in. China chooses exports and therefore devalues its currency, while the US chooses imports (remember comparative advantage) and therefore boosts its currency’s value. 

Why doesn’t everyone use comparative advantage? 

Because not every household, or government, is rich enough to spend on X (nanny) in order to earn more Y (income). What if there were very few high-income jobs? Would you have one? If not, you aren’t playing this “import” game. Interestingly, in countries with few high income jobs it is actually a social expectation that you hire nannies and “import” similar jobs because you are a job creator, and therefore a socio-economic enabler. 

Back to currencies though. 

Ip states that the USD (US dollar) is like a boring mutual fund for an ordinary household, and is therefore the world currency. And since countries like to take USD, we finance things easily. This is just one way in which money makes money and having the reserve currency of the world is critical to the US economy. And the US staying stable is, in turn, critical to the world economy. You want the world currency to be under the tutelage of a stable nation, not a flash in the pan or a gamble.

The Fed

Ip describes several mistakes the Fed has made, which we will not go into here. He describes them well, and it is important for us to understand (and the Fed too) so we can avoid them. By and large, the Fed does learn well. But there are always new mistakes to be made. By studying the past mistakes, Ip shows us how it is possible to distill fundamental economic truths. At that point, there’s no excuse for violating one of those truths. If the Fed is to make mistakes moving forward, it should only be in new, unexplored circumstances – not fundamental errors like during The Great Depression. The Fed has power; FOMC meetings move the market for a reason ("Investors, don't fight the Fed" as the saying goes.

Hawk and dove bankers are described pretty well by Ip. He shares that in the banking world “Only hawk bankers go to central banker heaven.” Funny guy. That’s the feeling in that circle at least. Hawkish bankers are tight with their actions, more likely to dissent, and care far more about inflation than unemployment. Doves are the opposite. It’s not just war that has hawks and doves, but economics too.

Overall, the Fed tries to target 1.7-2% inflation by measuring growth, unemployment, and inflation. Ip points out how Ben Bernanke did well overall in that regard, and describes Bernanke as a Great Depression buff, like there are Civil War buffs. Ip says Bernanke disliked the Fed’s excessive orthodoxy during The Great Depression, felt more action (and more liberal action) was needed sooner, but disliked FDR’s New Deal. Simply put, Bernanke felt the Fed missed and then the president missed in response, which exacerbated and prolonged The Great Depression.

Ip describes the Federal Funds Rate, the Fed as a lender of last resort, and discretionary spending versus entitlement spending. Each of these is covered well, easy to read, and easy to understand. Merely his poignant description of how US government borrowing is like an elephant pushing up long-term interest rates and crowding-out private investing is worth the price of the book. 

There are pros and cons to government borrowing, but they have major impacts that are important to understand as an investor. Basically, the US government borrowing abroad is far better for everyone in the US because they aren’t crowded-out, and Uncle Sam gets his borrowing complete. 

Another very poignant point Ip makes is that if the US borrowing is mainly abroad then inflation is mainly the rest of the world’s problem. A full two-thirds of inflation is at the expense of the rest of the world (when two-thirds of government borrowing is outside the US). Obviously this is both good and bad depending on how you look at it. But it's important to know as an investor. It gives you insight into the health of the US and world economic health.

Oh the leverage!

Lastly, we'll mention Ip’s coverage of leverage. He describes leverage this way: “Leverage is like speed in a crash, and as a crisis hits the more leverage involved the more damage.” See, he paints pictures. He's easy to read, and easy to remember. There are amazing advantages of leverage (labor, money, technology, media are all leveraged to great benefit) but when a household, business, industry, sector, or an entire economy begins to wobble… measure their leverage and decide how far away you need to get as an investor from an upcoming crash!

“The Little Book of Economics: How the Economy Works in the Real World” was fantastic, and we hope you can tell how much we loved it.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.

The concept of "Insurance Rate" is vital in personal finance, serving as a gauge for the adequacy of your insurance coverage relative to your unique financial situation. This includes factors like your spending habits, income, and net worth.  Here Arena Investor breaks down how each of these factors influences your insurance needs and offers a strategic approach to managing your Insurance Rate effectively.

What is Insurance Rate?

Insurance Rate is a measure that compares the amount of insurance coverage you have to the amount you actually need, based on key financial factors such as your spending, income, and net worth. Understanding and optimizing your Insurance Rate ensures that you are neither underinsured nor overpaying for unnecessary coverage.

Spending: Aligning Coverage with Lifestyle Costs

1. Understanding Your Spending: Your monthly and annual spending patterns play a crucial role in determining how much insurance you need. High expenditures might necessitate greater coverage to maintain your lifestyle in case of disruptions like illness or disability.

2. Coverage Considerations:

   - Health Insurance: Ensure your health insurance adequately covers your typical medical expenses. If you frequently visit medical professionals or require specialized medications, consider plans with broader coverage or lower deductibles.

   - Disability Insurance: Particularly important for those with high monthly spending, this insurance replaces a portion of your income if you're unable to work due to injury or illness.

How Arena Investor Can Help Analyze Your Spending versus Insurance

Your advisor can review your spending habits and current insurance policies that protect against potential financial strains, ensuring your coverage matches your lifestyle costs.

Income: Securing Your Earnings

1. Analyzing Your Income Sources: Your total income, including salary, bonuses, and any passive income, directly impacts your Insurance Rate. Higher earnings may require more extensive coverage to fully protect your standard of living.

2. Coverage Considerations:

   - Life Insurance: Essential for individuals with dependents or significant debts, life insurance should be sized to replace your income in the event of your death, providing financial security for your beneficiaries.

   - Loss of Income Insurance: This can supplement disability insurance by covering additional aspects of income loss due to illness or injury.

How Arena Investor Can Help Analyze Your Income versus Insurance

Your advisor can assess your income and income protection insurances based on your earnings and future income potential, ensuring your family’s financial stability.

Net Worth: Protecting Your Assets

1. Evaluating Your Net Worth: Your total net worth — which includes assets like homes, cars, investments, and savings — necessitates adequate insurance coverage to protect against loss, liability, or significant devaluation.

2. Coverage Considerations:

   - Property and Casualty Insurance: Adequate coverage for real estate and personal property is crucial, especially if your net worth is largely tied to these assets.

   - Umbrella Insurance: Offers additional liability protection that extends beyond the limits of regular policies, which is critical for high-net-worth individuals.

How Arena Investor Can Help Analyze Your Net Worth versus Insurance

Your advisor can assess your current net worth, projected net worth growth, and asset portfolio and discuss insurance, so you can get comprehensive protection of your net worth against unforeseen events.

All In All

Your Insurance Rate is a dynamic indicator of how well your insurance coverage aligns with your financial profile — your spending, income, and net worth. With the guidance of an Arena Investor Advisor, you can achieve an optimal Insurance Rate, balancing cost-efficiency with proper protection. This strategic approach not only secures your financial assets but also provides peace of mind, knowing that you and your family are well-protected no matter what life brings.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.