Understanding Burn Rate

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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.

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    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.
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• 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.

What is a business cycle?
It’s the ups and downs of the entire economy's Real GDP as it follows its overall trend.

The overall trend is upwards

Note: Oddly enough the term business cycle does not apply to a business. Rather, it refers to the entire economy (keeping us all on our toes I guess). 

As the US economy works its way upward it has its ups and down. The ups exceed the downs, and over time the economy (and the stock market) climb upwards. 

This occurrence is typical of a good, and normal, economy. It represents that the US economy is healthy overall, so it grows and performs well (upward trend).

But the US economy also encounters challenges along the way (the downs markets and slowing or shrinking GDP periods).

Importantly, individuals, companies, organizations, and government responds to the declines in order to “fix” the economy by solving a present challenge.

The US has been very good at fixing its economy as it meets challenges, plus we have a huge collection of smart and hardworking businesses full of good people and resources to fix their business (their slice of the economic pie).

Economists measure business cycles

These macroeconomists measure many variables to paint a picture and understand the past, present, and future economy. An example of a variable that is measured is Unemployment. Another example of a variable that is measured is Real GDP. There are tons of variables measured. But these variables are measured at regular intervals (perhaps once per week, once per month, once per quarter, once per year, etc.) When you measure a variable at consistent intervals it’s called a time series.

When you look at the time series (collection of data for one variable taken at regular intervals), you can see trends. Real GDP, Prices, and Unemployment are three massively important trends for economists. When the Real GDP trend shows increases for two or more quarters (a quarter is a 3-month interval, or a quarter of a year) then the economy is in expansion. If that expansion lasts for a long, long time (years) it is considered a boom. 

But when the Real GDP trend shows decreases for two (or more) quarters then the economy is in contraction. Historically, if the Real GDP is contracting then it was called a recession, but nowadays many economists look at more than just Real GDP before labeling the economy as being in a recession. 

(They will look at income, unemployment/employment, etc for an overall feel before using the word recession.) 

So expansion and contraction are not debatable: either your Real GDP continues to grow every quarter and you’re expanding (your economy), or your Real GDP continues to shrink every quarter and you’re contracting (your economy). Obviously, government is interested in having tools to end contraction, avoid recession, and restore expansion/growth — more on that later. 

The NBER (National Bureau of Economic Research) can officially declare a recession, but as an improving investor gathering your data do you want to just move with the herd and wait for the NBER to declare a recession or end of a recession? Or do you want to be one step in front of it? And even if you do wait, just understanding that an expansion or a contraction is coming can keep you emotionally calm and rational (buying low and selling high takes emotional control and sound reasoning). 

I saw that coming from a mile away” is a powerful feeling as an investor. It takes time to develop that — and you will still get surprised from time to time too. But since you’re winning more than you’re losing as you improve, you deal with it better.

Note: The NBER is typically full of Nobel Laureates and past members of the President’s Council of Economic Advisors. But, you know, good investors still ensure what they are reading and hearing makes sense to them.

Many economic factors correlate

For instance, Real GDP and Unemployment rates historically correlate (move together) very, very well. In other words, when Real GDP is going up then Unemployment is going down. When things move together but go in opposite directions that is called “an inverse relationship” or a “negative correlation.” They go in opposite directions, but at the same time; this can also be called countercyclical. And a direct relationship is when two things move in the same direction at the same time; this can also be called positive correlation, procyclical, or just cyclical. 

An investor could look at it the opposite way too: when Unemployment is going down then Real GDP is going up.

The NBER looks at this closely when deciding if we are in a recession. If Real GDP is declining, but Unemployment is not changing then they may not call it a recession. 

There are indeed times when things that are highly correlated (like Real GDP and Unemployment) do not move “correctly.” This is always odd for economists and investors, and you need to pursue the reason (or at least a theory) why. 

Remember, the economy is very dynamic and complex, so there are many things that are usually true but not always true. Economists are just gathering information and painting pictures in order to understand the economy. Not every painting from economists is photo-realistic. 

There are in-between periods too, such as 2024, when the painting looks more like a Monet. You can tell what it is, but there are not a lot of clean edges. What you don’t want is a Jackson Pollock painting (economically speaking), such as the lead-up to GFC (Great Financial Crisis of 2007-2008) that wasn’t understood and turned into a crash. 

As an investor, you want procyclical investments when the economy is good (restaurants, airlines, auto-makers) and countercyclical investments (discount retail and alcohol) when the economy is bad.

So before the NBER declares a recession they look for: a decline in total GDP, a decline in income, a decline in employment, and a decline in trade. So they want to see that the economy is bad, or down in many regards — and we would tend to agree with this. The term recession should be reserved for when many bad things are happening within the economy. Otherwise, people might think every bit of bad news is a recession, which reduces their participation in the economy (less iPhones, restaurants, and Disney+) which then would lead to more problems — because they got spooked.

Note: What works really well is to have a teammate that can understand, stay the course, and make some basic pivots along the way. If you can’t do it yourself, we recommend Arena Investor investment management services.

You can be in a growth recession too

What does that mean? It means you were growing at 3% but are now growing at 2.5%. See how you are growing slower now? The growth (growth rate) contracted. But you are still growing. It is like the kid in middle school who hits a growth spurt and grows 12″ in a year versus the kid who grows 6″ in a year. Don’t worry, they are both healthy. 

Look at the data for yourself, hear what is actually happening, and don’t just listen to panicky news. Growth rate contractions happen. Should we look at why? Yes. Should you panic? No. In fact, you should never panic. 

The moral of the story

Continue to learn so you can decide for yourself what is good and bad. (Hint: there are opportunities in every market.)

What is an economic depression?

So we know what contraction is, and we know a recession is more than a Real GDP contraction, but what is a depression? Simply put, an economic depression is when you are in a recession for a long time (years and years). 

Since The Great Depression economists have been steadfastly dedicated to preventing another depression! Heck, we already covered Keynes and his effort to develop macroeconomics because the world was suffering through The Great Depression. (There are other great contributions from others too in economics.)

Economies have momentum and inertia

The momentum is how much change is happening (a lot of upward or downward change in the Real GDP for instance) and inertia is the economy’s resistance to change. This does not mean that when government takes action it is useless; instead, it means that a train slows down slowly. You won’t get a barge to turn on a dime. You can put rudder inputs in, and a turn will start, but it might not respond like a fifth generation military fighter jet.

You may think you want quick changes, but you don’t. What you want is small inputs that are on-time from the government so you don’t get a runaway train in the first place — so you don’t need to do a 180 degree turn with an aircraft carrier — but instead a little left or a little right to stay on target.

As instructor pilots say, “small corrections sooner.” The US government has been pretty good at this compared to the rest of the world, especially when you consider how big, complex, and dynamic our economy is. But let’s stay vigilant.

Note: Economic inertia that is quite resistant to change is called persistence.

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.

Here's the overview:

Economic Growth and Inflation

• GDP Growth: The U.S. economy experienced a notable slowdown, with GDP growth coming in at 1.6%, significantly lower than the previous quarter's 3.4%. This deceleration was attributed to various factors including a drop in federal spending, a widening trade deficit, and inventory liquidation. Despite this, there was an underlying resilience in private domestic purchases, suggesting not all was gloomy.
• Inflation: Inflation remained a hot topic, with the Core PCE Price Index, which the Federal Reserve watches closely, showing a year-over-year increase of 3.6%, slightly below some expectations but still signaling persistent inflationary pressures. This figure, along with other inflation metrics like the GDP Price Index rising by 3.1%, indicated that while inflation might be cooling, it was still above comfort levels for many policymakers.

Market Performance

• Stocks: The stock market, particularly the S&P 500, set 22 new highs in Q1, showcasing strong investor confidence in the U.S. economy's ability to achieve a soft landing. This optimism was broad-based but led by technology sectors, which continued to benefit from AI-related advancements. Financials also performed well, reflecting confidence in the banking sector despite rising delinquencies in lower-income segments.
• Bonds: The bond market saw yields on 10-year U.S. Treasuries rise to 4.20% by the end of March, indicating expectations of sustained or slightly higher inflation and economic growth. This movement in yields was partly due to the anticipation of the Federal Reserve's policy decisions, which were closely watched for signs of rate cuts.
• Currency and Commodities: The U.S. dollar strengthened against major currencies like the euro and yen, reflecting the relative strength of the U.S. economy. Oil prices also surged by over 16%, driven by OPEC+ production cuts and renewed optimism in global growth prospects, despite geopolitical tensions.

Federal Reserve's Stance

The Federal Reserve's communication throughout Q1 was pivotal. While there was a strong signal towards a potential rate cut in June, the actual decision was delayed, influenced by the economic data which showed a robust economy but with inflation not declining as rapidly as hoped. This led to a mixed market reaction, with initial disappointment followed by a recalibration of expectations towards later rate cuts.

Global Market Sentiment

Internationally, while U.S. markets showed momentum, European and Asian markets also performed well, sometimes outperforming the U.S. on a currency-adjusted basis. This global market performance suggested a broadening of economic recovery or at least stabilization beyond just the U.S., influenced by similar monetary policy shifts in other major economies like the ECB hinting at rate cuts.

Looking Forward

As Q1 closed, the market's forward-looking indicators like the P/E ratio for the S&P 500 increased, signaling high valuations driven by expectations of future earnings growth or lower interest rates. However, this also hinted at potential overvaluation risks if earnings growth didn't materialize as expected.

Conclusion

The first quarter of 2024 was marked by a complex interplay of economic growth, inflation, and market expectations. While the economy showed signs of slowing down from its previous pace, the underlying consumer and business spending remained resilient. Markets, buoyed by tech and financial sectors, continued their upward trajectory, though with increasing attention to when and how monetary policy would adjust. Inflation, though showing signs of cooling, remained a central concern, influencing both market movements and Federal Reserve actions. This quarter set the stage for what could be a pivotal year, where economic policies, global growth, and technological advancements would continue to shape market dynamics.

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.