Market Commentary

Week Ahead

Markets Rocked by Fed Message

Markets were rocked by the Fed’s message “will keep at it until the job is done,” referencing the commitment to returning inflation to its 2% objective. As a result, the S&P 500 posted a loss of -4.63% bringing the YTD loss to -21.61%. Bond markets also declined by -1.56% bringing the YTD loss to -13.75% (while Long-term Treasuries have declined by -26.80% YTD). There is visible weakness in the U.S. economy with a slowing in the housing market and the Leading Index posting a -0.3%; however, the jobs market with lower jobless claims and improving retail and manufacturing continuing to post positive results as a headwind to the Fed’s effort to fight inflation. With housing prices falling by approximately 6% this year and equity markets declining by 20%, the wealth of U.S. households is definitely taking a hit and may eventually trickle down to lower demand.

The coming week will be filled with another week of headlines, with Fed Chair Powell speaking on Wednesday, followed by the release of critical housing data, GDP, and wholesale inventories.

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Green Danger Ahead?

With the Inflation Reduction Act and the European Climate Law, the West is pushing to exit oil and natural gas to prevent severe climate change and reduce dependence on foreign suppliers. As a result of the new laws and economic incentives, electric vehicle (EV) sales are expected to dominate the car market for the years to come. And the battery industry will grow along with it. Common lithium-ion batteries in use nowadays are made of various combinations of metals that include Lithium, Cobalt, and Copper: Lithium is mainly extracted from underground ponds in Australia, Chile, China, and Argentina. The process is very water-expensive and often causes damage to the land and trouble to the local communities; Cobalt is mainly extracted in the Democratic Republic of Congo (DRC), which supplies about 70% of global production. Unlike mines in developed nations, where heavy machines accelerate operations and safeguard workers, human hands dig up much of the cobalt. Often children’s hands. Mining and refining metal is an energy-intensive business, and the energy used often comes from coal and other fossil fuels. Therefore, the push to quickly abandon fossil fuels brings several hidden costs.

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ECB Raises Key Rate 0.75 Points

The EURUSD wavered around parity for most of the week and recovered some ground on Friday after the ECB (European Central Bank) decision to raise its key interest rate by 0.75 points. Over the years, heavy reliance on cheap Russian gas has exposed the nations in the Euro area to wide energy cost swings. The spike in prices in the past year has hit households and businesses across the continent with unbearable utility bills that were quickly followed by a general increase in goods prices (as businesses adjusted to larger production costs). Both Demand and Sentiment have been suffering as a result, as highlighted by McKinsey [https://www.mckinsey.com/business-functions/growth-marketing-and-sales/our-insights/survey-european-consumer-sentiment-during-the-coronavirus-crisis]. In its July survey, more than a third of respondents reported spending on nonfood discretionary items decreased due to the pricing pressure. And consumption could fall even more in the winter, as energy takes an even larger portion of consumers’ budgets.

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Global Supply Chain Issues Down

Shifts in demand, labor shortages, and lockdowns that began in 2020 with the worldwide spread of Covid-19 are some of the main drivers of the global supply chain crunch that has largely affected the prices of goods and services in the past two years. The invasion of Ukraine in 2022 and its geopolitical consequences have added more stress to an already chaotic situation. Decreasing demand for new products due to high prices and borrowing rates, and relaxation of the strict covid rules that have disrupted the supply chain for months, could be enough to lower the inflationary pressure in the next year. According to the Oxford Economics supply chain tracker, the situation has been improving over the past few months, and supply-chain conditions in the U.S. offered encouraging signs to start Q3. Cargo ship backlogs in Southern California have declined for six straight months now, and other modes of transport also signaled reduced stress. Shipping prices were flat or fell, as well. Though Ukraine War adds uncertainty to the mix, making it hard to predict when the supply chain issues will resolve, there are signs that the situation is improving and demand and supply are slowly converging towards an equilibrium.

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Are Cruises Coming Back?

The past two years have been tough on the travel industry, which has first faced the abrupt drop in demand caused by the pandemic and is now confronted with understaffing issues as the appetite for travel quickly rebounds. Cruise Operators have indeed seen demand drop sharply since 2020 because of pandemic-related restrictions and passengers’ fear of contagion. This negative trend, however, may soon end. Over the past year, the U.S. has gradually been relaxing masking and testing requirements. As a result, the demand for cruise travel has started to recover. As shown in this week’s Chart, the number of passengers who traveled with Royal Caribbean, Carnival, and Norwegian Cruise Lines in Q2 2022 has bounced sharply from the small numbers seen in the same quarter in the past two years. Demand is expected to grow even more now that the CDC has dropped its vaccination requirements for cruise ship passengers. In support of this view, after the new rules were announced, Carnival reported that booking activity was almost double the activity on the same day in 2019.

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Gas Down for 2nd Month

The week marked a second consecutive month of declining gas prices in the United States. The national average price for a gallon of gasoline fell to $3.99 on Thursday, down from the high of more than $5 a gallon in June, driven by a decline in global oil prices in recent months and a tax break on gasoline enacted by a number of states. On Friday, the House passed a climate, tax, and healthcare program dubbed the Inflation Reduction Act that will impose new taxes on shares’ buybacks for large corporations, provide some $80 billion to the IRS, and allow Medicare to negotiate drugs prices directly. Additionally, it will fund hundreds of billions in tax subsidies to fight climate change, targeting a 40 percent reduction in greenhouse gas emissions from 2005 levels by 2030.

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Monthly Performance Reports

Monthly Performance November 2021

October experienced a spectacular rebound from the September Effect drawdown, with the S&P 500 gaining 7.0% along with long-dated Treasuries returning 1.8%. This momentum was aided by President Biden’s massive stimulus expected from the Infrastructure Bill, above consensus corporate earnings, and the market’s expectation of a softer landing in rate tightening. Equity market gains were concentrated on growth and momentum...

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Monthly Performance October 2021

October experienced a spectacular rebound from the September Effect drawdown, with the S&P 500 gaining 7.0% along with long-dated Treasuries returning 1.8%. This momentum was aided by President Biden’s massive stimulus expected from the Infrastructure Bill, above consensus corporate earnings, and the market’s expectation of a softer landing in rate tightening. Equity market gains were concentrated on growth and momentum...

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Monthly Performance Report September 2021

To the casual eye equity markets led by the S&P 500 index-free climbs past another record gain of 2.38% in July was anything but routine. With close scrutiny as the undertow from the economic skepticism from the delta variant and emerging markets uncertainty with China’s sudden stock market crackdown temporarily splintered the global recovery. What should have been a choreographed...

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Monthly Performance Report August 2021

To the casual eye equity markets led by the S&P 500 index-free climbs past another record gain of 2.38% in July was anything but routine. With close scrutiny as the undertow from the economic skepticism from the delta variant and emerging markets uncertainty with China’s sudden stock market crackdown temporarily splintered the global recovery. What should have been a choreographed...

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Quarterly Performance Reviews