By: Ryan P. Johnson, CFA, CFP® - Director of Portfolio Management & Research
The S&P 500 continues to make new highs, with the market up over 17% this year (including dividends) and up about 38% over the past 12 months. The Dow Jones Industrial Average is around 35,000, while it touched 30,000 for the first time this past November. While not expected in the immediate future, a 10% correction from here would set stocks back only a few months, to late-March levels. In 24 of the past 25 years, the S&P 500 has seen at least a 5% loss at some point during the year, so sell-offs and corrections are a normal part of stock investing. The S&P 500 has shown a calendar year loss in only 5 of the past 25 years (including dividends). If a sell-off does occur, it is important to remember that your allocation to stocks is a lifecycle decision, not a market cycle decision. We regularly rebalance accounts to take profits in rising markets.
Economic readings such as consumer confidence, the unemployment rate, and services & manufacturing indicators continue to improve through this cycle. The ISM Services index, where any number above 50 shows growth, most recently had a reading of 60.1. This is the fourth month in a row with a reading over 60, which is the longest streak in over 20 years. Commodity prices such as lumber and corn have sold off sharply from the highs in early May, but oil remains near multi-year highs. Shipping costs from China to the U.S. have spiked, with data from Drewry showing the cost of shipping a 40ft container from Shanghai to L.A. approaching $10,000, an increase of over 200% from a year ago.
Bonds continue to be torn between inflation readings and Fed speak. Even as inflation readings have increased in recent months, Treasury bond yields have declined. The Federal Reserve continues to purchase bonds on a monthly basis to help keep interest rates low. They continue to signal that the discussion of “tapering”, or reducing the amount of bonds purchased each month, is only about to begin. Currently the futures market is expecting one Fed rate hike by the end of 2022. Lower yields contrast with higher inflation readings, such as the recent core CPI (Consumer Price Index, excluding food and energy) report that showed a 4.5% year-over-year increase in the average price of goods and services. The 0.88% month-over-month increase was most impacted by used car prices. Along with new cars, these factors added over 0.5% to the inflation gauge. The semiconductor chip shortage for new cars is expected to continue to improve as the year goes on, so the impacts from here could be less dramatic.
Persistent low interest rates have increased the need for investors to look elsewhere for returns and/or income. Depending on your specific circumstances and risk profile, we may use alternative investment funds in your accounts. This is something we may have used to replace a portion of the traditional bond allocation, but they are not bond funds. The funds have shown somewhat more risk than bonds historically but have also been good diversifiers. For more details, please contact us.
As we continue to grow, our focus remains on one family, business, or foundation at a time. We would love for you to send the link below to your friends and family, so that we may assist other successful business owners and individuals with their financial needs: https://mybuckingham.com/contact. We appreciate your continued trust and support.
Ryan P. Johnson, CFA, CFP®
Director of Portfolio Management & Research
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.