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February Economic Update

Market Summary

Stocks were mixed in January due to a pull back at the very end the month which has since been recovered by the first week of February. For the past month and a half, major stock market indices have been oscillating in expanding ranges characterized by multi-day pullbacks undercutting the prior short-term lows, then followed by multi-day rallies to new highs. These gyrations have largely been attributed to mixed economic recovery data, vaccine optimism and skepticism, the discovery of new COVID-19 strains, mostly positive corporate earnings, and stock market headlines such as the recent GameStop phenomenon.


Economic Developments

With the stock market at record highs, there are concerns regarding rising interest rates in the bond market which have been raising questions regarding stock valuations. In essence, higher interest rates from holdings bonds, which generally carry less risk than owing stocks, may become increasingly attractive to investors leading to decreased demand for stocks.


Interest rate jitters may have contributed to some unusual reactions to strong fourth-quarter earnings reports. By the end of January, 37% of S&P 500 companies had released their earnings. Of those companies, a staggering 82% reported larger than expected earnings. However, stock prices of those companies with positive earnings results fell in the two days preceding and following their earnings releases; on average retreating by 1.2%. While some of these stocks have since rebounded by the first week of February, pressures from rising interest rates may continue to apply downward pressure for stocks moving forward. (1,2,3)


Recently, the Federal Reserve has drawn criticism its ongoing $40 billion monthly purchases of mortgage-backed securities to meet its inflation objectives. Given the considerable rise in housing prices over this past year, critics are questioning why the Fed would continue to inflate the real estate market, especially when the Federal Reserve's own measure of inflation (CPI) does not factor housing prices into its equation. (4)


To further obscure the issue, Fed Chair Jerome Powell stated, "The housing sector has more than fully recovered from the downturn, supported in part by low mortgage interest rates." Notably, housing prices relative to employment wages are now approaching levels not seen since just prior to the 2008 housing crisis. (5)


Looking Forward...

Over the coming weeks, President Biden's $1.9 trillion dollar stimulus package proposal will be taking center stage. On Friday, February 12, the US Senate passed a bill approving a process allowing Democrats to approve the stimulus package with a simple majority of votes. (6)


While the size of the stimulus package is extremely large, it is likely necessary given decelerating economic over the past several months, perhaps most notably being a large decline with employment growth. The passing of the bill may lead to more rises in the stock market but will also likely increase bond yields which in turn could raise more questions regarding stock valuations.


Inflation will continue to be monitored and scrutinized throughout the entirety of this year. Many analysts have cited future inflation expectations as a catalyst for the stock market recovery and rally. However, we currently have only seen considerable inflation in asset prices - the stock market itself and real estate prices.


New Office Address

In other news, we have recently signed a new lease for a shared office space on the 15th floor of the same office building located at 494 and France Avenue in Bloomington. While we continue to work remotely from our home offices on a daily basis, this new office space may be utilized for in-person meetings and will also serve as our new mailing address.


If you would like to discuss your investments and/or financial planning goals, simply contact us to schedule an in-person meeting at our new office, or via a Zoom video call, whichever is your preference.


New Office Address:

3800 American Blvd West | Suite 1500

Bloomington, MN 55431

Monthly Financial Tip:

Succession planning is not just about an orderly ownership transition. Waiting too long may prompt changes in insurance premiums, fees, and taxes.


Citations:

1. FactSet Research, January 22, 2021. “Earnings Insights.”

2. FactSet Research, January 29, 2021

3. FactSet Research, January 25, 2021

4. https://www.barrons.com/articles/home-price-surge-says-inflation-is-real-the-fed-clings-to-illusion-it-isnt-51612543691

5. https://listwithclever.com/research/home-price-v-income-historical-study/

6. https://www.washingtonpost.com/opinions/2021/02/04/larry-summers-biden-covid-stimulus/

Disclaimers:

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.


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