Weekly Commentary: May 23 - 29
THE WEEK IN REVIEW: May 23 - 29
Go away in May?
The old saying "sell and go away in May" has not held up this year. Last week was a rocky one for markets as they floundered in the aftermath of Bitcoin volatility. Then the markets fixated Thursday on declining unemployment claims, grinding slowly downward as the economy fully reopened. The big test in that area will come this Friday when we get May job creation numbers. April jobs numbers from ADP came in at 742,000 and were in line with expectations, but the Bureau of Labor Statistics' April number missed by epic proportions (266,000 actual vs. 1 million expected).
I’ve seen expectations in the 650,000 range for next week’s reading. Missing the mark for a second month (from whatever expectations we settle on) would likely not bode well for the market. That type of result would seem to solidify the “enhanced benefits are keeping workers at home” argument. If that’s true, once those additional benefits end in a few months, you could have a rush of people trying to find work, and the possible glut of workers would be hard to absorb despite the record number of openings. The result would likely be downward pressure on wages due to competition and less money spent on products and services because all those looking for work will have less money to spend. It would be a supply shock of people looking for jobs all at once; if they cannot be absorbed in the workforce and aren’t receiving benefits, they won’t be spending money they don’t have, and the economy could stall. If we continue down that path, it's probable that there will be more calls for stimulus and additional benefits plus more borrowing by the government, which isn’t good for long- term prospects. We would bring the phrase “there is nothing more permanent than a temporary government program” to life.
On a brighter note, the second reading of Q1 2021 GDP stayed the same at 6.4%. Last Friday, core personal consumption expenditures, which exclude food and energy, increased 0.7% month-over- month and 3.1% annually, the biggest reading in nearly 29 years. The 1.2 percentage point annual increase from March was the largest since the U.S. began keeping records in 1960.
As has been the norm recently, the market shrugged the numbers off and focused instead on President Joe Biden’s massive $6 trillion budget proposal. The market rose to close out the week and the month of May on a modestly positive note. There has been an awful lot of proposed and actual spending (see infrastructure discussion below) and this budget should, in theory, be smaller given all the other spending bills out there. If you’re proposing to spend $1.7 trillion in "infrastructure," why include increased infrastructure spending in the budget? It seems that the current administration will try to fund pet projects in as many different ways as it can. This level of spending isn’t sustainable and will likely only erode future growth and lower the standard of living for future generations.
What's up with infrastructure?
After a heated debate on what is – and isn’t – defined as infrastructure, we still have no agreement on how much we will spend or what the definition of infrastructure really is. The Biden administration lowered its initial ask of $2.3 trillion to $1.7 trillion to counter the $568 billion from Senate Republicans in an attempt to reach a bipartisan deal. Senate Republicans upped their offer to around $1 trillion, but the debate over the definition of infrastructure rages on.
Look, I’ll be honest: I’m a purist. I define infrastructure as roads, bridges, seaports, the power grid, etc. I’m not saying there aren’t other important causes or services that provide value to society; just don’t try to bundle them under infrastructure and tell me not to worry about it. Are elder care, mental illness, health care, homelessness and other issues important? Of course! My issue is the government’s desire to pack as many non-related programs into a non-transparent black hole with no discipline and accountability of where the money goes or how it’s spent. It seems to me that you can define anything as infrastructure, just like people can justify anything to themselves. I believe we need to get serious and realistic because our roads and bridges are falling apart.
Bitcoin stabilizes a little plus capital gains news
What do capital gains and Bitcoin have in common? Well, nothing they didn’t have in common before, but given Bitcoin’s wild fluctuations recently, it was noteworthy that a proposal came from the White House stating that any cap-gains tax increases will be retroactive as of April 2021.
Bitcoin regained some ground after a pretty wild week, and with the crazy ride it’s been on it would be wise to note that the IRS considers Bitcoin and other cryptocurrencies as assets. (Much like a house, but without the $250,000 cap-gain exemption.) Classifying crypto as an asset similar to property means it will be taxed as such, and U.S. taxpayers must report Bitcoin transactions for tax purposes. Retail transactions using Bitcoin – such as the purchase or sale of goods – incur capital gains tax. The crazy crypto ride may have a few more twists and turns still ahead.
Why was April 2021 (which has already come and gone) chosen for the new rates to be effective? I guess if people knew rates would rise, they might cash out before the effective date. However, if you make it retroactive, people might just stay in the market since they’re already on the hook for the higher taxes. In my opinion, this isn’t a nice or fair thing to do, and it’s not right for the government to play games like this. People need consistency, especially in financial dealings. As I see it, if this proposal passes in its current form, it’s not a good outcome for investors.
Happy birthday, Dow Jones!
Last week the Dow Jones Industrial Average turned 125 years old. The Dow launched on May 26, 1896, closing at 40.94 after its first day of trading. Last week, it closed around 34,500. That’s a heck of a run, and it’s not even counting all the dividends that have been paid out over the past century and a quarter. Let’s hope the next 125 years are just as successful.
Coming this week
Data has been pretty good but not good enough to lift markets out of the 33,000-35,000 range on the Dow. (Although it has been creeping up to near-record levels again.) That may change with this week’s ADP report (Wednesday) and BLS employment situation (Friday). Remember last month? The much lower April numbers caused a stir. A similar miss could be the beginning of a pattern the markets won’t like.
Most of the country is open, but supply chains are still struggling to keep up and inflationary pressure continues hovering over an otherwise bright picture. There will be some bond auctions all week, which always bear watching. We should also watch speeches from Federal Reserve officials, who might say something that turns out to be out of line. PMI, construction spending, car sales and mortgage applications will provide insight into the economy’s health and current inflationary pressures.
We need to see continuing improvement in the weekly unemployment claims on Thursday. And on Friday, we’ll get factory orders to close out the week.
Have a great week!
Tom Siomades, CFA®
Chief Investment Officer
AE Wealth Management
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