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Volume 12, Edition 15 | May 15 - May 19, 2023

Keep Your Investments Sunny Side Up

Doug Walters, CFA
What do the debt ceiling debate and egg prices have in common? They both have the potential to derail your investments… but maybe not in the way you think.

Contributed by Doug Walters, Max Berkovich, David Lemire, Eh Ka Paw

Bad news sells. And because bad news sells, it is everywhere. The best investors know how to tune this out, or at least not let the media bias impact their behavior. We are often our own worst enemies when it comes to investing, letting our emotions get in the way of rational decision-making. Whether it is the debt ceiling or egg prices dominating the latest news cycle, staying fully invested for the long term at the right level of risk for you is your best chance for success.

We talked about the debt ceiling last week. The world as we know it is coming to an end… until it isn’t. Tune it out. Are we guaranteeing a clean solution? No. But the most likely path is a deal that avoids default, and betting one way or another on the outcome is just that… a bet (i.e., not an investment).

For a more light-hearted example of the state of today’s news flow, we turn to eggs. How many stories have we seen this year about the soaring price of eggs? They were everywhere! As a nation, we consume over 90 billion eggs annually, which is a lot. But eggs represent less than 0.1% of our average annual expenditures. Yet the media was obsessed with soaring egg prices, which had everything to do with a one-off avian flu event and very little to do with general inflation. There is nothing wrong with reporting this news, but now that egg prices have nearly declined to where they started, where are all the positive news stories about low prices? There are some, but they are few and far between.

Investing is a long-term venture, and news of the latest high-profile debate in Washington or soaring egg prices should not impact your risk tolerance or portfolio mix. News tends to be biased negatively, but long-term equity and bond returns tend to be biased positively. Don’t let the never-ending stream of scare stories hurt your ability to capture the full extent of what the investable markets offer.

$0.78 per dozen

The wholesale cost of a dozen large white eggs has fallen from a peak of $5.30 to $0.78 in five months. The current price is well below the average of the past 30 years. (Source: Factset)

Headline of the Week

Tea Leaves (revisited)

Reading the macro-economic tea leaves is always challenging, and this point in the economic cycle is no different. As earnings season ends, there were a few leaves worth reading. Generally, companies were able to beat much-lowered expectations, and reports were vastly better than feared. Banking stress was a key theme this quarter, but companies offered some fresh perspectives on the state of the consumer.

Target, Walmart, and Home Depot offered different takes but seemed to reinforce a theme of strength with retrenchment. Target saw customers shying away from trendier items in favor of necessities, Walmart saw increased sales, and Home Depot saw declines in major home renovations. Consumer balance sheets remain strong, but sentiment is softening. People appear to be reining in spending on discretionary and higher-end purchases in favor of everyday items, arguably enhancing the soft-landing thesis.

The Week Ahead

The debt ceiling negotiations drama continues, with every development scrutinized by investors. In other news…There will be a G7 meeting in Japan and a PGA Championship played in Rochester this weekend. On the economic front, the Federal Reserve’s meeting minutes, another look at the Gross Domestic Product, and an inflation reading will add kindling to market volatility.

Working the Core Down to Four

Inflation watching kicks in gear again as we gauge the Central Bank’s next move with the Personal Consumption Expenditures Index (PCE) next week.

  • The market believes the core PCE, which excludes food and energy, is the preferred inflation measure the Federal Reserve focuses on.
  • Current forecasts expect a decline of 0.2% to 4.4% in April.
  • Another ease in inflation would be a relief, especially if we can get down to 4%.

Second Look

Gross Domestic Product (GDP) for the 1st quarter will be revised.

  • The initial release indicated a slight expansion of 1.1%, dragged down by lowering inventories but boosted by consumer spending.
  • No change to the first report is expected, but a surprise revision may cause some unease.

Counting Minutes

The details of the last Federal Reserve meeting should uncover the thinking behind the most recent rate hike.

  • Since the post-meeting press conference was primarily uneventful, Fed watchers will turn to the meeting details for color.
  • Investors will look for clues if the Fed is done hiking and the hand count of who voted to hike.

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