Market Update
The market rally that has pushed ahead for months is showing the slightest of signs of slowing. Although corporate earnings have been terrific, economic data points that are less than rosy may be showing up in stock prices. Still, the S&P 500 is up 2.2% for July, its sixth consecutive month of gains. The Dow is up 1.5% and the Nasdaq Composite is up 0.8% month-to-date. Below is a chart of returns for the week.
Amongst data points pressuring prices is the gross domestic product (GDP), the broadest measure of U.S. goods and services produced. GDP grew only a little faster in the second quarter versus the first, at 6.5% annually, and that was slower than expected. Amazingly the economy is now larger than it was before the start of the pandemic. Fiscal stimulus, consumer spending and a healthier, vaccinated population have all contributed to bottom line growth. For all of 2021, estimates are for GDP to hover near 6.5%, now a bit below previous full-year projections. Then the global supply chain issues are proving to be persistent. Intel said this week that chip shortages could last into 2023. The trickle down effect of chip back-ups influences 12% of our economy, according to Goldman Sachs, and a huge swath of products – home appliances, cars and boats, of course phones, which is hitting Apple particularly hard. But the shortages go beyond those of material goods. Mattel and Hasbro, the dominant toy makers, have been vocal about transportation capacity headaches. Shipping constraints and port congestion have plagued companies with international manufacturers from the pandemic’s start. With no recent improvements in the situation, companies are raising prices to offset more expensive shipping options like using plane cargo to move goods. Lingering worries over inflation, China’s heavy-handed dealing with their technology businesses and of course, COVID-19’s latest edition, the Delta variant, are weighing on minds, stock prices and bond yields.
As keenly as we watch the stock market for information and indication of our economic health, the bond market has just as much to say. Yields, which fall as prices rise during strong buying, have been declining on government bonds in the U.S. and Europe. When adjusted for inflation, yields are at record lows. This is a sign of waning optimism about the global economic recovery. It does not portend disaster, just an adjustment of outlook. One thought is that the U.S. economy could be on the long road towards a slow-growth, low-yield future. Others say the wide range of probable outcomes for our post-pandemic world plus thin summer trading exacerbates market swings. At current, the benchmark 10-year U.S. Treasury is yielding 1.2% with inflation trending over 5% annually.
Robinhood Debut
The brokerage phenom Robinhood (HOOD) began publicly trading on Thursday. Their much-anticipated initial public offering (IPO), priced at $38 to start, traded down as much as 8% in its debut. Robinhood took full advantage of stay-at-home measures last year with massive marketing and press and pulled in millions of new traders. Founded in 2013, the company's 18 million clients are personal or "retail" investors with regular, non-retirement, trading accounts. This places them as the third largest brokerage house in the U.S. behind Fidelity Investments with 36 million and Charles Schwab with 32 million.
Wall Street remains fascinated with Robinhood's impact on the stock market. Last quarter its traders moved 9 times as many shares as E-Trade's clientele and 40 times more than Schwab's. They also traded 88 times more "risky" options contracts when compared to Schwab's clients. While the firm has been criticized for not educating their novice investors, Robinhood has continued to offer open access to advanced trading strategies in options and cryptocurrencies. This has led to some public failures and on-going scrutiny from state and federal agencies. While the company does not allow investors to open retirement accounts, like IRAs, it plans on making that option available in the future. CEO Vlad Tenev has other, bigger plans for the company he founded. He wants Robinhood to be the only company that people use on their phones to transact anything to do with moving money, making deposits, splitting payments with friends and paying bills. He sees a future where everyone with a smartphone has the Robinhood app. The company has already prioritized "fun" as a staple of using its technology. The ease of use and the flair is evident; one-touch trading is a breeze for novice and experienced traders alike. Robinhood understands that the fevered pitch of trading may wan as workers leave their homes to head back into the office. Option trading especially may decrease. Robinhood, which offers free stock trades, makes money by directing trade order flow and the more trades they process, the more income they earn. Analysts will be watching to see how Robinhood competes in an already competitive and evolving marketplace. For now, the IPO is a telling sign that some of the excitement may have already worn off and the stock is a wait-and-see proposition for investors.
Reluctant Retirees on the Rise
In just the last 17 months, COVID-19 has claimed just over 600,000 American lives, cost millions of people their jobs, at least temporarily, and some 800,000 businesses have permanently closed. It is no wonder then that many people will hang up their work boots for a final time. Between March 2020 and last month, 1.7 million more Americans retired sooner than trends suggested they would have in a non-pandemic world.
A MetLife survey of baby boomers, who appear to have been pulled from the more financially privileged set, retired earlier than expected because they adopted a “life is too short” mentality. A quarter said that they wanted to spend more time with loved ones. Baby boomers, currently in the age range of 57-75, may be right that life is too short – it is now statistically shorter than it was pre-pandemic. Life expectancy at birth in 2020 was 77.3 years, down from 78.8 years in 2019. Recent surveys by the Federal Reserve and The New School found that retirement for many more was involuntary and less than ideal. Older workers were more likely to face extra health risks and be disproportionately let go from their jobs. Most of the retirements came from those already older than age 65 and without college degrees. Sadly, this cohort is far from financially ready for retirement, even if that is now where they find themselves. The same Federal Reserve survey from 2019 found that households with older workers without a college degree had median household retirement savings of only $9,000. If one of those older workers had a college degree, the savings jumped to $167,000. If accurate, what a distressing financial setup for these new retirees. Whether life is short or not may be irrelevant, given it is what you do during it that is key. Going to college is clearly one of the most important influences on a life and career. Even a little college education has been shown to make a material and positive difference. While it is too late for a retiree with $9,000 in savings to change his fortune, younger generations, especially those who hopefully will be heading back into classrooms this fall, would be well served with healthy doses of financial literacy.
In Case You Were Wondering
As Olympic games continue in Tokyo, now starting their second week, a curious "country" has been at the top of the medal count. ROC, which stands for the Russian Olympic Committee, has taken the place of Russia, the country. The ROC athletes have earned 34 medals.
An illegal doping scandal, which has been bouncing around in courts for years, resulted in Russia's being banned participating in the Olympics until the end of 2022. Over 300 Russians protested their involvement and lobbied to be allowed to compete. But as no athlete can compete under the Russian flag, name or even the national anthem, there had to be a loophole, thus the ROC banner for these so called "neutral" athletes. And when an ROC athlete takes the gold, which has happened in gymnastics, shooting, swimming and several other events, there is a substitute for Russia's serious national anthem. In its place, Tchaikovsky's rousing Piano Concerto No. 1 takes the stage.
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