Charts for the Week

May 16, 2022

The Bottom | Are we there yet?

Despite a strong rally on Friday, the stock market continued to decline last week. Broad market indexes have come close but have yet to fall 20% into fabled bear market territory. While valuations based on forecasted earnings have come down to more reasonable levels, they remain elevated if high profit margins are not sustained. As investors adjust to rising interest rates and a Fed that seems impervious to their pain, the odds of a prolonged period of higher-than-normal market volatility are increasing. If a bear market is upon us, history suggests the selling pressure will subside when the Fed is near the end of an easing cycle (a tightening cycle is just commencing), the market has fallen 25% below its 200-day moving average (currently around 10%), and expected market volatility has increased above 40% (now less than 30%). History also suggests it will be a long and winding road. All that said, the recent past has highlighted that history is an imperfect guide, and we may merely be in the midst of a market correction with new highs not far off. However, the rising probability of a more significant drawdown warrants taking measured steps to mitigate the downside risk.

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Sources:, YCharts, AOW calculation

TIPS | Diversification for an uncertain time

May 9, 2022

The inflation expectations reflected in Treasury Inflation-Protected Securities (TIPS) have trended higher over the past year along with realized inflation. Based on TIPS yields compared to nominal Treasury bond yields, investors are expecting inflation to decelerate from over 8% to below 5% over the next year and then continue to moderate back to around 2.5% after three years. However, TIPS investors don’t have a crystal ball and likely suffer the same recency bias we all do as TIPS breakeven inflation rates have historically tracked closely with realized inflation. Until experience proves otherwise, TIPS are likely to reflect the recent past where inflation is a problem now but won’t be for long. Investors will benefit the most from having an allocation to TIPS if we are entering a period of low economic growth and high inflation (as last week’s economic reports of poor productivity growth and a tight labor market suggest is a possibility). On the other hand, if the Fed is intent on driving inflation back down to 2% as quickly as possible, nominal Treasury bonds will likely outperform TIPS over the next few years as real inflation-adjusted interest rates rise and inflation falls. Whatever the future may hold, TIPS provide good diversifications benefits for investors at a time of heightened macroeconomic uncertainty.

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Sources:, US Treasury Department, AOW calculation

GDP | False negative?

May 2, 2022

The US economy unexpectedly contracted in the first quarter of the year. The main driver of the slight 0.36% decline (1.4% annualized) was the increasing trade deficit. Imports have returned to their pre-Covid trend thanks to strong domestic demand, but exports have continued to languish. The consensus view is that the economy is not falling into a recession as the consumer who drives the bulk of economic activity continues to spend at a healthy clip with a rebound in the consumption of services offsetting slowing demand for goods. Neither the decline in GDP nor the recent rumbles through the stock market have significantly changed investors’ expectations for substantial interest rate hikes by the Federal Reserve over the next year. While it is unusual for the Fed to be embarking on a tightening cycle on the heels of a negative GDP print, a significant rise in unemployment may be the only thing that would give the Fed pause until inflation retreats -- and the labor market is still very strong by almost every measure.

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Soft Landings | Possible, but not probable

April 25, 2022

Market expectations for how quickly the Federal Reserve will raise rates continued to ratchet higher last week with the Fed now anticipated to increase the overnight federal funds rate by 0.50% at its next meeting in early May. The last time the Fed increased its target interest rate by that much in one meeting was May of 2000. Investors are now pricing in short-term rates exceeding 2% by the end of July, 3% by the end of the year and 3.5% by the middle of next year. The last time the Fed increased rates that quickly was back in 1994 when it increased the federal funds rate from 3% to 6% in one year and pulled off the fabled soft landing of cooling inflation without causing a recession. The recent volatility in the stock market exhibits growing concerns that policymakers won’t be so successful this time, and history suggests those concerns are valid. Of the thirteen monetary tightening cycles that have occurred over the past seventy years, only three have not ended in a recession. Hard landings are the norm. Adding to the challenge this time is how far behind the curve the Fed appears to be with the Fed Funds rate far below an uncomfortably high rate of inflation.

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Inflation | Hope springs eternal

April 18, 2022

Year-over-year inflation recorded another forty-year high last week with prices up 8.5% from March of last year. With the month-over-month core inflation excluding food and energy down for the second month in a row, there is a consensus view that March will represent peak inflation which is expected to retreat over the remainder of the year. That would be welcome as inflation has weighed down real wages and consumption over the past year. Barring more unwelcome surprises, the math logically points to a slow down in the rate of price increases from here. Whether inflation will retreat all the way to a stable 2% without a fight is less certain. The last mile back to price stability may be the hardest.  

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Bond Market | Sell-off continues

April 11, 2022

The sell-off in the bond market continued last week as comments by Federal Reserve officials and minutes from their last policy meeting increased expectations for interest rates to be higher sooner. The 10-year Treasury rate closed last week at 2.72% and has now increased by 2.2 percentage points from the low of 0.52% in 2020. The current decline in the bond market is in the same league as the pain Paul Volker inflicted in the early 1980s in his efforts to reign in double-digit inflation. Interest rates increased much more back then with the 10-year Treasury yield maxing out at 15.8% in 1981; however, the price declines were offset to some degree by the high interest earned. With interest rates still so low, the interest earn these days does little to mitigate the decline in bond prices. The move in the long-term yield did help to fix the ominous inverted yield curve at least in part with the spread between the 2-year and 10-year Treasury yields quickly moving back into positive territory. The adjustment to a normal rate environment is likely not done yet as a healthy economy would see the 10-year yield regularly trafficking between 3% and 4% with inflation back around 2%. Thus the bond market sell-off could ultimately exceed the roughly 20% decline seen in 1980. Nevertheless, most of the damage is probably already done -- unless inflation continues to romp wildly.  

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Sources:, Federal Reserve, US Treasury, AOWM calculations

Yield Curve | Flashing yellow...

April 4, 2022

Interest rates are marching higher. The 10-year Treasury yield has for the moment broken through the upper bound of its four-decade long downtrend while short-term rates have risen even more quickly. The yield on Treasury debt maturing in two years rose above longer maturities last week for the first time since 2019. The so-called inverted yield curve - where short-term yields rise above long-term yields - raises the specter of economic turbulence ahead as a yield curve inversion has preceded every recession since 1969. The Fed still has to raise ultra-short rates as expected for the full yield curve to invert, but the bond market is now projecting a bumpy ride if it does. The mega downtrend in interest rates may not be over yet, if tightening monetary policy to a relatively neutral level really is too much for the economy to handle well. It would actually be a healthy sign for long-term rates to continue marching a little higher without inducing fears of an apocalypse.    

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Sources:, Federal Reserve, US Treasury

The Trend | Still a friend?

March 28, 2022

Stocks have rallied nicely the past couple of weeks to stem their losses for the year and enable the S&P 500 Index to notch the highest 2-year return in its 65-year history. The broader US equity market, as measured by the Russell 3000 Index, is now bumping up against its 200-day moving average which it fell below earlier this year for the first time since the early days of the Covid-19 pandemic. The coming weeks will be telling as to whether investors have gone from “buying the dip” to “selling the rally” with the long-run moving averages serving as potential trading signals. If we have embarked on a classical prolonged bear market downturn, it will likely be punctuated with several strong rallies. During the market decline after the tech bubble in the late 1990s, there were three rallies of 20% or more interspersed as the market proceeded to lose half its value over the course of two and half years. While the near-term direction of the stock market is always an open question, the ultimate historical trend in the market remains the friend of investors with a long-term perspective. 

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Sources: S&P, YCharts,, AOWM calculations, The S&P 500 Index, formerly called the Composite Index (and later the Standard & Poor’s Composite Index), was first launched on a small scale in 1923. It began tracking 90 stocks in 1926 and expanded to 500 in 1957. Total return graphs are charted on log scales.

The Fed | Still just trying to catch up with inflation

March 21, 2022

Last week, the Federal Reserve raised its target overnight Fed Funds interest rate by 0.25% and projected six more rate increases this year as policymakers sped up their plans for raising nominal interest rates. Last September, they were looking to increase the Fed Funds rate to just 0.30% this year, and now it's projected to be 1.9% by December. This would seem to be a significant tightening of monetary policy; however, after adjusting for expected inflation (as forecasted by those same Fed policymakers), the real Fed Funds rate is actually projected to be lower this year than it was forecasted to be a year ago when the Fed was publicly committed to the notion that the pandemic-induced burst in inflation would be brief and transitory. Despite Fed officials ramping up their public concern about inflation and rhetorical commitment to price stability, the numbers paint a picture of a Fed that is still holding fast to the belief that inflation will naturally retreat without a significant tightening of monetary policy or slowing of the economy. The stock market cheered the relatively unchanged outlook for real interest rates last week. If the Fed’s implicit faith in benign inflation ultimately proves to be misplaced, the cheering likely won’t last.

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Sources:, Federal Reserve

World Trade | Already past peak globalization?

March 14, 2022

While Americans are importing a record of amount goods straining supply chains and pushing the US trade deficit further into the red, overall world trade has been relatively stagnant since 2008 and declining as a percentage of the global economy. The pandemic and now the war in Ukraine have highlighted how interlinked the world economies have become; at the same time, those events have led many to question the wisdom of that level of interdependence. Global trust and cooperation between developed and developing nations appears to be waning and with it one of the big deflationary forces that has helped to keep inflation low, just as inflation is hitting its highest levels in four decades. The rise in consumer prices is still likely to slow this year, but keeping inflation low and stable is becoming increasingly more challenging for policymakers.  

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Energy Prices | Adding to the wall of worry

March 7, 2022

Following the Russian invasion of Ukraine, the price of oil has spiked to its highest level since 2008. Prices at the pump have also increased with the average price of gasoline topping $4 per gallon for the first time since 2011. Gas prices were supposed to be one of those transitory items that would enable inflation to cool naturally; however, as geopolitical events have continued to push energy prices higher and raised doubts about how aggressively the Fed can raise interest rates in the current environment, inflation expectations have begun to climb again. Investors face an increasing wall of worry which they have overcome time and time again in the past -- although, starting with historically high asset valuations adds another layer of difficulty to the task in the short run.

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Sources: YCharts,, US Treasury Department, AAA,

February 28, 2022

Events | Predictably unpredictable

Stock markets around the globe became increasingly volatile last week following the Russian invasion of Ukraine.  On Thursday morning, the S&P 500 Index was down more than 5% and the Nasdaq more than 7% from the close the previous Friday, but from there stocks rallied strongly to end up around 1% for the week. Such spikes in short-term volatility are not unusual around major turning points in the market – both good and bad. While the intraday swings in sentiment last week were above average, they were still relatively tame given the potential Pandora's box that has been opened in Eastern Europe and far from the swings seen at the beginning of the Covid-19 pandemic, during the financial meltdown in the fall of 2008, or over the course of the bursting tech bubble at the beginning of the century. Even if the war in Ukraine is mercifully brought to a quick and good conclusion, increased market volatility is likely here to stay as the Federal Reserve tightens monetary policy to stem inflation. Over the past two years, many stocks have been bid up to offer minimal potential future returns for the risk being assumed by investors. Some of those high flyers had already fallen a long way back towards earth before last week. Recent global events are just another reminder that investors are well served to bake in a margin of safety and require an absolute potential return that compensates for the predictably unpredictable.

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Sources: YCharts

February 21, 2022

Housing Market | Weathering higher mortgage rates

The average 30-year mortgage interest rate has jumped nearly one percentage point over the past couple of months, increasing the cost of a new monthly mortgage payment by more than 11%. Mortgage rates are now in line with where they have been over the past decade; whether they continue to head higher will depend largely on whether investors continue to believe inflation will be brought swiftly under control. So far the higher rates have not significantly slowed the hot housing market. The increase in rates may have actually pulled some demand forward as individuals rush to buy a home in fear that rates will only head higher. Average rents increasing by more than 15% over the past year have likely also provided further incentive for individuals to lock in a fixed mortgage payment and for investors to seek out rental investments. The strong housing demand has met a historically low supply of existing homes for sale, which has combined to send home prices up over 30% the past two years. New home construction is picking up to meet the demand but has been constrained by supply bottlenecks. Higher mortgage rates and ultimately increasing supply will likely limit further price increases in the near term with inflation doing the primary work of reducing any recent excesses.

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Sources: YCharts, National Association of Realtors, US Census Bureau, Redfin (,

February 14, 2022

Inflation | Investors keeping the faith

Inflation ground stubbornly higher in January with the Consumer Price Index up 7.5% over the past year. While the Federal Reserve is keeping monetary policy dialed to extremely accommodative for one more month in the face of the highest inflation in four decades, investors have so far kept the faith that policymakers have everything under control. Short-term interest rates have shot up as investors expect the Fed will have to raise its target overnight interest rate sooner and faster than thought just a few weeks ago; however, the bond market still paints a picture of the future where inflation is brought quickly under control, interest rates remain historically low and the threat of a recession remains beyond the horizon. The stock market has similarly experienced increased volatility without abandoning a generally positive outlook for what is to come. The wisdom of the crowd should be hedged but not blithely dismissed. 

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Sources: YCharts

February 7, 2022

Federal Debt | Bad but not that bad... yet

Last week the gross debt of the US federal government reached $30 trillion, having increased by $6.8 trillion over the past two years. The amount of privately held federal debt is significantly less at $17.7 trillion as $6.5 trillion of the gross number is intragovernmental debt the federal government owes itself and $5.7 trillion is held by the Federal Reserve. As the Fed works to shrink its balance sheet, privately held federal debt will trend towards 100% of GDP even if the growth of the federal debt were to slow to be in line with the growth of the economy. That level of public debt does not raise as much concern as it used to, though that may change if interest rates continue to increase as well.

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January 31, 2022

Economic Growth | Less than meets the eye

The US economy grew 5.5% in 2021 - the fastest rate of growth since 1984. In the last three months of the year, the economy appeared to have bounced back strongly from the slowdown in the third quarter with annualized growth of 6.9%. However, excluding changes in inventories, economic growth for the fourth quarter was just 2% as personal consumer spending slowed significantly in November and December. After adjusting for inflation, personal consumption - which makes up 70% of the economy - is now back below the trend it was on before the pandemic. Going forward, the Omicron variant and the end of direct fiscal stimulus payments will likely continue to weigh on economic growth for at least the first part of the new year, and there is an increasing possibility that growth for both the economy and corporate profits may disappoint expectations in 2022. 

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January 24, 2022

Stocks | Inflation is not your friend

After sailing along relatively smoothly for nearly 22 months, the stock market has begun to experience some rougher seas. The S&P 500 Index fell below its 200-day moving average on Friday for the first time since the end of June 2020 and has had the largest pullback in over a year after a very placid 2021. At just 8.3% off its all-time high closing price reached on the first trading day of 2022, the recent market action is indicative of the typical level of volatility historically associated with equities, though it is perhaps more than investors have been recently lulled into expecting. While there have been signs of increasing risk aversion under the surface, increased investor concerns about high inflation and rising interest rates have begun to weigh on some of the largest company valuations that have kept the headline indexes moving higher the past few months. A Federal Reserve that is more aggressive about keeping inflation in check may not make investors happy in the short term, but they would like the return of persistent high inflation even less as it would likely reduce valuation multiples significantly more than profits could be boosted with higher prices.

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January 17, 2022

Inflation | Things are so expensive

Inflation remained non-transitorily high in December with the Consumer Price Index (CPI) up 7% compared to a year ago. Prices for goods have played the unusual role of pulling the overall CPI higher over the past year. The cost of goods excluding food and energy had remained largely unchanged for more than two decades leading up to the pandemic which created a perfect storm of surging demand and supply constraints for things. Goods inflation should moderate as the disruptions caused by Covid-19 subside. Whether goods will return to serving as a disinflationary anchor to overall inflation is less certain. There are also building price pressures for services and energy, all of which increases the probability that inflation will stay higher for longer than policymakers had hoped or expected and force them to push interest rates up higher sooner than hoped or expected.

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January 10, 2022

Interest Rates |  Déjà vu all over again

Like last year, interest rates began the new year by spiking higher. The initial jump in rates was supported by news that suggested the Federal Reserve really is serious about speeding up the normalization of monetary policy as well as a jobs report showing the unemployment rate dipping to 3.9% in December. Also similar to last year, the increase in interest rates sent rumbles through growth stocks whose high valuations are partly dependent on rock-bottom interest rates. The 10-year Treasury yield is now testing the levels it reached last spring when the consensus expectation was for rates to continue heading higher -- which is the logical consensus again today with inflation running at nearly 7% and the Fed supposedly on the verge of ceasing its bond buying. Time will tell. The persistent, four-decade downtrend in interest rates has repeatedly foiled expectations for higher rates. If the 10-year Treasury yield rises towards 2.5% by the end of this year, that long trend may actually be broken. It would also be the first time since the 1950s that long-term Treasury securities will have suffered negative returns in back-to-back calendar years.

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Sources: YCharts, US Treasury,, S&P, AOWM calculations

January 3, 2022

 The Market |  An enigma wrapped in a conundrum

At the start of 2022, the US stock market is simultaneously expensive on an absolute basis and cheap relative to risk-free US Treasury debt. At its root, the value of any financial asset is a summation of the cash flows investors collectively expect to receive in the future for holding the asset discounted by the return that investors expect to receive for risking cash now to buy it. A valuation model that discounts dividends (i.e., the actual cash investors receive) is not sophisticated, but it requires only one heroic assumption – the future growth rate of dividends – to lend insight into the current value of the market. Decades of data show that over thirty to forty-year periods the nominal growth rate of dividends for the market as measured by the S&P 500 Index has not oscillated greatly despite very different economic and inflation environments and the increasing prevalence of stock repurchases by companies. If the growth rate of dividends over long periods is fairly stable, then the current dividend yield becomes a more meaningful valuation metric that avoids debates about accounting earnings but tells the same story – the market is expensive and a swift return to more historical levels would be unpleasant. At the same time, stocks have rarely offered such a return premium relative to Treasury debt, which offers some hope that interest rates could rise without tanking the stock market.

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Sources:, S&P, AOWM calculations

December 27, 2021

 US Population |  Slowest growth in history

Last week the US Census Bureau announced another Covid-induced record – the slowest annual population growth in the nation’s history. In 2021, the US population is estimated to have increased by just 392,665 or 0.1%. According to the Census Bureau, “The year 2021 is the first time since 1937 that the U.S. population grew by fewer than one million people, featuring the lowest numeric growth since at least 1900, when the Census Bureau began annual population estimates.” Lower births and immigration as well as higher deaths contributed to the record low growth rate. The U.S. population had already been increasing at an increasingly slower pace leading up to the pandemic which amplified that trend. While population growth should bounce back some next year, it is expected to remain rather anemic in the coming decades which is why most economists estimate the long-run real potential growth rate for the US economy is likely now below 2%.

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December 20, 2021

 Monetary Policy |  A nominal pivot

Last week the Federal Reserve acknowledged that high inflation is proving to be more persistent than it had expected and announced moves to speed the normalization of monetary policy (in nominal terms). The Fed now anticipates increasing its target overnight interest rate towards 1% by the end of 2022 after previously not expecting to begin raising rates until 2023. That said, Fed policymakers are also forecasting higher inflation over the next year. Adjusting the projected target Fed Funds Rate for expected inflation suggests that, even after significantly underestimating inflation, Fed policymakers have actually not significantly altered their path for tightening policy in real inflation-adjusted terms and are sticking to a path that keeps monetary policy at a historically stimulative level for as far as the eye can see.  Nevertheless, the nominal pivot by the Fed caused some volatility in the equity markets last week as investors, who have placed much faith in the power of the Fed to keep the market levitating at a high level, tried to figure out what it all means. The ultimate consensus perception may be more important than the reality.

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December 13, 2021

 Household Net Worth |  An everything bubble?

The net worth of US households and nonprofits increased for the six straight quarter to a record $144.7 trillion buoyed by historically high valuations for just about every asset class. Over the past 18 months, the aggregate net worth of households and nonprofits has leaped forward by $34.1 trillion (30.9%), far surpassing any other 18-month period over the past seventy years. As a percent of GDP, household net worth has been stretched far from its historical average. While the past year and a half has demonstrated that extreme valuations can become even more extreme, a nation’s wealth can’t accelerate indefinitely from its productive capacity. There are thus four potential long-term futures from here: 1) asset values have reached a “permanently high plateau” without any significant change in the underlying economic fundamentals, thus future investment returns will be significantly below their historical averages; 2) there will be a productivity boom that leads to real economic growth fast enough to justify current valuations and continued strong returns (which is what the true believers in the current moment advocate will happen); 3) inflation runs hot, but not too hot, allowing the nominal value of the economy to catch up with the current elevated asset values (i.e., the soft landing policymakers at the Federal Reserve may be attempting to engineer); or 4) there is a slow or swift resetting of asset values back towards more historical levels (i.e., the hard landing policymakers hope to avoid). Each outcome is possible to some degree. For whatever it is worth these days, history would place a lower probability weight on the first two more sanguine futures; however, a diversified portfolio that underweights the most extreme valuations may be the wisest course to hedge the unknowable future.

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Sources:, , AOWM calculations

December 6, 2021

 Growth vs Value |  Oscillating winds...

For the first few months of the year, the investing winds appeared to be shifting in favor of stocks with valuations that are not dependent on high expectations for future profits (i.e., value stocks). But growth stocks have surged back in recent months, and relative to value stocks, growth had almost retaken the 2020 high before selling off at the end of last week. Such back and forth is not unusual when a market trend is potentially reversing. Value stocks have historically outperformed over the long run, and a number of fundamental factors suggest that value could do well relative to growth over the next several years; however, the winds may continue to oscillate for a while until that new trend firmly takes hold.

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Sources: YCharts, AOWM calculations

November 29, 2021

 Inflation | Banking on this time being different

A new Covid variant is once again scrambling attempts to project where the economy is headed. Before Omicron, there was the hope that the US economy would continue to expand quickly next year while the inflation rate would retreat from over 6% back towards 2%. Barring further Covid disruptions, there are logical reasons inflation should decline – e.g., used car prices will surely eventually stop rocketing to the moon; however, it would be a historical anomaly for inflation to decelerate as much as expected while the economy continued to expand at a fast rate. Indeed, over the past sixty years, every year-over-year decline in CPI inflation of 3% or more has been accompanied by an economic recession. Policymakers at the Fed believe this time will be different – or they are in reality OK with inflation remaining higher for longer than they can explicitly admit. How Covid will continue to scramble historical comparisons and the future is anyone’s guess.

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Sources: YCharts, BEA, BLS, AOWM calculations

November 22, 2021

 Corporate Profits | Will gravity take hold?

Corporate profits continued to exceed expectations last quarter with nearly 80% of the companies in the S&P 500 beating the consensus forecast. (The recent historical average before the pandemic was around 70%.) After falling 33% in 2020 due to the brief, sharp Covid recession, reported GAAP earnings per share for the S&P 500 are expected to more than double this year to a record high level. Earnings growth is anticipated to slow next year but remain a solid 8%. In nominal or real terms, corporate profits are at the high end of their historical growth range. The expansion in profitability over the past decade has been impressive with current earnings over 50% above their 10-year trailing average adjusted for inflation. The last two times in 2000 and 2007 that earnings got this far above their recent historical average, gravity took hold. At the very least, earnings growth seems likely to slow and remain relatively tame for the foreseeable future. The stock market could continue to roll higher without significant earnings growth, but it would require investors to pay even more for a dollar of earnings when they are already paying a historically high price.

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Sources: YCharts,, S&P, BLS, AOWM calculations

November 15, 2021

 Real Earnings Yield | All-time low...

Inflation continues to prove less transitory than hoped or expected with the Consumer Price Index up 6.2% in October compared to the year before – the highest level in over thirty years. At the same time the trailing real earnings yield for the S&P 500 Index (i.e., earnings divided by the price minus one-year inflation), fell to its lowest level on record, below negative 2%. The previous times the trailing real earnings yield has fallen below zero a significant market drawdown of at least 20% hasn’t been far off. However, history has been a notoriously bad guide over the past year and a half. If the current expectations for corporate profits are met (and earnings have generally exceeded expectations in recent quarters) and inflation retreats towards 2%, the current negative real earnings yield may just end up being another unprecedented artifact of the Covid market.

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Update on consumer sentiment: Last week we noted the divergence between consumer sentiment and market valuations. The latest reading from the Surveys of Consumers performed by the University of Michigan released on Friday showed the divergence widening further with consumer sentiment falling to levels last seen during the great financial crisis over a decade ago. If curious about what is asked to compile the consumer sentiment index, here’s the link to the survey questions from which the index is derived: 

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Sources: YCharts,, University of Michigan, S&P, BLS, AOWM calculations

 Consumers | Less bullish than investors

November 8, 2021

The jobs report released last week showed continued improvement and tightness in the labor market with the unemployment rate falling to a relatively low 4.6%. At the same time, the Federal Reserve recommitted to maintaining a highly accommodative monetary policy until more individuals are able and willing to rejoin the labor force with the expectation that the current high level of inflation will naturally subside. The encouraging signs of strength for the economic recovery coupled with the extended long good-bye for extreme monetary stimulus helped to push interest rates down and the stock market to a week of one all-time high after another. Despite the strength of the economy, consumers have been less sanguine than investors in their outlook – at least as measured by the University of Michigan’s Surveys of Consumers. Valuations in the stock market have historically tracked well with consumer sentiment as psychological waves of optimism and pessimism wash broadly over the economy. That has not been the case since the pandemic bottom as stocks have gone to the moon while consumer sentiment has remained grounded – a divergence in sentiment that is not likely to persist indefinitely.  We’ll get another read on how the consumer is feeling at the end of this week when the University of Michigan releases its preliminary survey results for November.

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Sources: YCharts, BLS, University of Michigan, S&P, AOWM calculations

November 1, 2021

 Growth & Inflation | Diverging outlook

At the beginning of July, economists were expecting the rapid economic recovery to continue in the third quarter with growth anticipated to be around 7% annualized. Instead supply bottlenecks weighed down the consumption of goods and the Delta variant slowed the recovery in the service economy, all of which reduced economic growth to a mere 2%. The consumption of goods remains well above the growth trend it was on before the pandemic even with the supply chain issues; thus, while goods consumption may rebound some as supply chains normalize, it is unlikely to add much to economic growth for the next couple of years. Looking forward, growth will be dependent largely on individuals returning to their pre-Covid spending habits and their consumption of services – which should happen if the pandemic mercifully continues to recede. Nevertheless, even as the stock market surged to new highs in October, the bond market highlighted the challenge facing the economy and policymakers. The yields on short-term debt increased in anticipation of the Federal Reserve needing to raise interest rates to rein in inflation while the yields on long-term debt with maturities of 10 years or more barely moved or even declined, likely reflecting concerns about growth. At the very long-end, the yield curve even inverted with the yield on the 30-year Treasury bond falling below the yield on the 20-year bond. Across the real yield curve for Treasury Inflation-Protected Securities, real inflation-adjusted yields fell in October, providing another indication of bond investors' twin concerns for higher inflation and slower growth. The policymakers at the Federal Reserve will give some indication this week of how they plan to navigate the diverging outlook for growth and inflation as they look to begin winding down the Fed's asset purchases as a first step in normalizing monetary policy.

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Sources: YCharts,, US Treasury, BEA, AOWM calculations

 Stocks | Minting new highs

October 25, 2021

After a mild pullback in September, large-cap stocks were back to minting new all-time highs last week even as small-cap stocks continue to trade largely sideways. A slew of earnings reports this week will test the strength of the current rally as roughly a third of the companies in the S&P 500 representing almost half the index’s market value report over the next five days. So far third quarter earnings have largely continued to exceed expectations. Inflation and wage pressures have yet to dent corporate profits but pose an increasing risk to the current outlook for sustained high profit margins.    

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Sources: YCharts, AOWM calculations

 Workers | Increasingly confident and hard to find

October 18, 2021

The number of individuals quitting their jobs has ratcheted higher in recent months. In August, more than 5 million workers left for greener pastures. At the same time, it is taking companies longer to fill positions with the number of open positions relative to new hires at its highest level in the past twenty years. The current ratio of openings to hires is 1.7 which suggests it is taking nearly two months on average for companies to find a new employee. The strong labor market is a clear sign of the economy’s strength, but also perhaps a sign of the pendulum beginning to swing back towards workers having greater bargaining power for higher wages.   

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October 11, 2021

 Energy | Another Inflationary Pressure

Energy prices are spiking across the globe as the Covid pandemic continues to be the long transitory tail wagging the economy. A colder than normal winter could send energy prices even higher, which would be deleterious for economic growth and inflation. Fossil fuel prices may also persistent at a higher level than in recent years as the push towards renewable energy and the generally negative view of carbon-based fuels has decreased investment in fossil fuels and raised the price needed to attract the new investment necessary to increase supply. The fact that the stock prices for many energy companies remain below their pre-Covid levels despite the increase in oil and gas prices shows investors’ continued wariness about the industry and the simultaneous challenge of smoothly transitioning to renewable energy for a world that still predominantly depends on fossil fuels to function.

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Sources: YCharts, World Bank Energy Price Incdex (, MSCI ACWI Energy Index includes large and mid cap securities across 23 Developed Markets (DM) and 27 Emerging Markets (EM) countries, S&P GSCI serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time.

October 4, 2021

 Bonds | Waning diversification benefits?

The ever so mild market turmoil in September saw the S&P 500 stock index fall 5% for the first time in eleven months and long-term interest rates increase. The simultaneous decline of both stock and bond prices highlights a concern that the diversification benefits of bonds may not be as great as they have been in the past as both asset classes trade at historically elevated valuations. Over the past twenty years bonds have nicely zigged when the stock market has zagged; however, ultra-low interest rates have created an environment that makes both stocks and fixed income securities more susceptible than they have ever been to a sell-off if rates rise significantly. Nevertheless, if investors ever again adopt a true risk-off mentality for some reason other than inflation, US Treasuries are likely to continue to serve as a perceived safe port in the storm, and the forty year downward trend in yields may not be over yet.

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Sources: Federal Reserve, S&P,, AOWM calculations of monthly average data

September 27, 2021

 Monetary Policy | Normalizing at a deliberate trot

Last week the Federal Reserve indicated it is likely to normalize monetary policy slightly faster than it had previously anticipated in the face of inflation that has proven more persistent than policymakers had initially forecasted. The Fed’s purchases of Treasury and mortgage debt may now be fully wound down by the middle of 2022, and the majority of Fed policymakers now expect the Fed’s target short-term interest rate, the Fed Funds Rate, to begin increasing next year instead of 2023. It will still be a relatively slow adjustment in policy from an extremely accommodating starting point that has the real Fed Funds Rate adjusted for inflation in uncharted territory. Policymakers, however, may not have the luxury of a such a slow normalization of interest rates (to a level that just a few years ago would have been viewed as still rather accommodating) if the labor market continues to tighten, inflation remains stubbornly high, and asset prices continue to elevate above historical norms.

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September 20, 2021

 August Inflation | Succor for the transitorists

Inflation slowed in August giving succor to the general consensus view that the recent rapid pace of price increases will slow and prove to be merely transitory. The Consumer Price Index (CPI) was still up over 5.3% compared to last year, but monthly inflation decelerated to 3.3% on an annualized basis (and monthly core inflation excluding food and energy prices slowed even more to 1.2% annualized). Current monetary policy and valuations in both the equity and fixed income markets are banking heavily on inflation continuing to cool in the coming months. One item that might keep inflation running higher for longer than desired is the likely increase in the largest component of the CPI – the price of shelter which makes up over 30% of the index. The estimated housing inflation incorporated into the CPI has remained fairly subdued in recent months despite significant increases in house prices and market observed rents. As economists at the Dallas Fed have estimated, there is a good probability that the official housing inflation number will increase significantly in the coming months which could offset the decline in the pandemic-related transitory components of the CPI and keep overall inflation elevated at an uncomfortable level. However, the cost of housing has just half the weight in the Federal Reserve’s preferred inflation metric, the Personal Consumption Expenditures (PCE) index, compared to the CPI (15% vs 31%), which may partly explain policymakers' confidence that they have ample time to slowly remove the punch bowl. The CPI generally measures inflation to be higher than the PCE, and that has been even more so the case in recent months.

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September 13, 2021

 Charitable Giving | Record year

Americans are estimated to have given away a record $471.44 billion (~2.2% of GDP) in 2020 despite the recession caused by the Covid-19 pandemic. Giving was up 5.1% from 2019 thanks in no small part to the strong stock market and significant government relief payments, which undoubtedly helped prevent the usual decline in overall charitable giving experienced during a recession.  A Gallup survey performed in April of 2020 did show a decline in the number of individuals giving to charities especially among lower income households. Nevertheless, nearly three quarters of Americans still indicated that they had donated money to a charitable cause in the past year. If the stock market can make it to the end of the year without any major hiccups, charitable giving seems poised to hit another all-time high in 2021. Donor-advised funds remain an increasingly popular way for individuals to convert appreciated securities into charitable gifts with total assets in approximately one million DAFs approaching $200 billion. 

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September 6, 2021

 Labor | Scarce and underemployed

Labor remained both scarce and underemployed last month as job growth slowed significantly but the unemployment rate continued to decline to 5.2%. Since 1980, it has taken longer with each subsequent recession for the labor market to regain the jobs lost during the economic downturn. This time around, the downturn was both quicker and deeper; however, even with the slowdown in August, the economy is on pace to potentially recover the lost jobs in a little more than two years, as opposed to the six years it took to recover from the last recession. Nevertheless, there are still over five million fewer individuals employed than before the pandemic, but an unusual element of this downturn is that the labor force also declined significantly and still had three million fewer workers in August than before the recession. As a result, some sectors have struggled to find individuals to hire even as the labor market in terms of total jobs remains more depressed than it was at the trough of every downturn over the past sixty years excluding the recession that accompanied the 2008 financial crisis. While the end of extra unemployment benefits may encourage more individuals back into the labor force in coming months, many workers may have permanently left the labor force for one reason or another.

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Sources:, YCharts, BLS, AOWM calculations

Corporate Profits |  Poised to mean-revert?

August 30, 2021

After-tax profits as a percentage of National Income reached an all-time high in the second quarter. On a pre-tax basis, profits hit a level as a percentage of National Income that has only been exceeded three times since 1947 -- which is as far back as the Bureau of Economic Analysis goes in providing quarterly national accounts data. Over the past twenty-five years, corporate profits have taken an increasing share of the National Income while the percent of National Income going to employees has declined. Current market expectations are for profit margins not only to remain at their current historic level, but for them to continue to expand higher. At the same time, investors are also putting historically high valuations on that outlook for earnings -- all of which leaves investors with little margin for safety, especially as some of the demographic, inflation, interest rate, political, and globalization trends that have aided the expansion of margins over the past few decades appear unlikely to be as favorable going forward.

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Sources:, BEA, AOWM calculations

August 23, 2021

Risk Aversion | Increasing beneath the surface

While the stock market quickly bounced off another mild downturn last week, there are creeping signs of growing risk aversion among investors. Last month, the amount of margin debt borrowed to buy stocks declined for the first time during the market’s epic run over the past seventeen months. At the same time, activity in the options market shows signs that some investors are beginning to hedge their positions (or bet on a decline). The number of stocks participating in the market’s climb higher has also been declining, and the valuations of riskier small cap companies have largely traded sideways over the past five months while large cap stocks have continued to head higher. Along those same lines, many of the theme and meme plays that retail investors have been enamored with have begun to see the air come out of their balloon over the past six months. And even in the credit markets, which the Federal Reserve has largely lulled to sleep, the riskiest debt has seen yields tick higher since the end of June, while long-term US Treasury yields have declined. All of this may simply be some healthy rationalizing of investor behavior; however, in the short run, increasing risk aversion among investors would serve as a headwind for the market to surge significantly higher from its current lofty level.   

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Sources: YCharts,, FINRA, CBOE, AOWM calculations

Stocks | Smooth sailing...

August 16, 2021

On March 23, 2020 at the depths of the Covid market panic, the S&P 500 closed at 2237.4, down 33.9% from its closing value on February 19, 2020. Last Friday, August 13, 2021, the S&P 500 closed at another record high of 4468.0 – just 6.8 points or 0.3% away from doubling in value in less than 17 months. The last time the stock market doubled so quickly was the 1930s as the market was still languishing 40% to 70% below its 1929 high; today the market is 32% above its pre-Covid high. The S&P 500 would need to decline by 24% to around 3400 to get back to the average historical market rally after a decline of 30% or more. In addition to being an unusually rapid and large increase in the market, it has been a relatively smooth ride as well with no pullback reaching 10% and no 5% declines since last October. A period of above average stability, however, can often be followed by one of above average volatility. As the economist Hyman Minsky put it, “Stability leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits.” 

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Sources: YahooFinance, AOWM calculations

August 9, 2021

Jobs Report | The recovery continues

The jobs report for July released last Friday indicated that the economic recovery remains on a solid trajectory. The economy added around 940,000 jobs with the unemployment rate falling to 5.4%. There are still about 5.7 million fewer people employed than before the pandemic, but if the current pace of job gains continues, that gap could be made up by January and the labor market could be back on its pre-Covid growth trajectory by this time next year. Adding further strength to the recovery in the job market is the high demand for workers as indicated by the significant increase in job openings which were estimated to be around 10 million in June. (See first graph below comparing job openings to the current number of unemployed.) One minor note of caution in the jobs number is the seasonally adjusted estimate for the increase in employment by local schools which accounted for 220,700 of the estimated new jobs. The seasonally adjusted estimate for local schools proved to be overly optimistic last summer (see second chart). The trend for local school employment is nevertheless positive compared to last year, which suggests the seasonally adjusted gain is likely directionally correct. But that component demonstrates the challenge of gauging the strength of the recovery given the continued uncertain disruption caused in life and the data by Covid-19.    

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Sources: U.S. Bureau of Labor Statistics,

Economic Growth | Strong but below expectations

August 2, 2021

Initial estimates for economic growth in the second quarter came in below very high expectations with the economy expanding over the past quarter at a healthy annualized growth rate of 6.5% while many economists were expecting growth to exceed 8%. The economy has still recovered amazingly quickly over the past year with the fastest year-over-year growth in seventy years. Inflation-adjusted real GDP is already above the level it had reached before the pandemic, although it still has some ground to make up to reach its pre-Covid growth trend. Assuming the evil Delta variant doesn’t derail things, the economy is expected to continue to grow at a solid pace for the rest of year thanks to the continued rebound in the private consumption of services, which is the largest component of the economy.

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Sources: U.S. Bureau of Economic Analysis,, AOWM calculations

July 26, 2021

Corporate Profits | Wind beneath the market's wings

The stock market experienced a little turbulence at the beginning of last week but quickly recovered to end the week at a new all-time high. Strong corporate earnings reports for the second quarter helped to quell economic growth concerns caused by the Delta variant of Covid-19. With nearly a quarter of the companies in the S&P 500 Index having reported earnings, 88% of them have exceeded consensus expectations for earnings and 86% have exceeded expectations for revenue. Given the tendency of management teams to manage short-term expectations, it is not unusual for most companies to exceed analysts’ estimates with 75% and 65% of the companies in the S&P 500 beating earnings and revenue estimates, respectively, in any given quarter on average over the past five years. However, corporate profits have continued to soar back much more quickly than they historically have thanks in no small part to historically high profit margins. Profits are expected to continue to grow strongly into next year with earnings per share for the S&P 500 forecasted to be up 55% this year to a record level and then another 11% next year. As long as they last, strong corporate earnings should provide lift to the market to counter any prolonged downdraft for, as long as the news is good, there is little cause for investors to re-evaluate the wisdom of placing historically high valuations on earnings derived from historically high profit margins.

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July 19, 2021

Inflation | Is it different this time?

Inflation surprised on the high side again in June with the Consumer Price Index up 5.4% over the past year. Short-term inflation over the past three months hit double digits with both total and core inflation up over 10% annualized for the first time since the high inflation days in the early 80s. Policymakers and investors appear completely at ease in their belief that the recent increase in inflation will be transitory and soon subside once various supply constraints work themselves out. The various unprecedented monetary actions taken by the Federal Reserve since the great financial crisis have led to many doom-and-gloom predictions about inflation over the past decade that have proven to be unwarranted (if one excludes the inflation in financial assets and house prices). This time might be different, however, as the combination of massive fiscal and monetary stimulus has succeeded in increasing the amount of money actually flowing into the real economy (as opposed to what was the case a decade ago when much of the quantitative easing basically just made a round trip back to the Federal Reserve). The economy is a highly complex system that usually humbles efforts to predict the future, but the risk for higher inflation does seem to be increasing given the rising tide of money flowing into the economy and the absence of the globalization or demographic trends that have previously helped to keep inflation in check.  

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Sources:, BLS, Federal Reserve

Junk Bonds | High risk, low reward

July 12, 2021

If looking for another sign these days of investors' current large appetite for risk and their desperate hunt for yield, look no further than the junk bond market where the current real yield on non-investment grade corporate debt has gone negative when the nominal yield is adjusted using the current trailing CPI inflation rate of 4.9%. That is to say, the riskiest part of the corporate debt market is offering no return for investors after inflation. Hopefully inflation won't stay at 5% for long; however, even using the 10-yr TIPS breakeven inflation rate of 2.2% generates a real return for "high" yield debt of just 2% which is a fairly meager return for the risk. But that could be said for much of the financial markets at the moment. The potential silver lining of good news to be found in the strong demand for junk bonds is that there were some rumblings in the credit markets before the stock market peaks in 2000 and 2007, and there are certainly no signs of concerns flashing there now.  Although in the age of quantitative easing by the Federal Reserve, such market signals may not be as reliable as they were in the past. 

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Ice Data Indices, LLC, ICE BofA US High Yield Index Effective Yield [BAMLH0A0HYM2EY], retrieved from FRED, Federal Reserve Bank of St. Louis;
AOWM calculations

July 5, 2021

Investors | Great Expectations

With stocks trading at historically high valuations on historically high profit margins, investors would be wise to temper their expectations for returns over the next decade; however, human nature biases us to project the recent robust returns indefinitely into the future. Surveys suggest investors and even finance professionals are expecting long-run stock returns that have a low probability of being realized. Stocks may still offer good relative returns in a low interest rate world, but the danger of overly great expectations is twofold: one, that investors will fail to save appropriately to achieve their financial goals; and two, that when returns disappoint, investors will bail on stocks at the worst time. While equity investors must always be optimistic about the future, they still would be well served not to estimate future returns with rose-tinted glasses. 

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AOWM calculations

June 28, 2021

Consumers | Continue spending Uncle Sam's cash

While total personal consumption declined slightly in May after adjusting for inflation, consumers still continued to do their part to lift the economy. The consumption of goods continues to run well above its trend level before the pandemic, and the consumption of services is recovering as the economy reopens more fully for business. Total consumption has exceeded its pre-Covid level even while households have been paying down their credit cards thanks to the massive government stimulus. In the coming months, the consumption of goods is likely to retrench, but the decline is expected to be more than offset by a surge in spending on services as folks re-engage life outside of their houses. How much consumer spending will boost the economy after this year will depend in part on when individuals feel comfortable increasing their consumer debt again. Frugality was forced on many households after the last recession, but there are ample reasons why it would be wise and rational for personal savings to remain higher than expected this go around as well. However, fiscal prudence by consumers need not doom the economy if their savings is funneled into productive investments that would help the economy grow now and in the future. 

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Source:, U.S. Census Bureau,, Federal Reserve,, AOWM calculations

June 21, 2021

Monetary Policy | Between a rock and a hard place

A week after a higher-than-expected inflation report, the Federal Reserve started talking about talking about raising its target overnight interest rate that is currently pegged close to zero. A majority of Fed officials indicated they expect the tightening of monetary policy is still a couple of years away, but that was a year earlier than had previously been intimated. Not surprisingly, short-term interest rates headed higher on the news with the 2-year Treasury yield rising from 0.16% to 0.26%; less expected, long-term interests fell even more with the 30-year Treasury yield falling from 2.20% to 2.01%. It would be reasonable to assume that the Fed increasing its forecast for economic growth and inflation and moving up the likely date that it will stop gobbling up Treasury securities and start increasing short-term rates might all have pushed long-term rates up, not down. That may yet happen, but the initial response by the bond market implies a belief by some investors that the booming US economy (or perhaps just the financial markets) will quickly falter without endless massive monetary stimulus that at the same time is also recognized as being unstainable in itself. In sympathetic fashion, the stock market sold off some at the end of the week as well; although, growth stocks showed relative strength likely thanks to the entrenched narrative that low long-term interest rates justify their high valuations.  

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Source: US Treasury, YCharts

June 14, 2021

Inflation | Prices soar; bond market snores

Inflation continued to pick up speed in May with the Consumer Price Index up 5% compared to last year. Many of the elements driving inflation higher suggest that inflation will abate in the fall and winter as the dislocations associated with the Covid-19 pandemic dissipate. That is certainly the belief of the policymakers at the Federal Reserve and it appears bond investors as well as the 10-year Treasury yield actually declined this week to 1.45% - its lowest level since early March. The spread between current inflation and the 10-year Treasury yield hasn’t been this wide since the truly high inflation days of the 1970s and early 1980s when waves of “transitory” inflation spiraled ever higher. That is the real inflationary danger on the horizon, not that inflation won’t decline later this year – which it likely will – but that the trend over the next decade will be for each transitory spurt of inflation and the subsequent ebb to be a bit higher than the last.     

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Labor Market | Who wants a summer job?

June 7, 2021

The labor market continued to show signs of improving in May with 559,000 new jobs added and the unemployment rate falling to 5.8%. Nevertheless, the number of individuals employed is still more than 7 million below the level before the pandemic. The recovery in employment has not been as quick as expected the past couple of months even while many businesses have struggled to find workers. Extended supplemental unemployment benefits, difficulties with childcare during the pandemic, and lingering concerns about the Covid-19 virus are likely culprits for the labor force participation rate lingering around 61.6%, down from its January 2020 level of 63.4%. One group that has benefited from the Covid job market is teenagers who are less likely to face any of the disincentives or hurdles to joining the labor force. The unemployment rate for individuals 16 to 19 years old fell to 9.6% in May, which is its lowest level since 1953. This age group is also the only group to see its participation rate rise above its pre-Covid level. As with many of the bottlenecks in the economy that have been starting to generate inflationary pressures, the general assumption is that the labor shortages being experienced by many companies will subside in the coming months as supplemental unemployment benefits expire and life returns to normal. However, if the events of the past year permanently decreased the number of individuals in the workforce for one reason or another (e.g., early retirements), Covid-19 may end up accelerating the demographic trends that were already likely to give workers more ability to push for higher wages in the coming decade. If that occurs, the blip in inflation may not be as transitory as hoped. 

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May 31, 2021

Growth vs Value | Slow and steady wins the race?

Value stocks have continued to outperform growth in recent months. The dramatic outperformance of growth stocks through last summer that was only previously match by the tech bubble of the late 1990s has waned, and value stocks have actually returned more than growth stocks over the past twelve months. The relative performance between the two investment styles has tracked similarly to the growth stock peak in 2000, as seen in the first chart below. The big difference this time, as shown in the second chart, is that, unlike in 2000 when value stocks basically held steady while growth stocks saw their high-flying valuations fall back to earth, this time around value stocks have been playing steady catch up with growth stocks that in general have also continued to motor ever higher, just at a slower pace. As a result, valuations for growth stocks remain historically high both on an absolute basis and relative to value stocks. While value stocks are themselves trading at historically high valuations, their relative reasonableness may enable them to continue to regain their historical status as the underestimated tortoise that beats the flashy hare in the long run.  

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Source: YCharts, AOWM calculations

May 24, 2021

Cryptos | Just taking a breather?

Cryptocurrencies are down over 40% in the past two weeks. In January, the total market value of all cryptocurrencies hit $1 trillion for the first time and then quickly soared to nearly $2.6 trillion before falling back to around $1.5 trillion. The spark for the latest round of selling pressure appears to have been increased concerns about potential restrictive regulatory actions especially in China. Cryptocurrencies have always been highly volatile, but the current sell-off is already on par with some of the bigger drawdowns experienced over the past couple of years. Of course, Bitcoin and Ethereum, the largest cryptocurrencies representing about 47% and 18% respectively of the total market at the moment, lost over 80% of their value after the initial big burst of crypto enthusiasm back in 2017 before climbing to significantly higher heights. Cryptocurrencies have been gaining institutional credibility over the past year, but their future as an asset class or reliable store of value remains anyone’s guess. Since they are still a small piece of the total global financial markets, the current turmoil in cryptocurrencies need not spell trouble for other markets unless it causes investors to pause and wonder what over asset prices may have run up too far too quickly over the past year.

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Inflation | A transitory blip or a troubling trend?

May 17, 2021

Consumer prices spiked higher than expected in April, up 4.2% compared to the same month last year. Core prices excluding volatile food and energy prices were up 3.0%, the most in nearly three decades. The increase in inflation was driven by the cost of goods with the prices for used cars and trucks leading the charge up 10% in just the past month and up 21% over the past year. Thanks in no small part to globalization, the prices of goods have served as a deflationary force over the past couple of decades, but the confluence of a pandemic, record government stimulus and strained supply chains have removed that anchor for overall inflation at least for the moment. Policymakers at the Federal Reserve still expect inflation to decline back towards their 2% target in the latter half of the year as the transitory effects related to the pandemic dissipate. However, inflation expectations both in the short term and the long term as measured by the market for Treasury Inflation-Protected Securities (TIPS) continue to trend higher -- expectations that have the potential to become a self-fulling prophecy if faith in the Fed’s commitment to price stability begins to waiver. 

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Source: YCharts,, FINRA, AOWM calculations

May 10, 2021

Margin Debt | In the eye of the beholder...

A tell-tale sign of excessive exuberance in the financial markets has historically been investors using increasing amounts of debt to leverage their bets on a booming market. And there are signs that may be occurring in the stock market these days. Margin debt – that is the amount of money investors have borrowed to buy stocks – has increased 50% from before the pandemic to hit an all-time high level in concert with the stock market. Margin debt has been running at historically high levels for several years, but the rapid increase over the past year has understandably raised concerns. To alleviate those concerns, bullish investors highlight that when adjusted for the current size of the stock market, margin debt is actually down from where it has been in recent years. They also point out that in 2000 and 2007 margin debt had continued to increase rapidly even as the stock market’s gains slowed, while so far this time around both have been galloping forward in unison suggesting the increase in margin is not excessive or imprudent. Margin debt may not be an unambiguous warning signal at the moment, but frothy valuations coupled with record leverage has the potential to ultimately be the recipe for some rather breathtaking market movements.

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Source: YCharts,, FINRA, AOWM calculations

May 3, 2021

Economic Growth | Things and more things

Initial estimates released last week by the Bureau of Economic Analysis indicate that the economy expanded at an annual rate of 6.4% in the first quarter, up from 4.3% in the previous quarter. The economy in aggregate has already quickly made up much of the ground lost during the pandemic, and economic growth is expected to continue to accelerate in the current quarter. It was an unusual recession, and it has been an unusual recovery led by a dramatic increase in the consumption of goods that has stressed supply chains and pushed the prices of many goods higher. Inflation-adjusted goods consumption is up nearly 13% from its pre-Covid level, while the inflation-adjusted consumption of services, which is typically more stable, was still down about 6% in the first quarter. The recovery in the service sector is expected to pick up steam as the economy continues to reopen. Whether the pandemic has led to a permanent reduction in the demand for parts of the service economy remains an open question. Similarly unknown is whether the splurge for goods has merely pulled demand forward from the future or constitutes a structural s