Message from Jon
This morning’s call with Tyler confirmed our previous discussions about the inflation trade earlier in January. We are seeing rates on bonds increasing in response to rising concerns about inflation coming our way. This trend will benefit some sectors and markets around the world while punishing others. The key will be to know which and when so that as an investor, you can move successfully and tilt portfolios accordingly.
There is another school of thought unfolding as well, and that is how rates are rising due to strengthening earnings and rebounding economy—or rebounding economy and strengthening earnings. At present though, our thoughts and suspicions lie with the former.
If inflation turns out to be the winning bet here, we will likely see it act as a headwind for growth and income alike, making the passive trade all the more challenging, I think.
Till we speak again, enjoy what is sure to be a wet week(end)!
General Market Commentary
Rising bond yields dampened investor enthusiasm for high-multiple growth companies last week, sending market averages mostly lower in a holiday-shortened week of trading.
The Dow Jones Industrial Average gained 0.11% for the week. But the Standard & Poor’s 500 fell 0.71% and the Nasdaq Composite index slid 1.57%. The MSCI EAFE index, which tracks developed overseas stock markets, declined 0.26%.1,2,3
The 10-year Treasury Note yield hit its highest level in a year last week on worries of a pick-up in inflation, while the 30-year Treasury Bond yield ticked over 2.0%. Rising yields weighed on the high-valuation growth stocks, most specifically the big tech names, in addition to dragging down interest rate sensitive sectors, like utilities and real estate investment trusts (REITs).4
Economic data painted a mixed picture of the economy. Jobless claims reflected a still-struggling labor market while a strong retail sales number and an above-consensus PPI (Producer Price Index) reflected strong consumer spending and building inflationary pressures.5,6,7
Stocks were flat as the week came to a close, as traders wrestled with the crosscurrents of positive economic data and a further rise in yields.
After a long period of low inflation, concerns are growing that higher consumer prices may return as a result of an accommodative Federal Reserve monetary policy and fiscal spending in response to the pandemic. Tensions heightened last week with the release of January’s PPI report, which saw a jump of 1.7%, the biggest monthly increase since 2009.8
This Week: Key Economic Data
Monday: Index of Leading Economic Indicators.
This Week: Companies Reporting Earnings
Monday: Palo Alto Networks (PANW).
“The fire is winter's fruit.”
– Arabian Proverb
Do You Know the Difference Between Taxable and Nontaxable Income?
All income you receive is taxable unless the rules explicitly state that it isn’t. According to the IRS, taxable income includes earned income like wages as well as any income earned by bartering or the exchange of property or services. Rental income is taxable as are other forms of unearned income like interest and dividends or Social Security.
Some income is not taxable unless certain conditions are met. For example, life insurance proceeds are usually not taxable to the beneficiary unless you redeem a life insurance policy for cash. Any amount you receive above the cost of the policy is taxable. State and local income tax refunds may be taxable and should be reported on your federal taxes.
There are also some forms of income that are usually not taxable, like:
* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
**Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
Tip adapted from IRS.gov9
Choose to Make Your Plate “MyPlate”
Ah, the Food Pyramid. It had a lot of flaws, but we’re not going to address them all right now. Its major weaknesses were that it generalized recommended servings per day and poorly defined portion sizes. So, in 2008, the U.S. Department of Agriculture implemented a user-friendly redesign: the pyramid was transformed into a plate.
The concept behind the MyPlate design was somehow both revolutionary and seemingly obvious. After all, we eat off a plate, not a pyramid. Portions are easier to see. Make half the plate fruits and vegetables; the other half, grains and protein. A serving of dairy (or non-dairy alternative) on the side. Easy, right?
Take advantage of this method the next time you sit down for a meal and see what adjustments you can make to make your plate even healthier.
Tip adapted from ChooseMyPlate.gov10
What appears once in a minute, twice in a moment, but never in a decade?
Last week’s riddle: Two fathers and two sons went truffle hunting. Each found a truffle yet they found only three in all. Why? Answer: The truffle-hunting party was made up three people - a man, his son and his grandson.
Happy snowy owl on Jones Beach, Long Island, New York.
Footnotes and Sources
2. The Wall Street Journal, February 19, 2021
3. The Wall Street Journal, February 19, 2021
4. CNBC, February 16, 2021
5. The Wall Street Journal, February 18, 2021
6. FoxBusiness.com, February 17, 2021
7. CNBC.com, February 17, 2021
8. CNBC, February 17, 2021
9. IRS.gov, September 19, 2020
10. ChooseMyPlate.gov, 2020
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