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October 15, 2021

As a kid, I loved the original Star Trek with William Shatner and Leonard Nimoy. This week, as Captain Kirk rocketed off into space on Blue Origin at the age of 90, I was wondering if this is the Final Frontier? I am wondering if the needs of the few are outweighing the needs of the many. Spock famously said, “logic clearly dictates that the needs of the many outweigh the needs of the few,” but Captain Kirk rebutted with, “or the one.” This back and forth set up a pivotal scene near the end of the film where Spock realized that to save the lives of his shipmates and the ship, he should sacrifice his own life; maybe all of the elites in Washington should sit down and watch the old reruns, or one of the many movies.

Well, it’s silly earnings season again and the stock market just keeps climbing that wall of worry, beginning to rebound after September’s pullback. Goldman Sachs Group just reported blowout earnings– why is it necessary to go through this exercise every 90 days? Speaking of climbing, what about inflation? I just got back from California where gas prices are $4.50 per gallon.  Where I live (in the land of the free), gas prices are up over 57% from a year ago, but California’s gas prices are still 42% higher than ours.

I’m back to traveling these days, and I just went through five airports and two hotels over the last week. I found out that some things have not changed since the pandemic, like Starbucks. Where do you pick up a “How to Order Starbucks Coffee” manual? The barista looked at me like I had three heads when I ordered a large coffee.  First of all, I don’t even like Starbucks Coffee, but as a novice they must see me coming a mile away. I can’t believe how many people I see standing in line waiting for an overpriced cup of burnt joe and an unfriendly atmosphere.  Anyway, see you soon, and as Spock would say, “Live Long and Prosper.”

 

Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

Initial Jobless Claims this week came in at 293,000, the lowest level since the pandemic began. However, the September jobs report found that employers only filled 194,000 jobs compared to the expected 500,000.

The three major indices all remain just above or below their 50-day moving average, indicating that the market is at a decision point: continue its current pullback, or begin its ascent.

The AAII Investor Sentiment Survey experienced a complete inverse of our last newsletter, with over 38% of investors feeling bullish about the next six months in the market and bearish sentiment falling to just below 32%.

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The Care of Dollar-Cost Averaging

Picture3 1018In this era of instant gratification, investors have become increasingly gambler-like in the pursuit of immediate rewards; this is why many people gambled on “meme” stocks like GameStop and AMC Entertainment earlier this year, and are now focusing on non-fungible tokens, or NFTs. Those who got lucky experienced a dramatic gain, while others may be too late to the “party.”

Unfortunately for many of these modern investors, there simply isn’t an immediate reward for saving for retirement. While a new TV or car can be enjoyed immediately, it can take decades for you to realize any semblance of a reward for your diligent 401(k) contributions. Maybe you don’t view retirement as a purchase in the same lens that you would view a new TV or car. Yet that is exactly what you do when you participate in a 401(k) plan; you are investing money today to use as retirement income tomorrow. Thanks to dollar-cost averaging, you can strive to retire on your own terms by simply investing a little bit all the time.

Dollar-cost averaging involves investing a constant dollar amount consistently for an extended period.  You may not realize it, but your 401(k) already employs the dollar-cost averaging strategy every pay period. Since the prices of the investments in your 401(k) fluctuate daily, your contributions buy a different number of shares each pay period based on the current price.  When shares are most expensive, you will buy fewer shares. In contrast, when the shares have decreased in price, you will buy more of them.

Dollar-cost averaging allows people to avoid the two most dangerous emotions of investing: fear and greed. When the stock market is down, investors become fearful and sell their investments while they are cheap. On the flip side, when the stock market is soaring, investors become greedy and rush in to purchase investments at or near their peak price. When you dollar-cost average, you avoid investing too much during market peaks and too little in market downturns, like the one we are currently experiencing.

We have included a table that helps to illustrate dollar-cost averaging in action. Note that in this example, even though the stock’s price was lower in December than it was in January, the account still had a positive return for the year due to dollar-cost averaging.

While investors can treat the market like Vegas and gamble away, investing a specific amount of money on a consistent basis into the stocks of quality companies or quality investment options in your 401(k) tends to be a more reliable strategy in the long run. The savings process can take decades, and a small deferral amount today may seem trivial, but dollar-cost averaging mixed with compound interest can help turn decades of small-but-consistent contributions into a significant nest egg at retirement.

 

Market indices

Year-to-date returns

Large  Cap indices

S&P 500:                                      18.16%

Dow Jones Industrial Average:    14.07%

Nasdaq-100:                     16.79%

Mid and Small Cap indices

S&P 400 (Mid Cap):                                 19.07%

S&P 600: (Small Cap):                             22.46%

Russell 2000:                                15.16%

International indices

MSCI EAFE Developed Index:         7.14%

MSCI Emerging Markets:               -1.90%

MSCI ACWI ex-US:                                   5.31%

Economic sector indicesPicture6

Basic Materials:                            15.60%

Communication Services:            22.38%

Consumer Discretionary:             13.38%

Consumer Staples:                          5.72%

Energy:                                         51.13%

Financials:                                     31.95%

Healthcare:                        12.10%

Industrials:                        14.95%

Real Estate:                       26.62%

Technology:                      18.56%

Utilities:                                          4.86%

 

Supply Chain Woes

No matter what store you enter today, you’re bound to find certain departments looking like a ghost town due to a lack of supply. Whether it be groceries or retail clothing, the U.S. is still in the middle of a supply chain crisis. Add onto this the recent stories about the cargo ships sitting outside the ports of Los Angeles and Long Beach, and it can feel difficult to understand why our supply chain is still experiencing significant strain while our country continues to reopen. Today, we want to discuss what a supply chain bottleneck entails, and how the current one can be addressed.

Like the word implies, a bottleneck in a supply chain refers to a congested point in the supply chain where inefficiencies (such as delays or costs) emerge. Today, a major supply chain bottleneck is the ports, specifically the previously mentioned ports. The ports of Los Angeles and Long Beach account for roughly 40% of all the shipping containers that enter the U.S. In short, these ports are integral to the flow of the nation’s supply chain. However, as you may have heard, many of these cargo ships carrying these containers are unable to unload in the ports, with as many as 64 ships anchored outside the port as of yesterday. What is causing this pile up, and why wasn’t this an issue prior to COVID-19? Well, part of the issue lies with trucking.

When it comes to unloading these cargo ships, trucks are an irreplaceable part of the process. The majority of goods from these cargo ships are shipped to their destinations by trucking, which means that a lack of trucking causes these cargo containers to pile up at the ports while waiting to be trucked. There are a few possible factors contributing to this lack of available truck drivers. First, there was the possibility that the higher federal unemployment benefits may have incentivized drivers to stay home; these benefits expired back in September. Another reason is that the DMV has had delays in getting aspiring drivers licensed for these types of vehicles, on top of the other requirements for licensing like a Department of Transportation physical and drug screening. Also, we are currently witnessing a standoff between workers and employers regarding pay in all industries, and trucking is no different.

The supply chain bottleneck has gotten to the point that the White House felt the need to intervene. The International Longshore and Warehouse Union, the international union representing dock workers, regulates the hours that dock workers were able to work; for example, the ports are typically closed on Sundays. However, the union recently agreed to allow 24/7 operations at the ports of Los Angeles and Long Beach, with Long Beach already a month into this operation.

While the extra hours are a move in the right direction, there are still other issues to address. For starters, Long Beach has found that there is still a notable shortage of available truck drivers, even after expanding to 24 hours. Also, truckers at the Long Beach port have claimed that they face restrictions on picking up containers, whether it be regulatory or due to a lack of loading equipment available. The extra hours will help the ports, but this supply chain has multiple wrinkles that it needs to iron out before we will be able to see the two things that we all want: full shelves in our stores, and cheaper price tags.

 

 

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Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor


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