Summary of the First Quarter of 2024: Economy and Markets

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Note: Economics is the study of how society uses resources for the development, production, procurement, distribution, and consumption of tangible products (such as iPhones) and intangible services (such as Apple Music).

John Maynard Keynes

The most important name in today’s worldwide economic system is John Maynard Keynes. Keynes is the one who developed economics as we know it. He wrote “The General Theory of Employment Interest and Money” in 1936 in the UK. Similar to Copernicus seeking to understand the movement of the Sun, planets, and stars, Keynes wanted to understand unemployment because The Great Depression was such a problem in the 1930s, and the existing understanding of economics did not explain what was happening (or what could be done about it) very well enough for governments to partake in righting the economic ship during the storm.

Note: Come back later for more articles about other economists across the ages, such as The Austrian School of economics (also very significant).

Keynes wanted to understand

He wanted to know what existing economics at the time could not explain about The Great Depression – but he did so with an emphasis on unemployment and by taking snapshots of the economy, as if it was static. So what he developed is useful, but lacks usefulness on growth or inflation issues.

More specifically, Keynes wanted to understand how employment and prices affect each other; how government affected employment and prices; and more than anything, he wanted to know how to “control” (or at least influence economies/money), such as how to drive employment up. 

More or less, Keynes used existing approaches that microeconomists used when evaluating businesses, plus some new approaches to expand economic knowledge into something bigger: macroeconomics

Simply put, Keynes took what was small or local and made it big – big enough for governments to use. Naturally, macroeconomics includes microeconomics since the economy of each piece would be part of the economy of the whole.

Milton Friedman came later

He pointed out that Keynesian Economics could not explain the relationship between price levels and economic output. He called this “the missing equation.” Friedman melded classical economics understandings of Adam Smith (and others) with Keynesian Economics. Friedman concluded that the classic theories worked in the long-run, but Keynesian Economics works in short intervals.

Local isn’t universal

“What goes up must come down” is right locally (in your backyard), but on a bigger scale it is wrong . The meteorites from space that have landed on Earth did not come back down to their origin when they “went up.” They never came back down.

Building on Friedman’s work

An economist from New Zealand began working with 100 years of UK data on the relationship between unemployment and inflation. The economist’s name was AW Phillips, and his work became known as The Phillips Curve. This curve was adopted by economists worldwide and is now a major contributor to economics. It shows that as unemployment rises, wages increase, and when unemployment falls, wages decrease.

Friedman and fellow economist Edmund Phelps felt that manipulating monetary policy (such as managing inflation) was not the right way to manage unemployment and that unemployment should be left “natural” and unaltered by central banks, the banks of governments.

Then in the 1970s and 1980s the US experienced both high unemployment and high inflation. Phelps and Friedman then clarified the understanding to show that The Phillips Curve was true if inflation was unanticipated. If it was anticipated, then the conditions were different. This ushered in a whole new element to economics: Expectations are part of the equation in a significant way.

Nowadays, we see expectations set by world governments very deliberately so they can use it as another way to manage economic systems. Something like “a period of somewhat-higher inflation can be expected in the next two quarters,” is common to hear from a Fed Chairman (Federal Reserve Chairman) since this economic understanding came to be.

Of note, since the late 80s/early 90s, economic growth theory is what has dominated economist efforts (since inflation, employment, and prices were already being managed with Keynesian and Friedman understanding), and GDP expansion continued as a top priority.

Back to The Great Depression

Let’s not forget how the interest and need for macroeconomics got started: The Great Depression. The Great Depression was not just in the US. It was global. It started in the US in 1929 though, and by 1930 it had reached the UK. Half of Britain’s trade (sales around the world) disappeared, and in some areas unemployment reached 70%! No wonder efforts were made to understand economics better.

The US had an awful time through The Great Depression too of course, as did countless other countries. For the US, The Great Depression did not end until we entered WWII in 1941. The statistics and the stories are really sad, and to this day people and governments study, fear, and work to avoid the conditions that led to The Great Depression.

Note: The Industrial Revolution followed by The Great Depression followed by WWII followed by The Cold War firmly cemented Keynesian Economics into world governments for a variety of reasons.

Boom and bust

Economic booms (a hot economy) and busts (a cold economy) are now known as business cycles. You may think that you always want your economy hot, but that is actually not true. Booms can lead to bubbles and bubbles pop and you get busts. Understanding business cycles is just one piece of the economy. Another piece of the economy is understanding growth.

Note: As investors, if we understand where things have been we can better understand where things are going — and that’s a major strategic advantage.

Let’s talk about GDP

When you add up all of the goods (such as iPhones) and services (such as Apple Music) you get GDP (Gross Domestic Product). GDP is measured as Total County Production measured in dollars (if you’re the US). GDP has been growing for 200 years for capitalist countries.

Note: there is no purely capitalist country, but each country has rules and people that are more capitalistic than others.

GDP across decades has a very obvious upward trend

But GDP throughout the weeks, months, quarters, and a year can (and do) have significant ups and downs. It is within these ups and downs that successful investors thrive and profit.

Let’s talk about inflation too

The last concept to introduce in this article is inflation. For most people the word has nothing but negative connotations. But in the world of Keynesian economics inflation is a given, and it's managed with government actions. 

Simply put: inflation is a rise in prices. 

Often people think inflation is simply a devaluing of currency by printing too much currency, but consider this: if currency was devalued then prices would go up, no? They would. So devaluing currency is a type/cause of inflation, but there are other types/causes too.

It’s right to monitor and take appropriate action against inflation

When prices go up enormous amounts this is called hyperinflation. For instance, between WWI and WWII Germany had inflation of 230% per month at times! That means every day prices went up 4% on average. So if milk cost $1 on Monday, it cost $1.04 on Tuesday, $1.08 on Wednesday, $1.12 on Thursday, and $1.17 on Friday. By the end of the month milk would cost $2.30. By the end of the year milk would cost $8.20. And a $25,000 car would cost $180,020.60 if those hyperinflation rates happened to us today. No wonder it scares people.

Historically, the US has managed inflation well

In the last 100 years, our worst experience had been in the 1970s when inflation reached 7% from 1973-1975. However, in 2022 inflation met or exceeded 7.5%. 

The US government used many tools and decision-makers to keep it down and return to the 3-4% average we have had since 1946 (on the heels of WWII). Before WWII, the US averaged about 1.7% inflation.

Around the world though, countries have been far more adversely affected by inflation. As mentioned, Germany experienced 230% inflation per year. Israel saw 400% inflation in 1985; Argentina has seen 700% inflation; Bolivia saw 12,500% in 1984. There are many more examples, but Keynesian economics does indeed have the understanding, tools, and systems that manage inflation well.

Inflation is like cancer to economies — and it must be detected early and expertly managed. When inflation is detected, it gets everyone’s attention!

So that’s the introduction to economics. There is a lot more to follow, but we hope you liked what you read, and we hope you have learned something too. Is this enough understanding for you to go start investing in stocks with great success? No. But we can build to that.

The key concepts in this article to remember are:

• John Maynard Keynes “invented” macroeconomics for governments
• Government using macroeconomics to influence and manage a country’s economy
• Milton Friedman identified the relationship between prices and economic output
• AW Phillips identified the relationship between Unemployment and inflation, known as The Phillips Curve
• Phelps-Friedman established expectations as a key component of an economy
• Business cycles, GDP, and inflation as the major factors government considers
• Since the late 80s/90s, economic growth has become the priority for economists

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Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

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Good morning, Heroes!

Here’s your Morning Market Preview for September 12th, 2024
Read, or listen relaxingly for a few minutes – whichever you prefer!

Key Economic Reports

• Initial Jobless Claims: The market consensus forecasts Initial Jobless Claims at 229,000. This is slightly up from the previous week's actual figure of 227,000, suggesting a modest increase in new unemployment claims.
  
  
• Producer Price Index (PPI): This indicator measures wholesale inflation and is closely watched by investors and economists for signs of upstream price pressures on the companies that produce for consumers further down the line.
  
  
• Core PPI: Analysts and market observers expect a monthly increase of 0.2% for the Core PPI, which excludes volatile items such as food and energy. This expectation reflects a continuation of moderate inflation pressures from the production side. 

Key Events & Earnings Reports Today

Adobe

• Expectations: The consensus expects Adobe to report revenue around $5.37 billion, showcasing a 10% year-over-year growth, driven by strong performance across its product lines, particularly in Creative Cloud and Document Cloud due to AI integration.
  
  

• Importance: The report will be crucial for investor sentiment, especially in the context of Adobe's strategic moves towards AI. Positive results could reinforce confidence in Adobe's strategic direction, potentially leading to stock price increases.
  
  

The Fed

• The Fed's next meeting is scheduled for the 17th and 18th and expectations are that the Fed will cut rates. The market expects a quarter percent cut, but some think a half percent cut and even no cut are possible. Ultimately, the Fed decides and the market reacts, so don’t guess with any significant amount of money. 

Stocks

Year-to-Date Performance:

• Up Most: Utilities & Information Technology continue to have the best 2024 at 20.85% and 20.74%, respectively.
  
  
• Down Most: Materials has now just barely replaced Consumer Discretionary as the second worst sector in 2024, and Energy continues its last place position, up 5.75% and 1.40%, respectively. Of note, the worst sector is still up this year.

5 Day Moving Average: This is the percent of Large Cap stocks above their 5 day average

• Up Most: Real Estate is at 90% the last 5 days, and Tech is at 84%.
  
  

• Down Most: Energy is down to 5% the last 5 days with Consumer Staples now at just 11%, marking a significant downward shift the last 5 days.

Crypto

• Bitcoin: Up to about $57,969 at the open, and is up a whopping 36.85% this year.
  
  
• Ethereum: Also up, at about $2,381 at the open, and is up a modest 1.67% this year.
  
  
• Top Gainers Recently: Bitcoin Cash and Cardano had a good 24 hours, up 3.7% and 2.52% respectively.

Bonds

• 2-Year Treasury Yield: Open at 3.65%, continuing its yield decline this year.
  
  
• 10-Year Treasury Yield: Open at 3.658%, also continuing its yield decline this year.

Gold

• Open Price: $2,516 per ounce, up again, now up a whopping 21.8% this year, driven by safe-haven buying amid economic uncertainties.

Real Estate

• 30-Year Fixed Mortgage Rate: Down again, now to 6.11%, the rate has dropped about 8.4% this year.
  
  
• Trends: Real estate is local, and each market is seeing different specific conditions. Some report high-end home sales staying strong while others report a weakening there and an improvement in affordable housing sales.

Geopolitical Aspects

• The sentiment around US leadership, including how it handles international relations, trade wars, and domestic policies like inflation control, impacts investor confidence. Discussions around strategic petroleum reserves, border issues, and political stability can lead to market reactions.

Worldwide Market News

• Global markets are reacting to concerns about China’s slowing economic growth and energy price fluctuations, while ongoing conflicts and trade disputes add further uncertainty.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.

P.S. 

Some Simple Explanations of Key Concepts to Level Up Your Financial Education

PPI: Measures the average change in selling prices received by producers, helping gauge future consumer price changes.

Fed Meeting: The Federal Reserve adjusts interest rates to control inflation and stimulate or cool down the economy.

Treasury Yields: Higher yields indicate that the government is paying more to borrow money, often a sign that inflation or interest rates are rising.

Equities: Stocks represent ownership in a company. Sectors like tech can be volatile but often offer high growth potential, while sectors like utilities are more stable but less growth-oriented.

Cryptocurrencies: Digital currencies like Bitcoin are highly speculative but have delivered strong gains this year.

Gold: Seen as a safe-haven asset, it tends to rise during times of economic uncertainty.

Real Estate: Changing mortgage rates make buying homes more or less expensive, which can cool off or heat up the housing market.

Understanding these elements helps in navigating the financial markets, where each piece of information can be a puzzle piece in predicting market movements or making informed investment decisions.

You’re the Hero.
    We’re the Guide.

‍Understanding how to build and balance your investment portfolio is key to long-term financial success. The "Equity Rate" is a crucial metric in this equation, especially for anyone looking to optimize their investment strategy. Defined as the ratio of your equity investments to your total personal cash and investments, the Equity Rate helps gauge the weight of equities within your broader financial portfolio. Arena Investor Advisors, simplify the concept of Equity Rate, explaining its significance and how it can be managed effectively.

What is Equity Rate?

Equity Rate measures the proportion of your investment portfolio that is invested in equities (stocks and ETFs) relative to your total financial assets, including cash and other investments. This ratio provides a snapshot of how exposed you are to the stock market's potential risks and rewards compared to more conservative investments like cash or bonds.

Importance of Understanding Your Equity Rate

1. Risk Management: Your Equity Rate is a direct indicator of your exposure to the volatility of the stock market. A higher Equity Rate generally means higher potential returns, but also higher risk, especially in short-term market fluctuations.

2. Investment Diversification: Understanding this rate helps in assessing whether you are overly concentrated in equities or if you need to increase your equity holdings to achieve potentially higher growth.

3. Financial Planning Alignment: Your Equity Rate should align with your financial goals, risk tolerance, and investment time horizon. It guides strategic adjustments to ensure your portfolio supports your overall financial objectives, such as buying a home, funding education, retirement, and so on.

How to Calculate Your Equity Rate

Calculate your Equity Rate by dividing the total value of your equity investments by the sum of all your personal cash and investments. For example, if you have $50,000 in equity investments and a total of $100,000 in personal cash and investments, your Equity Rate is 50%. This tells you that half of your total financial assets are invested in equities.

How an Arena Investor Advisor Can Help

1. Personalized Financial Assessment: An Arena Investor Advisor will start with a thorough review of your financial situation, including calculating your Equity Rate to understand your current investment exposure.

2. Customized Investment Strategies: Based on your Equity Rate and personal financial goals, your Arena Investor Advisor can develop strategies to optimize your investment portfolio. This might involve adjusting your equity investments to either increase your potential for growth or decrease your risk exposure.

3. Ongoing Portfolio Management: Investment needs change over time with shifts in market conditions, financial goals, and personal circumstances. Regularly reviewing and adjusting your Equity Rate with your Arena Investor Advisor ensures your investment strategy remains appropriate.

4. Risk Tolerance Alignment: Your advisor will help you understand your risk tolerance and how it relates to your Equity Rate. They can guide you in making informed decisions that balance potential returns with acceptable levels of risk.

5. Educational Support: Arena Investor provides continuous education on investment principles, helping you understand complex concepts like Equity Rate and their impact on your financial well-being. This education empowers you to make more informed financial decisions.

All In All

Your Equity Rate is more than just a number—it’s a reflection of your investment philosophy, risk tolerance, and financial health. Understanding and managing this rate is crucial for maintaining a balanced and effective investment portfolio. Ensure that your Equity Rate aligns with your financial goals, providing peace of mind and a solid foundation for achieving your long-term objectives. This strategic approach to personal finance not only secures your current financial needs but also paves the way for future prosperity.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.