Edition #56 - 7.23.2021
Initial Unemployment Claims, Inflation Components, Historical Equity Drawdowns, JPMorgan + Bitcoin
Economy:
With weekly unemployment data being released on Thursdays, it’s almost become tradition at this point to include the headline number in my Friday newsletters. At the beginning of July, I shared my thoughts on the initial unemployment claims & concluded with the following statement:
I suspect this figure will continue to decline steadily, with more substantial declines beginning in September & October 2021. There will continue to be unexpected spikes in claims, but the trend will continue to be to the downside.
At the time, initial claims had reached a post-pandemic low of 364,000 (which has since been revised to 368,000). Since that newsletter, the subsequent two unemployment reports have reflected a stabilization in the data with an average of 377,000. As I said in that newsletter, I warned that we should expect to see somewhat “random” spikes in claims, where the data is significantly worse than expectations.
That was exactly the case with the most recent data, for the week ending July 17, in which weekly jobless claims totaled 419,000 vs. consensus estimates of 350,000. Additionally, the prior week’s data of 360,000 (a pandemic low) was revised to 368,000 (tied pandemic low). Essentially, while the newest data missed estimates & shocked economists & analysts, we should expect the unexpected. Here’s an update on the trajectory of unemployment claims so far YTD:
One final thought on economic data, related to an entirely different topic. In regards to the consumer price index (CPI) data that was released for June 2021, I saw a fantastic post on Twitter that showed the variety of components that are most responsible for the +5.4% YoY increase in CPI inflation. Here is that post, courtesy of @byHeatherLong:
Stock Market:
With the resilience we’ve seen in the market this week, it’s beneficial to remind ourselves of the “goldilocks” scenario we’re currently in. The equity market has been stellar so far in 2021, particularly for those who have a buy & hold approach with broad-market exposure. As is typically the case, the market has individual losers & winners which makes stock-picking such an intriguing activity; however, this year has been a great reminder of the power of indexing.
With the S&P 500 up slightly more than +16% so far YTD, I want to highlight the fact that we have yet to experience a drawdown of -5% or worse so far this year in the index. We’ve had a degree of relative volatility, but it’s extremely muted compared to historical data. This brings me to a great chart from LPL research showing the number of times the S&P 500 experiences a -5% drawdown in a calendar year:
While there are certainly years where the index doesn’t experience a -5% drawdown, they are certainly rare. In fact, going back to 1996, it’s only happened one time. That’s a 4% chance over the last 25 years. Going back to 1950, it’s happened a total of 6 times or an occurrence rate of roughly 8.5%. Essentially, keep your expectations relatively low that we’re able to accomplish this feat in 2021. That does not mean that I’m saying the market is going to crash in 2021. Far from it in fact, as I remain extremely bullish & have a positive outlook on the equity market. I’m simply trying to set expectations, based on historical data, which shows we should expect to see a drawdown of at least -5% at some point in the year.
Cryptocurrency:
Over the course of this past week, there has been some extremely significant news related to Bitcoin & cryptocurrency in terms of adoption & milestones. Here are the most important of those achievements:
On Thursday, another major announcement was made by the largest bank in the United States. JPMorgan will now allow its financial advisors the ability to buy their wealth management clients cryptocurrency funds. While Morgan Stanley made an announcement in April that it was allowing their ultra-high net worth clients to buy external crypto funds, this access was limited to private-banking investors with at least $2M. This move by JPMorgan is much more broad-based for the clientele in comparison to Morgan Stanley, which will certainly put pressure on the other major banks to compete on these grounds.
This is especially surprising as a 180 degree stance considering that JPMorgan CEO, Jamie Dimon, had announced in 2018 that the Bank would fire traders involved in cryptocurrency transactions, as cited by this Seattle Times article. The beautiful thing about capitalism is that suppliers/producers will have to provide a service if there is sufficient demand. This is also an important vindication for Bitcoin adoption, as well as for Ethereum, which will both be available for JPMorgan’s financial advisor clients. Adapt or die is the name of the game.
Talk soon,
Caleb Franzen