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The Weekly Flyer: Tuesday, May 30th, 2023

The Markets

It’s a three-ring circus!

For centuries people have embraced the circus. Enjoying the sticky fluff of cotton candy while elephants, clowns and trapeze artists perform in the spotlights. Merriam Webster Dictionary defines the experience as wild, confusing, engrossing and entertaining.

Some aspects of that description apply to recent financial market activity. Last week, we saw:

  • Inflation flying above the Federal Reserve (Fed)’s target. Inflation re-entered the limelight last week. The Personal Consumption Expenditures (PCE) Index, one of the Fed’s favorite inflation gauges, showed that inflation rose in April along with consumer spending. That was unwelcome news for investors who hoped the Fed would leave the federal funds rate unchanged at its June meeting and, possibly, begin to lower rates later this year. By the end of last week, trading suggested there was a strong chance the Fed would raise rates in June, reported Jeff Cox of CNBC.

  • Artificial Intelligence (AI) drawing crowds. The thrill of AI has attracted investors and lifted stock markets higher this year. “Some stocks seen as AI winners – such as semiconductor makers and software developers – have more than doubled in value as traders bet on massive growth in the industry, even as fears mount over waves of job losses as everyday tasks become automated,” reported Graeme Wearden of The Guardian. Opinions vary about whether the rally is sustainable.

  • The debt ceiling barreling toward the center ring. Negotiators have reached a tentative agreement that would prevent a debt-ceiling default. Now, the agreement must be accepted by Congress, reported Steve Holland, Gram Slattery and Katharine Jackson of Reuters. No one is certain what will happen if Congress doesn’t accept the deal. Natalie Sherman of the BBC reported, “[A U.S. default] has never happened before so it is not entirely clear…The government would no longer be able to pay the salaries of federal and military employees, and Social Security [checks] – payments that millions of pensioners in the U.S. rely on – would stop. Companies and charities that count on government funds would be in peril.”

With so many issues vying for attention, what should investors do? The answer is more straightforward than you might imagine: focus on their financial goals. The weight of evidence accumulated over time supports the idea that holding a well-allocated and diversified portfolio built to meet your financial goals is a sound choice. While past performance is no guarantee of future results, financial markets have weathered a variety of calamitous events – including world wars – and come through.

Last week, the Standard & Poor’s 500 Index and Nasdaq Composite gained, while the Dow Jones Industrial Average lost ground, according to Barron’s. Yields on most maturities of U.S. Treasuries finished the week higher.

WHAT DO YOU KNOW ABOUT INNOVATION? Innovation is powerful. When new technologies take hold, they can revolutionize products, practices and industries, making older technologies obsolete. As a result, companies must adapt to remain competitive or disappear.

In economics, this concept is called creative destruction. It was introduced by economist Joseph Schumpeter in 1942. In his book, Capitalism, Socialism and Democracy, Schumpeter explained that the cycle of obsolescence and renewal is an essential aspect of capitalism that drives economic growth. See what you know about innovation and creative destruction by taking this brief quiz.

1. Investors are enthusiastic about an innovation that has helped drive stock market returns higher this year. What is it?

a. Vertical farming

b. Air taxis

c. Artificial intelligence

d. Quantum computing

2. One innovation resulting from the COVID-19 pandemic was remote work. How did this affect the economy?

a. Demand for office space fell

b. Employment among workers with disabilities rose

c. Hotel stays lengthened as people combined business and leisure

d. All of the above

3. The World Intellectual Property Organization’s Global Innovation Index identifies the most innovative economies in the world. In 2022, which country was the most innovative? (This country has led the pack for a dozen years.)

a. Switzerland

b. United States

c. Sweden

d. United Kingdom

4. Which of the following innovations resulted in creative destruction?

a. Streaming services

b. Assembly lines

c. E-commerce

d. All of the above

Weekly Focus – Think About It

“They say I'm old-fashioned, and live in the past, but sometimes I think progress progresses too fast!”

—Dr. Seuss, author

Answers: 1) c; 2) d; 3) a; 4) d

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