Economic Indicators

The most closely watch economic indicator of 2022 was easily inflation. Headline CPI started the year at 7% and reached its current cycle high of 9.1% in August. Since then, the price increases of goods, energy, and food have slowed considerably, bringing year over year CPI to 7.1% to end the year. Services inflation will be very closely watched in 2023 as it has yet to show any promising signs of slowing down significantly.

The Unemployment rate is a great barometer for the current health of the economy. In 2022, the unemployment rate fell from 4% to 3.7% and reached a low of 3.5% In July, equal to the lowest unemployment rate since 1969. A heavily cited metric showing the strength of this year’s labor market is the ratio of open jobs to job seekers, which closed the year at 1.7, meaning there are 1.7 open jobs for every one person looking for work. This is very unusual as job seekers have generally outnumbered job seekers over the past 20 years. This will be an important ratio to watch in 2023 as Federal Reserve Chairman, Jerome Powell, has cited the importance of bringing more balance to the job market in order to bring down inflation. In the Fed’s ideal scenario, employers slow hiring without increasing layoffs. This could slow the rapid wage growth we’ve seen this year, with the least amount of pain possible on individual households.

Equities

The S&P 500 was in a drawdown for the entire year, achieving its most recent all time high on January 3, 2022. The index reached a low of 24.5% in October and ending the year down 18.2%. The tech heavy NASDAQ 100 experienced steeper losses, ending the year 33.4% off its all-time high. Small cap stocks fared slightly better with the Russell 2000 ending the year 26.9% off its all-time high. The Energy sector achieved a historic year, gaining an astounding 64.2% in 2022. The Utilities sector was the only other sector to post positive returns in 2022, with just a 1.4% return.

The companies with the largest market caps that seemingly outperformed nearly every other asset class over the past 10 years had a very rough year. Some notable losers in 2022 were Tesla (-65%), Meta (-64%), Netflix (-51%), and Amazon (-50%). Apple, Microsoft, and Alphabet (Google’s parent company) are the only remaining companies that still have a market cap over a trillion dollars after 2022.

Fixed Income

The Federal Reserve hiked interest rates at the fastest pace since the 1980s, raising rates 17 times (counting each 25bps increase as a rate hike). The upper limit for the target federal funds rate sits at 4.5% after starting the year at just 0.25%. The Fed hiked rates 75bps in four of their seven meetings and ended the year less aggressively with a 50bps hike. Markets currently expect the Fed to slow down even more and hike only 25bps in February. In their last meeting, the Fed signaled that they expect the fed funds rate to get as high as 5.1% in 2023, however, markets are pricing in either fewer hikes or rate cuts at the end of the year. Forecasting the Fed’s moves over the next year is very difficult as it really depends on what inflation will do. If inflation comes in hotter than expected next year the Fed will most certainly consider raising rates much higher than 5%. If the unemployment rate rises significantly and inflation falls in a meaningful way, they may consider bringing the federal funds rate below its current level.

The rapid increase in interest rates this year had a huge effect on mortgage rates. The 30-year fixed mortgage rate started the year at just 3.2%, reached a high of 7.1% in August, and closed the year slightly lower at 6.4%. The increase in mortgage rates was likely a large factor the slowdown of the extremely hot housing market. After increasing nearly 22% earlier in the year, housing prices, measured by the Case-Schiller Composite 20 index, ended the year up a more modest 8.7%, still much faster than the 5.3% long term average.

Interest rates and bond prices have an inverse relationship; rapid increases in interest rates means rapid decreases in bond prices. The tightening of monetary conditions this year equates to a horrible year for bonds, which fell 13% in 2022 and remain 14.9% off their all-time high set nearly two and a half years ago. The silver lining of this bond drawdown is risk free assets now pay a much more attractive dividend. A two-year treasury rate now yields 4.36%, compared to just 0.74% at the beginning of the year.

Bond prices next year will depend on inflation and the economy. If inflation stays high the Fed will likely stay aggressive and bonds will suffer. If the U.S. enters a severe recession and the Fed is forced to cut rates, bonds will perform well. The Fed began 2022 believing it would only increase interest rates about four times, to an end-year rate of 0.9%. This shows how quickly things can change in a short amount of time, so the current market expectations of the Fed will be dependent on their ability to keep inflation heading in the right direction.

Commodities

Despite incredibly high uncertainty surrounding the supply of oil coming from Russia, the second largest oil exporter in the world, along with heavy sanctions and OPEC production cuts, the price of oil ended the year up just 2.8%. Crude Oil reached an annual high of $123.70 in March following Russian’s invasion of Ukraine but closed the year at just $79.28 a barrel. This directly correlates to the price of gas we pay at the pump. The average U.S. gas price per gallon got as high as $5.11 in June, higher than the previous all time high of $4.17 in 2008. Today, the national average is just $3.20 a gallon.

Wheat and natural gas showed very similar price movements to oil in 2022 as markets reacted very strongly to Russian’s invasion and then adjusted throughout the year to much more normal levels. The price of wheat reached a high of $12.94 a bushel in March, increasing 66% in just over two months. It fell to $7.92 to end the year. The World Food Price Index experienced similar declines, falling 15% from its 2022 high to end the year. European natural gas was the most affected by the Russia Ukraine war as Europe gets about a third of its gas from Russia.  The Price of European Natural Gas increased 341% from January to August 2022. It fell nearly 80% from its peak, but still remains four times higher than its 2020 year-end price.

Next year, the war in Ukraine will remain a very important catalyst to commodity prices. As of now, Russia has been able to find alternate buyers to get around sanctions, and Europe has been able to stock up on enough natural gas to likely get through the winter. Any developments in the war that disrupt supply and force sanctions to tighten will surely affect the price of the commodities listed above.

Interesting Articles

• Caitlin McCabe: For U.S. Stocks, 2022 Is a Year With Almost No Record Highs
• Ben Carlson: 2022 Was One of the Worst Years Ever For Markets

All data and figures in this article were collected from YCharts, Inc. on 01/03/2023 by Zach Hill of Blue Ridge Wealth Planners unless otherwise cited.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries

The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law.

The FTSE Developed Europe Index is an index of European stocks, part of the FTSE Global Equity Index Series. It is a subset of the FTSE Europe Index. The FTSE Eurobloc Index is a subset of it.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

The FAO Food Price Index (FFPI) is a measure of the monthly change in international prices of a basket of food commodities. It consists of the average of five commodity group price indices weighted by the average export shares of each of the groups over 2014-2016. The FFPI is calculated as the trade-weighted average of the prices of food commodities spanning the key agricultural markets for cereals, vegetable oils, sugar, meat and dairy products. While these commodities represent about 40 percent of gross agricultural food commodity trade (FAOSTAT), they are chosen for their high and strategic importance in global food security and trade.

Economic Data Last Week

U.S. CPI¹

On Tuesday, the Bureau of Labor Statistics reported CPI increasing 7.1% year over year in November. This was lower than the consensus estimate of 7.3%, and far lower than the current cycle high of 9.1% reported in June. Year over year inflation has not been lower than 7.1% since December of 2021. After stripping out volatile items, Core CPI also came in below expectations at 6%, its lowest level since July.

Food, energy, and shelter continue to experience the biggest price increases, increasing 10.6%, 13.1%, and 7.1% year over year in November, respectively. However, both food and energy price increases are below their current cycle highs set earlier in the year. Energy prices had increased nearly 42% in June, while Food price increases reached their high in August with an 11.3% increase. Shelter, on the other hand, set a new cycle high this past report. Shelter is an important component of CPI as it makes up about a third of the index.  However, several independent reports show rent and housing price increases beginning to slow. Zillow’s Observed Rent Index shows rents increasing 8.4% year over year in November, down from its high of 17% reported in February.² The Case-Shiller 20 Composite Index, which measures the value of residential real estate in 20 U.S. metropolitan areas, increased 10.5% in September, down from its high of 21.3% in April. The CPI component of shelter tends to work on a lag. So, the decreases we are seeing in housing prices and rent are likely not yet reflected in the still increasing shelter component of CPI. This is a strong argument for CPI to continue to show slowing price increases in future reports.

Looking at alternate measures of inflation, the Cleveland Fed’s Trimmed Mean CPI, which takes away the most extreme values of inflation, fell to 6.7%, down from its current cycle high of 7.3% in September.³ The Sticky-Price CPI shows how much prices have changed year over a year for products with prices that are generally very slow and difficult to update. A high Sticky-Price CPI can show that long term inflation expectations are rising.  Sticky-Price CPI was reported at 6.6% last week, higher than last month’s value of 6.5% and a new current cycle high.⁴

Both Germany and the UK reported slowing inflation from the previous month.  Germany’s prices increased 10% year over year, while the UK reported price increases of 10.7%.

Retail Sales⁵

U.S. Retail Sales fell 0.6% month over month in November, the largest decrease of the year.  This implies a slowdown in sales this holiday season, which is consistent with the slowdown in holiday retail hiring this year compared to previous years.

GDP Now is a statistical estimate of quarterly GDP provided by the Atlanta Federal Reserve.  Despite the low retail sales numbers, it still estimates fourth quarter GDP to grow by an annualized rate of 2.8%, which is slightly below the long-term average of 3.2%.⁶

Equities

The S&P 500 fell 2.1% last week; it is now 18.5% off its all-time high set at the beginning of the year. The index is down 5.5% in December but is still up 7.8% in the fourth quarter to date.

The Energy sector will most certainly end the year with the best returns as it is up 56.7% year to date. The Utilities sector has the next best returns of the year with just 0.6%. The more cyclical sectors experienced the steepest losses on the year, with the Communications and the Consumer Discretionary sectors both down over 30% year to date.

Fixed Income

The Federal Reserve met last Wednesday and agreed to raise the target Federal Funds rate by 50bps after raising by 75bps four meetings in a row, bringing the upper limit of the target Federal Funds rate to 4.5%. They also outlined their projections for interest rates over the next several years. Their estimated Federal Funds rate in 2023 is just above 5%. Their estimates for 2024 vary quite a bit, but the consensus estimate for the Federal Funds rate is just above 4%. These estimates can of course change at any time, but they currently imply that the Fed expects two 25bps rate hikes in 2023, and then rate cuts in 2024.⁷

In order for the Fed to consider cutting interest rates, they will likely need to see both inflation and economic activity slow considerably. This is also outlined in their Summary of Economic Projections. They estimate GDP to increase by just 0.5% in 2023, down considerably from their September estimate where they projected GDP to grow by 1.2% in 2023. They project inflation, measured by the PCE price index, to increase 3.1% in 2023 and then 2.5% in 2024. The PCE price index recently increased 6% year over year and the Federal Reserve’s long run target remains at 2%.

What to Watch for This Week

• The PCE price index will be released on Friday. Core PCE is expected to increase 4.7% year over year, down from the 5% reported in October.
• Canada and Japan will release inflation numbers next week.

Interesting Articles

• Matthew Zeitlin: Why does good news about the economy sound bad to the Fed?
• Barry Ritholtz: What the Fed Gets Wrong

References

1. Bureau of Labor Statistics: Consumer Price Index Summary
2. Zillow: Housing Data
3. Federal Reserve Bank of Cleveland: Median CPI
4. Federal Reserve Bank of Atlanta: Sticky-Price CPI
5. United States Census Bureau: Advanced Monthly Sales, November 2022
6. Federal Reserve Bank of Atlanta: GDP Now
7. Federal Reserve: Summary of Economic Projections

All data and figures in this article were collected from YCharts, Inc. on 12/19/2022 by Zach Hill of Blue Ridge Wealth Planners unless otherwise cited.

 This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

 Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries

 The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.

 Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

 Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

 The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law.

The FTSE Developed Europe Index is an index of European stocks, part of the FTSE Global Equity Index Series. It is a subset of the FTSE Europe Index. The FTSE Eurobloc Index is a subset of it.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content.

The PCE price index (PCEPI), also referred to as the PCE deflator, PCE price deflator, or the Implicit Price Deflator for Personal Consumption Expenditures (IPD for PCE) by the BEA, and as the Chain-type Price Index for Personal Consumption Expenditures (CTPIPCE) by the Federal Open Market Committee (FOMC), is a United States-wide indicator of the average increase in prices for all domestic personal consumption. It is benchmarked to a base of 2012 = 100. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from the largest component of the GDP in the BEA's National Income and Product Accounts, personal consumption expenditures.

The Zillow Observed Rent Index (ZORI) is a smoothed measure of the typical observed market rate rent across a given region. ZORI is a repeat-rent index that is weighted to the rental housing stock to ensure representativeness across the entire market, not just those homes currently listed for-rent. The index is dollar-denominated by computing the mean of listed rents that fall into the 40th to 60th percentile range for all homes and apartments in a given region, which is once again weighted to reflect the rental housing stock.

The S&P CoreLogic Case–Shiller Home Price Indices are repeat-sales house price indices for the United States. There are multiple Case–Shiller home price indices: A national home price index, a 20-city composite index, a 10-city composite index, and twenty individual metro area indices. These indices were first produced commercially by Case Shiller Weiss. They are now calculated and kept monthly by Standard & Poor's, with data calculated for January 1987 to present. The indices kept by Standard & Poor are normalized to a value of 100 in January 2000

Economic Data Last Week

U.S. Producer Price Index¹

The Producer Price index, which measures price changes at the wholesale level, increased slightly more than expected in November. The index increased 0.3%, compared to the consensus estimate of 0.2%. The year over year change in producer prices was reported at 7.4%, far below its current cycle high of 11.5% reported in March.

Despite the slightly higher than expected increase in producer prices last month, several other indicators have pointed to inflation finally slowing down. Some of the biggest factors contributing to inflation this past year have been food, energy, used cars and rent. Global food prices have fallen drastically since the initial invasion of Ukraine, measured by the World Food Price Index, which is down 15% since March.² Additionally, the price of wheat has fallen over 40% since its historic run up earlier in the year. After reaching a high of $124 a barrel in March, WTI Crude Oil has fallen over 40% to just above $70 a barrel today. Meanwhile, the average price paid for a gallon of gasoline in the U.S. is just $3.50 after achieving a record high $5.12 in June. After increasing considerably, used car prices are finally decreasing steadily. The Manheim Used Vehicle Value index is down over 14% year over year.³ Rent prices have been a little more stubborn, but still show signs of slowing as the cost of renting a home increased 7.8% in October, its slowest pace in over a year and well below its year to date high of 17.5% reported in March.⁴

Equities

The S&P 500 fell in four out of the five days last week, ending the week down 3.4%. The index is currently up 10.1% in the fourth quarter. If the S&P 500 ends up finishing the fourth quarter higher, it will be the first positive quarter since the fourth quarter of 2021.

When compared to very recent history, this has been an unusually long drawdown as it has been 236 trading days since the last all-time high on January 3. Since then, year over year inflation reached a 40-year high of 9.1% and the Federal Reserve increased interest rates from 0.25% to 4.0%, which is 16 rate hikes in a typical hiking cycle. At its lowest level of the year, the S&P 500 was down 24.5% and is currently 16.7% off its high. During the two most recent stock market drawdowns, in 2020 and in 2018, equity markets found new all-time highs in just 125 and 145 trading days respectively.  However, the number of trading days between all-time highs experienced this year is a fraction of what was experienced in the Dot Com Bubble and the Great Financial Crisis. There were 1,375 trading days between all-time highs during the bear market following the Great Recession in 2007, and there were 1,802 trading days between all-time highs following the bursting of the Dot Com Bubble in 2000.

The peaks and troughs experienced during this bear market have closely tracked inflation expectations and therefore have been tied to expectations surrounding the Federal Reserve’s interest rate increases. The end of the current drawdown, absent a major geopolitical shock, likely relies on getting inflation under control and slowing the pace of rate hikes or stopping them all together. Therefore, the next several CPI reports, including the upcoming report on December 13 will be very important for equity returns.

Fixed Income

Interest rates remained relatively stable ahead of the Federal Reserve’s meeting next week with neither the short nor long end of the curve changing too much. However, interest rates remain well below their current cycle highs. The ten-year Treasury rate is currently trading at 3.57%, well below its level of 4.23% in late October. The two-year Treasury rate is currently trading at 4.33%, after trading as high as 4.73% at the beginning of November. This drop in yields has made for a great quarter to be in invested in bonds with the U.S. Aggregate Bond index gaining 3.85% in the fourth quarter to date. If the quarter were to end today, this would be the best quarter for bonds since 2011. Still, the U.S. Aggregate Bond Index is 13% off its all-time high set in August of 2020, with a record 27-month drawdown.

The Federal Reserve is still expected to hike just 50bps in their meeting this week. This will be the first 50bps rate increase since May following four 75bps hikes in a row. The Fed will also release an updated Summary of Economic Projections, outlining their estimates on interest rates and economic data for the next few years.

What to Watch for This Week

• U.S. CPI will be reported on Wednesday. Economists expect month over month inflation to fall to 0.3%, after being reported at 0.4% in both September and October. The year over year rate is expected to fall to 7.3%.
• The Federal Reserve meets on Thursday to determine the new target federal funds rate. They are expected to raise rates by 50bps, the smallest rate hike since May. This would bring the upper limit of the federal fund rate to 4.5%.
• The Bank of England and the European Central Bank will also meet this week to make interest rate decisions.
• U.S. Retail Sales will be reported on Thursday, the consensus estimate is for a month over month decrease of 0.1% after increasing 1.3% in October.
• The Euro Area, UK, and France all release their inflation data this week.

Interesting Articles

• Christopher Mims: Survival Lessons From Past Tech Downturns
• Jeff Sommer: After a Terrible Year for Bonds, the Outlook Is Better

References

1. Bureau of Labor Statistics: Producer Price Index News Release Summary
2. Trading Economics: World Food Price Index
3. Manheim Used Vehicle Value Index
4. Redfin: Rental Market Tracker

All data and figures in this article were collected from YCharts, Inc. on 12/12/2022 by Colin Bohne of Blue Ridge Wealth Planners unless otherwise cited.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law.

The FTSE Developed Europe Index is an index of European stocks, part of the FTSE Global Equity Index Series. It is a subset of the FTSE Europe Index. The FTSE Eurobloc Index is a subset of it. 

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

The Producer Price Index (PPI) is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

The FAO Food Price Index (FFPI) is a measure of the monthly change in international prices of a basket of food commodities. It consists of the average of five commodity group price indices weighted by the average export shares of each of the groups over 2014-2016. The FFPI is calculated as the trade-weighted average of the prices of food commodities spanning the key agricultural markets for cereals, vegetable oils, sugar, meat and dairy products. While these commodities represent about 40 percent of gross agricultural food commodity trade (FAOSTAT), they are chosen for their high and strategic importance in global food security and trade.

West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content.

Economic Data Last Week

Payroll Report¹

The Bureau of Labor Statistics released the payroll report for November on Friday. It showed nonfarm payrolls increasing by 263,000 in November, more than the 200,000 expected by analysts. The unemployment rate remained at 3.7%, while the participation rate fell slightly to 62.1%, below its pre-pandemic level of 63.4%.

The payroll report has been one of the most important reports to watch as inflation remains high. The Federal Reserve has cited the importance of cooling the labor market in order to bring inflation down. There are still over ten million job openings and only six million job seekers. This imbalance leads to strong wage gains that force companies to increases prices to protect their profit margins. Those price increases then cause employees to seek more wage gains to compensate them for the higher costs of living, potentially created an inflationary spiral. Wages increased 5.1% year over year in November, much faster than the consensus estimate of 4.6% and the long-term average of 2.9%. Wages increased 0.6% from October to November, this is the fastest monthly increase since January of this year.

Another interesting take away from the payroll report is the slowdown in holiday season retail hiring this year. Typically, retailers increase their hiring in October through December to account for increased holiday traffic. In October and November of this year, only 419,000 workers have been hired in the retail space, the lowest amount in these two months since 2009 and nearly 20% fewer than this time last year. A slowdown in retail hiring signals that companies don’t expect this holiday season to be as busy as past years.

Personal Consumption Expenditures Price Index²

The Fed’s preferred inflation index showed prices rising 6.0% year over year in October, down from last month’s reading of 6.3%, and below its current cycle high of 7.0%

Inflation also showed promising signs of slowing globally, with the Euro Area reporting year over year inflation of 10%, below last month’s report of 10.6%. This is the first time the Eurozone has reported a decrease in year over year inflation in 17 months.

Equities

The S&P 500 ended the week up a little over 1%, with most of the gains coming after Fed Chairman, Jerome Powell, hinted at plans to slow rate hikes to 50bps in their December visit. The S&P 500 is up 13.9% in the fourth quarter and is now just 13.8% off its year-to-date high set on January 3, 2022.

Earnings season is nearly over, with only a few companies left to report third quarter earnings. The third quarter blended earnings growth rate is just 2.5%, its lowest level since 2020. While earnings were negatively affected by rising costs, revenues remain robust as corporations continue to increase their prices. The blended revenue growth rate for the third quarter is 10.9%, this will mark the seventh straight quarter that the S&P 500 has reported revenue growth above 10%.³

Fixed Income

Between the jobs report and Jerome Powell’s comments, interest rates had a volatile week. The two-year Treasury rate ended the week down nearly 20bps while the 10-year rate fell 16bps. The U.S. Aggregate Bond index is up 3.8% in the fourth quarter and is 13.1% off its all-time-high set in August 2020.

After a stronger than expected jobs report, interest rates increased in anticipation of the Federal Reserve being forced to hike more aggressively amid faster wage growth than expected. However, it seems this fear dwindled towards the end of the day as Treasury rates fell to more reasonable levels. Markets still overwhelmingly favor a 50bps hike in the Fed’s December visit.

The yield curve remains severely inverted, with the 10-2 spread ending the week at -0.77%, the deepest inversion since 1981. With an aggressive Federal Reserve, this inversion signals that markets believe that rates are higher today than they will be in the future. The likely reasoning behind this belief is that the Fed will hike the U.S. economy into a recession to bring down inflation. The Fed will then be forced to cut rates to stimulate growth. Powell has made several comments the past few weeks claiming that the risk of not hiking enough is far greater than the risk of hiking too much. If the Fed hikes too much, they can always cut rates. However, if they fail to hike enough and inflation gets out of control, their options are much more limited.

What to Watch for This Week

• U.S. Producer Price Index will be released on Friday, producer prices are expected to increase 0.2% in November, equal to the increase in October.
• The first estimate of the University of Michigan’s Consumer Sentiment index will be released on Friday, it is estimated that the index will increase slightly to 56.9. Its current cycle low was 50 in June.
• The Bank of Canada meets for an interest rate decision this week, they are expected to hike 50bps.

Interesting Articles

• James Bullard: Reflections on Monetary Policy in 2022
• Clare Toeniskoetter: Meet the Man on a Mission to Expose Sneaky Price Increases

References

1. Bureau of Labor Statistics: Economic Situation – November 2022
2. Bureau of Economic Research : Personal Income and Outlays, October 2022
3. Factset Earnings Insight

All data and figures in this article were collected from YCharts, Inc. on 12/5/2022 by Colin Bohne of Blue Ridge Wealth Planners unless otherwise cited.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice visit the particular investment needs of any investor. Past performance does not guarantee future results.

Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law.

The FTSE Developed Europe Index is an index of European stocks, part of the FTSE Global Equity Index Series. It is a subset of the FTSE Europe Index. The FTSE Eurobloc Index is a subset of it.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

The Producer Price Index (PPI) is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

The U of M Consumer Sentiment Index is a survey of consumer confidence conducted by the University of Michigan and Thompson Reuters. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.

The PCE price index (PCEPI), also referred to as the PCE deflator, PCE price deflator, or the Implicit Price Deflator for Personal Consumption Expenditures (IPD for PCE) by the BEA, and as the Chain-type Price Index for Personal Consumption Expenditures (CTPIPCE) by the Federal Open Market Committee (FOMC), is a United States-wide indicator of the average increase in prices for all domestic personal consumption. It is benchmarked to a base of 2012 = 100. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from the largest component of the GDP in the BEA's National Income and Product Accounts, personal consumption expenditures.

Economic Data Last Week

Producer Price Index¹

The Producer Price Index (PPI) measures price inflation at the wholesale level; it is the average change in prices over time that U.S. producers receive for their output. This generally feeds through to the Consumer Price Index (CPI), that measures the inflation that the consumers actually experience. The PPI report was similar to the CPI report last week showing inflation decelerating more than expected. Producer prices grew 8% year over year, far below its current cycle high of 11.5% reported in March, and below the consensus estimate of 8.3%. Core PPI, which strips out the more volatile items, increased at 6.7% year over year, also below the consensus estimate of 7.2%. This is an overall great report and another sign that the worst of inflation may be behind us.

U.S. Retail Sales²

The October Retail Sales report, which measures the seasonally adjusted sale of retail goods and services, showed a month over month increase in consumer spending of 1.3% compared to the consensus estimate of 1.0%. After adjusting for inflation using components of the Consumer Price Index, real retail sales grew by 0.8%.

The consumer continues to prove their ability to spend amid 40-year high inflation.  Earnings growth is not keeping pace with price increases, so the consumer’s resilient spending power must be fueled by other sources. One potential source is pent up cash from the pandemic. In their earnings reports, banks have shown that even the least affluent consumers still have a surplus of cash in their deposit accounts after receiving government stimulus and having a limited ability to spend during lockdowns.³ Consumers are also able to spend more by saving less, the personal savings rate is currently 3.3%, its lowest level since 2007 and well below the long-term average of 8.8%. Lastly, people are taking on more debt.  The Federal Reserve of New York shows U.S. credit card debt increasing 15% year over year in the third quarter. This is the largest increase year over year in the data available, going back to 2003. Total consumer debt, which also includes items like mortgages, auto loans, and student loans, increased by 8% year over year in the third quarter, its fastest pace since 2008.⁴

These sources of spending are not necessarily sustainable. Eventually, inflation will need to fall, or people will need to adjust their spending habits.

Global Inflation

Several major counties reported inflation last week. The United Kingdom reported 11.1% year over year inflation while the Eurozone reported 10.6% and Germany reported 10.4%, all new cycle highs. Japan and France also reported new cycle highs last week, while Canada’s annual inflation fell slightly.  While the U.S. is showing promising signs that price pressures are abating, the global inflation crisis is most certainly still in full swing.

Equities

Equity markets had a relatively quiet week with the S&P 500 falling just 0.62%. The S&P 500 is now 16.1% off its all-time high set on January 3, 2022. While the index has gained 10.9% in the fourth quarter so far, the S&P 500 has not posted a positive quarter since the fourth quarter of 2021.

Earnings season is nearly over with 94% of S&P 500 companies reporting third quarter results. The blended earnings growth rate remains at 2.2%, the lowest since the third quarter of 2020.  The Energy sector has easily seen the most growth of any sector, with its earnings growing an astounding 137% year over year. If the Energy sector was excluded from the S&P 500, the earnings growth for the index would be negative 5.3% in third quarter.⁵

Target and Walmart both posted very different earnings results last week. Target missed earnings targets by nearly 30% and projected a drop in comparable sales for the first time in five years.⁶ Walmart, on the other hand, posted better earnings than expected and was able to sell a significant portion of its excess inventory.⁷ A potential conclusion for this discrepancy is consumers are switching to lower cost alternatives amid higher inflation.

Fixed Income

The two-year Treasury rate gained about 10bps last week, closing at 4.5%, while the ten-year rate lost a modest 5bps, ending the week at around 3.4%. The U.S. Aggregate Bond index is down 13.4% year to date and is 15.3% off its all-time high set in August 2020.

Markets still favor a 50bps interest rate hike in December, which would bring the upper limit of the target federal funds rate to 4.5%. It seems that throughout the year, Fed officials have mostly been on the same page: calling for extremely restrictive monetary policy to stop inflation from getting out of hand.  We are now seeing some Fed officials express a wider variety of opinions on the outlook of future interest rate hikes. Some say there is a ways to go before hikes are done, while others have stated there may justification to start moving at a slower pace. In the December visit, the Fed will release their economic projections and we will be able to determine what the consensus estimates are for rates hikes in the coming years.

What to Watch for This Week

• Durable Goods Orders will be released on Wednesday, the consensus estimate is for a monthly increase of 0.4%, equal to the increase in September

Interesting Articles

• Josh Zumbrun: Inflation and Unemployment Both Make You Miserable, but Maybe Not Equally
• Charlie Bilello: A Bear Market Checklist

References

1. Bureau of Labor Statistics: Producer Price Index
2. U.S. Census Bureau: Advance Monthly Sales For Retail And Food Services: October 2022
3. Bank of America 3Q22 Financial Results
4. Federal Reserve Bank of New York: Household Debt and Credit Report Q3 2022
5. FactSet: Earnings Insight
6. Bloomberg: Target Cuts Outlook, Misses Big on Profit as Its Shoppers Retrench
7. Walmart Financial Presentation Q3 FY 2023

All data and figures in this article were collected from YCharts, Inc. on 11/21/2022 by Colin Bohne of Blue Ridge Wealth Planners unless otherwise cited.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice visit the particular investment needs of any investor. Past performance does not guarantee future results.

Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries

The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law.

The FTSE Developed Europe Index is an index of European stocks, part of the FTSE Global Equity Index Series. It is a subset of the FTSE Europe Index. The FTSE Eurobloc Index is a subset of it.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

The Producer Price Index (PPI) is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

Economic Data Last Week

Consumer Price Index (CPI)¹

The CPI report showed inflation decelerating much more than expectations last month. The headline CPI number showed year over year growth in aggregate prices of 7.7% compared to the consensus estimate of 8%. Year over year inflation has not been below 8% since February of this year. This is the first time CPI has come in slower than consensus estimates since August and it’s the first time CPI has been reported below even the lowest economist estimate since 2020. Perhaps more importantly, after stripping out the volatile food and energy prices, Core CPI was reported at 6.3% compared to the consensus forecast of 6.5%.  Month over month figures for both CPI and Core CPI were also reported below forecasts. 

Looking at other measurements of CPI also show promising signs that inflation has peaked and is moving encouragingly in the right direction. The Cleveland Fed’s “Trimmed Mean CPI”, which strips out the most extreme values of inflation, fell for the first time since January of 2021.² The consistent rise in this measure has previously indicated that rising prices were a problem in several segments of the economy rather than a select few. 

Another measure of inflation getting a lot of attention is the Atlanta Fed’s Sticky Price Inflation Index.³ In this index, the Atlanta Fed separates CPI into two categories: Flexible CPI, which includes items that can have their prices easily updated immediately, like gasoline, and Sticky CPI, which includes items with prices that are much more difficult and slower to update, like rent. The theory is that sticky prices are very slow to reflect economic conditions, but they better reflect long term expectations of inflation.  If it is costly and slow to change prices, businesses will want their price decisions to account for inflation over longer time periods, so a rising Sticky Price CPI index can illustrate that inflationary pressure is gaining strength. The growth in Sticky Price CPI was reported at 6.5% year over year in October, equal to the 6.5% year over year growth reported in September. This is the first time the year over year change hasn’t increased from month to month since July 2021.

An additional development in inflation this week was the University of Michigan’s consumer sentiment index.⁴ Part of this index tracks where consumers think inflation will be in the future.  Fed chairman, Jerome Powell, has illustrated the importance of getting consumer expectations of inflation down and has cited the results from the University of Michigan index specifically. Unfortunately, inflation expectations for both one and five years ahead increased slightly this month.  

Equities

Equity markets rallied last week with the S&P 500 gaining 5.9%. The overwhelming majority of these gains were realized after the CPI report showed unexpectedly positive inflation data. On Thursday following the report, the S&P 500 gained 5.5% and the Nasdaq 100 gained 7.5%. This is the biggest one-day gain for either index since the extreme volatility during the 2020 drawdown. This is only the fifth time in the last 20 years the Nasdaq 100 has gained 7.5% or more in a single day.

Fixed Income

A lower-than-expected CPI report sets off a chain of events in financial markets. If inflation is decelerating significantly, the Fed may not have to hike rates as much as previously expected. This brought U.S. Treasury rates down across the curve. On Thursday, the ten-year rate fell 33bps while the 2-year rate fell 30bps. Markets now favor a 50bps hike in December after four 75bps rate hikes in a row.⁵

Lower interest rates in the U.S. makes investing in Treasuries less enticing to investors abroad; thus, decreasing the value of the U.S. dollar relative to other major currencies. The U.S. Dollar Index fell 2% on Thursday and one Euro can now buy 1.03 dollars, the highest amount since August. A strong dollar has an adverse effect on companies with a large portion of their revenues coming from abroad. Half of S&P 500 companies have cited a strong dollar as having a negative impact on earnings in the third quarter, with earning growth for companies with a majority of their earnings coming from within the U.S. far outpacing earnings growth for companies that get over half of their revenue from abroad.⁶ So, slower inflation can lead to lower interest rates, which can lead to a weaker dollar and potentially higher corporate earnings growth. 

What to Watch for This Week

• The Producer Price Index will be reported on Tuesday, the consensus estimate is for a 0.4% month over month growth, no change from last month
• U.S. Retail Sales will be released on Wednesday, analysts expect a growth of 1% month over month after being flat last month
• The Euro Area, UK, Canada, France, and Japan all release inflation this week

Interesting Articles

• Jonathan Levin: The Path to a Soft Landing Runs Through Corporate Earnings
• Justin Fox: Americans Have $5 Trillion in Cash, Thanks to Federal Stimulus

References

1. Bureau of Labor Statistics: Consumer Price Index Summary
2. Federal Reserve Bank of Cleveland: Median CPI
3. Federal Reserve Bank of Atlanta: Sticky-Price CPI
4. University of Michigan: Survey of Consumers
5. CME FedWatch Tool
6. Fact Set: Earnings Insight

All data and figures in this article were collected from YCharts, Inc. on 11/14//2022 by Colin Bohne of Blue Ridge Wealth Planners unless otherwise cited.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice visit the particular investment needs of any investor. Past performance does not guarantee future results.

Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss. 

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law. 

The FTSE Developed Europe Index is an index of European stocks, part of the FTSE Global Equity Index Series. It is a subset of the FTSE Europe Index. The FTSE Eurobloc Index is a subset of it.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market. 

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

The U of M Consumer Sentiment Index is a survey of consumer confidence conducted by the University of Michigan and Thompson Reuters. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.

The Producer Price Index (PPI) is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

The Nasdaq 100 is an index composed of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. This index includes companies from a broad range of industries with the exception of those that operate in the financial industry, such as banks and investment companies.

Economic Data Last Week

Payroll Report¹

The Bureau of Labor Statistics released their employment situation report on Friday, detailing the changes in the labor market in October. Overall, the payroll report showed continued strength in the labor market with 261,000 new jobs added to the economy last month, compared with the consensus estimate of 200,000. However, the unemployment rate actually rose to 3.7% from 3.5%, while the participation rate declined slightly. The unemployment and participation rate are derived from a separate survey that is conducted on households rather than on businesses and can occasionally show discrepancies from the headline number that we get from the payroll report. According to the household survey, the increase in the unemployment rate was a result of an addition of 306,000 unemployed workers in October. The last time the unemployment rate increased was this past August, but it was a result of more people entering the labor force. When you are not actively looking for a job, you are not considered unemployed. So, an uptick in the unemployment rate can be a result of more job seekers in the economy rather than of layoffs or a slowdown in hiring.  That isn’t necessarily the case in the report this month because the participation rate decreased while the unemployment rate increased. So, the October household survey shows more people unemployed and less people participating in the labor force. The discrepancies in the surveys make it difficult to draw conclusions from the data, one shows continued growth in the labor market while the other shows signs of weakness.

Information was also released this week showing job openings increasing in September. As of now there are 1.9 available jobs for every one person seeking employment.² Fed chairman, Jerome Powell, has mentioned this ratio several times this year; he believes we need to see the amount of people looking for work and the number of open positions come into balance in order to slow wage growth and ultimately bring down inflation. The jobs report showed wages growing 0.4% in October, faster than analysts’ expectation of 0.3%.  Year over year wages grew 4.7% in October, which is slower than the 5% growth recorded in the previous month, but still much faster than the long-term average of 2.9%. In the Fed’s ideal scenario, what they have been referring to as a soft landing, the number of job openings would come down without a significant increase in layoffs. Moreover, more people would enter the labor force, pushing the participation rate up.  This would bring the supply and demand for workers into balance, potentially slowing wage growth and inflation with minimal pain on households.

Equities

The S&P 500 ended the week down 3.3%, with the majority of its losses coming after the Federal Reserve’s interest rate hike announcement on Wednesday. The S&P 500 is up 5.4% in the fourth quarter and remains 20.3% off its all-time high set on January 3, 2022.

A majority of the companies in the S&P 500 have reported earnings results for the third quarter.  The projected earnings growth rate is 2.2%.³ If 2.2% ends up being the actual earnings growth for the quarter, it will be the lowest earnings growth rate since the third quarter of 2020 where earnings fell 5.7%.

Retailers tend to add employees to their workforce in anticipation of the surge in sales due to the holidays. The holiday hiring season typically starts in October and is most prominent in November.  The number of workers retailers hire can give us some insight on how much retail sales will grow in the winter. If companies are hiring much more worker than usual, they likely expect the holiday season to be much busier than usual.  This October, retailers added 163,000 jobs, roughly 30% less than they added in the month of October in the previous two years.¹ This is consistent with Amazon’s earnings report released earlier this month forecasting lackluster growth in sales this winter.⁴

Fixed Income

The two-year Treasury rate found new cycle highs last week, closing the week at 4.7%, its highest level since 2007.  The U.S. Aggregate bond index is 17.6% off its all-time high set in August 2020.

The Federal Reserve announced a 75bps rate hike on Wednesday, which was in line with expectations.  The upper limit of the target federal funds rate is now 4%.  This is the fourth hike of 75bps in a row and the target federal funds rate is now at its highest level since 2007. Investors continue to look for clues that indicate when the Federal Reserve will slow their pace of rate increases and eventually stop hiking all together. On Wednesday, the Fed acknowledged that the rate hikes they have done so far will work on a lag, and that we haven’t seen the full impact that they will have on the economy just yet. Jerome Powell was also very clear that it is too soon to start thinking about pausing rate increases and that the Fed needs to continue to restrict economic growth to stop inflation.  Stocks and bonds both fell following the visit.

The next FOMC visit is in December, where investors are placing nearly even probabilities that we will see either a 50 or 75bps rate hike. The Fed’s current economic projections, last updated in September, indicate that the federal funds rate will get as high as 4.6% in 2023.  They will release new projections in December, and based on Jerome Powell’s comments, their estimated federal funds rate for 2023 will most likely be revised higher.  

What to Watch for This Week

• CPI will be reported on Thursday. The consensus estimate is for a year over year increase of 8% after increasing 8.2% in the previous month.  Core CPI is expected to slow slightly to 6.5% after being reported at 6.6% last month.

Interesting Articles

• Sam Ro: Why stocks rally when everything else is getting worse
• Ben Carlson: Why Today’s Inflation is Not a Repeat of the 1970s

References

1. Bureau of Labor Statistics: Employment Situation – October 2022
2. Bureau of Labor Statistics: Job Openings and Labor Turnover Summary
3. Fact Set Earnings Insight
4. Wall Street Journal: Amazon’s Holiday Blues Come Early – and Hard

All data and figures in this article were collected from YCharts, Inc. on 11/07//2022 by Colin Bohne of Blue Ridge Wealth Planners unless otherwise cited.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice visit the particular investment needs of any investor. Past performance does not guarantee future results.

Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss. 

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law.

The FTSE Developed Europe Index is an index of European stocks, part of the FTSE Global Equity Index Series. It is a subset of the FTSE Europe Index. The FTSE Eurobloc Index is a subset of it.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

Economic Data Last Week

Real Gross Domestic Product (GDP)¹

Real U.S. GDP measures the inflation adjusted value of goods produced and services provided within the United States over a given period of time. Real GDP increased at an annualized rate of 2.6% in the third quarter, more than the consensus estimate of 2.4%, but less than the long-term average of 3.2%. Positive third quarter growth in GDP represents a growing U.S. economy despite negative GDP prints in the first two quarters of the year.

Personal Consumption Expenditures Price Index (PCE)²

The PCE Price Index is the Federal Reserve’s preferred measure of inflation. The PCE price index is similar to CPI in the sense that it attempts to track the changes in aggregate price levels; however, the PCE index includes a more comprehensive list of consumer expenditures. Additionally, the PCE price index takes changes in consumer preferences into account, like altering one’s purchasing habits when certain products become more expensive than others.  The PCE price index grew 6.2% year over year in September, the slowest pace since January 2022, but still much faster than the Fed’s 2% target. Perhaps more worrisome is the core PCE price index, which strips out volatile items such as food and energy. In September, Core PCE grew 5.1% year over year, its fastest pace since March of this year.  This is similar to what we are seeing in CPI where price increases at the beginning of the year were mostly due to very high energy inflation, but price increases are now becoming broad based with a multitude of categories experiencing faster price appreciation. The Federal Reserve Bank of Dallas measures this phenomenon with the “Trimmed Mean PCE Inflation Rate”, which removes the items with the most extreme inflation and calculates aggregate price growth using the remaining categories.³ The Trimmed Mean PCE was at 3.3% to start the year, its most recent reading was 4.7%, signaling that the inflation we are experiencing today cannot be completely attributed to the very volatile prices of a select few items.

Global Ocean Shipping Rates

When the global economy was shut down and reopened, many industries struggled to recover.  One of the hardest hit was the container shipping industry, causing delivery times and costs to increase dramatically. For this reason, shipping rates and delivery times have been a closely watched metric to measure the extent of lingering supply chain disruptions caused by the pandemic. The Freightos Baltic Index, which measures the cost to ship a 40-foot container overseas, fell to $3,340 last week, its lowest level since 2020.⁴ Additionally, the amount of time it takes to ship and unload a cargo ready container from China to the United States is near its lowest number of days since the first quarter of 2021.⁵

Equities

Equities ended the week with strong returns, with the S&P 500 gaining nearly 4%. The S&P 500 is up nearly 9% in the third quarter after posting negative returns in the first and second quarters of the year. The index is now 17.6% off its all-time high set on January 3, 2022 and is 9.1% higher than its year-to-date low set on October 12.

Earlier this month, many financial institutions reported better than expected third quarter earnings growth. Big Tech was unfortunately unable to replicate this last week with many of the largest companies in the world reporting lackluster third quarter results and providing poor forecasts that didn’t live up to investors’ expectations. Amazon estimated weak holiday sales this year and Alphabet (Google’s parent company) and Meta (formerly known as Facebook), reported lackluster growth in advertising revenue as businesses cut their marketing expenses amid economic uncertainty.  Meta fell 24% last week while Amazon lost 13%, and Alphabet lost 5%. The Nasdaq 100 index, which is heavily overweight technology stocks, is 29.9% off its all-time high set in December of last year.

Fixed Income

Last week, Treasury rates remained relatively unchanged in the short end of the curve with the 2-year Treasury rate closing the week at 4.4%, down just 6bps. However, the 10-year rate fell 21bps and closed the week at 4%.  The U.S. Aggregate Bond index is 17% off its all-time high set in August 2020. The index is approaching 27 months since its last all-time high, the longest period ever recorded since the inception of the index in 1976.

Part of the reason financial institutions have posted such strong earnings growth this quarter is the high spread between the amount they charge for loans and the amount they pay for deposits. JP Morgan recently posted its highest quarterly net interest income ever⁶; this is the money the bank earns on loans minus what the bank pays out for deposits.  The average 30-year mortgage now costs customers over 7%, while the average FDIC insured saving account pays only 0.21% in interest.⁷ The average 60-month CD is not much better, paying an underwhelming 0.83%.⁷ With the Federal Reserve aggressively hiking rates, it is likely that the interest rate received for parking your money at a bank will start to increase. There is also growing competition among banks that should put upward pressure on deposit rates. While the average savings and CD rates are very low, some banks offer rates as high as 3.5% for savings accounts and 4.25% for five-year CDs.⁸

What to Watch for This Week

• The Federal Reserve meets on Wednesday, they are expected to hike interest rates by 75bps, bringing the upper limit of the target federal funds rate to 4%.
• Jobs numbers will be reported on Friday, the consensus is for 220,000 jobs to be added to the economy in October, while the unemployment rate ticks up slightly to 3.6%.
• The Bank of England is expected to raise interest rates 75bps to 3%.

Interesting Articles

• Emily Badger and Eve Washington: Why the Price of Gas Has Such Power Over Us
• Bill Dudley: Will Jerome Powell Be Like Volcker or Burns?

References

1. U.S. Bureau of Economic Analysis: Gross Domestic Product, Third Quarter 2022 (Advance Estimate)
2. U.S. Bureau of Economic Analysis: Personal Income and Outlays, September 2022
3. Federal Reserve Bank of Dallas: Trimmed Mean PCE Inflation Rate
4. Freightos Baltic Index (FBX): Global Container Freight Index
5. Flexport: Ocean Timeliness Indicator
6. JP Morgan Chase: 3Q22 Financial Results
7. FDIC: National Rates and Rate Caps
8. Bankrate

All data and figures in this article were collected from YCharts, Inc. on 10/31/2022 by Colin Bohne of Blue Ridge Wealth Planners unless otherwise cited.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice visit the particular investment needs of any investor. Past performance does not guarantee future results.

Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries

The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law.

The FTSE Developed Europe Index is an index of European stocks, part of the FTSE Global Equity Index Series. It is a subset of the FTSE Europe Index. The FTSE Eurobloc Index is a subset of it.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

The PCE price index (PCEPI), also referred to as the PCE deflator, PCE price deflator, or the Implicit Price Deflator for Personal Consumption Expenditures (IPD for PCE) by the BEA, and as the Chain-type Price Index for Personal Consumption Expenditures (CTPIPCE) by the Federal Open Market Committee (FOMC), is a United States-wide indicator of the average increase in prices for all domestic personal consumption. It is benchmarked to a base of 2012 = 100. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from the largest component of the GDP in the BEA's National Income and Product Accounts, personal consumption expenditures.

Economic Data Last Week

US CPI Report¹

The inflation data from the CPI report on October 13th showed aggregate prices increasing more than expected.  The year over year inflation rate is now 8.2%, higher than the consensus estimate of 8.1%, but lower than last month’s reading of 8.3%. Year over year inflation has steadily decreased since its current cycle high of 9.1% set in June of this year, yet aggregate prices remain stubbornly high. Investors and consumers have expected price growth to slow much faster than it has amid the Federal Reserve’s aggressive monetary policy.

Energy prices fell month over month for the third month in a row, falling 2.1% in September, led by gasoline prices which fell nearly 5%. Year over year growth in energy prices remains very high with oil prices around 58% higher today than this time last year. Keep in mind that year over year oil prices are comparing the cost of oil today with the cost of oil from September 2021, when Crude Oil was trading at a mere $70 a barrel. As time goes on, the year over year comparison will become more favorable and annual energy inflation should come down even if oil prices remain flat.  The price of Crude Oil in March 2022 was between $100 and $120 a barrel.  So if the price of oil remains around $80-$90 like it has the past three months, annual energy inflation in March 2023 can be negative without prices necessarily needing to fall from here.  

Several countries reported inflation last week: The United Kingdom matched their current cycle high at 10.1%.  Canada and France both showed signs of price growth slowing, reporting 6.9% and 5.6% respectively.  The Euro Area set a new cycle high at 9.9%.

University of Michigan Consumer Sentiment²

The University of Michigan Consumer Sentiment Index is a monthly survey used to gauge consumer confidence levels in the United States.  Questions are asked about consumers’ views of their current financial situation as well as their outlook on the economy and inflation.  In June of this year, around the same time gasoline prices reached all-time highs, the index reached an all-time low with a reading of 50, meaning consumers were reportedly more pessimistic than they have been in the history of the survey.  As gas prices fell, consumers felt better about their current and future economic situation and the index improved, increasing to a value of 60 last week, slightly higher than the lows reached during the Great Financial Crisis in 2008. A key component of the index is consumer expectations of inflation. The Federal Reserve has cited inflation expectations in this report when raising interest rates, claiming getting expectations under control was crucial to avoid inflation getting out of hand. The October report showed household one year inflation expectations increasing for the first time since March of this year.

Equities

After several very volatile weeks in a row, the S&P 500 had a relatively calm week last week, gaining 2%. The index is 20.7% off its all-time high set at the beginning of the year and it is 5% higher than its year-to-date low set on October 12, 2022.

Earnings season is underway with many major banks reporting third quarter results last week. Investors are closely watching third quarter earnings for signs that interest rate hikes are finally starting to slow the economy and many of the reports so far have failed to show that. The Bank of America earnings call showed that consumers are still spending, with credit card usage increasing 13% year over year in the third quarter. The report also showed that despite the low personal savings rate, consumers still have pent up savings from the pandemic, with the least affluent Bank of America customers having five times the amount of cash in their accounts than they had in January 2020. Finally, the report showed credit card delinquencies at their second lowest level in the history of the bank with only 1.4% of credit card balances over 30 days past due. 

With strong consumer spending, healthy balance sheets, and low unemployment, it’s difficult to make an argument that the U.S. economy is slowing down significantly.  However, only 20% of S&P 500 companies have reported third quarter earnings, the remaining earnings reports will offer some much-needed guidance on the state of the economy.

Fixed Income

Interest rates continued their ascent with the 10-year Treasury rate closing over 4.2%, gaining 20bps last week.  The 10-year rate has now increased for 12 weeks in a row, the longest streak since 1984.⁴ The three-month Treasury rate crossed over 4% last week, after closing at just 0.06% a year ago. The three-month rate briefly traded higher than the 10-year rate last week, another popular indicator that typically precedes a recession.  

What to Watch for This Week

• The first estimate of third quarter GDP will be released on Thursday, the consensus estimate is for a growth rate of 2.4%. This would be a large improvement from the first and second quarters in which GDP contracted.
• Durable Goods Orders are expected to grow by 0.6% after falling 0.2% last month.
• The European Central Bank and the Bank of Canada both meet this week, both are expected to raise interest rates by 75bps.

Interesting Articles

• Ben Carlson: Why Isn’t Inflation Falling?
• Truman Du: Animation: The Largest Public Companies by Market Cap (2000-2022)

References

1. U.S. Bureau of Labor Statistics: Consumer Price Index Summary
2. University of Michigan: Survey of Consumers
3. Bank of America 3Q22 Financial Results
4. Bloomberg: Global Bond Yields Reach Key Milestones as Rate-Hike Bets Mount

All data and figures in this article were collected from YCharts, Inc. on 10/24/2022 by Colin Bohne of Blue Ridge Wealth Planners unless otherwise cited.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice visit the particular investment needs of any investor. Past performance does not guarantee future results.

Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries

The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law.

The FTSE Developed Europe Index is an index of European stocks, part of the FTSE Global Equity Index Series. It is a subset of the FTSE Europe Index. The FTSE Eurobloc Index is a subset of it.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. 

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

The U of M Consumer Sentiment Index is a survey of consumer confidence conducted by the University of Michigan and Thompson Reuters. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.

Economic Data Last Week

U.S. Payroll Report¹

The Payroll Report showing September employment data came in relatively in line with expectations. There were 263,000 new jobs added to the economy in September compared to the consensus estimate of 250,000.  Average hourly earnings grew 5% year over year, below expectations of 5.1%, but much higher than the long-term average of 2.9%. The unemployment rate fell to back to 3.5% after briefly increasing to 3.7% last month. This was mostly as a result of people leaving the labor force as the participation rate fell slightly to 62.3% from 62.4% last month.  One is only counted as unemployed if they are actively looking for a job, when people quit looking, they leave the labor force, so the participation rate can fall with the unemployment rate.  In another sign that the economy is still healthy, the number of persons employed part time for economic reasons decreased by over 300,000 in September to 3.8 million, the lowest level since 2005.

The inability to find and hire workers has been a major problem this year for many industries.  One contributor to this is the change in immigration trends over the past five years.  Immigration to the U.S. began to drop in 2017 due to several restrictions enacted by the White House.  The flow of immigrants to the U.S was further weakened by travel restrictions implemented during the pandemic.  The Kansas City Fed estimates that an additional 3.4 million immigrants would have entered the U.S between 2017 and 2022 without the change in trend that started in 2017.² Many of these immigrants would have participated in the labor force. Not only has immigration declined, but the average processing time for work visas has slowed from two to four months in 2019 to 11 months in 2021, further weakening the supply of available workers.² This mostly affects industries where non-U.S. born workers are most prominent, like services, hospitality, and construction.  These industries have seen the largest increase in job vacancies and earnings over the past five years.  Immigration also benefits industries that do not depend on foreign born workers because immigrants fill jobs that allow others to enter the labor force. Foreign born workers make up 25% of direct care workers, such as home health aides and childcare.² A shortage of workers in those fields leads to an increase in the cost that can cause some workers to exit the labor force to replace these lost services. Studies have shown that increased immigration leads to substantially lower costs of childcare and increases the number of hours worked by women in the top quartile of the wage distribution. ^3,4

Equities

The S&P 500 had a very volatile week, gaining nearly 6% by Tuesday’s close but ending the week up only 1.6% after losing 2.8% on Friday, following the jobs report. There has now been 50 trading days in which the S&P 500 has fallen by 1% or more, the highest number of occurrences since 2009 and there are still three months left in the year. The S&P 500 is currently 23.2% off its all-time high set on January 3, 2022.  

Since inflation has been persistent in the markets, good news has been bad news for equities. A strong labor market is good news for the economy and all of the people with jobs but leads to equity price declines. A stronger labor market means higher wages and therefore higher inflation. Higher inflation means more rate hikes from the Federal Reserve, which will likely eventually slow the economy and hurt corporate earnings.

Fixed Income

Like equities, interest rates were very volatile last week, starting the week down and ending up.  The 10-year treasury rate fell as low as 3.6% on Tuesday and closed the week at 3.9%.  The U.S. Aggregate bond index is 16.6% off its all-time high set in August 2020.

The moderately slower growth in jobs did not offer any relief in the likelihood of an aggressive Federal Reserve as the markets are still favoring a 75bps hike in their November visit, which would be their fourth hike in a row of that magnitude.  The inflation report on Thursday will offer some guidance on what the Fed plans to do for the remainder of the year.  The Fed will likely need to see price growth slow significantly to avoid increasing the Federal Funds rate to their current estimate of 4.6% to end the year.  

Commodities

After just recently closing under $80 a barrel for the first time since January 2022, Crude oil gained 11% this week, closing at $92.64.  The likely culprit of the recent surge in oil prices was OPEC+ announcing a cut in their production target by two million barrels a day, the largest cut since the start of the pandemic. A cut in supply without a cut in demand generally leads to an increase in prices. It is historically unusual for OPEC to cut production while the price of oil is already so high, and this announcement signals that OPEC is willing to act to keep oil prices elevated. Further risks to higher oil prices include additional European oil sanctions against Russia, which are set to kick in in December and January, further tightening the supply of oil.  The United States is also nearing the end of its planned oil releases from its Strategic Petroleum Reserve.  The U.S. has been releasing one million barrels a day from its reserves since April; as of now, there are no scheduled releases after November.  

What to Watch for This Week

• CPI will be reported on Thursday. September inflation is expected to be 0.2%, while year over year inflation is expected to be 8.1%, down from 8.3% last month. Core inflation is actually expected to increase to 6.5% year over year, from 6.3% last month.
• PPI will be released on Wednesday: current consensus is for a year over year increase of 8.4%, down from 8.7% last month
• U.S. Retail Sales will be reported on Friday: analysts expect a growth of 0.2% in September
• Germany, France, and China to release inflation this week

Interesting Articles

Ben Carlson: Will the Stock Market Fall if Earnings Fall?

Charlie Bilello: There Will be Drawdowns

References

1. Bureau of Labor Statistics: Employment Situation Summary
2. Kansas City Fed: Immigration Shortfall May Be a Headwind for Labor Supply
3. Delia Furtado: Fertility Responses of High-Skilled Native Woman to Immigrant Inflows
4. Patricia Cortés: Low-Skilled Immigration and the Labor Supply of Highly Skilled Woman

All data and figures in this article were collected from YCharts, Inc. on 10/10/2022 by Colin Bohne of Blue Ridge Wealth Planners unless otherwise cited. 

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice visit the particular investment needs of any investor. Past performance does not guarantee future results.

Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries

The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law.

The FTSE Developed Europe Index is an index of European stocks, part of the FTSE Global Equity Index Series. It is a subset of the FTSE Europe Index. The FTSE Eurobloc Index is a subset of it.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

The Producer Price Index (PPI) is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.

Economic Data Last Week

Core Personal Consumption Expenditures (PCE) Price Index

The Core PCE Price index is the Federal Reserve’s preferred inflation gauge.  It increased 0.6% month over month in August, higher than the consensus expectation of 0.5%, and higher than last month’s increase of 0.0%.  Year over year, the PCE price index increased 4.9%, the highest level since April of this year.  The PCE report also shows personal spending increasing 0.4% in August, higher than the forecasted 0.2%. Real wages, that is earnings after adjusting for inflation, fell 2.75% year over year. Despite consumer incomes not keeping up with inflation, their spending has not slowed down. However, personal savings has been negatively impacted.  The personal savings rate fell to 3.4% last week, its lowest level since 2007.

Initial Claims for Unemployment Insurance

Initial claims for unemployment insurance are used to measure the number of layoffs in the economy; as employees are laid off, they apply for unemployment insurance.  For the week ending September 24, there were only 193,000 initial claims for unemployment insurance, the lowest level since April of this year.  The four-week moving average initial claims fell for a fifth straight week. This is another sign that the labor market is still very strong.  The jobs report last month showed that there are almost twice as many open jobs as there are people looking for work.  The Bureau of Labor Statistics will release their monthly jobs report this Friday that will give an indication of whether the labor market has finally started to cool, though the recent data on unemployment insurance suggests that it hasn’t.

Equities

The S&P 500 fell to new year to date lows last week, amid continued fears that the Federal Reserve is hiking the economy into a recession.  The S&P 500 fell 2.9% last week.  The index is now down 23.9% year to date and lost 4.9% in the third quarter.  This is the first time the S&P 500 has posted negative returns for three quarters in a row since 2009.  The NASDAQ 100 also just posted negative returns for three quarters in a row, its first time since 2002 following the Dot Com Bubble.

Valuations in equities are starting to look much cheaper after being considered relatively expensive for the last several years.  The forward P/E ratio measures the price of a stock divided by the 52-week forward consensus expectation earnings per share. It can be used to judge the confidence investors have in a stock or index. A high P/E ratio means investors are willing to pay more for a single dollar of earnings today because they expect a company’s earnings to grow in the future. The forward P/E Ratio on the S&P 500 is 15.3¹, lower than its ten-year average of 17.0.² Small cap stocks, measured by the S&P 600, have a forward P/E of 10.7, levels not seen since the COVID pandemic drawdown in 2020 and the great financial crisis in 2008.¹

Fixed Income

Interest rates remain volatile as investors anticipate an increasingly aggressive Federal Reserve.  The ten-year Treasury rate got as high as 4% last week but ended the week lower at 3.8%.  The U.S. Aggregate Bond Index is now down 16.3% from its all-time high set in August 2020. 

Interest rates revolve around the market’s expectation of the Federal Reserve.  The Fed has been very clear over the past several weeks that they are willing to cause economic pain to avoid inflation getting out of control.  The recent economic data showing a strong labor market and persistent consumer spending reinforces the probability of them hiking rates another 75bps in November, which would bring the upper limit of the federal funds rate to 4.0%.  The consensus in the markets as of today is for the target federal funds rate to end the year at 4.5%; however, expectations will most certainly adjust to new labor market and inflation reports for the remainder of the year.

Commodities

In a sign that the worst of inflation may be behind us, commodity prices have been consistently falling over the past several weeks.  The Bloomberg Commodities index fell to its lowest level since February of 2022.  Crude oil closed the week below $80 a barrel. This is the cheapest Crude has traded since January 2022, completely wiping out the large price increase following the Russian invasion of Ukraine. 

Additionally, the price of lumber is 75% off its high set during the pandemic³. While the price of Aluminum⁴, Wheat, and Natural Gas, are all around 30% off their current cycle highs. These dramatic price reductions signal the disruptions caused by the pandemic are finally abating.

What to Watch for This Week

• The September Payroll report will be released on Friday. The consensus estimate is 250,000 new jobs added to the economy, down from last month’s report of 315,000.  The unemployment rate is expected to remain at 3.7%.
• ISM Manufacturing PMI is reported on Monday, analysts expect a reading of 50.9 signaling an expansion in the manufacturing sector.
• Germany, France, and the Euro Area all report inflation this week.

Interesting Articles

Henry Grabar: Will Anyone Ever Buy or Sell a Home Again

Joshua M. Brown: Bear in mind

References

1. Yardeni Stock Market Briefing: Selected P/E Ratios
2. FactSet Earnings Insight
3. Trading Economics: Lumber
4. Trading Economics: Aluminum

All data and figures in this article were collected from YCharts, Inc. on 10/03/2022 by Colin Bohne of Blue Ridge Wealth Planners unless otherwise cited.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice visit the particular investment needs of any investor. Past performance does not guarantee future results.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law.

Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries. 

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.

The PCE price index (PCEPI), also referred to as the PCE deflator, PCE price deflator, or the Implicit Price Deflator for Personal Consumption Expenditures (IPD for PCE) by the BEA, and as the Chain-type Price Index for Personal Consumption Expenditures (CTPIPCE) by the Federal Open Market Committee (FOMC), is a United States-wide indicator of the average increase in prices for all domestic personal consumption. It is benchmarked to a base of 2012 = 100. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from the largest component of the GDP in the BEA's National Income and Product Accounts, personal consumption expenditures.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Smaller capitalization securities involve greater issuer risk than larger capitalization securities, and the markets for such securities may be more volatile and less liquid. Specifically, small capitalization companies may be subject to more volatile market movements than securities of larger, more established companies, both because the securities typically are traded in lower volume and because the issuers typically are more subject to changes in earnings and prospects.

The S&P 600 is an index of small-cap stocks managed by Standard and Poor's. It tracks a broad range of small-sized companies that meet specific liquidity and stability requirements. This is determined by specific metrics such as public float, market capitalization, and financial viability, among a few other factors.

Economic Data Last Week

Existing Home Sales

There were a reported 4.8 million existing homes sold in August, down 0.4% from July and down 20% from August 2021. This is the seventh month in a row that existing home sales have dropped.  Excluding the initial COVID pandemic decline, monthly home sales are now at their lowest level since 2014. In another sign that the housing market is slowing down, the amount of time it takes to sell a home has started to increase.  A typical home spent 42 days on the market in August, which is 5 days longer than this time last year. This is still far faster than August 2019, where the average house took over 60 days to sell.¹

The extreme volatility in mortgage rates has played a significant role in the slowdown in the housing market.  The 30-year mortgage rate reached a high of 6.29% last week, its highest level since 2008 and much higher than its all-time low of 2.65% set just 19 months ago.  In the last few years, many homeowners either purchased homes or refinanced at historically low interest rates. Selling their existing home to purchase a new home means getting a new mortgage at a much higher rate. Therefore, home buyers are forced to either downsize or pay a much higher monthly payment for an equally priced home. This is evident in Fannie Mae’s Home Purchase Sentiment Index, which fell to its lowest level since 2011 with 73% of respondents claiming now is a bad time to buy a home.²

Equities

The S&P 500 came very close to posting new year to date lows last week, falling over 4.5%. The S&P 500 is currently down 21.6%, only slightly better than its year to date low of 22.4% set in the middle of June. The 60/40 portfolio (60% in U.S. stocks and 40% in U.S. Bonds) is having one of its worst years on record, currently down 19% year to date. This is the worst start to the year since the beginning of the U.S. Aggregate Bond index in 1976.

Earnings season is virtually behind us with over 99% of S&P 500 companies having reported second quarter earnings numbers.   Year over year aggregate earnings for S&P 500 companies grew 8.5%, led by the energy sector, which grew its earnings by nearly 300% from the second quarter of 2021.³

Fixed Income

The Federal Reserve hiked interest rates 75bps as expected, bringing the upper limit of the federal funds rate to 3.25%, the highest level in nearly 14 years.  The markets reacted strongly to this, causing stocks to fall, interest rates to rise, and the value of the U.S. dollar to gain against a basket of major currencies. Markets expected the 75bps hike, but investors were surprised by the Fed’s outlook on interest rates and the economy moving forward.  Shown in the “Summary of Economic Projections”, the consensus amongst Fed officials is a federal funds rate of 4.4% by the end of the year, which would mean hiking rates 5 more times this year (counting each 25bps increase as one hike).⁴  Fed officials have also attempted to be very clear in their last several public appearances that they don’t envision rate cuts in 2023, and the summary of projections shows that with a majority of officials envisioning rates between 4.5-5% in 2023.

The Fed has also been clear that it may take some economic hardship to bring inflation down significantly.  Typically, the purpose of hiking interest rates is to slow an overheating economy by curbing demand, which usually results in job loss. The Fed’s goal is to slow the economy in such a way that inflation comes down to their target level with as little job loss as possible. However, in their summary of economic projections, they predict unemployment will increase to 4.4% in 2023, after projecting only 3.9% in their previous 2023 projections published in June.⁵ This signals that the Fed may be becoming less confident in their ability to pull off a “soft landing”.

The Fed visit resulted in U.S. Treasury rates continuing to increase at a rapid pace.  The 2-year Treasury rate closed the week at 4.21% after gaining over 34bps, marking the first time since 2007 the rate has been over 4%.  The yield curve remains severely inverted, with the 10-2 spread at negative 0.49%, very close to levels last seen before the bear market following the Dot Com Bubble.   The U.S. Aggregate Bond index achieved new year to date lows last week with a drawdown of 15.5% from its all-time high set in August 2020.  The U.S. Aggregate Bond Index is approaching its 26^th month in a drawdown, much longer than the previous record of 15 months set in 1981.

What to Watch for This Week

• U.S. Durable Goods Orders: consensus is for a decrease of 1.1% after being flat in July.
• U.S. Core PCE Price Index: analysts currently expect a year over year rate of 4.7%, up from the 4.6% reported last month.
• Germany, France, and the Euro Area all report inflation this week.

Interesting Articles

Aziz Sunderji: Consumers Feel Worse Now Than They Did During Covid Lockdowns

Ben Carlson: How Long Does it Take For Stocks to Bottom in a Bear Market?

References

1. Realtor.com: August 2022 Monthly Housing Market Trends Report
2. Fannie Mae: National Housing Survey
3. I/B/E/S data from Refinitiv
4. Federal Reserve Summary of Economic Projections – September 2022
5. Federal Reserve Summary of Economic Projections – June 2022

All data and figures in this article were collected from YCharts, Inc. on 9/26/2022 by Colin Bohne of Blue Ridge Wealth Planners unless otherwise cited.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice visit the particular investment needs of any investor. Past performance does not guarantee future results. 

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law.

Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.

Economic Data Last Week

Consumer Price Index¹

The Consumer Price Index (CPI) report was, as usual, the most anticipated release of the month.  It showed August inflation increasing just 0.1%, bringing year over year inflation to 8.3%.   The year over year report is lower than the current cycle high of 9.1% that was reported in June 2022, and it is lower than last month’s report of 8.5%.  However, analysts had actually estimated aggregate prices would fall month over month, causing markets to react very negatively to the data.  

Energy prices fell 5% in August, while the price of gasoline fell almost 11%.  However, besides energy, there were few bright spots in the report.  Food and shelter both increased almost a full percent and the price of new vehicles continued to increase despite the easing of supply chain constraints.  Core CPI measures the rate of change in prices without including the volatile items that make up food and energy. Core CPI increased 0.6% in August, indicating that much of the low headline CPI (not core) report can be attributed to the large decrease in energy costs. 

Inflation remains a global problem.  The UK reported inflation last week at 9.9%, just off its current cycle high of 10.1%.  Germany also released inflation numbers last week, showing annual inflation in August equal to its current cycle high of 7.9%.

U.S. Retail Sales²

The Retail Sales report measures the sale of retail goods and services in the United States over the period of one month. In August, retail sales grew 0.3% compared to analysts’ expectations of no growth at all.  Investors are still anticipating signs showing a slowdown in consumer spending, but this report shows that despite negative real wage growth and low consumer sentiment, the consumer is still spending.

Equities

The S&P 500 continued its downward trend, closing the week down 4.8%, now only 6.1% above its year-to-date lows set on June 16.  Most of last week’s losses came after the CPI report on Tuesday, where the S&P 500 lost over 4% and the Nasdaq 100 lost nearly 5.5% in a single trading session.  The S&P 500 is now 18.4% off its all-time high set on January 3, 2022.

Amid global recession fears, 40-year high inflation, and aggressive central banks, fund managers remain very negative on the outlook for global equities.   Bank of America conducted a survey of professional investment managers that found 62% of managers are overweight cash and 52% are underweight equities.  In the history of the survey, this is the greatest percentage of investors reportedly overweight cash and it’s the highest percent of respondents claiming to be underweight equities since 2001.^3,4

Fixed Income

U.S. Treasury rates increased dramatically following the hotter than expected inflation print.  The two-year Treasury rate opened the week at 3.56% and closed at 3.86%, gaining almost 20bps on Tuesday alone.  The two year is at its highest level since 2007 and has come a long way from its low of 0.09% set just 19 months ago.  The yield curve remains inverted as the 10-2 spread is at negative 0.45%.

Stubbornly high inflation creates a domino effect in the markets.  Hotter than anticipated inflation means the Federal Reserve might have to hike rates even more aggressively than previously expected.  Higher interest rates in the world’s biggest economy attracts investment in U.S. Treasuries from global investors.  More money coming to the U.S. from abroad combined with investors rushing to the safety of the U.S. dollar amid global recession fears, increases the value of the dollar relative to other currencies.  The day after the inflation report, the pound dropped to its lowest level since 1985 and the value of the euro fell below parity, nearing its lowest level since 2002.  A strong dollar can increase financing costs in emerging markets who borrow in dollars, as well as increase the total cost of commodities that are priced in dollars. 

It is unclear how far the Federal Reserve will go with their rate increases, but as long as inflation lingers, fears of increasingly aggressive interest rate hikes will likely continue to escalate.

What to Watch for This Week

• The Federal Reserve meets on Wednesday to announce a rate hike decision. As of now, the consensus is for a 75bps hike, bringing the upper limit of the target Federal Funds rate to 3.25%.
• Canada and Japan report August inflation this week.
• The Bank of England and the Bank of Japan also meet this week for interest rate decisions.

Interesting Articles

Sam Ro: The stock market is not the economy in an important way

Ben Carlson: We’re Still in a Bear Market You Know

References

1. https://www.bls.gov/news.release/pdf/cpi.pdf
2. https://www.census.gov/retail/marts/www/marts_current.pdf
3. https://www.reuters.com/markets/europe/super-bearish-fund-managers-allocation-global-stocks-all-time-low-bofa-survey-2022-09-13/
4. https://www.bloomberg.com/news/articles/2022-09-13/bofa-survey-shows-nadir-in-stock-allocations-amid-recession-fear

All data and figures in this article were collected from YCharts, Inc. on 9/12/2022 by Colin Bohne of Blue Ridge Wealth Planners unless otherwise cited.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice visit the particular investment needs of any investor. Past performance does not guarantee future results.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is seen as a gauge of prosperity for businesses regulated by UK company law.

Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

The performance figures shown are gross of investment advisory fees and other expenses. The deduction of these management fees and expenses would reduce the overall return. Because fees are deducted quarterly, the compounding effect would be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged.  For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%.