Market Updates

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 meeting 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 26th 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 meeting 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 meeting 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%.

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