From an investment standpoint, recent conditions have been something like a Halloween-themed hayride. Bumpy.. ok really bumpy, with a couple of scares here and there. But there’s news that may help calm your nerves…
Market Commentary
US stocks fell sharply in September to end a disappointing third quarter. Aggressive moves from central banks around the world increased global recession fears. Earnings for S&P 500 companies were strong in the second quarter with 75% beating estimates. Of the 106 companies that issued third quarter EPS guidance, 65 issued negative guidance and 41 issued positive guidance. Economic news was mixed over the month. US employers adding 315,000 jobs in August, slightly less than the 318,000 economists had forecasted and well below the 526,000 added in July. The unemployment rate increased for the first time this year in August to 3.7%, up from 3.5% in July. CPI increased by 8.3% in August, above the expected 8.1%, but lower than the 8.5% increase in July. Core CPI, which excludes energy and food prices, increased 6.3% in August from a year earlier, higher than the 6.1% expected. On a monthly basis, core CPI rose 0.6% in August, above the 0.3% increase expected and double the increase from July. The personal consumption expenditures index, the inflation gauge the Fed prefers, was up 6.2% in August from a year earlier, below the 6.4% increase in July. US manufacturing activity grew in August at the same rate as July with the pace of growth remaining at low levels. U.S. home prices fell in July for the first time in years as higher mortgage rates started to weigh on prices.
Foreign stocks also declined sharply in September and for the third quarter as global recession fears increased. The Bank of England increased its key interest rate by 0.5% to 2.25% marking the seventh consecutive increase. In a move contrary to the efforts of the BOE to curb inflation, the UK government announced tax cuts and energy subsidies that caused significant market volatility. The BOE had to step in and buy long term bonds to stabilize the market. The U.K.’s annual inflation rate rose by 9.9% in August down from 10.1% in July. The European Central Bank (ECB) increased its key rate by 0.75%, following the 0.50% increase in July, and signaled further rises were likely over the coming months. ECB President Christine Lagarde warned that inflation was spreading beyond energy and said the ECB was ready to increase rates aggressively over the next several meetings. The eurozone’s headline inflation rate hit 9.1% in August, higher than the 9% expected and up from 8.9% in July. Oil prices continued to fall in September ending at $79.49 per barrel down from $89.55 at the end of August. Developed markets topped emerging markets over September, the third quarter, the year to date, and trailing year.
Interest rates rose in September driving bond prices sharply lower as bond markets processed aggressive rate hikes from the world’s central banks. The Federal Reserve increased the federal-funds rate by 0.75% to a range between 3% and 3.25% and signaled additional large increases were likely even though they would increase the risk of a recession. New projections show the rate rising to between 4% and 4.5% by the end of the year, which would call for sizable rate increases at the November and December meetings. Fed Chairman Jerome Powell said, “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.” The yield on the 10-year Treasury moved significantly higher in September and the third quarter ending the month at 3.80% up from 3.13% at the end of August and 2.93% to start the quarter. The rate for a 30-year fixed-rate mortgage increased rose above 6%, its highest level since 2008, more than double the rate from a year ago. US Agency bonds were the top performer for September, 3Q, and the year to date and shorter term bonds outpaced longer term bonds for September, 3Q, and the year to date.
| Index Performance | Sept. | 3Q | Year to Date | Trailing 12 Months |
| US Stocks (Russell 3000) | -9.27% | -4.46% | -24.62% | -17.63% |
| Foreign Stocks (FTSE AW ex US) | -9.95% | -9.65% | -25.86% | -24.52% |
| US Bond Mkt. (BBgBarc Int. Gov/Cred) | -2.67% | -3.06% | -9.63% | -10.14% |
| Municipal Bonds (BBgBarc 1-10 Yr Muni) | -2.47% | -2.25% | -7.17% | -7.08% |
| Cash (ICE BofA ML 3-Mo T-Bill) | 0.25% | 0.46% | 0.57% | 0.58% |
Inflation continues to be the biggest driver of market performance. Here are our thoughts.
US stocks added to their previous week’s gains to end the best month since 2020, as Fed Chairman Powell’s comments led investors to believe the pace of rate hikes may be easing. The S&P 500 increased by 4.3% and the Dow gained 3.0% for the week. Foreign markets also experienced gains with the FTSE All World Ex US up 1.7% for the week. US crude increased to $98.62 per barrel up from $94.70 the week prior. The yield on the 10-year Treasury fell to 2.64% down from 2.78% the week prior, their lowest level since early April.
The Fed agreed to raise its benchmark federal funds rate by 0.75%, in line with expectations, to a range between 2.25% and 2.5%. Chairman Jerome Powell said it was too soon to say how the rate path would evolve, but he pointed to projections officials submitted last month showing they expected to raise the fed-funds rate to around 3.5% this year and 4% next year. Powell stated, “These rate hikes have been large, and they’ve come quickly and it’s likely that their full effect has not been felt by the economy.” When asked if he thinks the economy is in a recession he said “I do not think the U.S. is currently in a recession. There are just too many areas of the economy that are performing too well.”
The U.S. economy contracted for a second consecutive quarter, a common definition of recession. Gross domestic product fell at an inflation and seasonally adjusted annual rate of 0.9% in the second quarter. That follows a 1.6% contraction in the first quarter of 2022.
Personal income grew by 0.6% in June, slightly above the consensus of up 0.5%. June’s increase matched the revised 0.6% increase in May.
US stocks fell over the week as investors recalibrated their expectations for the Fed to begin tightening monetary policy. The S&P 500 dropped 1.8% and the Dow fell 0.3% for the week. Abroad, the FTSE All World Ex US was down 0.3% for the week. The yield on the 10-year Treasury surged with investors expecting the Fed to move faster to raise the Fed Funds Rate. After the 10-year Treasury ended the year at 1.50%, it jumped over the first week of 2022 to finish at 1.76%. It’s the highest the 10-year has been since January 2020.
US hiring fell well short of expectations in December with 199,000 new hires added. The unemployment rate dropped to 3.9% from 4.2% in November. Wage growth was up 4.7% over the year, a significant increase over recent years.
OPEC+ agreed to continue to gradually increase oil production.
Manufacturing continued to expand in December, but at a slower pace than November.
Analysts are projecting 22% growth in 4th quarter corporate earnings.
Minutes from the Fed’s December meeting outlined that they were planning on completing their bond purchase program in March and that they expected to raise the Fed Funds rate three times in 2022. In addition, they discussed reducing the size of their bond portfolio, another form of monetary tightening. The moves together were more aggressive than investors had anticipated.
US mortgage rates rose to their highest level since May 2020.
Initial jobless claims were 207,000 remaining near multidecade lows.
Eurozone consumer prices rose 5% over 2021, its fastest pace ever.
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