Monthly Archives: September 2022
U.S. Stock Prices Fell Sharply as the Fed Increased Interest Rates
Market Data as of Week Ending: 09/23/2022 unless noted otherwise
U.S. stock prices fell sharply as the Fed increased interest rates and reset expectations of their resolve to continue in the face of persistent inflation. Fed Chairman, Jerome Powell, did not attempt to quell volatility in equity markets and spoke plainly about their commitment to reducing inflation, regardless of its impact on economic growth. Large companies generally outperformed their small and mid-sized peers, while the valuation factor had mixed results, depending on size. All eleven major sectors in the S&P 500 dropped with declines more pronounced in cyclical and economically sensitive sectors such as energy and consumer discretionary. Traditionally defensive sectors such as consumer staples, utilities, and healthcare provided the best downside protection for the week. Developed foreign and emerging stock prices declined with mixed results relative to the U.S. as currency markets were rattled.
U.S. Treasury yields advanced again as the 10-year U.S. Treasury increased 0.24% and ended the week at 3.69%. The 2-year yields increased by more than 0.40% to 4.21% as investors are starting to align more closely with the Fed’s forecast. Despite higher yield changes in the short end of the curve, longer duration bonds experienced the steepest declines and higher quality bonds outperformed. High yield corporate bonds lagged as investors are pivoting away from the riskiest segment of the bond market. Yields on investment grade and high yield corporate bonds rose, finishing the week at 5.4% and 9.3%, respectively.
It was a light week for economic data releases as investors were closely following not just the Fed’s policy rate decision, but more importantly, the committee’s forecasts and messaging after the meeting. Their expectation for real economic growth was reduced to 0.2% in 2022 and 1.2% in 2023; however, they noted the high level of uncertainty around those projections based on the current cycle of interest rate increases. Economic survey data from S&P Global surprised to the upside as both manufacturing and services activity were better than expected. The manufacturing sector showed signs of resilience and even increased from 51.5 to 51.8 (levels above 50 indicate growth). Activity in the services sector increased but remains in contraction territory at 49.2. The U.S. dollar appreciated by more than 3% against a basket of major currencies, and Japan intervened in the currency market to support the yen for the first time since 1998.
Bond Yields Increase as Inflation Remains Elevated
Market Data as of Week Ending: 09/16/2022 unless noted otherwise
U.S. stock prices fell as the S&P 500 recorded its largest weekly decline of the quarter. Despite improving consumer sentiment, investors were disappointed that the CPI report was higher than expected, increasing the risk that “peak inflation” may not be behind us. Value stocks outperformed their growth counterparts across the board while small and mid-sized companies generally outperformed their large peers. All eleven major economic sectors in the S&P 500 dropped with nearly half of sectors down more than 6%. Energy stocks provided the best downside protection for the week followed by the consumer staples and utilities sectors. Traditionally cyclical sectors such as industrials and materials along with economic growth-oriented sectors, such as information technology and communication services, were among the most notable laggards. Developed foreign and emerging stock prices declined but outperformed the U.S. for the week.
U.S. Treasury yields advanced again as the 10-year U.S. Treasury ended the week at 3.45% and the 2-year increased to 3.80%. Despite higher yield changes in the short end of the curve, longer duration bonds experienced the steepest declines and higher quality bonds outperformed. High yield corporate bonds lagged as investors have started to become more concerned about the riskiest segment of the bond market. Yields on investment grade and high yield corporate bonds rose, finishing the week at 5.1% and 8.8%, respectively.
There were several key economic releases during the week. However, in advance of the Fed meeting, all eyes were focused on the August CPI report. Prices only increased 0.1% in August but the core index, excluding the more volatile energy and food, increased 0.6%. The 12-month change in prices remains elevated at 8.3% and 6.3% respectively. The increase in core prices was broad based with notable increases in shelter, medical care, household furnishings, and new vehicles. Retail sales rebounded in August with a gain of 0.3% after a decline of 0.4% in the prior month. On the employment front, weekly jobless claims dropped for the fifth consecutive week to 213,000. Inflation remains a global problem as the ECB recently increased rates 0.75% and the UK reported that inflation over the past year was just below 10% in August.
Markets Rally to Snap Three Week Losing Streak
Market Data as of Week Ending: 09/09/2022 unless noted otherwise
U.S. stock prices moved higher, snapping a string of three weekly losses, as moderating inflation fears appeared to have supported sentiment. The markets showed resiliency after Chair Powell reaffirmed the Fed’s hawkish stance despite a slowdown in economic growth. Value stocks lagged their growth counterparts across the board while small and mid-sized companies generally outperformed their large peers. All eleven major economic sectors in the S&P 500 registered gains with eight sectors gaining at least 3.2%. Traditionally cyclical sectors such as consumer discretionary, materials, and financials outperformed while more sensitive sectors, such as energy and communication services lagged. Developed foreign and emerging stock prices delivered mixed results but trailed the U.S. for the week.
U.S. Treasury yields advanced again for the week due to stronger-than-expected economic data and central banks reaffirming hawkish stances. Shorter duration bonds experienced a more significant move as the 10-year U.S. Treasury increased by 0.12%, ending the week at nearly 3.31% and the 2-year increased to 3.56%, up from 3.40%. Lower quality high yield bonds outperformed across the duration spectrum while government and corporate bonds lagged. Yields on investment grade and high yield corporate bonds were mixed, finishing the week at 4.9% and 8.2%, respectively.
Economic releases were relatively light for the holiday shortened week. The U.S. ISM services index reached its highest level in four months, moving to 56.9% in August as there were some improvements in supply chain, logistics and costs. Jobless claims fell to a three and a half month low of 222,000, signaling that layoffs are still near a record low despite a softening U.S. economy. Total consumer credit rose by $23.8 billion in July, down from the $39.1 billion jump in June as consumers are having to rely more on debt to finance purchases due to higher inflation. The ECB increased its key interest rates by a record 0.75% in an attempt to curb inflation, announcing that more rate increases are likely.
Stock Prices Declined for Third Consecutive Week
Market Data as of Week Ending: 09/02/2022 unless noted otherwise
U.S. stock prices declined for the third consecutive week as investors price in the impact of higher interest rates that may linger, especially if the economy remains stable. Value stocks held up better than their growth counterparts while smaller companies generally lagged their large and mid-sized peers. All major economic sectors in the S&P 500 declined with the most significant losses in the information technology and materials sectors. Traditionally defensive sectors such as consumer staples, utilities, and health care provided some downside protection and outperformed. Developed foreign and emerging stock prices also declined but delivered mixed results relative to the U.S. for the week.
U.S. Treasury yields advanced again for the week with more significant increases in longer duration bonds. The 10-year U.S. Treasury increased by 0.15%, ending the week at nearly 3.20% and the 30-year increased to 3.35%, up from 3.21%. Higher-quality government bonds generally outperformed while high yield corporate bonds lagged. However, since long duration yields were up more than 0.10%, long duration government and investment grade corporate bonds were down more than 2.5%. Yields on investment grade and high yield corporate bonds increased, finishing the week at 4.9% and 8.5%, respectively.
Economic releases were sparse for the week, but the employment situation report on Friday showed that the economy continues to have strong support for labor demand. Employers added 315,000 jobs in August, down from more than 500,000 in July, but well above levels that might signal a recession is imminent. The unemployment rate rose to 3.7% in August as more workers entered the labor force. Job openings also increased to more than 11.2 million with nearly two jobs available for each unemployed person. Manufacturing data remains mixed as survey results from ISM and S&P are still indicating that current conditions are in expansion territory. However, the threats of inflation, supply constraints, and rising interest rates are constraining growth.