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U.S. Stock Prices Fell Sharply as the Fed Increased Interest Rates

Market Data as of Week Ending: 09/23/2022 unless noted otherwise

Equities

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.

Bonds

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.

Macroeconomic Data

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.

 

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Bond Yields Increase as Inflation Remains Elevated

Market Data as of Week Ending: 09/16/2022 unless noted otherwise

Equities

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.

Bonds

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.

Macroeconomic Data

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.

 

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Markets Rally to Snap Three Week Losing Streak

Market Data as of Week Ending: 09/09/2022 unless noted otherwise

Equities

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.

Bonds

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.

Macroeconomic Data

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.

 

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Stock Prices Declined for Third Consecutive Week

Market Data as of Week Ending: 09/02/2022 unless noted otherwise

Equities

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.

Bonds

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.

Macroeconomic Data

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.

 

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Fed Minutes Send Market Lower

Market Data as of Week Ending: 08/19/2022 unless noted otherwise

Equities

U.S. stock prices ended the week lower, snapping a string of four consecutive weekly gains for the S&P 500 and NASDAQ as investors digested a host of earnings and economic data. The reversal in the market’s rally came after the July FOMC meeting minutes revealed policymakers would likely continue to raise rates in the short term. Value stocks held up better than their growth counterparts while large companies outperformed their small and mid-sized peers. The S&P 500 experienced a relatively broad-based pullback amongst its sectors with only traditional defensive sectors, consumer staples and utilities, along with energy recording a gain. Cyclical and sensitive sectors such as communication services, materials, and financials fared the worst. Developed foreign and emerging stock prices moved lower and lagged the U.S. for the week.

Bonds

U.S. Treasury yields were mixed last week as the Fed minutes impacted monetary policy expectations. The 10-year U.S. Treasury increased to 2.98%, up from 2.85%, as the 2-year remained at 3.24%. Returns were negative across the fixed income spectrum with quality leading to mixed results while shorter duration was positive. Government and corporate bonds outperformed across the short and intermediate duration, while long duration corporate was the worst performing segment. Yields on investment grade and high yield corporate bonds increased, finishing the week at 4.6% and 7.8%, respectively.

Macroeconomic Data

Economic releases were mixed for the week as Monday was kicked off by the Empire State manufacturing index recording its second largest decline on record, one of the lowest levels in the survey history at -31.3 in August. The NAHB home builders’ index slipped to 49 in August, the first time since May of 2020 that the index broke below the break-even measure of 50, as cooling buyer demand has negatively impacted builders’ sentiment. U.S. retail sales were flat in July as cheaper gas prices meant consumers spent less at the pump. The Philadelphia Fed manufacturing index recovered to 6.2 in August from a negative 12.3 last month, suggesting improving conditions. The U.S. leading economic indicators index declined for the fifth month in a row, dropping 0.4% in July, as rising interest rates and pessimism among consumers has dampened the economy. The UK’s inflation rate hit 10.1% in July, the first double-digit reading since 1982, while the Eurozone’s inflation hit a record 8.9% in July.

 

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Cooler-than-expected Inflation Sends Markets Higher

Market Data as of Week Ending: 08/12/2022 unless noted otherwise

Equities

U.S. stock prices moved higher for the fourth straight week, the longest string of weekly gains since November 2021, as investors welcomed the idea that consumer prices may have peaked. In a reversal from previous weeks, value stocks outperformed their growth counterparts while small and mid-sized companies continued their outperformance versus their large company peers. All eleven of the major economic sectors advanced for the week, led by energy, financials, and materials. Traditionally, defensive sectors such as consumer staples and health care lagged. Developed foreign and emerging stock prices moved higher but lagged the U.S. for the week.

Bonds

U.S. Treasury yields ended the week relatively unchanged with the 10-year U.S. Treasury remaining at 2.83% as it appears the treasury market remains skeptical of a softening to monetary policy. Lower quality bonds outperformed for the fourth week in a row and were led by outperformance from long duration high yield bonds. Government and corporate bonds generally advanced across the duration spectrum, while long duration government was the only segment that failed to post a gain. Yields on investment grade and high yield corporate bonds declined, finishing the week at 4.4% and 7.5%, respectively.

Macroeconomic Data

Economic releases were generally positive for the week as Wednesday’s cooler-than-expected CPI reading dominated headlines. The NFIB small-business index rose to 89.9 in July from 89.5, reflecting improved expectations among small-business owners. U.S. productivity fell at a -4.6% annual rate in the second quarter, marking the second consecutive quarterly decline as labor costs are rising sharply. The U.S. consumer price index was unchanged in July, keeping the 12-month inflation rate at 8.5% as the decline in used car prices and goods was able to offset the rise in cost of shelter and wages. The U.S. producer price index fell 0.5% in July, marking the first downshift since 2020 as energy prices fell 9%. The University of Michigan’s preliminary consumer sentiment reading showed improvement as the index rose to 55.1 from 51.1 in July. The BoE expects a recession to begin at the end of the year as the U.K.’s GDP contracted by 0.1% in the second quarter.

 

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Markets End the Week Mixed on Surprising U.S. Jobs Report

Market Data as of Week Ending: 08/05/2022 unless noted otherwise

Equities

U.S. stock prices finished the week mixed as investors weighed U.S.-China relations, earnings and a much stronger-than-expected jobs report. The higher-than-expected job growth revived investors’ concerns that the Federal Reserve will need to maintain aggressive monetary tightening in response to the data. Growth stocks continued their outperformance versus their value counterparts while small and mid-sized companies generally outperformed their large company peers. The major economic sectors produced mixed results for the week with information technology, consumer discretionary and communication services sectors leading the way. Energy and traditionally cyclical sectors such as real estate and materials lagged. Developed foreign stock prices moved lower and underperformed the U.S., while emerging markets outperformed both.

Bonds

U.S. Treasury yields moved higher last week as positive economic data eased recession fears. The 10-year U.S. Treasury increased to 2.83% on the back of the stronger-than-expected jobs report while the 2-year yield jumped to 3.23%. Lower quality bonds outperformed for the third week in a row and were led by outperformance from long duration high yield bonds. Government and corporate bonds failed to post a gain across the duration spectrum. Yields on investment grade rose while high yield corporate bonds declined, finishing the week at 4.5% and 7.7%, respectively.

Macroeconomic Data

Economic releases were generally positive as the “good news is bad news” dynamic remained intact. The ISM manufacturing index fell to 52.8%, marking a 25-month low but showed that inflation pressures eased and was above expectations. Americans added $312 billion in debt in the second quarter, with $46 billion of that on their credit cards, marking the sharpest increase in more than 20 years. The ISM services index rose to 56.7% from 55.3% in July, suggesting the economy continues to expand despite growing headwinds. The U.S. added a surprising 528,000 new jobs in July sending the unemployment rate to a pre-pandemic low of 3.5% as the labor market continues to be a beacon of light. The BoE raised its key interest rate by 0.50% to 1.75%, the biggest increase in 27 years.

 

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Stocks Shrug Off Downbeat GDP to Close Out Best Month Since 2020

Market Data as of Week Ending: 07/29/2022 unless noted otherwise

Equities

U.S. stock prices moved higher last week as markets shrugged off a downbeat GDP report in hopes that economic contraction may slow the Fed’s aggressive hiking cycle. U.S. earnings have proved resilient, with the majority of companies in the S&P 500 beating estimates to start second quarter earnings season. Value stocks lagged their growth counterparts while small and mid-sized companies generally outperformed their large company peers. All the major economic sectors produced gains for the week and were led by strength in the energy, utilities, industrials, and consumer discretionary sectors. Traditionally defensive sectors such as consumer staples and health care lagged. Developed foreign stock prices delivered solid gains and outperformed the U.S, while emerging markets trailed.

Bonds

U.S. Treasury yields declined as expectations for aggressive central bank policies softened. The 10-year U.S. Treasury fell to 2.65% and the 2-year yield ended the week at 2.89% on the back of the Fed’s rate hike and negative U.S. GDP growth. Lower quality bonds outperformed for the second week in a row and were led by outperformance from long duration high yield bonds. Long duration government bonds were the only ones that failed to post a gain. Yields on investment grade and high yield corporate bonds declined and finished the week at 4.3% and 7.8%, respectively.

Macroeconomic Data

Economic releases were generally worse than expected, creating a “bad news is good news” dynamic. U.S. consumer confidence declined for the third straight month in July, dropping to 95.7 as inflation continues to impact the consumer. U.S. pending home sales fell 8.6% in June, significantly worse than estimates, as higher mortgage rates and dampened sentiment likely have potential homebuyers on the sidelines. The U.S. economy shrank by 0.9% in the second quarter, marking the second quarterly decline in a row. The back-to-back declines in GDP were the first since the 2007-2009 Great Recession. The U.S. PCE rose 1% in June, led by higher fuel prices, as inflation remains higher than expectations. University of Michigan’s Consumer Sentiment Index was revised higher, unexpectantly, to 51.5, from 51.1, but still remains at historically low levels.

 

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Three Year Winning Streak for 401(k) Participants Could Be in Jeopardy

After three straight years of positive annual returns, 401(k) participants face a nearly 18% decline as we hit the halfway point of 2022.

Just two years ago, as the pandemic took hold across the globe, 401(k) participants watched their account balances get walloped. In the first quarter of 2020, the Mid Atlantic Trust Company 401(k) Composite Benchmark showed a 16.12% decline for that quarter alone for the hypothetical 401(k) participant. But, of course, from that low point, the markets came roaring back with solid gains achieved throughout the remainder of 2020 to finish the year at +14.85%. Tack on gains of over 14% for 2021 and 401(k) participants rode one of the strongest two-year market rallies in history.

Comparison with Major Indices Q2 Table

Sometimes, of course, as quickly as the market “giveth,” the market “taketh away.” With the closing of the books on the first half of 2022 at the end of June, 2020, we closed out the worst first-half performance in global markets in decades as fears grew that the central banks would push economies into a recession with their fight against inflation, ongoing supply-chain issues, and the Russia-Ukraine war. For the second quarter, the S&P 500 fell more than 16% – its biggest one-quarter fall since March 202, the Dow Jones Industrial Average staged its worst first-half performance since 1962, losing 11.3%, and the Nasdaq suffered its biggest quarterly drop since 2008, losing 22.4%. Meanwhile, the Mid Atlantic Trust Company 401(k) Composite Benchmark also took a hit in quarter two, with a -12.96% return, putting it down -17.99% year to date, but in better shape than the Nasdaq and S&P 500 indices.

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ABOUT THE MID ATLANTIC 401(k) BENCHMARK
Mid Atlantic Trust Company is a leading financial services organization that provides a wide array of brokerage, advisory, and trust services to a diverse national client base of financial advisors and institutions, asset managers, and benefits administrators through its various subsidiary companies.  Because we provide these services, Mid Atlantic Trust Company has plan investment data on over 100,000 401(k) plans representing approximately $120 billion in assets. In response to requests from our institutional clients, we have created the Mid Atlantic Trust Company 401(k) Composite Benchmark. Using data from plans serviced by Mid Atlantic Trust Company with assets of at least $100,000 at the beginning and ending of the month, the Mid Atlantic Trust Company 401(k) Composite Benchmark is designed to reflect the portfolio performance across 401(k) plans serviced, in any capacity, by Mid Atlantic. See the “Methodology” section of this report for details on how the composite benchmark is calculated.  
 
* For the hypothetical participant balances, we used a starting balance based on the average 401(k) participant balance provided by the Investment Company Institute for the Year of the starting balance. In our calculation, we assumed a starting annual salary of $50,000, a combined employee/employer 9% annual contribution rate, and a 3% annual salary increase and applied the monthly rate of return of the Benchmark.

Stock Prices Recover as Investors Focus on Growth

Market Data as of Week Ending: 07/22/2022 unless noted otherwise

Equities

U.S. stock prices gained as companies in the S&P 500 have generally reported better than expected results for the second quarter. Sentiment has shifted back toward investors embracing risk assets, with an emphasis on growth stocks, as the economy starts to show signs of slower growth. Value stocks lagged their growth counterparts while mid-sized companies generally outperformed their small and large company peers. Most of the major economic sectors produced gains for the week and were led by strength in the consumer discretionary, materials, industrials, and information technology sectors. Traditionally defensive sectors such as utilities, health care, and consumer staples lagged. Developed foreign and emerging market stock prices also delivered solid gains and outperformed the U.S.

Bonds

U.S. Treasury yields declined as the 10-year U.S. Treasury fell to 2.75% and the 2-year yield ended the week at 2.97%. When short-term yields are higher than longer-term yields, it’s typically associated with slower growth and higher recession risks. Lower quality bonds outperformed and were led by outperformance from long duration high yield bonds. Government bonds lagged but still delivered gains across the yield curve. Yields on investment grade and high yield corporate bonds declined and finished the week at 4.4% and 8.1%, respectively.

Macroeconomic Data

Economic releases were generally worse than expected and are indicating that the economic growth is slowing, increasing the risk of recession. The July reading of the S&P Global Flash US Composite PMI came in at 47.5 and contracted (below 50) for the first time in nearly two years as both manufacturers and service providers reported softer demand. Initial jobless claims rose to 251,000, a new high for the year, and continuing claims rose to 1.4 million. Housing starts declined 2% in June and prices remain elevated as the median price of existing homes increased more than 13% over the previous 12 months. In Europe, the ECB lifted policy rates for the first time since 2011 to address inflation in the region. In the United Kingdom, which officially left the EU in 2020, inflation climbed to a new four-decade high of 9.4%.

 

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