Do you remember playing on the seesaw when you were a kid? The last few months in the markets felt like we were doing just that (it’s not quite as fun as the seesaw). The first half of the quarter we were on our way up to the top of the seesaw as the capital markets rose coming off June lows. Then, in August and September, we were riding the seesaw back down as the markets hit new lows since late 2020. And the entire time we were asking: ‘Is this seesaw teetering on the edge of a recession?’
U.S. Market and Economic Review
There are few places for investors to hide as a mostly familiar slate of worries is fueling declines in global stocks and bonds. On a year-to-date basis through September 30th, we have seen markedly negative returns across almost all asset classes. Returns range from negative 18 percent in large value-oriented stocks to negative 32 percent for large growth-oriented stocks. Bonds have not fared any better with longer maturity bonds down 29 percent and intermediate bonds down 15%. No surprise that the only area of the market that is positive this year is energy as prices have risen markedly this year.
While headline inflation in the U.S. moderated over the summer as gas prices declined, core inflation climbed, mostly due to increased shelter costs. The Consumer Price Index (CPI) jumped 8.3 percent in August (year-over-year) and Core CPI (which excludes food and energy) rose 6.3 percent. These levels are well above the Federal Reserve’s long-term target of 2 percent.
Persistently high inflation led to aggressive interest rate hikes by the Federal Reserve (Fed). The Fed has raised the benchmark Federal Funds Rate by 3 percent this year, with the three most recent increases being 0.75 percent each. The Fed has been explicit in its intent to aggressively fight inflation and is willing to see the economy slow and unemployment rise to bring it down. This has raised concerns over the ultimate impact of sharply higher rates on the U.S. economy.
The U.S. labor market has been a bright spot in the economy but may be starting to cool. Unemployment remains favorable at 3.5 percent as of September, matching the 50-year low seen before the pandemic. However, many economists expect the job market to cool as inflation and higher rates take a toll on profits. We are already seeing hiring freezes and job cuts in the technology sector, which staffed up given the strength since 2020.
Global Market and Economic Review
Like the U.S. markets, the International markets are also posting markedly negative returns. These economies are facing some of the same challenges as the U.S. regarding inflation and rising interest rates. However, they are also facing additional challenges in terms of closer economic ties to Ukraine and Russia for food and energy supplies. In addition, China continues to languish in relative terms due largely to its policies to combat COVID with mass lockdowns. Inflation has been high not just in the U.S., but around the globe; and the Federal Reserve isn’t the only central bank raising interest rates. Annual inflation in the Eurozone was 10 percent in September. Roughly ninety central banks around the world have raised rates in 2022, and more than forty have hiked by at least 0.75 pecent. This also is weighing on the International markets
Markets have been volatile in 2022 and the ability of central banks to dampen high and widespread inflation without causing recessions remains a key question for investors. The war in Ukraine and its ultimate implications also weigh heavily on the markets. Stock and bond markets have undergone significant corrections, and both represent much better forward-looking opportunities than we have seen in some time. However, we expect volatility to continue to be a key theme given persistent risks. This volatility highlights the importance of maintaining a prudent asset allocation consistent with your long-term financial plan.
What Does This Mean For You?
As we continue to navigate 2022, know that working with a credentialed and experienced financial advisor can help you feel confident in your financial future. Domani Wealth advisors are always ready to start a conversation, provide a second opinion, or offer recommendations as part of our financial planning foundation to help you work toward your goals.
Data sources: Bloomberg, Callan, Capital Economics
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