Market Commentary – August 2022
Through the first half of August, the stock market continued to ride July's rally. Including the first two weeks of August, stocks had posted four consecutive weekly gains — the longest weekly rally of 2022. The latest inflation data showed prices had fallen in July, bolstering investor confidence that the Fed may begin to reel in its aggressive interest-rate hike policy. By mid-August, the S&P 500 had recouped half of its losses from the beginning of the year, and the Nasdaq had risen over 20.0% from its low in June. U.S. corporate profits rose 9.1% to a fresh record high of $2.62 trillion in the second quarter of 2022, following a 4.9% drop in the previous period. It appeared that even if the Fed continued its hawkish push to get inflation down to the 2.0% target, the economy had thus far been resilient, with the labor market continuing to show strength, while industrial production advanced.
Despite these developments, Federal Reserve officials maintained their hawkish rhetoric. As markets rallied to technical resistance levels of the 200-day moving average of the S & P 500 Index, the summer of 2022 ended abruptly. First, the release of the minutes of the July meeting of the Federal Open Market Committee revealed that several Committee members were concerned that inflation remained unacceptably high, and that, despite declines in oil and some commodities, there was little evidence to date that inflation pressures were subsiding. Then Fed Chair Jerome Powell spoke before the Jackson Hole Economic Symposium and reiterated the Fed's resolve to stamp down inflation, even if that means slower economic growth and "some pain on households." Investors reacted by pulling from equities, sending stock values lower, while giving back gains enjoyed earlier in the month. Each of the benchmark indexes ended August in the red, led by the tech-heavy Nasdaq, followed by the S&P 500 and the Dow.
Bond prices also fell in August, pushing yields higher. Ten-year Treasury yields rose nearly 50 basis points in August. Two-year Treasury yields were about 33 basis points higher, resulting in an inverted yield curve, which may be an indicator of a recession. The dollar rose higher against a basket of world currencies. Gold, like most other commodities, slid lower in August. Crude oil prices declined for the third consecutive month in August, as rising inflation has cut into consumer spending, weakening demand. Gas prices also continued to fall in August after reaching record highs in May and June. The national average retail price for regular gasoline was $3.827 per gallon on August 29th, down from $4.330 on July 25th but $0.688 higher than a year ago.
As of August
|Monthly Change||YTD Change|
|S & P 500||4,766.18||4,130.29||3,955.00||-4.24%||-17.02%|
|Federal Funds||0.00% – 0.25%||2.25% - 2.50%||2.25% - 2.50%||75 bps||225 bps|
|10-yr Treasury||1.51%||2.64%||3.13%||49 bps||162 bps|
*Chart reflects price changes, not total return
Last Month’s Economic News
- Employment: Employment rose by 528,000 in July, well above the revised June total of 398,000 and exceeding the prior four-month average (388,000). Job growth was widespread in July, led by gains in professional and business services, leisure and hospitality, and health care. With the July increase, employment has increased by 22.0 million since reaching a low in April 2020 and has returned to its pre-pandemic level of February 2020. The unemployment rate edged down to 3.5% in July, and the number of unemployed persons dipped marginally to 5.7 million, with both measures returning to their pre-pandemic levels. Among the unemployed, the number of workers who permanently lost their jobs was 1.2 million in July (1.3 million in June). The labor force participation rate was little changed at 62.1% in July. The employment-population ratio, at 60.0%, was also little changed from the previous month. Both measures remain below their February 2020 values (63.4% and 61.2%, respectively). In July, average hourly earnings rose by $0.15 to $32.27. Over the 12 months ended in July, average hourly earnings increased by 5.2%. The average work week was 34.6 hours in July, unchanged for the fiftieth month in a row.
- FOMC/interest rates: The Federal Open Market Committee did not meet in August and does not meet again until mid-September. Nevertheless, much of the rhetoric from Federal Reserve officials points to another interest-rate hike of at least 75 basis points.
- GDP/budget: The economy has decelerated for two quarters in a row. Gross domestic product decreased 0.6% in the second quarter of 2022 after falling 1.6% in the first quarter. A portion of the second-quarter downturn is attributable to sectors impacted by higher interest rates that are cutting into demand (e.g., housing, nonresidential fixed investment), while rising inflation and ongoing supply-chain disruptions are impacting production. Consumer spending rose 1.5% in the second quarter after increasing 1.8% in the first quarter. Most of the increase in consumer spending is attributable to a 3.6% jump in services, while spending on durables slid 0.1%. Also dragging down GDP was a 4.5% decline in fixed investment, within which residential fixed investment dropped 16.2%, evidence of the slowdown in the housing sector. Nonresidential (business) fixed investment was unchanged in the second quarter after rising 10.0% in the previous quarter. Exports rose 17.6% in the second quarter, while imports, which are a negative in the calculation of GDP, advanced 2.8% after jumping 18.9% in the first quarter. In the second quarter, the personal consumption expenditures price index, a measure of inflation, increased 7.1%, the same increase as in the first quarter.
- Inflation/consumer spending: Overall, inflationary pressures weakened in July. According to the latest Personal Income and Outlays report, the personal consumption expenditures price index, a measure of inflation favored by the Federal Reserve, fell 0.1% in July after increasing 1.0% the previous month. Consumer prices have risen 6.3% since July 2021, down from the 12-month spread for the period ended in June 2021 (6.8%). Personal income and disposable personal income increased 0.2% in July after increasing 0.7% in June. Consumer spending inched up 0.1% in July, following a 1.0% increase in June.
- The Consumer Price Index was unchanged in July after climbing 1.3% in the previous month. For the 12 months ended in July, the CPI increased 8.5% (9.1% for the 12-month period ended in June). Both the monthly and 12-month rates were below expectations. In July, the CPI less food and energy rose 0.3% after increasing 0.7% in June. Pulling the CPI lower in July was a 7.7% drop in gasoline prices, offsetting a 1.1% increase in prices for food and a 0.5% rise in prices for shelter. Nevertheless, for the 12 months ended in July, food prices are up 10.9%, the largest increase since May 1979. And despite the decline in July, gasoline prices have risen 44.0% over the last 12 months.
- Prices that producers receive for goods and services dipped 0.5% in July, following increases of 1.0% in June and 0.8% in May. Producer prices have increased 9.8% since July 2021 (11.3% for the 12 months ended in June). Prices less foods, energy, and trade services increased 0.2% in July and 5.8% since July 2021. In July, the decrease in the producer price index was attributable to a 1.8% decline in prices for goods, the largest decline since April 2020. In contrast, prices for services advanced 0.1%. In July, 80.0% of the drop in prices for goods was attributable to a 16.7% decrease in gasoline prices. Food prices, on the other hand, rose 1.0% in July after falling 0.2% in June.
- Housing: Sales of existing homes retreated for the fifth consecutive month in June, falling 5.4% from the May estimate. Year over year, existing home sales were 14.2% under the June 2021 total. According to the latest survey from the National Association of Realtors®, mortgage rates and home prices have risen sharply over a short span of time, taking a toll on potential home buyers. The median existing-home price was $416,000 in June, up from $408,400 in May and 13.4% higher than June 2021 ($366,900). Unsold inventory of existing homes represents a 3.0-month supply at the current sales pace, up from a 2.6-month supply in May. Sales of existing single-family homes also fell, down 4.8% in June. Sales of existing single-family homes have fallen 12.8% since June 2021.
- Sales of new single-family homes also declined in July, falling 12.6% from June's total and 29.6% from July 2021. The median sales price of new single-family houses sold in July was $439,400 ($414,900 in June). The July average sales price was $546,800 ($457,300 in June). The inventory of new single-family homes for sale in July represent a supply of 10.9 months at the current sales pace, up from June's 9.2-month supply.
- Manufacturing: Industrial production increased 0.6% in July. Industrial production was flat in June. In July, manufacturing output gained 0.7% after falling 0.4% in each of the previous two months. The production of motor vehicles and parts rose 6.6% in July, while factory output elsewhere moved up 0.3%. In July, the index for mining rose 0.7%, while the index for utilities fell 0.8%. Overall, total industrial production in July was 3.9% higher than it was a year earlier. Since July 2021, manufacturing has risen 3.2%, mining has jumped 7.9%, while utilities have increased 2.2%.
- July saw new orders for durable goods increase less than $0.1 billion, virtually unchanged from the June total. Excluding transportation, new orders rose 0.3% in July. Excluding defense, new orders increased 1.2%. Transportation equipment, up for three consecutive months, decreased in July, falling 0.7% from the previous month.
- International markets: Inflationary pressures continued to be felt around the world. Consumer prices rose 9.1% in the eurozone from a year earlier, increasing the likelihood that the European Central Bank will respond by aggressively raising interest rates. Vaulting inflation underscored the continued impact of the Russia-Ukraine war on Europe. In its latest move, Russia shut down its main artery for natural gas to Europe for maintenance, prompting European nations to scramble to fill gas storage facilities to prevent a shortage in the winter. Elsewhere, China's factory activity remained in contraction in August, resulting in U.S. business confidence in China falling. Overall for the markets in August, the STOXX Europe 600 Index slid 4.5%. The United Kingdom's FTSE fell nearly 2.0%. Japan's Nikkei 225 Index rose 1.25%, while China's Shanghai Composite Index advanced 1.2%.
- Consumer confidence: The Conference Board Consumer Confidence Index® increased in August for the first time in the last four months. The August index stands at 103.2, up from 95.3 in July. The Present Situation Index, based on consumers' assessment of current business and labor market conditions, improved to 145.4 in August, up from 139.7 in July. The Expectations Index, based on consumers' short-term outlook for income, business, and labor market conditions, rose to 75.1 in August (65.6 in July).
Eye on the Month Ahead
The Federal Open Market Committee meeting in the middle of September is expected to culminate in an interest-rate hike of at least 75 basis points. Investors remain concerned that the Fed's actions taken to try to slow inflation will also push the economy into a recession. Some economic sectors are showing signs of slowing down, particularly housing and retail sales, while gross domestic product retracted in the second quarter. As the third quarter of the year comes to a close, September may prove to be a month of more noticeable economic waning.
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