Fortis Wealth Management

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December 2022
Market Update
(all values as of 11.30.2022)

Stock Indices:

Dow Jones 34,589
S&P 500 4,080
Nasdaq 11,468

Bond Sector Yields:

2 Yr Treasury 4.38%
10 Yr Treasury 3.68%
10 Yr Municipal 2.75%
High Yield 8.46%

YTD Market Returns:

Dow Jones -4.81%
S&P 500 -14.39%
Nasdaq -26.70%
MSCI-EAFE -16.78%
MSCI-Europe -17.23%
MSCI-Pacific -15.76%
MSCI-Emg Mkt -21.08%
 
US Agg Bond -12.62%
US Corp Bond -15.39%
US Gov’t Bond -13.16%

Commodity Prices:

Gold 1,784
Silver 22.48
Oil (WTI) 80.52

Currencies:

Dollar / Euro 1.03
Dollar / Pound 1.19
Yen / Dollar 138.48
Canadian /Dollar 0.74

Macro Overview

Markets reacted to indications that the Federal Reserve might slow its pace of rate increases heading into the new year. Financial markets would positively view such a change in monetary policy, with the anticipation of eventual lower rates.

The supply chain constraints that existed one year ago have largely subsided. Production, shipping, labor, and material shortage issues were critical concerns during the height of the constraints. The alleviation of supply constraints has led to deep product discounts as retailers mark down prices on numerous items heading into the holiday season. Lower prices tend to decrease retail profit margins, but allow stores to reduce inventory levels and attract consumer traffic.

The Federal Reserve’s most recent survey of economic activity nationwide, known as the Beige Book, revealed weakening economic growth, tighter bank lending standards, and easing inflation. Slowing wage growth is apparent as some companies announce layoffs and trim job positions. Some analysts view these dynamics as deflationary and indicative of a potential economic slowdown.

A closely followed inflation indicator by the Fed, the Personal Consumer Expenditure (PCE) Price Index, fell consistently since June. Data released by the BEA revealed a drop from a 7 level in June to 6 in October, signaling a drop in overall prices and inflation.

Recession fears hindered markets from a further rebound, with growing concerns regarding the labor market. John Williams, Federal Reserve President from the New York district, said that unemployment could reach 5% in 2023, up from 3.7% this past month. Regardless, the Fed’s primary current objective of stamping out inflation remains, meaning any further rate increases could slow hiring and raise unemployment.

Yields on U.S. Treasury bonds, a vital benchmark for mortgage and consumer loan rates, fell modestly in November. The 10-year Treasury bond yield fell to 3.68% in November, down from 4.10% at the end of October. Lower yields offer a reprieve for borrowing consumers and businesses nationwide.

Sources: U.S. Department of the Treasury, U.S. Federal Reserve Bank of New York, U.S. Bureau of Economic Analysis, U.S. Federal Reserve Bank of St. Louis

 
1-year Treasury note was 4.74% compared to 3.68% on the 10-year Treasury

Equities Propelled By Lower Rate Expectations – Global Equity Update

Equity markets rebounded in November as stabilizing inflation stirred optimism that lower rates would eventually materialize. The Dow Jones Industrial Average, S&P 500 Index, and the Nasdaq all climbed modestly in November. Foreign developed and emerging market equity markets outperformed U.S. equities in November, propelled by a slightly weakening U.S. dollar along with lower global interest rates.

Corporate earnings are a key focus for analysts, particularly for companies exposed to consumer sentiment and the economic environment. Many retailers have discounted heavily in preparation for a challenging holiday season. (Sources: Dow Jones, S&P, Nasdaq, Bloomberg, Reuters)

Some Reprieve As Rates Fall Modestly – Fixed Income Overview

With the new year approaching, many analysts expect the Fed to begin slowing its rate hike trajectory. Currently, the Fed Funds Rate range is 3.75% to 4.00%, up drastically from its two-year stint at 0%. The benchmark 10-year Treasury bond yield ended November at 3.68%, down from 4.10% at the end of October. Mortgage and personal loan rates fell modestly, adding buoyancy to consumer demand.

Shorter-term maturity yields for Treasury bonds remained higher than longer-term Treasury bond yields at month end, representing an inverted yield curve indicative of probable slowing economic activity. Yields on the 1-year Treasury note was 4.74%, compared to 3.68% on the 10-year Treasury bond on November 30th. (Sources: U.S. Department of the Treasury, Bloomberg, Reuters)

OPEC Decides To Cut Oil Production – Oil Industry Overview

The Organization of the Petroleum Exporting Countries (OPEC) is a group of nations that comprise the world’s major oil producers, producing more than half of the world’s crude oil. OPEC recently announced its largest cut to its production of oil since April 2020, dropping daily production by 2 million barrels. This decision is likely to raise gas prices for consumers across the globe and increases tension in already-strenuous relations between Saudi Arabia and the United States.

Saudi Arabia, the de facto leader of OPEC, will voluntarily cut production while other OPEC members including Iraq may not be able to afford lower production levels. While Saudi Arabia denied that the production cut would harm Saudi-U.S. relations, U.S. officials see it as an act of aggression that may force a reevaluation of relations. U.S. officials claim that Saudi Arabia is choosing to side with Russia, which has lost daily production of around 1 million barrels per day due to its war with Ukraine. OPEC’s production cut could undermine the efforts of Western countries to curtail Russian oil revenue. (Sources: Wall Street Journal, U.S. Energy Information Administration, Organization of the Petroleum Exporting Countries, Federal Reserve Bank of St. Louis)

 
food inflation at 8.2% is the highest level since the 1980s

Unemployment Rate Expected to Rise Heading Into 2023 – Labor Market Update

In September 2022 the unemployment rate hit 3.5%, its lowest point since the start of the pandemic. New Fed forecasts predict the unemployment rate will rise to 4.4% in 2023. A 4.4% unemployment rate is still historically quite low, although pre-pandemic unemployment rates hovered around 3.5%. Economists largely expect the true unemployment rate to breach the Fed’s expectations and reach 5% as early as the first quarter of 2023. By the end of 2023, the unemployment rate is forecasted to be as high as 6%. In examining pre-pandemic years, a 6% unemployment rate would be a nearly decade-long high, last seen in 2014. Early warnings are evident, as exemplified by new mass layoffs in the tech sector.

The main reason for the high unemployment rate projections is the Fed’s continued increase in interest rates. These increases have pushed the U.S. economy into a potentially recessionary environment, and are expected to continue. While the Fed may slow its raises to only 0.5 or 0.25 basis points instead of their recent 0.75 increases, economic indicators signal that it may soon be time to pause these increases to avoid high unemployment and a recessionary environment driven by sharp decreases in consumer and business spending. (Sources: U.S. Bureau of Labor Statistics, Federal Reserve Bank of St. Louis)

Elevated Food Inflation Continues – Consumer Demand Dynamics

The most recent measure of food inflation is 8.2%, with 2022 inflation at the highest level since the 1980s. The category experiencing the steepest price hikes appears to be food prices. Price increases at grocery stores directly affect all consumers, prompting many to reconsider what they place in their shopping carts. Currently, several food categories are at all-time inflation highs, meaning the price spikes from last year to now are the highest ever recorded. At the top of these categories is food at employee sites and schools, which includes cafeteria food at public schools. This category is up a massive 91.4% from a year ago. Other categories seeing all-time high price jumps are butter and margarine which have spiked by 32.2%, flour which has leaped by 24.2%, soup which has jumped 20.5%, cereal which is up 17.7%, and canned fruits and vegetables which have increased 19%. An additional category seeing tremendous pricing pressure is eggs, which over the past year have risen 30.5%. The prices of these common groceries have major effects on consumer decision-making. Due to inflation, consumers are increasingly only buying necessities and may further limit their purchases. Consumer spending makes up nearly 70% of GDP, so when consumer spending falls due to high prices, GDP can also be expected to fall. (Sources: U.S. Bureau of Labor Statistics, Bureau of Economic Analysis, Federal Reserve Bank of St. Louis)

 
In 1804, the world’s population reached 1 billion

World Population Surpasses 8 Billion – Global Demographics

In 1804, the world’s population reached 1 billion people. In 1927, over a century later, it reached 2 billion. Now, just 11 years after it passed 7 billion, the world’s population officially surpassed 8 billion people. This growth is not unprecedented, as overall growth rates have been decreasing since the 1960s. Growth rates are currently less than 1% and peaked at around 2.25% in 1964. Populous nations like China and the United States have seen lower growth rates in recent years, but much of the less-developed world is experiencing tremendous growth. About 70% of the growth from 7 to 8 billion was seen in low-income and lower-middle-income populations, which is expected to continue despite the scarcity of reproductive health care in these regions. Some of the lowest growth rates were exhibited in Europe, and the European population is expected to decline over the coming years.

As it currently stands, most of the world’s population lives in Asia, with over 1.4 billion people living in China and India. India is expected to surpass China as the world’s most populous nation as early as 2023, as China struggled with historically low births in recent years. The world’s third-most populous nation is the United States, with over 330 million people, followed by Indonesia, Pakistan, and Brazil. A significant amount of population growth over the past decade has been in sub-Saharan Africa, where the population is expected to grow faster than the rest of the world for the next billion people as well. Global fertility rates are down globally, and high-income nations have fewer people under the age of 65. As a result, growth is expected to slow down. Even though it took only 11 years to go from 7 to 8 billion, it is projected to take 15 years to reach 9 billion and 22 to reach 10 billion. (Sources: United Nations; Our World in Data; World Economic Forum; U.S. Census Bureau)

High Mortgage Rates Deter Potential Homebuyers – Housing Market Review

Mortgage rates eclipsed 7% in late October 2022, the highest level in over 20 years. This has discouraged many potential buyers from purchasing a home, instead renting or staying where they currently live. Recent rates are discouraging enough that the probability of individuals changing their primary residence in the next year is at a record low. A survey conducted by the Federal Reserve Bank of New York highlights this dynamic. In March 2019, nearly 22% of people were likely to change their primary residence over the next year, which coincided with strong faith in the economy and low mortgage rates around 4%. However, in late 2022 only 14% of households expect to move to a new primary residence over the next year. The Fed is deliberating whether to continue increasing the federal funds rate, which has a tremendous impact on mortgage rates. National housing prices saw their first decrease in over 10 years in 2022, as fewer buyers can pay mortgages at increasingly high rates. Lower spending rates in the housing market could potentially hint toward a grim economic outlook for 2023. (Sources: Census Bureau, Freddie Mac, Fed Bank of St. Louis)