July 2022
Market Update
(all values as of 10.31.2022)

Stock Indices:

Dow Jones 32,732
S&P 500 3,871
Nasdaq 10,988

Bond Sector Yields:

2 Yr Treasury 4.51%
10 Yr Treasury 4.10%
10 Yr Municipal 3.40%
High Yield 8.92%

YTD Market Returns:

Dow Jones -9.92%
S&P 500 -18.76%
Nasdaq -29.77%
MSCI-EAFE -25.09%
MSCI-Europe -25.57%
MSCI-Pacific -24.27%
MSCI-Emg Mkt -31.16%
 
US Agg Bond -15.72%
US Corp Bond -19.56%
US Gov’t Bond -16.15%

Commodity Prices:

Gold 1,640
Silver 19.32
Oil (WTI) 86.83

Currencies:

Dollar / Euro 0.99
Dollar / Pound 1.15
Yen / Dollar 1.48
Canadian /Dollar 0.73
 

Macro Overview

Attention has shifted from inflation to recession as housing, wages, interest rates, commodities, and consumer expenditures have all receded from their highs, an indication to economists that an economic slowdown or recession may be evolving.

Numerous countries worldwide are restricting the export of food, adding to global supply constraints already causing shortages and hunger in various third-world countries. Such restrictions, which have been exacerbated by the invasion of Ukraine, are considered a form of food protectionism.

The EU imposed a partial ban on crude oil imports from Russia in response to the invasion of Ukraine. With energy prices already soaring in Europe, the ban is expected to cause even further inflationary pressures throughout the European region.

Equity indices had their worst first six months in decades, with the Dow Jones, S&P 500, and Nasdaq averages all posting negative returns. Elevated labor and material costs, recessionary concerns, and an increasingly faltering sentiment have fostered downward momentum.

The Federal Reserve Bank of Atlanta estimates Gross Domestic Product (GDP) with a model it has been utilizing for years, with a very low average tracking error of just -0.3. The model, known as GDPNow, estimates GDP for the second quarter of the year at negative 2.1%, following another negative 1st quarter GDP of 1.6%. Many economists consider two consecutive quarters of negative GDP as indicators of a recessionary environment. Fed Chairman Jerome Powell said that the risk of a recession is heightened as rates continue to move higher, stating that a recession is not the Fed’s “intended outcome”, but that it is “certainly a possibility.”

Other signs of stabilizing inflationary pressures are present in the commodities market, where copper, oil, wheat, rice, and lumber continued to fall from their highs this past month. Lower commodity prices tend to help alleviate some expenses and inflation for consumers.

Gasoline prices eased a bit this past month with the national average for a gallon of regular gasoline falling to $4.87 at the end of June, down from $5.00 earlier in the month. As pricey as gasoline may seem, gasoline prices can be much higher in other countries, such as in Hong Kong where consumers are paying upwards of $11 per gallon.(Sources: The Federal Reserve Bank of Atlanta, EuroStat, Dept. of Energy, S&P, UN World Food Programme)

 

 
the Dow Jones Index suffered its worst six months since 1962

Equity Indices Have a Rough First Half – Domestic Equity Overview

Equity indices have had a difficult first half of the year, their worst in decades. The S&P 500 Index had its worst first half in over five decades, the Dow Jones Index suffered its worst six months since 1962, and the Nasdaq had its worst first six months ever.

Energy was the only positive sector in the S&P 500 for the first six months, while the other ten sectors including health care, financials, communications, and real estate were negative. Consumer discretionary and technology sector stocks were among the worst-performing sectors, with consumer staple stocks among the better performers.

Second-quarter earnings, due for release in July, are expected to reveal how company profits fared with exceptionally elevated material and labor costs earlier in the year. Analysts are also sensitive to a growing consensus expecting a recessionary environment before the end of the year.

Sources: Bloomberg, S&P, Reuters, Dow Jones

Yields Hold Steady Until Fed Decides – Fixed Income Update

The yield on the 2-year Treasury bond fell to 2.84% on July 1st, the biggest drop since March 2020. Yields on the 5, 10, and 30-year Treasury bonds also fell, indicative of deflationary trends.

Many analysts expect the Fed to raise short-term rates at least once more by 75bps in July, with a possible pause thereafter. Some are even projecting the Fed to reverse course and start easing rates in 2023 should the economy fall into a recession. (Sources: Treasury Dept., Federal Reserve)

Series I Savings Bonds – Over 9.5% Yields With No Down-Side In Real Terms

One of the best retirement-savings vehicles available is one that you may never have heard of- the I Bond. I Bonds presently offer a risk-free yield of 9.62%, while an insured savings account is returning less than 1% before taxes. I Bonds are a type of savings bond that promise a fixed rate of interest for up to 30 years, but you can cash out any time after the first year. If you redeem the I Bond in the first five years you will have to pay a penalty of three months worth of interest.

Regardless, I Bonds work great as an emergency fund due to their easy liquidity, assuming you have held them for at least a year. To purchase I Bonds you must open account on-line through the Treasury’s website TreasuryDirect.gov. (You can use this same account to buy TIPS without paying any commission.)

I Bonds are not taxable on a state level, only on the Federal level, and the tax is not due until one redeems the Bond. There is a limit of $10,000 of I Bonds that can be bought each calendar year, but tax refunds can be taken in the form of a paper I Bond for up to an additional $5,000 that will be mailed to you.  You can then convert it to a digital I bond on Treasury’s website.

Source: https://www.treasurydirect.gov/

 
inflation rate of 7.6% for the CPI-E is lower than the 8.6% rate for the CPI

Upper Earners Hold Most Savings On Hand – Consumer Behavior

Consumers are now saving less than before the pandemic, as stimulus assistance funds
and generous unemployment benefits have gradually evaporated, encouraging consumers to tap their savings at an accelerating pace. The drop in savings has been especially prolific for those nearing retirement. As markets have pulled back, so have retirement fund values, elongating the retirement threshold for many.

Savings rates rose dramatically in 2020 as billions of dollars in stimulus relief payments
made their way into consumer accounts. Federal Reserve data found that households
spent only 40 percent of their payments, used 30 percent to pay down debt, and saved
about 30 percent on the initial round of stimulus payments. The spectacular rise in the
savings rate to nearly 34 percent in April 2020 was a validation of how much of the
payments went towards savings.

As additional relief programs along with generous unemployment benefits became effective, the savings rate remained elevated through the end of 2021. The most recent data show that the savings rate dropped to 5.4 percent in May 2022, lower than where it stood at roughly 7.5 percent before the pandemic began.

A Fed analysis found that lower-income households tend to spend most if not all of their income and end up having very little disposable income at the end of each month. Most lower-income households have already depleted their pandemic surplus funds in savings and are also being squeezed by inflation as food and energy prices continue to escalate. This has led to upper-income earners holding the most savings on hand, while lower-income savings begin to dwindle. (Source: U.S. Bureau of Economic Analysis, St. Louis Federal Reserve Bank, Marginal Propensity to Consume Working Paper; Federal Reserve Bank of Boston)

Inflation Can Be Different For Those Over 62 – Retirement Planning

Data compiled by the government via the Bureau of Labor Statistics (BLS) maintains a separate tally of inflation for people over 62. The rarely heard index, known as the CPI-E, is a variation of the traditionally recognized CPI (Consumer Price Index), but with an emphasis on goods and services mostly used by those over 62 years of age. This past month, the recent release of the CPI-E and the CPI revealed an inflation rate of 7.6% for the CPI-E versus an 8.6% rate for the traditional CPI over the past year.

The CPI-E assigns a larger weight to senior-related expenses such as medical services and housing, and a lesser proportion to education and transportation. The index was first created in 1987 when Congress directed the BLS to assist in identifying inflationary pressures among senior citizens. The index currently represents roughly 25% of all U.S. consumers. (Source: BLS)

 

 
Estonia and Lithuania have seen inflation exceed 20%

Those 55 & Older Are Going Back To Work – Retirement Planning

Rising inflation along with no new pandemic relief funds are prompting many aged 55 and older to return to work. Labor Department data shows that the participation rate for those above 55 years old has been rising over the past few months, with over 480,000 55 plus year olds returning to the labor force. Plenty of available jobs has also made it enticing for many to reenter the work force, with over 11 million open positions nationwide.
The return of 55 plus year olds to work may postpone retirement for many, who may have been planning on retiring sooner rather than later. The dramatic rise in stocks valuations and 401k plans over the past two years positioned many for a possible earlier retirement. But with recent market valuations sliding, the prospect of retirement may be further out than desired.
Other factors encouraging a return to the workforce include vaccinations, school re-openings, more remote and flexible work opportunities, and attractive wages.
Sources: Department of Labor

Inflation Varies From Country To Country In Europe – European Inflation

A tremendous surge of inflation has encompassed European countries as a result of the Russian invasion of Ukraine. Essential energy and food products that have for years been imported from Russia and Ukraine have elevated overall prices throughout Europe. Natural gas, petroleum, and numerous energy products have risen roughly 42% in the past year, hindering economic growth and consumer sentiment in the 27-member European Union (EU).

Overall inflation for the 27 countries making up the EU rose 8.6% in the past year, essentially identical to the inflation rate in the United States. The Harmonised Index of Consumer Prices, which measures inflation in the EU, saw the EU’s inflation rate reach its all-time high in May of this year at 8.8%. This figure is more than four times the EU’s average inflation rate from 2000 to 2022, which was at a stable 2.03% and even reached lows of -0.6% in 2015. Inflation has also been exceptionally harsh for Estonia and Lithuania, where inflation has exceeded 20%. Supply constraints, energy costs, and imported foods have been among the primary drivers of inflation in the EU.

Source: Eurostat; https://ec.europa.eu/eurostat/documents/2995521/14644614/2-01072022