Derek J. Sinani

Founder/Managing Partner

derek@ironwoodwealth.com

17015 N. Scottsdale Road Suite 235

Scottsdale, AZ 85255

480.473.3455

October 2022 - It was a long summer ...
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 – Financial markets were anxious during the third quarter as rising rates, inflation, and slowing economic activity hindered major equity indices. Dramatic tax cuts implemented in the U.K. (and quickly reversed) stirred global financial currency markets with the British pound falling to historic lows – resulting in bond and currency market intervention by the Bank of England.

The effects of Hurricane Ian on the insurance and property casualty industry may take months to determine. Preliminary estimates are expected to surpass $57 billion in property losses and damage, yet not as catastrophic as Katrina’s $125 billion in losses during 2005. Historically, the carnage of a major hurricane comes with the silver lining of a reconstruction boom that can stimulate regional economies.  This mini-boom generally extends into home goods, clothing and apparel, furniture, electronics, automobiles, and general construction and labor employment activity.

Affordability constraints from elevated home prices and rising mortgage rates continue to hinder housing nationwide. Mortgage volume for both purchased and refinanced loans fell to a 22-year low in late September due to increasing rates which are slowing mortgage activity. The mortgage and title insurance industry – a rather large sector, will likely experience material employment downsizing, layoffs, and furloughs.

Concerns surrounding the extent of the Federal Reserve’s strategy on raising rates affected fixed-income and equity markets in September. The Fed’s strategy to combat inflation by increasing the Fed Funds rate has been one of the most ambitious in decades. The Federal Reserve increased short-term rates again in September with the Fed Funds rate reaching a target range of 3% to 3.25%. I encourage the Fed to slow down its pace after the November meeting.  Monetary policy is lagged and variable.  It would be highly prudent to be slightly patient in accessing the lagged and variable impact of their policy thus far.

The “Fed Funds Rate” is controlled by the Federal Reserve, and is the key interest rate that influences consumer and business interest rates. This year, the Fed has aggressively increased the rate – with the goal of slowing spending and inflation. The U.S. is currently experiencing the highest inflation rate since 1981. In March 2022, the Fed began increasing interest rates – before then, the rate was effectively at 0% between April 2020 and February 2022. As of September 21st, the rate has a target range of 3% to 3.25%, which means the rate has risen 3% in just 7 months. This is the largest increase made by the Fed in a single year since 1982. Based on this, the Fed Funds Rate would reach 4% to 4.25% by yearend.

 
2-year Treasury yield at 4.22%, 10-year Treasury yield at 3.83% On Sept 30th

Stocks Endure Difficult Third Quarter – Domestic Equity Overview

Equities across the board were down in the quarter ending September 30th, as the market continues to react to global turmoil and the Fed’s aggressive interest rate spikes. Sectors that held up the best relative to other sectors included biotechnology, healthcare services, and oil/gas, joined by banks, semiconductors, and healthcare equipment.

Various equity analysts believe that the current rallies in equities are not yet durable rallies. Optimistically, certain sectors are establishing more attractive valuations as prices have receded.  Once we see evidence that the trajectory of inflation is moderating, a durable and potentially explosive stock market rally will likely unfold.

Short-Term Bond Rates Remain Higher Than Long-Term Bond Rates – Fixed Income Review: Rising rates are being compounded by the Fed’s suspension of buying U.S. Treasuries and mortgage bonds on the one market. Along with the Fed’s current increase in short-term rates, the additional pressure on the fixed-income market has exacerbated the rapid rise in interest rates.

Short-term Treasury bond yields remained higher than longer-term maturities in September, known as an inverted yield curve. The 2-year Treasury yield finished September at 4.22% while the longer-term 10-year Treasury yield was at 3.83%.

Euro and Pound Declining – Currency Update: The European economy is currently experiencing turbulence due to the Ukrainian conflict and Russian supply cuts. On the other hand, high-interest rates have increased the strength of the U.S. dollar, resulting in historical lows in the exchange rates of the U.S. Dollar to European currencies.

2022 marked the first time the U.S. Dollar hit parity, or equal value, with the Euro since 2002. The Euro’s peak value was in April of 2008 when one euro was equal to 1.6 dollars. However, the aforementioned economic turbulence in Europe has started a recent decline in the euro’s valuation, which sits at around one euro equal to 0.97 dollars.

A more drastic decline can be seen in the dollar and the British pound exchange rate. The pound saw a peak of around 2.1 dollars equal to one pound in November 2007, yet has lost nearly half its value in the approximately 14 years since. Currently, the pound is equal to 1.09 dollars, nearly a 50% decline from this peak to the current valuation.

These exchange rates not only highlight the turbulence in European economies but also the growing strength of the U.S. Dollar. The dollar has historically grown stronger in times of global recession and war, which is currently the case as well. Many European goods are much relatively cheaper now for Americans, which could remain for months or even years.

 
Currently, 66% of Americans are homeowners

Housing Affordability / Series 1 of 2: Rising Mortgage Rates Deter New Buyers – Housing Overview

The 30-year conforming mortgage rate has a profound effect on the prices of homes and the rate at which interest is collected on mortgages. This rate is increasing, which has an inverted effect on home prices, causing them to drop for the first time in over a decade.

Between July and June of 2022, home prices experienced their first monthly drop since March of 2012. This ended a decade-long surge of rising home prices by falling to -0.44% from June to July of 2022. The cause of this is higher mortgage rates, resulting in lower affordability.

Mortgage rates, as of late September 2022, have reached 6.7%. This is the highest they have been in over 16 years and have not reached this level since July 2006. When mortgage rates are at such high levels, they can deter new homebuyers, as potential buyers do not want to purchase a home on which they have to pay such high interest. Thus, sellers are forced to drop their home prices to look more favorable to buyers, but such high mortgage rates still end up making most houses more expensive than they were months ago when home sale prices were relatively higher.

Currently, 66% of Americans are homeowners, which is down from 2004 highs of nearly 70% but still on the rise from 2016 lows of 63%. However, these mortgage rates are expected to drop the homeownership rate yet again as an increasing amount of potential buyers are dissuaded from purchasing a home now and instead look to rent and wait until mortgage rates drop.

Unemployment Claims On The Rise – Labor Market Overview

Unemployment claims reached their highest level since late November 2021, and have steadily increased throughout the year. As of the week ending on August 6th, the job market saw initial unemployment claims rise to 262,000. This was an increase of 14,000 claims from the previous week’s 248,000 claims and an increase of over 30,000 claims from just 6 weeks prior. This gradual increase in unemployment claims is emerging as uncertainty over the economy expands. Many sectors, specifically tech, real estate, mortgage and title are experiencing stagnated hiring and even layoffs. With a volatile stock market and a slowing economy, technology companies are easing and even freezing hiring and in some cases conducting layoffs. Optimistically, layoffs are not at the high levels they were during the pandemic, but unemployment claims have been steadily increasing. This could foreshadow more uncertainty in an economy that has begun to slow down, and actually may be a positive as it will influence the Fed to slow or moderate its path of higher interest rates.

 
Retirees Make Up an Increasing Portion of the Population

Retirees Make Up an Increasing Portion of the Population – Retirement Trends

Since the early 2010s, the share of the U.S. population made up of retirees has been growing at a fairly constant rate, yet saw a spike since the beginning of the pandemic. In just the first year of the pandemic, an additional 1.3% of the population was made up of retirees- an increase of 3.6 million people.

In comparison, the average annual growth rate from 2010 to 2020 was just 0.3% per year.

This increase, however, is not attributed to the commonly held perception of retirement where employed people transition into retirement. According to the Kansas City Fed, this increase in the number of retirees is due to the decrease in the number of retirees who decide to come out of retirement and rejoin the workforce. So, for many retirees, deciding to go back to work sounds much more unappealing than it did in the years leading up to the pandemic.

Compared to rates before the pandemic, current employment-to-retirement and retirement-to-unemployment rates have remained constant, whereas a drop-off has been seen in the rates of unemployment-to-retirement and retirement-to-employment. This portrays that around the same number of people are entering retirement from the workforce or starting to look for a job during retirement, while fewer people are finding a job after retirement.

Many retirees are still generally considered young enough to rejoin the workforce and have rejoined the workforce since the pandemic has calmed down this past year. From February 2020 to June 2021, 0.7 million people under the age of 60 retired, 0.5 million between the ages of 61-67, and 1.6 million between the ages of 68-75. Over 250,00 A large amount of these groups can return to work, which may lead to an increase in retirement-to-employment rates in the future. (Sources: Kansas City Fed, U.S. Census Bureau)