Fortis Wealth Management

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October 2022
Market Update
(all values as of 09.30.2022)

Stock Indices:

Dow Jones 28,725
S&P 500 3,585
Nasdaq 10,575

Bond Sector Yields:

2 Yr Treasury 4.22%
10 Yr Treasury 3.83%
10 Yr Municipal 3.26%
High Yield 9.50%

YTD Market Returns:

Dow Jones -20.95%
S&P 500 -24.77%
Nasdaq -32.40%
MSCI-EAFE -28.88%
MSCI-Europe -30.50%
MSCI-Pacific -25.80%
MSCI-Emg Mkt -28.91%
 
US Agg Bond -14.61%
US Corp Bond -18.72%
US Gov’t Bond -15.10%

Commodity Prices:

Gold 1,668
Silver 19.01
Oil (WTI) 79.74

Currencies:

Dollar / Euro 0.97
Dollar / Pound 1.09
Yen / Dollar 144.50
Canadian /Dollar 0.73

Macro Overview

Financial markets experienced volatility during the third quarter as rising rates, inflation, and slowing economic activity hindered major equity indices. Dramatic tax cuts proposed in the U.K. stirred global financial currency markets, with the British pound falling to historic lows. Fiscal policy reform is a focal point as various international economies are potentially poised to fall into recession.

The effects of Hurricane Ian on the insurance and property casualty industry may take months to determine. Analysts expect preliminary insurance estimates to surpass $57 billion in property losses and damage. For context, Hurricane Katrina caused $125 billion in losses during 2005.

Affordability constraints are impacting the national housing market due to elevated home prices and rising mortgage rates. Mortgage volume for both new purchases and refinanced loans fell to a 22-year low in late September, due to rapidly increasing rates.

Concerns regarding the extent of the Federal Reserve’s strategy on raising rates affected fixed-income and equity markets in September. The Fed’s approach 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%. (Sources: Federal Reserve, FreddieMac, Mortgage Bankers Association, Treasury Dept., Bloomberg)

The Fed’s Continuous Increase Of The Fed Funds Rate – Monetary Policy

The Fed Funds Rate, which is controlled by the Federal Reserve Board, is the interest rate that banks charge each other to borrow money. This year, the Fed has aggressively increased that rate.

The effects of increasing the Fed Funds Rate are more expensive borrowing costs and reduced demand for borrowing money. By increasing the rate, the Fed hopes to pacify rising inflation, as the U.S. is currently experiencing the highest inflation rate observed since 1981.

In March of this year, the Fed began to increase interest rates. Prior to that, 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%, amounting to a rise of 3% in just 7 months. This is the largest increase made by the Fed in a single year since 1982. If the Fed continues on this trajectory, the Fed Funds Rate would reach 4% to 4.25% by the end of this year. (Sources: Federal Reserve Bank of St. Louis, Federal Reserve Bank of New York)

 
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 reacted to global turmoil and the Fed’s aggressive interest rate hikes. Sectors that held up the best relative to other sectors included biotechnology, healthcare services, and oil/gas, joined by banks, semiconductors, and healthcare equipment.

Some equity analysts believe that the current rallies in equities are bear market rallies with little or no fundamental strength. Optimistically, certain sectors reached relatively attractive valuations as prices receded. (Sources: S&P, Dow Jones, Bloomberg)

Short-Term Bond Rates Higher Than Long-Term Bond Rates – Fixed Income Review

Rising rates are compounded by the Fed’s move to suspend its purchase of U.S. Treasuries and mortgage bonds. Along with the Fed’s current increase in short-term rates, the additional pressure on the fixed-income market has exacerbated a rapid rise in interest rates. Short-term Treasury bond yields remained higher than longer-term maturities in September. This dynamic is known as an inverted yield curve, which economists widely view as a warning sign for a future recession. The 2-year Treasury yield finished September at 4.22%, while the longer-term 10-year Treasury yield was at 3.83%.(Sources: U.S. Treasury, Bloomberg, Federal Reserve)

Euro and Pound Plummeting – Currency Update

The European economy is experiencing turbulence due to the Ukrainian conflict and Russian supply cuts. Simultaneously, high interest rates are increasing 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 2008, when one euro was equal to 1.6 dollars. However, the aforementioned economic turbulence in Europe precipitated a recent decline in the euro’s valuation, which sits at around one euro equal to 0.97 dollars.

An even more drastic decline occurred with the British pound exchange rate. The pound saw a peak of around 2.1 dollars equal to one pound in November 2007, and has lost about half its value in the 14 years since. Currently, the pound is equal to 1.09 dollars, nearly a 50% decline from the peak to the current valuation.

These exchange rate movements highlight not only 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. Many European goods are relatively much cheaper now for Americans, which could remain the case for months or even years. (Sources: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis)

 
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 monthly cash flows required to service mortgages. This rate is increasing, which has an inverse effect on home prices, causing them to drop for the first time in over a decade.

Between July and June of 2022, national home prices experienced their first monthly drop since March of 2012. This ended a decade-long surge of rising home prices, falling 0.44% from June to July of 2022.

The average mortgage rate, as of late September 2022, reached 6.7%. This is the highest it has been in over 16 years, since July 2006. When mortgage rates are at such high levels, they tend to deter new homebuyers, since most potential buyers are constrained by their monthly earned income on how much they can afford in monthly mortgage payments. As a result, sellers are forced to drop their home prices to make the debt service payments more affordable for buyers.

Currently 66% of Americans are homeowners, compared with nearly 70% in 2004 and 63% in 2016. However, rising mortgage rates are expected to lead to a decrease in the homeownership rate as an increasing amount of potential buyers are dissuaded from purchasing a home now and instead opt to rent until mortgage rates drop. (Sources: U.S Census Bureau, S&P Dow Jones Indices, Freddie Mac, Federal Reserve Bank of St. Louis)

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. The gradual increase in unemployment claims is emerging in the context of uncertain economic outlook. Many sectors, particularly tech and real estate, are experiencing stagnated hiring and even layoffs.

With a volatile stock market and a slowing economy, technology companies are easing or freezing hiring, and in some cases conducting layoffs. Notably, layoffs are not at the high levels seen in the depths of the COVID-19 pandemic, but unemployment claims have been steadily increasing. This could foreshadow more uncertainty in an economy that has begun to slow down. (Sources: U.S. Employment and Training Administration, Federal Reserve Bank of St. Louis)

 
1.3% of the population is made up of retirees- which is 3.6 million people

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

Since the early 2010s, the share of the U.S. population comprising retirees grew at a fairly constant rate, but then saw a sharp spike during the pandemic. In just the first year of the pandemic, an additional 1.3% of the population was made up of retirees, which amounted to an additional 3.6 million people.

In comparison, the average annual growth rate of the retiree population from 2010 to 2020 was just 0.3% per year. The Kansas City Fed states that, had this pace continued, the number of retirees would have expanded by 1.5 million rather than the actual 3.6 million retirees. The increased rate generated over 2 million additional retirees.

This increase, however, is not attributed to more employed people transitioning into retirement. According to the Kansas City Fed, this increase in the number of retirees is due to a decrease in the number of retirees who decided to come out of retirement and rejoin the workforce. So, for many retirees, deciding to go back to work is apparently much less appealing now 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 there has been a decline in the rates of unemployment-to-retirement and retirement-to-employment transitions. 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.

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 retired, and 1.6 million between the ages of 68-75 retired. A large portion of these groups could potentially 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)