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 increases. Sectors that held up the best relative to other sectors included biotechnology, healthcare services, and oil/gas, joined by banks, semiconductors, and healthcare equipment.

Corporate earnings are increasingly becoming a focal point as shrinking margins are becoming more apparent in various industries.  Inflation and escalating wages continue to dampen margins and induce downward earnings revisions.  Various equity analysts believe that the current rallies in equities are bear market rallies with little or no fundamental strength. Optimistically, certain sectors are establishing more attractive valuations as prices have receded.

(Sources: S&P, Dow Jones, Bloomberg)

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

Rising rates are being compounded by the Fed’s reversal from buying to now selling U.S. Treasuries and mortgage bonds. Along with the Fed’s current increase in short-term rates, the additional selling pressure on the fixed-income market has exacerbated the rapid rise in interest rates.

Short-term Treasury bond yields are now higher than longer-term maturities.  This is 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%.  An inverted yield curve signals pending economic weakness and possible recession.

(Sources: U.S. Treasury, Bloomberg, Federal Reserve)

Copper down on Global Economic Slowdown – Global Economy Review

Copper is among the most actively traded commodities worldwide.  It is a vital piece of global economic growth and a crucial commodity in major industries like construction, power generation & transmission, transportation, and technology.  The fast-expanding electric vehicle and environmentally green energy sources of wind and solar use significant amounts of copper.

Copper’s price per pound as of July 11th reached a low of $3.23, down from its historic high of $4.94 in late February of this year, a drop of around 34%.  The decline in the price of copper is a signal of the worldwide economic weakness.  European economies are in a clear decline exacerbated by Russia’s invasion of Ukraine.  The price of copper is another signal of a looming recession.

(Sources: Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PCOPPUSDM)

Housing Affordability: Rising Mortgage Rates Deter New Buyers – Housing Overview

Mortgage rates have a profound, inverse effect on the prices of homes.  Rising mortgage rates have caused home prices to drop for the first time in over a decade. From June to July 2022, home prices experienced their first monthly drop of -0.44% since March of 2012. This ended a decade-long surge of rising home prices.

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.   In January 2022 when 30-year mortgages rates were 3%, the mortgage payment for a $300,000 mortgage was $1,265.  Now, at a 6.7% interest rate, the mortgage payment would be $1,936, or 53% higher!

When mortgage rates are at such high levels, they 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 the recent high of 70% in 2004. Both percentages are higher than the recent lows in 2016 of 63%.  However, these higher mortgage rates are expected to drop the homeownership rate yet again as an increasing number of potential buyers are dissuaded from purchasing a home.  Instead, it is expected these potential buyers will continue to rent and wait for 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. This gradual increase in unemployment claims is emerging as uncertainty over the economy expands. Many sectors, specifically tech and real estate, 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.

(Sources: U.S. Employment and Training Administration, Federal Reserve Bank of St. Louis)