Dan Groben

Phillip Menard

Servant Advisors

1028 Oakhaven Road

Memphis, TN 38119

901.922.6001

www.servantadvisors.com

September 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

Our Valued clients:

As we continue into the last month of the 3rd qtr of 2022, volatility and a reversal from the recent rally has also continued.

Recession fears weighed on markets as equities pulled back from a mid-summer rally that many analysts suspect was short-lived. U.S. equities began August in rebound mode but reversed course to end the month in negative territory.

Crude oil and gasoline prices fell further in August, offering a reprieve for consumers and easing inflationary pressures slightly. Oil prices posted their largest monthly drop for the year, falling to $88.90 per barrel at the end of August, down over 30% from a high of $130 in March.

Demand for homes continued to ease in August as rising mortgage rates and elevated home prices continued to make affordability a challenge for millions of home buyers. The average 30-year conforming fixed mortgage rate rose to 5.66% on September 1st, yet still below June’s high of 5.81%.

Concerns surrounding an impending recession mounted in August, as equity markets hesitated with further anticipated Federal Reserve rate hikes. Numerous factors continue to hinder economic growth both in the U.S. and internationally, including the invasion of Ukraine, food supply issues, monetary tightening, inflation, and falling corporate margins. 

A drop in real wages and heightened layoffs added pressure to the already uncertain labor market, which seems to be cooling following a year of rapid growth. Many Americans are returning to work from the heights of self-employment in 2021 as uncertainty in the economy grows. Large sectors like technology and finance are seeing companies usher plans to return workers to the office, away from the popularity of remote work during the pandemic. 

The unemployment rate rose to 3.7% in August from 3.5% the previous month, making August’s unemployment rate the highest since February of this year. This indicates a slight slowdown in the labor market.

Retail stores continue to hold excess inventories, as consumers curb purchases. Too much inventory can hinder earnings for companies, especially heading into the holiday season.

China re-instated a zero-covid policy by extending a lockdown in the western city of Chengdu, slowing Chinese exports and economic growth. Such policies also lead to closures of factories and manufacturing facilities, which can affect supply chains globally.

Russia halted all gas supplies to Europe indefinitely, further complicating efforts for European consumers and raising fuel prices to new highs. Europeans are already experiencing broad levels of inflation not seen in decades.

Sources: Freddie Mac, BLS, Department of Energy, Federal Reserve Bank of St. Louis

 
the savings rate is the lowest it has been since September of 2008

Fed Makes It Tough For Equities In August – Equity Review

U.S. equities began August in rebound mode but reversed course to end the month in negative territory. Continued Fed rate hikes and recession fears weighed on equities.

Company earnings are increasingly becoming a focal point as shrinking margins are becoming more apparent in various industries. Inflation and erratic wages continue to dampen margins and induce downward earnings revisions. (Sources: Bloomberg, Reuters, S&P)

Rates Tentative As Uncertainty Persists – Fixed Income Update

U.S. Treasury bond yields rose in August, with the 10-year Treasury ending the month with a 3.15% yield. Treasury bond yields flattened as well, with the shorter-term 1-year Treasury finishing the month at 3.50%, nearly identical to the 20-year Treasury yield at 3.53%. Such a dynamic tends to attract bond buyers towards the shorter end of the curve. Economists view a flattening yield curve as indicative of a possible economic slowdown.

In addition to raising short-term rates, the Fed will continue to sell U.S. Treasury bonds and mortgage-backed securities from its balance sheet, indirectly placing pressure on rates to rise. (Sources: Bloomberg, Reuters, U.S. Department of the Treasury)

Personal Savings At Lowest In 14 Years – Consumer Behavior

During the peak of the pandemic, uncertainty over the job market and elevated unemployment caused consumers to save at heightened rates. In addition, “going out” became extremely limited as restaurants, stores, and vacations were off the table for a majority of the population. With the pandemic tranquilized, consumer spending spiked tremendously and savings began to deplete.

With spending levels falling, many consumers have become wary of fully depleting their pandemic-era savings, yet are now still saving at very low levels. The personal savings rate, which measures how much disposable (post-tax) income people tend to save has reached a 14-year low. The rate reached 4.4% in April 2022 according to the Bureau of Economic Analysis, the lowest it has been since September of 2008.

With both savings and spending down, many consumers have resorted to increasingly focusing on buying essential goods rather than spending on discretionary items. Economists view this dynamic as a decline in consumer confidence throughout the economy.

Source: U.S. Bureau of Economic Analysis, Federal Reserve Bank of St. Louis

 
wages increased 5% in the past 6 months, real wages decreased over the same time

Gross Domestic Product (GDP) Has been slipping lately

Many have argued that the economy is technically in a recession as two (2) negative quarters of GDP has historically been the definition of a recession, this happened in the first two (2) qtr’s of 2022. Others dispute this fact on the grounds that unemployment is typically higher when a recession happens: This should clarify in the coming months.

 

Wage Increases Don’t Necessarily Mean More Money In Your Pocket – Labor Market Dynamics

A jump in inflation could mean that even with a pay raise, you could have less money in your pocket. 

To evaluate wages, there are two factors to consider, nominal wage growth and real wage growth. A nominal wage is simply the wage, in U.S. dollars. A real wage is the nominal wage growth in the context of inflation, adjusted for the level of purchasing power held by the U.S. dollar. For example, $5 in 1950 has the same purchasing power as around $60 in 2022. Thus being paid $5 in 1950 is worth much more than being paid $5 in 2022.

Both real and nominal wages ballooned in early 2020, and then both also fell tremendously one year later in early 2021. However, since this fall in both wage measures, nominal wages have continued to increase while the purchasing power of these wages continues to fall because of inflation.

In recent months, inflation has grown at an above-average rate, reaching 9.1% in June 2022. This inflation rate is greater than the rate at which wages grow, which means that real wages are actually decreasing relative to inflation. While wages have increased at over 5% for the past 6 months, real wages have decreased over this same time. So, consumers are left with less purchasing power even if their salary has risen.  (Sources: BLS, EPI analysis of Bureau of Labor Statistics Current Employment Statistics)

 
Senior Citizens League estimates COLA could reach over 10% for 2023

Social Security Cost of Living Adjustment Expected To Increase For 2023 – Retirement Planning

Many rely on Social Security and the annual increases known as the Cost of Living Adjustment (COLA) to keep up with inflation. The Cost of Living Adjustment (COLA) occurs annually and compares the 3rd-quarter Consumer Price Index for Urban Wage Earners (CPI-W) with its value at the same time the year prior.

With inflation reaching upwards of 9% in June 2022, the cost of living has grown. Thus, the Senior Citizens League, an advocacy group for elderly citizens, expects this year’s COLA to jump a historic amount for 2023. The group predicted a 10.5% increase in June when inflation was at 9.1% and a jump of 9.6% in July when inflation cooled down ever so slightly to 8.5%. This response to elevated living costs would be the biggest adjustment since 1981.

The Senior Citizens League also noted in its preliminary report that if inflation would continue to be rampant, the COLA could reach over 10%, yet if inflation cools down the adjustment could be closer to 9.3%. The current average Social Security benefit comes in at just over $1,600 and the adjustment could raise it by $159, according to a Senior Citizens League Policy Analyst. (Source: Senior Citizens League, Social Security Administration)

The Struggle of Returning to Work – Labor Market Dynamics

From the historic high of quitting seen in late 2021, confidence in the economy has fallen which has caused the quit rate to fall as well. The quit rate remains high but has fallen by over 270,000 quits per month since the November high. The self-employed workforce has also decreased by over 500,000 people since its high in late 2021. These decreases result from many corporations deciding remote work is not as effective as in-person work.

Numerous companies are making pushes for a full return to in-person work, along with countless companies changing their work-from-home policies to permit hybrid, but not fully remote work. These corporations, however, are being met with refusals to return by employees. Many employees who have become accustomed to remote work refuse to return to in-person work, especially fully in-person without any remote work whatsoever. With new mandates regarding return to work being released across main sectors, employees are still holding onto their power in demanding to remain working remotely.

As always, we continue to watch & evaluate these events and their impact on our client portfolios frequently. Further volatility and possibly a downturn depending on economic data as we move forward will provide opportunities. As we have planned ahead and made cash available, we will take advantage of the opportunities as they arise.

More to come….Dan & Phil