Robert Krueger

Alexander Randolph Advisory Inc.

8200 Greensboro Drive, Suite 1125

McLean, VA 22102

703.734.1507

www.alexanderrandolph.com

July 2022
Market Update
(all values as of 08.31.2022)

Stock Indices:

Dow Jones 31,510
S&P 500 3,955
Nasdaq 11,816

Bond Sector Yields:

2 Yr Treasury 3.45%
10 Yr Treasury 3.15%
10 Yr Municipal 2.61%
High Yield 8.34%

YTD Market Returns:

Dow Jones -13.29%
S&P 500 -17.02%
Nasdaq -24.47%
MSCI-EAFE -21.21%
MSCI-Europe -23.79%
MSCI-Pacific -16.35%
MSCI-Emg Mkt -19.31%
 
US Agg Bond -10.75%
US Corp Bond -14.21%
US Gov’t Bond -11.49%

Commodity Prices:

Gold 1,721
Silver 17.82
Oil (WTI) 88.90

Currencies:

Dollar / Euro 1.00
Dollar / Pound 1.16
Yen / Dollar 139.07
Canadian /Dollar 0.76
 

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. In addition to consumers noticing the price increases in gasoline and diesel at the pump, they will also be indirectly affected by higher prices as transportation costs are passed along to consumers. Diesel is the primary fuel for railroads and trucking, which transport the bulk of consumer goods nationwide. 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. Russia missed payment on its government bonds in late June, which is considered a default by the international bond market. The last time Russia defaulted on its debt was in 1917, during the Russian Revolution. As a reminder, the Russian Revolution saw the abolition of the Russian monarchy and the beginning of Russia’s communist regime, a huge turn for the nation. 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%. 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.” Some companies over the past few weeks have also announced hiring freezes and layoffs in response to slowing economic activity. Fortunately, the cutbacks have so far been limited to a few industries including technology, mortgage lending, and popular pandemic-era companies. Various companies are believed to have over-hired during the past two years when growth was more prominent, and costs were still contained. 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, EIA, S&P, World Food Program

 

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 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

 

Equity Indices Have a Rough First Half – Domestic Equity Overview

Equity indices have had an absolutely dreadful first half, 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, real estate, and more- 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

 

European economy growing despite headwinds

Overall, the outlook for international equity markets remains cloudy given high inflation, rising interest rates and the war in Ukraine. However, the prevalence of old-economy, dividend-paying companies in Europe — exactly the type that are back in our favor — could mean that international markets are poised for a period of relative outperformance.

The European economy is holding up remarkably well despite investor worries about a war-induced recession. While the manufacturing sector has been hurt by the war in Ukraine and fears that Russia may cut off natural gas supplies, the services sector has done much better, driven primarily by pent up demand.

“There’s still a reasonable degree of momentum in the European economy,” says economist Robert Lind. “That’s a reflection of the reopening trends we saw at the start of the year as governments began easing pandemic-related restrictions.”

Source: International outlook: What’s old is new again | Capital Group

 

 

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 Harmony 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 the inflation jump 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

 

What’s Risen The Most – Tracking Inflation

Energy and fuel were among the top contributors to inflation this past year, with used cars, electricity and food all enhancing the tensions surrounding inflation.

Transportation costs have become a growing contributor to inflation, as the vast majority of food, produce, and basic consumer goods are transported using gasoline and diesel. The summer months are expected to be especially challenging for shippers and consumers, as the historically demanding summer months drive fuel prices even higher. Optimistically, the rise in inventories is expected to ease inflation over the next few months, as the supply of materials and finished products are expected to fall in price.

Sources: EIA, BLS, Labor Dept.

 

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: Bureau of Labor Statistics; https://www.bls.gov/cpi/research-series/r-cpi-e

Gasoline Prices Expected To Head Higher This Summer – Energy Overview

Various factors are contributing to sustained high gas prices, which are expected to add to price pressures heading into the summer months. Traditionally, gasoline prices move higher as vacation travelers hit the road during the summer months. Transportation companies, railroads, and airlines also see enhanced activity during the summer season.

This summer, however, may produce exceptional prices, as continued supply constraints, shipping issues, and increased international demand for U.S. oil and gasoline driven by the Russian invasion of Ukraine. The EIA reported that the average price of a gallon of regular gasoline rose to over $4.00 in May for all 50 states, the first time ever.

Rising gasoline prices can become a burden for both consumers and companies. Not only are consumers spending more of their income on fuel, companies also pass along the higher costs of fuel to consumers. Higher fuel prices tend to filter down to the consumer since the cost of food, transportation, and travel are all affected by rising fuel expenses.

There is also the prospect of lower fuel prices. Historically, rising fuel prices eventually hinder economic growth, thus slowing industrial and consumer activity and lessening demand for fuel. Many economists believe that a recession would also curtail demand for fuel, thus bringing fuel prices lower.

Sources: U.S. Energy Information Administration (EIA)