Derek J. Sinani

Founder/Managing Partner

derek@ironwoodwealth.com

17015 N. Scottsdale Road Suite 235

Scottsdale, AZ 85255

480.473.3455

June 2022 - Clouds Gathering on the Horizon
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:  There’s a growing consensus among various economists and market analysts that inflation could force consumers to cut back on spending to the extent that a recession materializes. Consumer expenditures have an enormous impact on economic activity, representing 70% of Gross Domestic Product (GDP). Even the Federal Reserve seems to think that rising rates can pose a risk to the U.S. economy – but inflation has backed the Fed up against the ropes.

The Federal Reserve Bank of New York released a report in early May identifying concerns members of the Fed have. Among the concerns are that elevated and persistent inflation, coupled with a sharp rise in rates could slow economic activity causing an increase in delinquencies, bankruptcies, and other forms of financial distress. The report also identified uncertainty surrounding heightened commodity prices and geopolitical risks attributed to the ongoing Russian conflict.  With that said, recession in my view is nearly unavoidable at this stage.  My baseline belief is that the U.S. economy will likely be in a broad recession by mid-2023.

Inflation had seemed to have eased a bit in April, but underlying price pressures continue to identify gasoline and energy costs as the most acute for consumers. March data showed a decrease from 8.5% to 8.3% annualized inflation rate for all items. However, Today, June 10th, the May consumer price index showed a monthly rise of 1%, well above the 0.7% rise forecast by economists. The year-over-year rate rose 8.6%, topping the 40-year high of 8.5% seen in March.

Federal Reserve data is indicating a rise in revolving credit card usage and a decrease in the savings rate. Consumer credit outstanding has risen the most since November 2001, when the economy was in recession. The Federal Reserve calculates that the average household is spending an additional $300 per month due to inflation.   What does this mean?  A segment of consumers are being forced to use credit cards to meet daily living costs as their savings are being depleted.

Soaring transportation costs are translating into higher prices for companies and consumers nationwide. A gallon of diesel has risen to over $5.50 this past month from $3.17 this same time last year. Diesel is the primary fuel used for transporting goods via trucks, trains, and shipping.The Federal Reserve plans to raise short term rates again in June and July – essentially, being forced to raise rates to combat inflation, all the while, the economy is slowing – not an ideal situation.  Separately, according to the Federal Reserve, it now takes the average home buyer 10 years worth of wages to buy an average-priced single-family home, double the historical norm of 5 years worth of wages.  A precursor to declining real estate prices?

 
Stock market correction showing signs of stabilizing

Domestic Equity Update:  The Wilshire 5000 Total Market Index, which includes every publicly traded U.S. company, declined $10 trillion in value since the beginning of the year, down from $53 trillion. Equities currently account for about 33% of household wealth – adverse “wealth effect” should be monitored closely.

This year’s stock market correction is showing signs of stabilizing.  I expect the stock market to experience a final and potentially meaningful rally between now and the first quarter of 2023.  Ideally, this rally will take us to new “all-time” highs around SP 5150-5500.  Should this come to fruition, it will likely mark the completion of a strong secular bull market that began in 2009, pausing briefly in 2020 – only to resume shortly thereafter.  Should this final push higher occur in the coming quarters, it will become increasingly prudent for us to begin the process of meaningfully reducing (perhaps eliminating) risk in our investment portfolios.  This risk reduction will initially be achieved by selling “risk” investments (stocks) and increasing our cash holdings.  Don’t fret, we’ve been through this before.  Those prepared with a disciplined and prudent investment strategy will ultimately prevail.

A strong U.S. dollar continues to weigh on multi-national company earnings, making up 40% of the S&P 500 Index. These are companies whose revenue are primarily generated overseas. Increases in inventory, labor costs, and supply constraints continue to weight on corporate earnings projections for the 2nd quarter.

Rates Held Steady In May – Fixed Income Review

Short term and long term Treasury bond yields fell moderately in late May. Such a dynamic may be representative of interest rates beginning to level off after a rapid rise over the past few months. The Federal Reserve indicated that it would raise short term rates again in June and July, but not as much as had previously been expected – this remains to be seen. The average rate on a 30 year fixed mortgage fell slightly in late May to 5.10% from 5.25%, offering some reprieve to homebuyers. Mortgage rates are still well above the 3.11% average at the end of last year. The retreat in U.S. Treasury bond yields spilled over to municipal and corporate bonds, where yields fell modestly for the month. Overall bond prices rose as yields fell for nearly all domestic bond sectors.  Regardless of a possible let up in the Fed’s tightening trajectory (which is unlikely in my opinion), further increases are expected over the next two months along with Fed balance sheet reductions (Quantitative Tightening) which will place additional pressure on rates.

Do growing Inventories Means Lower Prices & Discounts Could Be Coming – Consumer Retail

As the pandemic created supply constraints over the past two years, companies learned to stock up on materials and finished products in hopes of alleviating any future supply chain snags. Now that constraints have lessened and various supply chains have resumed operations, companies have been accumulating raw materials and building a stockpile of finished products at an incredibility fast pace. Historically, increases in inventory levels have been an indication that demand for their goods might be weaning due to a pullback in business and consumer demand. As inventories swell, companies are eager to reduce stockpiles by discounting, which could mean lower prices for consumers.

 

 

 

 
The median credit score of newly originated mortgages in the 1st quarter was 776

Credit Usage Heading Higher – Consumer Credit

As pandemic assistance funds vanish, consumers are turning to savings and credit to pay for essentials. With many consumers having exhausted their cash reserves, credit becomes an option. Con­sumers have been tap­ping into sav­ings accumulated from pan­demic stim­u­lus funds in order to keep up with in­fla­tion.

Even though overall wages have risen roughly 6% over the past year according to Labor Department data, the increases are still not enough to keep up with inflation running at over 8%. As households start to experience shortfalls, many resort to credit in order to meet month to month expenses.

Auto loans and credit card debt have seen the largest usage increases as tracked by the Federal Reserve over the past few months. Mortgage debt has also risen, but mostly at the upper end of the credit score scale. Credit scores on newly originated mortgages remain relatively high, reflecting continuing high lending standards by lenders. The median credit score of newly originated mortgages was 776 during the first quarter of 2022. Analysts also believe that median credit scores may possibly begin to fall as consumers tap credit cards and exhaust their cash savings. (Sources: Labor Department, Federal Reserve Bank of New York; Household Debt and Credit Report (Q1 2022)

Global Commodity Prices May Be Signaling That Inflation Is Taming – Commodities Market Update

As heightened commodity prices have stoked inflation over the past year, commodity prices worldwide are now starting to ease as demand for various commodities are alleviating.

The Global Price Index of All Commodities tracks the price of widely traded commodities, including copper, wheat, gold, lumber, and sugar. Broad commodity prices retracted in April after reaching record levels in March, with building and manufacturing related commodities seeing the largest drop. Simultaneously, food related commodities have continued to see rising prices over the past two months. Historically, a drop in building materials is indicative of a broader slow down in economic activity, as home builders and manufacturers prepare for an expected drop in demand. As commodity prices ease, so does inflation, which is a result of the manufacturing industry reigning in prices and trying to stay competitive.(Sources: International Monetary Fund,  Federal Reserve Bank of St. Louis)

 
a gallon of regular gasoline rose to over $4.00 in May for all 50 states

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 enormous rise in inventories is expected to ease inflation over the next few months, as an over supply of materials and finished products are expected to fall in price. (Sources: EIA, BLS, Labor Dept.)

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.  This morning, (June 10th) – I read that the National Average for unleaded gasoline topped $5 per gallon last week – another all-time record (and not a good one at that).

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 via the cost of food, transportation, and travel.

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