Fortis Wealth Management

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June 2022
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

Consensus is growing among various economists and market analysts that inflation could, potentially, force consumers to cut back on spending to the extent that a recession materializes. Consumer expenditures have a significant impact on economic activity, comprising about 70% of Gross Domestic Product (GDP).

The Federal Reserve notes that rising interest rates can pose a risk to the U.S. economy. The Federal Reserve Bank of New York released a report in early May identifying specific concerns that members of the Fed have. Among the concerns are that elevated and persistent inflation, coupled with a sharp rise in interest rates could slow economic activity and cause an increase in delinquencies, bankruptcies and other forms of financial distress. The report also identified uncertainty regarding heightened commodity prices and geopolitical risks attributed to the ongoing Russian conflict.

Inflation appeared to ease slightly in April, but underlying price pressures for gasoline and other energy costs are acute for consumers. Recent data showed an increase from 8.3% to 8.6% annualized inflation in May as reflected by the consumer price index (CPI). Fuel oil now stands at a 12-month price increase of 106.7%.

Federal Reserve data indicates 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.

Soaring transportation costs translate into higher prices for companies and consumers. A gallon of diesel rose to over $5.50 in May from $3.17 a year ago. Diesel is the primary fuel used for transporting goods via trucks, trains, and shipping.

The Federal Reserve indicated that it plans to raise short term rates again in June and July, but potentially not as much as previously expected. Extensive inflationary pressures in conjunction with higher rates are likely prompting a slowdown in consumer activity, a welcome sign for the Federal Reserve.

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.

Sources: BLS, Labor Department, Federal Reserve Bank of Atlanta; HOAM, EIA

 
Stocks currently account for about 33% of household wealth

Earnings Come Into Focus – Domestic Equity Update

The Wilshire 5000 Total Market Index, which includes every publicly traded U.S. company, has lost roughly $10 trillion in mark-to-market price since the beginning of the year, down from $53 trillion. Equities currently account for about 33% of household wealth.

Some analysts note that recent earnings from certain companies as misleading. Increases in revenue, to some extent, may be attributable to an inflationary increase in product and service prices rather than improved sales. Analysts typically view volume increases as a more favorable trend than inflationary price increases.

A strong U.S. dollar weighs on international earnings, which make up 40% of the S&P 500 Index earnings. These are generated by multi-national companies with revenue largely dependent on overseas sales. Supply constraints and increases in inventory and labor costs put pressure on corporate earnings projections for the second quarter. (Sources: S&P, Wilshire Associates, Bloomberg)

Rates Held Steady In May – Fixed Income Review

Short-term and long-term Treasury bond yields fell moderately in late May, which is referred to as a shift down in the yield curve. Such a dynamic may be indicative of interest rates beginning to level off following a rapid rise over the past few months. The Federal Reserve indicated that it would raise short term rates again in June and July, though not as much as previously expected.

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 seen 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, further increases are expected over the next two months along with Fed balance sheet reductions that will place additional pressure on rates. (Sources: U.S. Treasury, Federal Reserve, FreddieMac)

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 future supply chain snags.

Now that constraints have lessened and various supply chains have resumed operations, companies have recently accumulated raw materials and built stockpiles of finished products at a fast pace. Historically, increases in inventory levels for companies is seen as an indication that consumer demand for their goods might be weak. As inventories swell, companies are eager to reduce stockpiles to the point of discounting, which ultimately means lower prices for consumers. (Source: Federal Reserve Bank of St. Louis)

 

 

 

 
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 turned to savings and credit to pay for essentials. Con­sumers have been tap­ping into record-high personal sav­ings that were accumulated during the pan­demic, in order to keep up with in­fla­tion.

While overall wages have risen roughly 6% over the past year according to Labor Department data, the increases have not kept 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 saw the largest usage increases as tracked by the Federal Reserve over the past few months. Mortgage debt also rose, 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 note that median credit scores may 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 Easing – Commodities Market Update

Heightened commodity prices have largely driven inflation over the past year. Now, non-energy commodity prices are beginning to ease globally as demand for various commodities is softening.

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 commodities related to building and manufacturing seeing the largest drop. Simultaneously, food-related commodities 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 decrease in demand. As commodity prices ease, so does inflation, as the manufacturing sector reigns in costs to stay competitive. (Sources: International Monetary Fund, Global Price Index of All Commodities, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PALLFNFINDEXQ, June 7, 2022)

 
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 and trucks following close behind.

Transportation costs have a significant impact on 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 high demand drives fuel prices even higher. Optimistically, the enormous rise in inventories is expected to ease inflation over the next few months, as an oversupply of materials and finished products may lead to price reductions. (Sources: EIA, BLS, Labor Dept.)

Gasoline Prices Expected To Head Higher This Summer – Energy Overview

Various factors lend to sustained high gas prices, which industry analysts widely expect to increase further 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 may see greater price pressures than usual, due to residual 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 be burdensome for both consumers and companies. Consumers spend more of their income on fuel for personal vehicles, and companies see compressed profit margins due to higher costs. Higher fuel prices often filter down to the consumer level since the cost of food, transportation, and travel are all affected by rising fuel expenses.

There is a possibility that we see lower fuel prices in the relatively near future. Historically, rising fuel prices eventually hinder economic growth, slowing industrial and consumer activity and thereby lessening demand for fuel.

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