Robert Krueger

Alexander Randolph Advisory Inc.

8200 Greensboro Drive, Suite 1125

McLean, VA 22102

703.734.1507

www.alexanderrandolph.com

October 2022
Market Update
(all values as of 06.28.2024)

Stock Indices:

Dow Jones 39,118
S&P 500 5,460
Nasdaq 17,732

Bond Sector Yields:

2 Yr Treasury 4.71%
10 Yr Treasury 4.36%
10 Yr Municipal 2.86%
High Yield 7.58%

YTD Market Returns:

Dow Jones 3.79%
S&P 500 14.48%
Nasdaq 18.13%
MSCI-EAFE 3.51%
MSCI-Europe 3.72%
MSCI-Pacific 3.05%
MSCI-Emg Mkt 6.11%
 
US Agg Bond -0.71%
US Corp Bond -0.49%
US Gov’t Bond -0.68%

Commodity Prices:

Gold 2,336
Silver 29.43
Oil (WTI) 81.46

Currencies:

Dollar / Euro 1.06
Dollar / Pound 1.26
Yen / Dollar 160.56
Canadian /Dollar 0.73

Macro Overview

Recession fears pressed 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. Some analysts expect prices to follow historical patterns as decreasing demand in the fall and winter months usually brings lower prices.

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.

Analysts expect that a peak in inflation may help stimulate equity market dynamics, should the Fed reconsider a continued rise in rates. Modifications to Fed policy might include a halt to raising rates should economic conditions worsen.

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 inflation not seen in decades.

Sources: Freddie Mac, U.S. Bureau of Labor Statistics, U.S. Department of Energy, Federal Reserve Bank of St. Louis,

 

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

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 Rate Remain Higher Than Long-Term Bond Rates – Fixed Income Review

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

Short-term Treasury bond yields remained higher than longer-term maturities in September, 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%.

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

The Fed’s Continuous Increase of the Fed Funds Rate – Monetary Policy

The Fed Funds Rate, which is controlled by the Federal Reserve Board, is the interest rate at which banks charge each other to borrow money. This year, the Fed has continued to aggressively increase the rate. The effects of increasing the Fed Funds Rate are more expensive borrowing costs and reduced demand for borrowing money. By increasing the rate, the Fed hopes to pacify rising inflation, as the U.S. is currently experiencing the highest inflation rate observed since 1981.

In March of this year, the Fed began its increase of interest rates. As of September 21st, the rate has a target range of 3% to 3.25%, which means the rate has risen 3% in just 7 months. This is the largest increase made by the Fed in a single year since 1982. Based on this, the Fed Funds Rate would reach 4% to 4.25% by the end of the year.

Sources: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis, Federal Reserve Bank of New York

 

 

 

 

Housing Affordability Series 1 of 2: Rising Mortgage Rates Deter New Buyers – Housing Overview

The 30-year conforming mortgage rate has a profound effect on the prices of homes and the rate at which interest is collected on mortgages. This rate is increasing, which has an inverted effect on home prices, causing them to drop for the first time in over a decade.

Between July and June of 2022, home prices experienced their first monthly drop since March of 2012. This ended a decade-long surge of rising home prices by falling to -0.44% from June to July of 2022. The cause of this is high mortgage rates.

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. When mortgage rates are at such high levels, they can 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 2004 highs of nearly 70% but still on the rise from 2016 lows of 63%. However, these mortgage rates are expected to drop the homeownership rate yet again as an increasing amount of potential buyers are dissuaded from purchasing a home now and instead look to rent and wait until mortgage rates drop.

Sources: U.S Census Bureau, S&P Dow Jones Indices, Freddie Mac, Federal Reserve Bank of St. Louis

 

Euro and Pound Plummeting in Value to the Dollar – Currency Update

The European economy is currently experiencing turbulence due to the Ukrainian conflict and Russian supply cuts. On the other hand, high-interest rates have increased the strength of the U.S. dollar, resulting in historical lows in the exchange rates of the U.S. Dollar to European currencies.

2022 marked the first time the U.S. Dollar hit parity, or equal value, with the Euro since 2002. The Euro’s peak value was in April of 2008 when one euro was equal to 1.6 dollars. However, the aforementioned economic turbulence in Europe has kickstarted a recent decline in the euro’s valuation, which sits at around one euro equal to 0.97 dollars. Currently, the pound is equal to 1.09 dollars, nearly a 50% decline from this peak to the current valuation.

These exchange rates not only highlight the turbulence in European economies but also the growing strength of the U.S. Dollar. The dollar has historically grown stronger in times of global recession and war, which is currently the case as well. Many European goods are much relatively cheaper now for Americans, which could remain for months or even years.

Sources: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis

Retirees Make Up an Increasing Part of the Population – Retirement Trends

Since the early 2010s, the share of the U.S. population made up of retirees has been growing at a fairly constant rate, yet saw a spike since the beginning of the pandemic. In just the first year of the pandemic, an additional 1.3% of the population was made up of retirees- which is 3.6 million people.

In comparison, the average annual growth rate from 2010 to 2020 was just 0.3% per year. Had this pace continued, the Kansas City Fed states that the number of retirees would have expanded by 1.5 million rather than the actual 3.6 million retirees. The increased rate generated over 2 million additional retirees.

This increase, however, is not attributed to the commonly held perception of retirement where employed people transition into retirement. According to the Kansas City Fed, this increase in the number of retirees is due to the decrease in the number of retirees who decide to come out of retirement and rejoin the workforce. So, for many retirees, deciding to go back to work sounds much more unappealing than it did in the years leading up to the pandemic.

Compared to rates before the pandemic, current employment-to-retirement rates have remained constant, whereas a drop-off has been seen in the rates of unemployment-to-retirement and retirement-to-employment. This portrays that around the same number of people are entering retirement from the workforce, while fewer people are finding a job after retirement.

Many retirees are still generally considered young enough to rejoin the workforce and have rejoined the workforce since the pandemic has calmed down this past year. From February 2020 to June 2021, 0.7 million people under the age of 60 retired, 0.5 million between the ages of 61-67, and 1.6 million between the ages of 68-75. A large amount of these groups can return to work, which may lead to an increase in retirement-to-employment rates in the future.

Sources: Kansas City Fed, U.S. Census Bureau

 

Market Returns: All data is indicative of total return which includes capital gain/loss and reinvested dividends for noted period. Index data sources; MSCI, DJ-UBSCI, WTI, IDC, S&P. The information provided is believed to be reliable, but its accuracy or completeness is not warranted. This material is not intended as an offer or solicitation for the purchase or sale of any stock, bond, mutual fund, or any other financial instrument. The views and strategies discussed herein may not be appropriate and/or suitable for all investors. This material is meant solely for informational purposes, and is not intended to suffice as any type of accounting, legal, tax, or estate planning advice. Any and all forecasts mentioned are for illustrative purposes only and should not be interpreted as investment recommendations.