Markets Have (Mostly) Good Fourth Quarter

Global equity markets had a pretty good fourth quarter – except for the tech names – and when the final Wall Street-bell weakly tolled on Friday, December 30th, most of the major global equity markets were positive, notwithstanding the pullback seen during the month of December.

Despite the overall losses for the year, the DJIA and S&P 500 did manage the first positive quarter for the year, whereas NASDAQ – dominated by the tech names – managed to see its fourth consecutive quarterly loss – its first time since 2001.

For the fourth quarter of 2022:

• The DJIA advanced 15.4%;

• The S&P 500 gained 7.1%;

• NASDAQ lost 1.1%; and

• The Russell 2000 added 3.6%.

The themes that drove market performance in the 4th quarter were consistent from previous quarters – inflation fears and hopes that the Fed might slow its pace and magnitude of rate hikes. And while inflation remained stubbornly high as readings of the CPI and the PPI were improved, the Fed did reduce its 7th rate hike magnitude from 75 basis points to 50.

The other themes were at odds with one another at times: rising consumer and investor confidence; rising food and gas prices, positive GDP numbers, a cooling-off of the housing market, better-than-expected manufacturing data; not-so-great corporate earnings, and continued supply-chain bottlenecks.

Further, we saw that:

• Volatility, as measured by the VIX, trended down this quarter, beginning the quarter around 31 and ending near 22, with a peak in mid-October.

• West Texas Intermediate crude trended down for the quarter too, starting at just over $86/barrel and ending the quarter at just under $77, about where it stood one year ago.

Market Performance Around the World

Investors were very happy with the quarterly performance around the world, as all 36 developed markets tracked by MSCI were positive for the fourth quarter of 2022 – with most recording positive returns in the double digits. And for the 40 developing markets tracked by MSCI, 38 of them were positive too, with many emerging markets in Europe gaining more than 30%.

Source: MSCI. Past performance cannot guarantee future results

Sector Performance Rotated in Q42022

The overall trend for sector performance for the fourth quarter was good, as 9 of the 11 sectors advanced, with 6 advancing by double-digits.

Compare that to an ugly third quarter, where 10 of the 11 S&P 500 sectors dropped with only Consumer Discretionary staying positive. And as happened in each quarter last year, the performance leaders and laggards rotated throughout the quarter and the ranges were substantial.

Here are the sector returns for the third and fourth quarters of 2022:

Source: FMR

Reviewing the sector returns for just the fourth quarter of 2022, we saw that:

• Almost all sectors were painted green, although the Consumer Discretionary sector took a big hit;

• 6 of the 11 sectors saw double-digit gains in the fourth quarter, including the Energy sector which jumped more than 20%;

• The defensive sectors (think Materials and Industrials) turned in a great quarter as did the interest-rate sensitive sectors (think Financials); and

• The differences between the best (+20%) performing and worst (-17%) performing sectors in the fourth quarter was massive.

GDP Down in 3rd Quarter

At the end of the quarter, the Bureau of Economic Analysis reported that real gross domestic product increased at an annual rate of 3.2% in the third quarter of 2022. In the second quarter, real GDP decreased 0.6%.

U.S. Bureau of Economic Analysis. Seasonally adjusted annual rates

Further: “In the third quarter of 2022, as real GDP for the nation increased at an annual rate of 3.2%, real GDP increased in 16 of the 23 industry groups for which BEA prepares quarterly state estimates.

• Information services; professional, scientific, and technical services; and mining were the leading contributors to the increase in real GDP nationally.

• The mining industry was the leading contributor to the increases in real GDP in Alaska, Texas, Oklahoma, Wyoming, North Dakota, and New Mexico, the six states with the largest increases in real GDP, and in West Virginia, the state with the eighth-largest increase in real GDP.

Personal income increased in all 50 states and the District of Columbia in the third quarter, with the percent change ranging from 14.2% in Colorado to 1.4% in Kentucky.

Fed Raises Rates for the 7th Time

In mid-December, the Fed announced a 50 basis points rate hike to the fed funds rate (its 7th rate hike in 2022) and then released the following statement: “Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are contributing to upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.”

This seventh rate hike this year – and the second one in the 4th quarter – were some of the more predicted rate movement the markets have ever seen.

Fed Rate Hikes: Taming Inflation

In addition, Wall Street is expecting the federal funds rate to move above 5% in 2023.

Inflation Still Stubbornly High

The Bureau of Labor Statistics announced the Consumer Price Index for All Urban Consumers (CPI- U) rose 0.1% in November on a seasonally adjusted basis, after increasing 0.4% in October.

In addition, over the last 12 months, the all items index increased 7.1% before seasonal adjustment.

With core prices – excluding the volatile food and energy costs – inflation was up 6.0%. Economists surveyed by the Wall Street Journal had expected an increase of 7.3% for headline CPI and 6.1% for core inflation.

12-month percentage change, Consumer Price Index, selected categories, November 2022, not seasonally adjusted.

Source: U.S. Bureau of Labor Statistics.

Further:

The index for shelter was by far the largest contributor to the monthly all items increase, more than offsetting decreases in energy indexes.

• The food index increased 0.5% over the month with the food at home index also rising 0.5%.

• The energy index decreased 1.6% over the month as the gasoline index, the natural gas index, and the electricity index all declined.

• The index for all items less food and energy rose 0.2% in November, after rising 0.3% in October.

• The indexes for shelter, communication, recreation, motor vehicle insurance, education, and apparel were among those that increased over the month.

• Indexes which declined in November include the used cars and trucks, medical care, and airline fares indexes.

Cooling Off Housing Market

The U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced the following new residential construction statistics for November 2022:

Sales of new single‐family houses in November 2022 were at a seasonally adjusted annual rate of 640,000

• This is 5.8% above the revised October rate of 605,000, but is 15.3% below the November 2021 estimate of 756,000

• The median sales price of new houses sold in November 2022 was $471,200

• The average sales price was $543,600

• The seasonally‐adjusted estimate of new houses for sale at the end of November was 461,000. This represents a supply of 8.6 months at the current sales rate.

Consumer Confidence Jumps

“The Conference Board Consumer Confidence Index increased in December following back-to-back monthly declines. The Index now stands at 108.3 (1985=100), up sharply from 101.4 in November.

• The Present Situation Index—based on consumers’ assessment of current business and labor market conditions – increased to 147.2 from 138.3 last month.

• The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – improved to 82.4 from 76.7. However, Expectations are still lingering around 80 – a level associated with recession.

“Consumer confidence bounced back in December, reversing consecutive declines in October and November to reach its highest level since April 2022. The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus. Vacation intentions improved but plans to purchase homes and big-ticket appliances cooled further. This shift in consumers’ preference from big-ticket items to services will continue in 2023, as will headwinds from inflation and interest rate hikes.”

Present Situation
Consumers’ assessment of current business conditions improved in December.

• 19.0% of consumers said business conditions were “good,” up from 17.8%.

• 20.1% said business conditions were “bad,” down from 23.6%.

Consumers’ appraisal of the labor market was also more favorable.

• 47.8% of consumers said jobs were “plentiful,” up from 45.2%.

• 12.0% of consumers said jobs were “hard to get,” down from 13.7%.

Expectations Six Months Hence
Consumers were less pessimistic about the short-term business conditions outlook in December.

• 20.4% of consumers expect business conditions to improve, up from 19.8%.

• 20.3% expect business conditions to worsen, down from 21.0%.

Consumers were more upbeat about the short-term labor market outlook.

• 19.5% of consumers expect more jobs to be available, up from 18.5%.

• 18.3% anticipate fewer jobs, down from 21.2%.

Consumers were mixed about their short- term income prospects.

• 16.7% of consumers expect their incomes to increase, down slightly from 17.1%.

• However, 13.3% expect their incomes will decrease, down from 15.8%.

Retail Sales Down

The U.S. Census Bureau announced that U.S. retail and food services sales for November 2022, were $689.4 billion, down 0.6% from the previous month, but up 6.5% above November 2021.

• Total sales for the September 2022 through November 2022 period were up 7.7% from the same period a year ago.

• Retail trade sales were down 0.8% from October 2022, but up 5.4% above last year.

• Gasoline stations were up 16.2% from November 2021, while food services and drinking places were up 14.1% from last year

Monthly Retail Sales: Past 20 Years

Consumer Sentiment Jumps

The University of Michigan released its index of Consumer Sentiment and reported that “consumer sentiment confirmed the preliminary reading earlier this month, rising 5% above November. Sentiment remains relatively downbeat at 15% below a year ago, but consumers’ extremely negative attitudes have softened this month on the basis of easing pressures from inflation. One-year business conditions surged 25%, and the long-term outlook improved a more modest but still sizable 9%. Still, both measures are well below 2021 readings. Assessments of personal finances, both current and future, are essentially unchanged from November.

Year-ahead inflation expectations improved considerably but remained elevated, falling from 4.9% in November to 4.4% in December, the lowest reading in 18 months but still well above two years ago. Declines in short-run inflation expectations were visible across the distribution of age, income, education, as well as political party identification. At 2.9%, long run inflation expectations have stayed within the narrow, albeit elevated, 2.9-3.1% range for 16 of the last 17 months. While the sizable decline in short-run inflation expectations may be welcome news, consumers continued to exhibit substantial uncertainty over the future path of prices.”

Exports and Imports Down

The U.S. Census Bureau announced the following international trade, wholesale inventories, and retail inventories advance statistics for November 2022:

Advance International Trade in Goods

• The international trade deficit was $83.3 billion in November, down $15.5 billion from $98.8 billion in October.

• Exports of goods for November were $168.9 billion, $5.3 billion less than October exports.

• Imports of goods for November were $252.2 billion, $20.8 billion less than October imports.

Advance Wholesale Inventories

• Wholesale inventories for November, adjusted for seasonal variations and trading day differences, but not for price changes, were estimated at an end-of-month level of $933.6 billion, up 1.0% from October 2022.

• This is up 21.0% from November 2021.

• The September 2022 to October 2022 percentage change was revised from up 0.5% to up 0.6%.

Advance Retail Inventories

• Retail inventories for November, adjusted for seasonal variations and trading day differences, but not for price changes, were estimated at an end-of-month level of $738.7 billion, up 0.1% from October 2022.

• This is up 18.4% from November 2021.

• The September 2022 to October 2022 percentage change was revised from down 0.2% to down 0.4%.

Sources: bls.gov; bea.gov; census.gov; umich.edu; conference- board.org; census.gov; msci.com; fidelity.com; msci.com; nasdaq.com; wsj.com; morningstar.com

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Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

Global Market Commentary: Third Quarter 2022

Markets Have Awful Third Quarter

Global equity markets had an awful third quarter, and when the final Wall Street bell weakly tolled on Friday, September 30th, all major global equity markets were in the red, leading to overall market declines not seen in decades.

Further, entering the fourth quarter of 2022, the DJIA and S&P 500 are both at their lowest since November 2020, while NASDAQ is at its lowest since the end of July 2020.

For the third quarter of 2022:

• The DJIA dropped 6.7%;

• The S&P 500 lost 5.3%;

• NASDAQ lost 4.1%; and

• The Russell 2000 declined by 3.6%.

The themes that drove market performance in the third quarter were the same worries that drove markets in the first two quarters and toward the end of last year. And the two most dominant themes continue to be inflation and the Fed – with the former rising to 40-year highs and the latter causing Wall Street to worry that the course of rising rates would lead to a recession.

The other themes were at odds with one another at times: rising consumer and investor confidence; rising food and gas prices, negative GDP numbers, a cooling-off of the housing market, better than expected manufacturing data; not-so-great corporate earnings, continued supply-chain bottlenecks and more social unrest.

Further, we saw that:

• Volatility, as measured by the VIX, trended up this quarter, beginning the quarter under 27 and ending the month over 31, although there was a dip in the middle of the quarter.

• West Texas Intermediate crude trended down for the quarter, starting at just over $105/barrel and ending the quarter at just under $80, slightly higher than where it stood one year ago.

Market Performance Around the World

Investors were unhappy with the quarterly performance worldwide, as all 36 developed markets tracked by MSCI were negative for the third quarter of 2022 – with most recording negative returns in the double digits. And for the 40 developing markets tracked by MSCI, 38 of them were negative too, with only the EM Latin America and EFM Latin America and Caribbean Index both gaining about 1%.

Source: MSCI. Past performance cannot guarantee future results

Sector Performance Rotated in Q22022

The overall trend for sector performance for the third quarter was ugly, as 10 of the 11 S&P 500 sectors dropped, with only Consumer Discretionary staying positive. And as if those numbers weren’t bad enough, the performance leaders and laggards rotated throughout the quarter, and the ranges were substantial.

Here are the sector returns for the second and third quarters of 2022:

Source: FMR

Reviewing the sector returns for just the third quarter of 2022 and the first nine months of the year, we saw that:

• Almost all sectors were painted red for the third quarter, with only the Consumer Discretionary sector painted green;

• 2 of the 11 sectors saw double-digit declines in the third quarter, whereas 7 recorded a double-digit decline in Q2;

• The interest-rate sensitive sectors (Information Technology, Financials, and Real Estate specifically) struggled as the Fed raised rates; and

• The differences between the best (+4%) performing and worst (-13%) performing sectors in the third quarter were big.

GDP Down in 2nd Quarter

The Bureau of Economic Analysis released its third estimate of 2nd quarter's GDP and announced that it decreased at an annual rate of 0.6%, following a decrease of 1.6% in the first quarter. This third estimate was the same as was announced in the second estimate in August.

• The smaller decrease in the second quarter, compared to the first quarter, reflected an upturn in exports and an acceleration in consumer spending.

• Profits increased 4.6% at a quarterly rate in the second quarter after increasing 0.1% in the first quarter.

• Private goods-producing industries decreased by 10.4%, private services-producing industries increased by 2.0%, and government decreased by 0.2%.

• Overall, 9 of 22 industry groups contributed to the second-quarter decline in real GDP.

Housing Was Mixed

On September 20th, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced the following new residential construction statistics for August 2022:

Building Permits

• Privately‐owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 1,517,000.

• This is 10.0% below the revised July rate of 1,685,000 and 14.4% below the August 2021 rate of 1,772,000.

• Single‐family authorizations in August were at a rate of 899,000; this is 3.5% below the revised July figure of 932,000.

• Authorizations of units in buildings with five units or more were at a rate of 571,000 in August.

Housing Starts

• Privately‐owned housing starts in August were at a seasonally adjusted annual rate of 1,575,000.

• This is 12.2% above the revised July estimate of 1,404,000 but is 0.1% below the August 2021 rate of 1,576,000.

• Single‐family housing starts in August were at a rate of 935,000; this is 3.4% above the revised July figure of 904,000.

• The August rate for units in buildings with five units or more was 621,000.

Housing Completions

• Privately‐owned housing completions in August were at a seasonally adjusted annual rate of 1,342,000.

• This is 5.4% below the revised July estimate of 1,419,000 but is 3.1% above the August 2021 rate of 1,302,000.

• Single‐family housing completions in August were at a rate of 1,017,000; this is 0.4% above the revised July rate of 1,013,000.

• The August rate for units in buildings with five units or more was 318,000.

Mortgage Rates Jump

According to data compiled by Bankrate on the last day of the quarter:

• 30-year fixed rate: 6.83%

• 15-year fixed rate: 6.00%

• 5/1 ARM rate: 5.22%

• 30-year fixed jumbo fixed rate: 6.81%

Producer Price Index Drops

The Producer Price Index for final demand fell 0.1% in August, seasonally adjusted, the U.S. Bureau of Labor Statistics reported. Final demand prices decreased by 0.4% in July and advanced by 1.0% in June.

On an unadjusted basis, the index for final demand moved up 8.7% for the 12 months that ended in August.

In August, the decrease in the index for final demand is attributable to a 1.2% decline in prices for final demand goods. In contrast, the index for final demand services advanced by 0.4%.

• Prices for final demand fewer foods, energy, and trade services moved up 0.2% in August following a 0.1% rise in July.

• For the 12 months that ended in August, the index for final demand for fewer foods, energy, and trade services increased by 5.6%.

Final Demand

Final demand goods: The index for final demand goods fell 1.2% in August after declining 1.7% in July. The August decrease can be traced to a 6.0% price drop for final demand energy. Conversely, the index for final demand goods, fewer foods, and energy rose 0.2%, while prices for final demand foods were unchanged.

Product detail: In August, over three-quarters of the decrease in prices for final demand goods is attributable to the index for gasoline, which fell 12.7%.

Prices for diesel fuel, jet fuel, chicken eggs, primary basic organic chemicals, and home heating oil also declined. In contrast, the index for construction machinery and equipment increased by 2.6%. Prices for beverages and beverage materials and for electric power also rose.

Final demand services: The index for final demand services increased by 0.4% in August, the fourth consecutive rise. Sixty% of the August advance can be traced to a 0.8%increase in margins for final demand trade services. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services, less trade, transportation, and warehousing, also moved higher, rising 0.3%. Conversely, the index for final demand transportation and warehousing services decreased by 0.2%.

Product detail: Forty percent of the price increase for final demand services can be attributed to margins for fuels and lubricants retailing, which rose 14.2%. The indexes for securities brokerage, dealing, investment advice, and related services; loan services (partial); transportation of passengers (partial); portfolio management; and chemicals and allied products wholesaling also increased. In contrast, prices for truck transportation of freight decreased by 1.9%. The indexes for guestroom rental and for food and alcohol retailing also fell.

Leading Indicators Drop

The Conference Board Leading Economic Index for the U.S. decreased by 0.3% in August 2022 to 116.2 (2016=100) after declining by 0.5% in July. The LEI fell 2.7% over the six-month period between February and August 2022, a reversal from its 1.7% growth over the previous six months.

From the Conference Board release:

“The US LEI declined for a sixth consecutive month, potentially signaling a recession. Among the index’s components, only initial unemployment claims and the yield spread contributed positively over the last six months—and the contribution of the yield spread has narrowed recently.

“Furthermore, labor market strength is expected to continue moderating in the months ahead. Indeed, the average workweek in manufacturing contracted in four of the last six months—a notable sign, as firms reduce hours before reducing their workforce. Economic activity will continue slowing more broadly throughout the US economy and is likely to contract. A major driver of this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to counter inflationary pressures. The Conference Board projects a recession in the coming quarters.”

Further:

• The Conference Board Coincident Economic Index for the U.S. increased by 0.1%in August 2022 to 108.7 (2016=100), after increasing by 0.5% in July.

• The CEI rose by 0.6% over the six-month period from February to August 2022, slower than its growth of 1.5% over the previous six-month period.

• The Conference Board Lagging Economic Index for the U.S. increased by 0.7% in August 2022 to 115.4

Consumer Confidence Up

The Conference Board’s Consumer Confidence Index increased in September for the second consecutive month. The Index now stands at 108.0 (1985=100), up from 103.6 in August.

• The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – rose to 149.6 from 145.3 last month.

• The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – increased to 80.3 from 75.8.

Present Situation

Consumers’ appraisal of current business conditions was more favorable in September.

• 20.8% of consumers said business conditions were “good,” up from 19.0%.

• 21.2% of consumers said business conditions were “bad,” down from 22.6%.

Consumers’ assessment of the labor market improved.

• 49.4% of consumers said jobs were “plentiful,” up from 47.6%.

• 11.4% of consumers said jobs were “hard to get,” down slightly from 11.6%.

Expectations Six Months Hence

Consumers were more positive about the short-term business conditions outlook in September.

• 19.3% of consumers expect business conditions to improve, up from 17.3%.

• 21.0% expect business conditions to worsen, down from 21.7%.

Consumers were more optimistic about the short-term labor market outlook.

• 17.5% of consumers expect more jobs to be available, up from 17.1%.

• 17.7% anticipate fewer jobs, down from 19.6%.

Consumers were mixed about their short-term financial prospects.

• 18.4% of consumers expect their incomes to increase, up from 16.6%.

• Conversely, 14.3% expect their incomes will decrease, up from 13.9%.

Investor Consumer Rises

“The Global Investor Confidence Index increased to 108.8, up 1.5 points from August’s revised reading of 107.3. The increase was led by a 7.7-point jump in Asian ICI to 100.1. North American ICI rose as well, up 2.4 points to 109. European ICI, meanwhile, fell 5.5 points to 100.1.”

The release further stated:

“Despite heightened equity market volatility experienced globally, risk sentiment expressed by institutional investors remained steady in September as the Global ICI rose slightly to 108.8. As anticipated, European investors were rattled by a continued energy crisis, diminishing growth prospects, and hawkish global central banks; as a result, the EMEA ICI tumbled 5.9 points. Going forward, it will be important to monitor whether the dip in European investor confidence persists, given the market’s negative reaction to the UK’s recent fiscal plans. Overall, the increase in the September Global ICI can be largely attributed to Asia-Pacific investors as risk appetite grew in tandem with the reopening of borders and easing of restrictions in Macau and Chengdu, China.”

Consumer Sentiment

“Consumer sentiment confirmed the preliminary reading earlier this month and was essentially unchanged from the month prior, at less than one index point above August. Buying conditions for durables and the one-year economic outlook continued lifting from the extremely low readings earlier in the summer, but these gains were largely offset by modest declines in the long run outlook for business conditions. As seen in the chart, sentiment for consumers across the income distribution has declined in a remarkably close fashion for the last 6 months, reflecting shared concerns over the impact of inflation, even among higher-income consumers who have historically generated the lion's share of spending.”

The median expected year-ahead inflation rate declined to 4.7%, the lowest reading since last September. At 2.7%, median long run inflation expectations fell below the 2.9-3.1% range for the first time since July 2021. Inflation expectations are likely to remain relatively unstable in the months ahead, as consumer uncertainty over these expectations remained high and is unlikely to wane in the face of continued global pressures on inflation.

Compensation Up

Compensation costs for civilian workers increased 1.3%, seasonally adjusted, for the 3-month period ending in June 2022, the U.S. Bureau of Labor Statistics reported.

• Wages and salaries increased 1.4% and benefit costs increased 1.2% from March 2022.

• Compensation costs for civilian workers increased 5.1% for the 12-month period ending in June 2022 and increased 2.9% in June 2021.

• Wages and salaries increased 5.3% for the 12-month period ending in June 2022 and increased 3.2% for the 12-month period ending in June 2021.

• Benefit costs increased 4.8% over the year and increased 2.2% for the 12-month period ending in June 2021.

Sources: bls.gov; umich.edu; census.gov; msci.com; fidelity.com; nasdaq.com; wsj.com; morningstar.com

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Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

If you've been reading or watching the news lately, you know a lot is happening in the financial world.

You've heard about changes in interest rates, rising inflation, and the potential of a looming recession.

If the headlines have caused you some anxiety, you’re not alone. We've all been through a lot, financially and personally, over the last couple of years. You may feel like any sense of certainty has gone out the window.

But we're here to reassure you. The best course of action during times of uncertainty is to stick to the financial plan you and your financial advisor have developed. Markets and circumstances will shift and change, but a well-developed financial plan will help you weather the storms. And if you haven’t crafted a financial plan yet, perhaps now is the time. 

Read on to find answers to your latest financial questions. 

What’s Happening in the Financial News?

Let's start by diving into what's happening in the financial news. In 2022, and in the last couple of years, the news has been full of dramatic headlines and financial uncertainty. But what is all this talk about the Federal Reserve raising interest rates and a tighter monetary policy? To understand, it's important to know what's been going on with inflation.

Inflation has been accelerating

In June of 2022, inflation rates jumped to 8.5%, the highest they've been since the 1980s. For some context, the Fed tries to maintain inflation at a rate of 2% over the long run.

Lately, you’ve likely experienced inflation at the gas pump or grocery store. You’re paying a lot more for these necessities than you were a year ago.

So, what is inflation? Inflation is a decrease in money's purchasing power, which results in higher prices for goods and services. 

Part of the reason inflation has been accelerating so quickly is due to widespread supply shortages in the wake of the pandemic. When supply goes down, demand goes up.

The real effects of accelerated inflation include a higher cost of living. We're paying more for gas, groceries, and rent than we were a year ago — roughly 8.5% more across the board. 

In response to rising inflation, the Federal Reserve increased interest rates

What, if anything, can be done to combat rising inflation? That's where the Federal Reserve comes in.

The Federal Open Market Committee (FOMC) makes decisions about open market operations on behalf of the Federal Reserve. Their main goals are to keep employment up, stabilize prices, and moderate long-term inflation rates. One of their main jobs is to control the supply of money in the US economy, which influences inflation rates.

When inflation is high, the FOMC tends to raise interest rates, which increases the cost of borrowing. The idea is to make borrowing less appealing, reducing the amount of money in circulation. This slows demand and therefore lowers prices.

 In June 2022, the FOMC voted to raise interest rates by 0.75%, or 75 basis points. And in July, the FOMC raised interest rates by another 75 basis points, for a total of 150 basis points so far this year.

This interest rate, also known as the Federal Funds Rate, is an important indicator of the economy. It's the rate at which banks charge each other to lend Fed funds overnight. It directly impacts consumer interest rates on mortgages, auto loans, and credit cards.

This is all part of a tighter monetary policy

Along with rising inflation and higher interest rates, you've probably been hearing the term “tighter monetary policy” being tossed around in the financial news.

A tighter monetary policy aims to slow down an “overheated” economy. An overheated economy is one experiencing high levels of inflation following a period of economic growth.

One way to cool an overheated economy is to slow inflation by raising interest rates. This makes borrowing less attractive — and more expensive. The result is a smaller amount of money circulating through the economy. 

Increasing the reserve requirement, the amount of money banks are required to have on hand, is another way of taking money out of circulation and increasing the cost of borrowing. 

On the other hand, a tighter monetary policy makes saving more attractive. This is because higher interest rates on savings accounts work in a savings account holder's favor. 

There’s talk of a recession

So, why all the fear in the news?

In response to the tighter monetary policy, stocks have been dropping, and there's a fear of a looming recession. Interest rates will likely continue to rise, making it more expensive for those applying for a mortgage, paying off debt, or getting a car loan. 

There are a few signs — like the fact that the economy shrank in early 2022, turbulence regarding political disruptions and the ongoing pandemic, and increased interest rates, that indicate the potential for a recession. But that doesn’t mean you should make any drastic decisions.

How You Should Respond to The Financial News

A lot of this news sounds scary. After living through 2008, the fear of a recession is real. But that doesn't mean you should panic. The truth is, no one knows exactly what's next. The economy is cyclical, and ebbs and flows are normal. The worst thing you can do is make knee-jerk reactions in response to what you hear in the news.

So, what should you do?

In general, less is more. If you've been working with a trusted financial advisor to balance a well-diversified portfolio as you approach retirement, you're on the right track. It's times like these when you have to sit tight and weather the storm.

If you’re managing your money without a professional’s perspective, this might be the time to get some trusted advice. If you’re feeling anxious or uncertain, a financial planner is a great person to consult.

Finally, you can make sure your emergency savings account is fully funded. As we mentioned earlier, one upside of higher interest rates is that your savings account benefits. 

Make sure your emergency savings are fully funded so you can be prepared in case of tough times. This means if something does happen and you need extra cash, you won’t have to dig into your hard-earned retirement funds. 

Work With a Financial Planner to Prepare For the Future

At Outside the Box Financial Planning, we take a personal approach to financial planning. When the financial news is unsettling, it can be tough to make level-headed decisions. Instead, you might be tempted to act on impulse.

The best thing you can do is have a trusted financial planner in your corner — one who’s ready to help you through whatever happens. We do more than manage your assets. We ease your concerns so you can feel financially secure and prepared.

To see if we can help you feel more secure in your financial future, click here to schedule a conversation today.

---

Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

Global Market Commentary: First Quarter 2022

Markets Have Terrible Second Quarter 

Global equity markets had an awful second quarter, and when the final Wall Street bell weakly tolled on June 30th, all major global equity markets were in the red, leading to overall market declines not seen in decades. 

To underscore how bad it has been so far in 2022, consider that the S&P 500 recorded its worst first six months in 52 years, and the DJIA recorded its worst first six months since 1962.

For the second quarter of 2022: 

• The DJIA dropped 11.2%;

• The S&P 500 lost 16.7%;

• NASDAQ plummeted 22.7%; and

• The Russell 2000 declined 18.4%.

The themes that drove market performance in the second quarter were the same worries that drove markets in the first quarter and towards the end of last year. And the two most dominant themes continue to be inflation and the Fed – with the former rising to 40-year highs and the latter causing Wall Street to worry that the course of rising rates would lead to a recession.

The other themes were plummeting consumer confidence, rising food and gas prices, negative GDP numbers, declining manufacturing, a cooling-off of the housing market, not-so-wonderful corporate earnings, continued supply-chain bottlenecks, and a lot of social unrest here at home.

Further, we saw that:

• Volatility, as measured by the VIX, trended up significantly this quarter, beginning around 19 and ending the month just south of 29.

• West Texas Intermediate crude trended up slightly for the quarter, starting at just under $100/barrel and ending at over $105. For perspective, WTI started 2022 at about $75/barrel.

Market Performance Around the World

Investors were unhappy with the quarterly performance around the world, as all 36 developed markets tracked by MSCI were negative for the second quarter of 2022 – and all of them saw negative returns in the double digits. And for the 40 developing markets tracked by MSCI, 39 of them were negative, with many losing more than a quarter of their value.

Source: MSCI. Past performance cannot guarantee future results

This Bear Seems Especially Angry

U.S. equity markets turned in a terrible second quarter to add to a not-so-great first quarter, pushing the major equity markets to levels not seen in a long time. And while many are suggesting that there is more pain to come from this bear, plenty of others suggest that the worst is behind us. But we of course, won’t know for sure for another six months.

For the YTD through the end of June:

• The DJIA is down 15.9%;

• The S&P 500 is down 21.0%;

• NASDAQ is down 30.3%; and

• The Russell 2000 is down 24.8%.

Sector Performance Rotated in Q22022

The overall trend for sector performance for the second quarter and the YTD was ugly, as all 11 S&P 500 sectors dropped for the second quarter, and only the Energy sector was positive YTD. As if those numbers weren’t bad enough, the performance leaders and laggards rotated throughout the quarter, and the ranges are substantial.

Here are the sector returns for the first two quarters of 2022:

Source: FMR

Reviewing the sector returns for just the second quarter of 2022 and the first six months of the year, we saw that:

• All sectors were painted red for the second quarter, and only the Energy sector is green YTD;

• 7 of the 11 sectors saw double-digit declines in the second quarter, and those same 7 saw double-digit declines YTD too;

• The defensive sectors (Utilities and Consumer Staples) turned in a relatively decent quarter and have held up relatively ok YTD;

• The interest-rate sensitive sectors (Information Technology and Financials specifically) struggled as the Fed raised rates; and

• The differences between the best (-5%) performing and worst (-29%) performing sectors in the first quarter were big.

The Fed, The Fed, The Fed

The Federal Reserve voted to increase the fed funds by an amount not seen in almost 30 years. From the Federal Reserve press release dated June 15, 2022:

“Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1.5% - 1.75% and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that was issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.”

Like the previous hike earlier this year, this rate hike was one of the most predictable and predicted rate movements the markets have ever seen. However, the magnitude of the rate hike was not predicted.

“Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” said Fed Chair Jerome Powell. And Powell also said that decisions will be made “meeting by meeting.”

Interestingly, as of the day after the Fed’s historic announcement, Wall Street assigned a probability of more than 80% that the Fed would raise rates by another 75 basis points at their next meeting at the end of July. And that probability has held steady through the end of June too.

GDP Slumps

As the quarter wound down, the Bureau of Economic Analysis released its 3rd estimate of 1st quarter GDP and reported that real gross domestic product decreased at an annual rate of 1.6%. Analysis. In the fourth quarter of 2021, real GDP increased 6.9%.

This 3rd estimate was notable in that the 2nd estimate issued last month reported that GDP declined 1.5%.

U.S. Bureau of Economic Analysis. Seasonally adjusted at annual rates.

“The update primarily reflects a downward revision to personal consumption expenditures (PCE) that was partly offset by an upward revision to private inventory investment (refer to "Updates to GDP").

The decrease in real GDP reflected decreases in exports, federal government spending, private inventory investment, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased. Nonresidential fixed investment, PCE, and residential fixed investment increased.”

Housing Cools Off

The National Association of Realtors announced that existing-home sales retreated for the fourth consecutive month in May. Month-over-month sales declined in three out of four major U.S. regions, while year-over-year sales slipped in all four regions.

From the release:

• Total existing-home sales (completed transactions that include single-family homes, townhomes, condominiums, and co-ops) fell 3.4% from April.

• Year-over-year sales receded by 8.6%.

"Home sales have essentially returned to the levels seen in 2019 – prior to the pandemic – after two years of gangbuster performance. Also, the market movements of single-family and condominium sales are nearly equal, possibly implying that the preference towards suburban living over city life that had been present over the past two years is fading with a return to pre-pandemic conditions."

• Total housing inventory registered at the end of May increased by 12.6% from April but dropped 4.1% from the previous year.

• Unsold inventory sits at a 2.6-month supply at the current sales pace, up from 2.2 months in April and 2.5 months in May 2021.

"Further sales declines should be expected in the upcoming months given housing affordability challenges from the sharp rise in mortgage rates this year. Nonetheless, homes priced appropriately are selling quickly, and inventory levels still need to rise substantially – almost doubling – to cool home price appreciation and provide more options for home buyers."

• The median existing-home price for all housing types in May was $407,600, up 14.8% from May 2021, as prices increased in all regions.

• This marks 123 consecutive months of year-over-year increases, the longest-running streak on record.

Further:

• Properties typically remained on the market for 16 days in May, down from 17 days in April and 17 days in May 2021.

• Eighty-eight percent of homes sold in May 2022 were on the market for less than a month.

The largest year-over-year median list price growth occurred in Miami (+45.9%), Nashville (+32.5%), and Orlando (+32.4%). Austin reported the highest growth in the share of homes that had their prices reduced compared to last year (+14.7 percentage points), followed by Las Vegas (+12.3 percentage points) and Phoenix (+11.6 percentage points).

Regional Breakdown

• Existing-home sales in the Northeast climbed 1.5% but fell 9.3% from May 2021. The median price in the Northeast was $409,700, a 6.7% rise from one year ago.

• Existing-home sales in the Midwest dropped 5.3% from the previous month and also fell 7.5% from May 2021. The median price in the Midwest was $294,500, up 9.5% from one year before.

• Existing-home sales in the South declined 2.8% in May and fell 8.4% from the previous year. The median price in the South was $375,000, a 20.6% jump from one year ago. For the 9th consecutive month, the South recorded the highest pace of price appreciation relative to the other three regions.

• Existing-home sales in the West slid 5.3% in May and dropped 10.0% from this time last year. The median price in the West was $633,800, an increase of 13.3% from May 2021.

Manufacturing Cools Off 

S&P Global reported that we saw “the weakest upturn in US private sector output since January’s Omicron-induced slowdown in June. The rise in activity was the second-softest since July 2020, with slower service sector output growth accompanied by the first contraction in manufacturing production in two years.

• The headline Flash US PMI Composite Output Index registered 51.2 in June, down from 53.6 in May. The decline in the index reading signaled further easing in the business activity expansion rate to a pace notably slower than March’s recent peak. Although service providers continued to indicate a rise in output, it was the weakest increase in five months.

• Manufacturers fared worse, with factory production slipping into decline as the respective seasonally adjusted index fell to a degree only exceeded twice in the 15-year history of the survey, at the height of the initial pandemic lockdowns in 2020 and the height of the global financial crisis in 2008.

• Weaker demand conditions, often linked to the rising cost of living and falling confidence, led to the first contraction in new orders since July 2020. Decreases in new sales for goods and services in June were the first recorded since May and July 2020, respectively.

• Similarly, new export orders contracted at the steepest pace since June 2020 as foreign customers paused or reduced new order placements due to inflation and supply chain disruptions.

• Inflationary pressures remained marked in June, as input costs and output charges rose substantially again. Although the pace of input price inflation eased to the slowest for five months, it was sharper than any seen before April 2021. Alongside food, fuel, transportation, and material price hikes, firms often mentioned that wages had increased to entice workers to stay, which added pressure to operating expenses.

• Finally, business confidence slumped to one of the greatest extents seen since comparable data were available in 2012, down to the lowest since September 2020. Manufacturers and service providers were far less upbeat regarding the outlook for output over the coming year than in May, principally amid inflationary concerns and the further impacts on customer spending as well as tightening financial conditions.

Consumer Sentiment Hits Record Low 

The University of Michigan’s Consumer Sentiment Index for June came in 14.4% below May for the lowest reading on record.

“Consumers across income, age, education, geographic region, political affiliation, stockholding, and homeownership status all posted large declines. About 79% of consumers expected bad times in the year ahead for business conditions, the highest since 2009. Inflation continued to be of paramount concern to consumers; 47% of consumers blamed inflation for eroding their living standards, just one point shy of the all-time high last reached during the Great Recession.”

Orders for Durable Goods Up 

Four days before the end of the quarter, the U.S. Census Bureau announced the May advance report on durable goods manufacturers’ shipments, inventories, and orders: 

New Orders

• New orders for manufactured durable goods in May increased by $1.9 billion or 0.7%.

• Up seven of the last eight months, this increase followed a 0.4% April increase.

• Excluding transportation, new orders increased by 0.7%.

• Excluding defense, new orders increased by 0.6%.

• Transportation equipment increased by $0.7 billion or 0.8% for two consecutive months to $87.6 billion.

Shipments

• In May, up twelve of the last thirteen months, shipment of manufactured durable goods increased by $3.6 billion or 1.3% to $268.4 billion.

• This followed a 0.3% April increase.

• Up seven of the last eight months, transportation equipment led the increase, $1.7 billion or 2.1% to $84.7 billion.

Unfilled Orders

• Unfilled orders for manufactured durable goods in May, up twenty-one consecutive months, increased $3.7 billion or 0.3% to $1,109.8 billion.

• This followed a 0.5% April increase.

• Up fifteen of the last sixteen months, transportation equipment led the increase, $2.9 billion or 0.5% to $639.8 billion.

Inventories

• Inventories of manufactured durable goods in May, up sixteen consecutive months, increased $2.7 billion or 0.6% to $482.7 billion.

• This followed a 0.9% April increase.

• Up nineteen consecutive months, Machinery led the increase, $1.0 billion or 1.2% to $82.3 billion.

Capital Goods

• Non-defense new orders for capital goods in May increased by $0.4 billion or 0.5%.

• Shipments increased by $1.3 billion or 1.6%.

• Unfilled orders increased by $3.9 billion or 0.6%.

• Inventories increased by $0.6 billion or 0.3%.

• In May, defense orders for capital goods increased by $0.3 billion or 2.6%.

• Shipments increased by $0.3 billion or 2.5%.

• Unfilled orders decreased by $0.2 billion or 0.1%.

• Inventories increased by $0.1 billion or 0.3%.

Sources: bea.gov; census.gov; nar.realtor; umich.edu; spglobal.com;  msci.com; fidelity.com; nasdaq.com; wsj.com; morningstar.com

From the Federal Reserve press release dated June 15, 2022:

“Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.”

No One Was Surprised

This rate hike –like the previous hike earlier this year–was one of the most predictable and predicted rate movements the markets have ever seen. What was not predicted until recently, however, was the magnitude of the rate hike. Yet while the markets and traders were expecting this hike, the announcement did contribute to the DJIA, NASDAQ, and the S&P 500 all rallying by more than 1%. But within a few hours after markets closed, the futures market suggested that those gains would be wiped out the following day.

Keep in mind that’s only one trading day and one futures “night”–long-term investors should think about the risk that the Fed continues moving rates higher and faster than expected throughout 2022 because then we could see some longer-term challenges for the stock market and consumers. And higher rates are all but certain to happen for the remainder of the year. The magnitude, however, depends on a number of factors. “Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” said Fed Chair Jerome Powell. And Powell also said that decisions will be made “meeting by meeting.”

Interestingly, as of the day after the Fed’s historic announcement, Wall Street assigned a probability of more than 80% that the Fed would raise rates by another 75 basis points at their next meeting at the end of July. So, will there be implications for this announcement? Sure. But enough to make most investors change allocations or courses of action? Maybe. Maybe not.

Reason to Change

The most important tool available to the Fed is its ability to set the federal funds rate, or the prime interest rate. This is the interest paid by banks to borrow money from the Federal Reserve Bank. Interest is, basically, the cost to the banks of borrowing someone else’s money. The banks will pass on this cost to their own borrowers.

Increasing the federal funds rate reduces the supply of money by making it more expensive to obtain. Reducing the amount of money in circulation, by decreasing consumer and business spending, helps to reduce inflation.

Effects on Consumers and Businesses

Any increased expense for banks to borrow money has a ripple effect, which influences both individuals and businesses in their costs and plans.

• Banks increase the rates that they charge to individuals to borrow money, through increases in credit card and mortgage interest rates. As a result, consumers have less money to spend and must face the effect of what they want to purchase and when to do so. In other words, mortgage rates are trending up and credit card interest rates are too. The same is true with auto loans.

• Because consumers will have less disposable income (in theory), businesses must consider the effects on their revenues and profits. Businesses also face the effect of the greater expenses of borrowing money. As the banks make borrowing more expensive for businesses, companies are likely to reduce their spending. Less business spending and capital investment can slow the growth of the economy, decreasing business profits.

These broad interactions can play out in numerous ways.

Effects on the Markets

This one is a bit trickier because intuitively stock prices should decrease when investors see companies reduce growth spending or make less profit. The reality, however, is that the Fed typically won’t raise rates unless they deem the economy healthy enough to withstand what should –at least in textbooks –slow the economy. But the reality is that stocks often do well in the year following an initial rate hike. But after multiple and large rate hikes in the same year? Much tougher to predict. If the stock market declines, investors tend to view the risk of stock investments as outweighing the rewards and they will often move toward the safer bonds and Treasury bills. As a result, bond interest rates will rise, and investors will likely earn more from bonds. Obviously, many factors affect activity in various parts of the economy. A change in interest rates, although important, is just one of those factors. Give me a call if you have questions or want to discuss additional repercussions that this Fedrate increase will likely have. ways.

Global Market Commentary: First Quarter 2022

Markets Have Worst Quarter Since 1Q2020

Global equity markets had a volatile first quarter and when the final Wall Street bell rang on March 31st, global equity markets were in the red, as March was not enough to make up for the dismal returns from January and February.

But maybe the worst news was that the bond market suffered its worst quarter since 1980.

For the first quarter of 2022:

• The DJIA ended Q1 with a loss of 5.2%;

• The S&P 500 ended Q1 with a loss of 5.5%;

• NASDAQ ended Q1 with a loss of 10.2%; and

• The Russell 2000 ended Q1 with a loss of 8.9%.

The themes that drove market performance in the first quarter were the same themes that drove markets toward the end of last year. But in late February and throughout all of March, Wall Street dealt with the invasion of Ukraine by Russia and its impact on global markets.

Volatility and oil prices spiked this quarter, driven by a host of issues, including Russia’s invasion, rising inflation, supply chain issues and the Federal Reserve’s timing and size of rate hikes (we saw a 25 basis point hike in March).

The other themes were volatile consumer confidence, continued red-hot housing prices, high GDP growth numbers and corporate earnings that came in better than expected.

Further, we saw that:

• Volatility, as measured by the VIX, trended up most of the month, more than doubling to a high of 36 on March 7th, before retreating to come to rest marginally higher than where it began the month.

• West Texas Intermediate crude made a big move in the first quarter, starting at $75/barrel and ending the quarter at over $100. For perspective, WTI started 2021 at $48/barrel.

Market Performance Around the World

Investors were unhappy with the quarterly performance around the world, as 35 of the 36 developed markets tracked by MSCI were negative for the first quarter of 2022, with only MSCI Pacific ex-Japan advancing. And for the 40 developing markets tracked by MSCI, 26 of them were negative, with many posting staggering losses, including MSCI Eastern Europe that dropped almost 60%.

Source: MSCI. Past performance cannot guarantee future results

March Could Not Lift the Entire Quarter

U.S. equity markets reversed the negative course of the quarter’s first two months and ended March in positive territory. But it was still not enough to overcome the biggest two-month drop (January and February) since March 2020 as markets ended the 1st quarter of 2022 in the red - the first since the 1st quarter of 2020.

For the month of March:

• The DJIA was up 4.2%;

• The S&P 500 was up 5.2%;

• NASDAQ was up 5.1%; and

• The Russell 2000 was up 3.1%.

Sector Performance Rotated in Q12022

The overall trend for sector performance for all 3 months so far in 2022 was mixed and the performance leaders and laggards rotated throughout, giving investors a few mini sector rotations each month and during the quarter.

Here are the sector returns for the shorter time periods:

Source: FMR

Reviewing the sector returns for just the first quarter of 2022, we saw that:

• 9 of the 11 sectors were painted red for the first quarter, which is in stark comparison to the previous quarter;

• The Energy sector turned in an astonishing quarter, driven by a massive jump in oil prices;

• The defensive Utilities sector turned in a good quarter;

• The interest-rate sensitive sectors (Information Technology and Financials specifically) struggled as the Fed raised rates by 25 bps; and

• The differences between the best (+38%) performing and worst (-13%) performing sectors in the first quarter widened.

The Fed Increases Rates

The dominant theme this month (besides Russia/Ukraine) revolved around whether the Fed might need to raise short-term interest rates more quickly and more often, eating into future profits, especially within the high-flying tech names.

Then at the March meeting, the Federal Reserve moved its fed funds target rate from near zero to a range of 0.25% to 0.50%. It was the first rate hike since 2018.

The Federal Funds Rate – 10 Year Chart

But the Fed also released the so-called “dot plot,” which shows where individual Fed officials expect interest rates to be.

And given the surge in inflation numbers – from the perspectives of both consumers (CPI) and producers (PPI), the majority now expect seven hikes in 2022, four in 2023 and none for 2024. (In other words, there could be a rate hike at every remaining Fed meeting this year and at half the meetings next year.)

If this comes true, it would be higher than the Fed’s estimate of the long-run neutral rate, (which is 2%), and would suggest a more hawkish policy that could be more restrictive to growth.

Interestingly enough, when the Fed raised rates 25 basis points and released its “dot plot,” stocks rallied, suggesting that Wall Street appreciates the path that has been outlined.

But The Fed Was Not Unanimous

By its own metrics, however, it was becoming increasingly difficult for the Fed to forestall a rate increase at least in the range of 0.25%.

In fact, buried in a footnote of the Fed’s statement was this nugget:

“Voting against this action was James Bullard, who preferred at this meeting to raise the target range for the federal funds rate by 0.5 percentage points to 1/2 to 3/4 percent.”

Bond Markets Struggle

At the end of the quarter, there was a lot of chatter because the 2-year Treasury yield and the 10-year Treasury yield inverted, leading many to suggest a recession is on the way in the next 12 months.

10YR-2YR Treasury curve and 10YR-3MTH Treasury curve (%)

But lost in much of the quarter-end summaries was this ominous sign: the bond market suffered its worst quarter since 1980. Specifically, the Bloomberg U.S. Aggregate Bond Index had its worst quarter since late 1980.

Want more bad bond news? Well,

• The first quarter of 2022 was the third-worst quarter since the index’s inception.

• March was the worst monthly performance for the index since July 2003.

GDP UP 6.9% Last Quarter

Two days before the quarter ended, the Bureau of Economic Analysis reported that real gross domestic product increased at an annual rate of 6.9% in the fourth quarter of 2021.

In the third quarter, real GDP increased 2.3 percent.

U.S. Bureau of Economic Analysis. Seasonally adjusted at annual rates.

PCE Price Index Up 6.4% Over 12 Months

The Bureau of Economic Analysis reported a lot of information on the last day of the quarter, including that:

• Personal income increased $101.5 billion (0.5%) in February

• Disposable personal income increased by $76.1 billion (0.4%)

• Personal consumption expenditures increased $34.9 billion (0.2%)

Further:

• Real DPI decreased 0.2% in February and Real PCE decreased 0.4%

• Goods decreased 2.1%

• Services increased 0.6%

• The PCE price index increased 0.6%

• Excluding food and energy, the PCE price index increased 0.4%

The PCE price index for February increased 6.4% from one year ago, reflecting increases in both goods and services.

• Energy prices increased 25.7%

• Food prices increased 8.0%

• Excluding food and energy, the PCE price index for February increased 5.4% from one year ago

Personal Consumption Expenditures Price Index, Ex-Food and Energy

Change from Month One Year Ago

February 2022 5.4%

January 2022 5.2%

December 2021 4.9%

November 2021 4.7%

Unemployment is Very Low

Unemployment (3.8%) is now nearly at record lows. In addition, the number of job openings exceeds the number of unemployed by the widest margin in the past 20 years.

Record job openings exceed the number of unemployed (numbers in millions)

Source: FactSet

This paradigm suggests that we will be in a tight labor market for a while. And the jobs growth and unemployment numbers reported at the end of the quarter reinforce that notion.

Source: Bureau of Labor Statistics

New Home Sales Down

The U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced the following new residential sales statistics for February 2022.

New Home Sales

• Sales of new single‐family houses in February 2022 were at a seasonally adjusted annual rate of 772,000

• This is 2.0% below the January rate of 788,000

• This is 6.2% below the February 2021 estimate of 823,000

Sales Price, Inventory, and Months’ Supply

• The median sales price of new houses sold in February 2022 was $400,600

• The average sales price was $511,000

• The seasonally‐adjusted estimate of new houses for sale at the end of February was 407,000

• This represents a supply of 6.3 months at the current sales rate

Consumer Confidence is Up

The Conference Board announced that “the Consumer Confidence Index increased slightly in March, after a decrease in February. The Index now stands at 107.2 (1985=100), up from 105.7 in February. The Present Situation Index – based on consumers’ assessment of current business and labor market conditions—improved to 153.0 from 143.0 last month. However, the Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions— declined to 76.6 from 80.8.”

Present Situation
Consumers’ appraisal of current business conditions improved in March.

• 19.6% of consumers said business conditions

  were “good,” up from 17.6%.

• 22.1% of consumers said business conditions were “bad,” down from 25.1%.

Consumers’ assessment of the labor market also improved.

• 57.2% of consumers said jobs were “plentiful,” up from 53.5%, a new historical high.

• 9.8% of consumers said jobs are “hard to get,” down from 12.0%.

Expectations Six Months Hence

Consumers’ optimism about the short-term business conditions outlook declined in March.

• 18.7% of consumers expect business conditions will improve, down from 21.3%.

• 23.8% expect business conditions to worsen, up from 19.9%.

Consumers were mixed about the short-term labor market outlook.

• 17.4% of consumers expect more jobs to be available in the months ahead, down from 19.4%.

• Conversely, 17.7% anticipate fewer jobs, down from 19.6%.

Consumers were also mixed about their short-term financial prospects.

• 14.9% of consumers expect their incomes to increase, up from 14.7%.

• 13.7% expect their incomes will decrease, up from 13.0%.

Sources: conference-board.org; bea.gov; census.gov; msci.com; fidelity.com; nasdaq.com; wsj.com; morningstar.com; bea.gov

The year-end holidays approach and bring lots of things to do. Yet with holiday cheer there are financial plans to make, too.

Consider these financial opportunities before 2022 arrives.

MAKE FINANCIAL GIFTS

As we count our many blessings and share time with our loved ones, we can express our thanks through giving to others. Donate to your favorite charity before year-end.

Generally speaking, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60%) of the taxpayer's adjusted gross income. But did you know that the IRS has temporarily suspended limits on charitable contributions?

Sure it might change, but as of now, qualified contributions are not subject to this limitation and individuals may deduct qualified contributions of up to 100% of their adjusted gross income.

To qualify, the contribution must be a cash contribution and made to a qualifying organization. Contributions of non–cash property do not qualify for this relief. Taxpayers may still claim non–cash contributions as a deduction, subject to the normal limits.

You can gift assets or cash to your child, any relative, or even a friend, and take advantage of the annual gift tax exclusion. Any individual can gift up to $15,000 this year to as many other individuals as he or she desires a couple may jointly gift up to $30,000. Whether you choose to gift singly or jointly, you've probably got a long way to go before using up the current $11.7 ($23.4 million for couples) lifetime exemption.

Grandparents, aunts, uncles, and parents too can fund 529 college saving plans this way, but it is worth noting that December 31st is the 529 funding deadline.

MAX OUT RETIREMENT PLANS

Most employers offer a 401(k) or 403(b) plan, and you have until December 31st to boost your contribution. This year, the contribution limit on both 401(k) and 403(b) plans is $19,500 for those under 50 (it's going up by $1,000 next year) and $26,000 for those 50 and older. This year, the traditional and Roth individual retirement account contribution limits are $6,000 for those under 50 and $7,000 for those 50 and older.

But be careful because high earners face contribution ceilings based on their adjusted gross income level.

Remember IRA cash-outs. Once you reach age 72 you are required to take annual Required Minimum Distributions (RMDs) from your retirement accounts.

Your first RMD must be taken by April 1st of the year after you turn 72. Subsequent RMDs must be taken by December 31st of each year. If you don't take your RMD, you'll have to pay a penalty of 50% of the RMD amount.

Did you inherit an IRA? If you have and you weren't married to the person who started that IRA, you must take the first RMD from that IRA by December 31st of the year after the death of that original IRA owner. You have to do it whether the account is a traditional or a Roth IRA.

Consider dividing it into multiple inherited IRAs, thus extending the payout schedule for younger inheritors of those assets. Any co–beneficiaries receive distributions per the life expectancy of the oldest beneficiary. If you want to make this move, it must be done by the end of the year that follows the year in which the original IRA owner died.

If your spouse died, then, you should file Form 706 no later than nine months after his or her passing. This notifies the IRS that some or all of a decedent's estate tax exemption is carried over to the surviving spouse.

Business owners' retirement plans. If you have income from self-employment, you can save for the future using a self-directed retirement plan, such as a Simplified Employee Pension (SEP) plan or a one–person 401(k), the so-called Solo (k). You don't have to be exclusively self–employed to set one of these up – you can work full–time for someone else and contribute to one of these while also deferring some of your salary into the retirement plan sponsored by your employer.

Contributions to SEPs and Solo (k) s are tax–deductible. December 31st is the deadline to set one up, and if you meet that deadline, you can make your contributions as late as April 15th next year (or October 15th with a federal extension).

You can contribute up to $58,000 to a SEP and this rises to $61,000 next year.

If you contribute to a 401(k) at work, the sum of your employee salary deferrals plus your Solo (k) contributions can't be greater than the $19,500/$26,000 limits. But even so, you can still pour up to 25% of your net self-employment income into a Solo (k).

IRS INCREASES CONTRIBUTION LIMITS FOR NEXT YEAR

The Internal Revenue Service announced that the amount individuals can contribute to their 401(k) plans in 2022 has increased to $20,500, up from $19,500 for 2021 and 2020.

From the IRS website:

Highlights of Changes for 2022

"The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $20,500, up from $19,500. The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver's Credit all increased for 2022.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer's spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase–outs of the deduction do not apply.) Here are the phase–out ranges for 2022:

• For single taxpayers covered by a workplace retirement plan, the phase–out range is increased to $68,000 to $78,000, up from $66,000 to $76,000.

• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase–out range is increased to $109,000 to $129,000, up from $105,000 to $125,000.

• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase–out range is increased to $204,000 to $214,000, up from $198,000 to $208,000.

• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase–out range is not subject to an annual cost–of–living adjustment and remains $0 to $10,000.

The income phase–out range for taxpayers making contributions to a Roth IRA is increased to $129,000 to $144,000 for singles and heads of household, up from $125,000 to $140,000. For married couples filing jointly, the income phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000. The phase–out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost–of–living adjustment and remains $0 to $10,000.

The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate–income workers is $68,000 for married couples filing jointly, up from $66,000; $51,000 for heads of household, up from $49,500; and $34,000 for singles and married individuals filing separately, up from $33,000.

The amount individuals can contribute to their SIMPLE retirement accounts is increased to $14,000, up from $13,500.

Key Employee Contribution Limits That Remain Unchanged

The limit on annual contributions to an IRA remains unchanged at $6,000. The IRA catch–up contribution limit for individuals aged 50 and over is not subject to an annual cost–of–living adjustment and remains $1,000.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan who are 50 and older can contribute up to $27,000, starting in 2022. The catch–up contribution limit for employees aged 50 and over who participate in SIMPLE plans remains unchanged at $3,000."

Quarterly Market Commentary: Third Quarter 2021 

Markets Struggle in the Third Quarter

Global equity markets had a mixed third quarter, but when the final Wall Street-bell chimed on September 30th, global markets had not moved very much, despite the final month of the quarter turning in dismal results.

For the third quarter of 2021:

• The DJIA ended 3Q with a loss of 1.5%;

• The S&P 500 ended 3Q with a gain of 0.6%;

• NASDAQ ended 3Q with a loss of 0.2%; and

• The Russell 2000 ended 3Q with a loss of 4.4%.

But many are trying not to focus on the mixed returns for 3Q (and dismal September returns) and are instead focusing on how the market performed for the first nine months of the year – and those numbers are solid, as:

• The DJIA is up 12.1% YTD;

• The S&P 500 is up 15.9% YTD;

• NASDAQ is up 12.7% YTD; and

• The Russell 2000 is up 12.4% YTD.

Interestingly, the themes that helped drive market performance have been on Wall Street’s worry list for a while and did not just appear on July 1st. Topping the worry list was rising inflation, the Federal Reserve’s schedule of remaining accommodative; declining consumer sentiment; overheating housing; concerns that the delta variant might stall economic activity; and disappointing economic data hampered by supply chain issues.

Further, we saw that:

• Volatility, as measured by the VIX, trended up in the third quarter, starting slightly over 15 and ending the month at 23.

• West Texas Intermediate crude did not move much in the third quarter, starting and ending just north of $75/barrel. Further, WTI has climbed more than 50% in six months, having started 2021 at $48/barrel.

Market Performance Around the World

Investors were not thrilled with the quarterly performance around the world, as 32 of the 35 developed markets tracked by MSCI were negative for the third quarter of the year. And of the 40 developing markets tracked by MSCI, 26 of them were negative too.

Source: MSCI. Past performance cannot guarantee future results

Again, the themes that helped drive market performance this month have been on Wall Street’s worry list for a long time and did not magically appear when the third quarter kicked off. 

In fact, the worries of rising inflation; the Federal Reserve’s schedule of remaining accommodative; declining consumer sentiment; overheating housing; the delta variant; and supply chain issues have all been around for many months (inflation has gone up every month in 2021, for example). 

But the third quarter did see a few more troublesome topics added to that long worry list, including:

• Treasury Secretary Janet Yellen warning of economic catastrophe if Congress did not raise the debt ceiling limit;

• A hotly-debated infrastructure bill that could carry a price tag of at least $1 trillion and up to $3.5 trillion;

• Skyrocketing shipping fees heading into the holiday season as container ships are anchored outside U.S. ports waiting to be unloaded;

• Rising unemployment applications for the last 3 weeks of the month; and

• China’s Evergrande Group risking default on its debt and sending shock-waves throughout global markets, similar to when Lehman Brothers collapsed (13 years ago to the day) and kicked off the Financial Crisis of 2008.

And as if we need another reminder about inflation, the number of companies warning of inflation on their latest earnings calls hit an all-time high too.

Finally, while glass-half-empty economists were busy reminding us all month that September has historically the worst month for stocks, now they’re preaching that October has historically been the most volatile month for stocks. So, is it any surprise that stocks struggled with this growing Wall of Worry?

September Lived Up to Its Billing

All the major U.S. equity markets and virtually all the developed and emerging markets tracked by MSCI were down for the month of September, in keeping in line with what has historically been the worst month for stocks. For the month of September:

• The DJIA was down 4.3%;

• The S&P 500 was down 4.8%;

• NASDAQ was down 5.3%; and

• The Russell 2000 was down 3.6%.

Further, the S&P 500 and NASDAQ both turned in their worst months since the height of the pandemic in March 2020.

IPOs on Fire

The IPO market was on fire during the third quarter, with a stunning record amount of activity on the M&A and IPO front. Here are some statistics for perspective:

• Q3’s global M&A activity produced deals worth more than $1.5 trillion, which is 38% more than the highest quarter on record

• Global M&A activity through the first nine months of 2021 reached more than $4.3 trillion, which trounces the annual record of $4.1 trillion

• There has been a crazily historic 770 U.S. IPOs over the first three quarters of 2021 and that is a whopping 3x the ten-year average of 205

• SPACs make up 58% of this year’s IPOs, but the 323 non-SPAC IPOs are already greater than any year since 2008

Sector Performance Rotated in Q32021

The overall trend for sector performance for each of the first nine months and the first, second and third quarters was good, but the performance leaders and laggards did rotate throughout, suggesting that a few sector rotations may have occurred in just 9 months. 

For perspective, recall that this time last year, the third quarter of 2020 ended with 10 of the 11 S&P 500 sectors painted green. Fast forward a year later and 5 of the 11 are painted red.

Here are the sector returns for the shorter time periods:

Source: FMR

Reviewing the sector returns for just the third quarter of 2021, we saw that:

• 5 of the 11 sectors were painted green for the third quarter;

• The Energy sector turned in another volatile quarter, this time retreating as the price of oil barely moved, whereas last quarter Energy led the other sectors as the price of oil leapt by $15/barrel;

• The Financials sector turned in another solid quarter, helped by the Federal Reserve’s stance of keeping rates low through at least 2023; and

• The differences between the best (+2.77%) performing and worst (-3.71%) performing sectors in the third quarter widened.

Asset Class & Style Performance

The second quarter and first six months of 2021 were good for almost all investors, with most of the major asset classes and styles turning in very respectable – and most importantly green – numbers across the board. 

For the quarter, Commodities continued their spectacularly red-hot pace, Growth outpaced Value and small-caps lagged the larger caps. 

Source: Barclays, Bloomberg, FactSet, FTSE, MSCI, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT All REITs; Cmdty: Bloomberg UBS Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in local currency. Past performance is not a reliable indicator of current and future results.

Turning to Commodities, which jumped another 6% for the quarter to add to its almost 30% gain YTD, it should be noted that 14 of the last 17 months have seen gains. Further, that almost 30% gain YTD represents its largest annual gain since 1979. 

Natural gas has gone through the roof with a YTD gain of 135% and WTI Crude oil is up 55% YTD. Supply and demand challenges are driving energy prices higher, as the summer driving season saw record-high gasoline demand and supplies were disrupted by hurricane season.

Consumer Confidence Sinks Again

On September 28th, the Conference Board announced that its Consumer Confidence Index declined in September, after declining in both July and August. The Index now stands at 109.3 (1985=100), down from 115.2 in August. And only 19% of consumers think business conditions are good, whereas 25% think conditions are bad.

“Concerns about the state of the economy and short-term growth prospects deepened, while spending intentions for homes, autos, and major appliances all retreated again. Short-term inflation concerns eased somewhat, but remain elevated,” read the press release from the Conference Board.

Inflation Keeps Rising

The Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers increased 0.3% in August on a seasonally adjusted basis after rising 0.5% in July. Over the last 12 months, the All Items index increased 5.3%.

A few highlights:

• The indexes for gasoline, household furnishings and operations, food, and shelter all rose in August and contributed to the monthly all items seasonally adjusted increase.

• The energy index increased 2.0%, mainly due to a 2.8% increase in the gasoline index.

• The index for food rose 0.4%, with the indexes for food at home and food away from home both increasing 0.4%.

Some Positive Inflation News Maybe?

Here is some good news on the monthly inflation increases (maybe):

• The index for dairy and related products declined in August, falling 1.0% after rising in each of the previous 4 months.

• There was a sharp decline in the index for food at employee sites and schools, which fell 17% in August.

• The index for airline fares fell sharply, decreasing 9.1% over the month.

• The index for used cars and trucks declined 1.5% in August, ending a series of five consecutive monthly increases.

GDP Up 6.7%

On the last day of the third quarter, the Bureau of Economic Analysis announced that real gross domestic product increased at an annual rate of 6.7% in the second quarter. In the first quarter, real GDP increased 6.3 percent.

“The increase in real GDP in the second quarter reflected increases in PCE, nonresidential fixed investment, exports, and state and local government spending that were partly offset by decreases in private inventory investment, residential fixed investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.”

Current Account Deficit Widens in 2Q

The U.S. Bureau of Economic Analysis announced that “the U.S. current account deficit, which reflects the combined balances on trade in goods and services and income flows between U.S. residents and residents of other countries, widened by $0.9 billion, or 0.5%, to $190.3 billion in the second quarter of 2021.

The second quarter deficit was 3.3% of current dollar gross domestic product, down from 3.4% in the first quarter. The $0.9 billion widening of the current account deficit in the second quarter mainly reflected reduced surpluses on services and on primary income that were mostly offset by a reduced deficit on secondary income.”

Jobless Claims Up

On the last day of the quarter, the Department of Labor announced that for the week ending September 25th, the advance figure for seasonally adjusted initial claims was 362,000, an increase of 11,000 from the previous week's unrevised level of 351,000. In addition:

• the 4-week moving average was 340,000, an increase of 4,250 from the previous week's unrevised average of 335,750.

• The advance seasonally adjusted insured unemployment rate was 2.0% for the week ending September 18, a decrease of 0.1% from the previous week's unrevised rate.

• The advance number for seasonally adjusted insured unemployment during the week ending September 18 was 2,802,000, a decrease of 18,000 from the previous week's revised level.

• The 4-week moving average was 2,797,250, a decrease of 750 from the previous week's revised average. This is the lowest level for this average since March 21, 2020 when it was 2,071,750.

“The highest insured unemployment rates in the week ending September 11 were in Puerto Rico (4.7), California (3.4), District of Columbia (3.2), Oregon (3.2), Alaska (3.1), Nevada (3.1), New Jersey (3.1), the Virgin Islands (3.1), Hawaii (2.7), and Illinois (2.7). 

The largest increases in initial claims for the week ending September 18 were in California (+17,218), Virginia (+12,140), Ohio (+4,147), Oregon (+3,413), and Maryland (+2,452), while the largest decreases were in Louisiana (-6,935), New York (-2,275), Missouri (-1,568), Oklahoma (-1,264), and New Mexico (-1,055).” 

Exports & Imports of Goods and Services 

“Exports of goods increased $28.3 billion, to $436.6 billion, mostly reflecting increases in industrial supplies and materials, mainly petroleum and products, and in capital goods, mainly civilian aircraft and semiconductors. 

• Imports of goods increased $29.0 billion, to $706.3 billion, primarily reflecting an increase in industrial supplies and materials, mainly petroleum and products and metals and nonmetallic products.

• Exports of services increased $7.6 billion, to $189.1 billion, primarily reflecting an increase in travel, mostly other personal travel.

• Imports of services increased $9.1 billion, to $127.8 billion, mostly reflecting increases in transport, primarily sea freight and air passenger transport, and in travel, primarily other personal travel.”

Worries of a Government Shutdown?

On literally the last day of the month with just hours to spare, President Biden signed a bill extending government funding through December 3rd, averting a partial shutdown. But the debt-ceiling fight remains and is likely to dominate Wall Street’s Wall of Worry heading into October. 

Here is a very important thing to remember: if the debt ceiling is not raised and the government does shut down, it wouldn’t be the first time. In fact, it wouldn’t even be the twentieth time. 

Since 1976 the government has been shut down 22 times, the last being between December 22, 2018 until January 25, 2019 (35 days). If this happens, then yes, the stock market will likely react negatively. 

But for perspective, consider the impact to stock markets during the last 2013 and 2018/2019 shutdowns – stocks actually rose.

Source: FactSet

But remember, as always: past performance is never a guarantee of future results. 

Sources: census.gov; bea.gov; bls.gov; dol.gov; bea.gov; factset.com; msci.com; fidelity.com;  nasdaq.com; wsj.com; morningstar.com

Headlines are looking grim again, so let's pause and take stock.

Why are the headlines terrible?

Because the media loves drama. This is not news to you or me or anyone who pays attention. The 24-hour news cycle is there to whip up emotions and keep us glued to the latest "BREAKING NEWS."

So, what’s behind the noise and should we worry?

Before we jump into unpacking the news, let’s take a moment and remind ourselves of how far we’ve come since the pandemic began.

You can see it right here in this chart:

We've recovered the vast majority of jobs lost since the bottom of the pandemic's disruption last April. The economy is still missing several million jobs to regain pre-pandemic levels, but we've made up a lot of ground, and jobs growth is still strong.1

In fact, there are more job openings right now than job seekers to fill them.2

But there's an important caveat to the chart above.

The monthly jobs report is what economists call a "lagging" indicator, meaning that it's telling us where the economy was, not where it's going.

To figure out what might lie ahead, economists turn to "leading" economic indicators that help forecast future trends.

So, what are the leading indicators telling us about the economy?

A couple of the most popular indicators are manufacturing orders for long-lasting (durable) goods since companies don't like to order expensive equipment unless they expect to need it soon.

Another one is groundbreaking (starts) on new houses, which indicate how much demand builders expect for housing.

Let's take a look:

Both indicators suggest continued (if bumpy) growth. Now, those are just two sectors, and we want to be thorough, so let's take a look at a composite.

The Conference Board Leading Economic Index (LEI) gives us a quick overview each month of several indicators.

It increased by 0.7% in June, following a 1.2% increase in May, and a 1.3% increase in April, showing broad, but slowing growth.3

What does that tell us? That the economy still has legs.

Will the delta variant derail the recovery?

A serious slowdown due to the delta variant seems unlikely, but we could potentially see a bumpy fall, especially in vulnerable industries and areas with surging case counts.

There's also some potentially good news about the delta variant that we can take from other countries.

India and Great Britain both experienced delta-driven surges earlier this summer.4

And what happened?

A steep and scary rise in case counts and hospitalizations...followed by a rapid decline.

It seems that these fast-moving delta waves might burn themselves out.

Unfortunately, these surges come with a painful human cost to patients, overburdened medical staff, communities, and families.

But, if this pattern holds true in the U.S., it doesn't appear that the economic impact will be heavy enough to derail the recovery.

All this to say, it's clear that the pandemic is still not over.

But we've come such a long way since the darkest days of 2020 and the road ahead still seems bright (if a little potholed).

Please remember to take panicky headlines with a shaker or two of salt.