September Market Recap

October 3, 2022 

Investors desperate for good news received very little in September.

The latest inflation readings fell less than expected, the Federal Reserve doubled-down on its rate-hiking, and equities responded by sinking to calendar-year lows. When markets closed on Friday afternoon, the S&P 500 concluded its worst month since March 2020. The S&P and NASDAQ finished lower for the third consecutive quarter, something that hasn’t happened since 2009.

In terms of year-to-date performance, only two years (1974 and 2002) in the last 75 were worse than the S&P 500’s 24.8% loss through the first nine months of 2022. Those looking for a silver lining will like knowing that the S&P gained 8% over the final three months in both years.

All 11 sectors in the S&P 500 decreased last month. Real Estate (-13.6%), Communication Services (-12.2%), and Technology (-12.1%) inflicted the most pain. Health Care (-2.7%) weathered the storm best.

Index	September 2022	YTD 2022
Dow	-8.84%	-20.95%
S&P 500+	-9.34%	-24.77%
NASDAQ	-10.50%	-32.40%

The Fed has put itself into a difficult position with only two possible paths out: Either it continues raising interest rates aggressively to bring down inflation and harms the economy by doing so. Or it maintains more friendly monetary policy to support financial markets but allows inflation to remain elevated for the foreseeable future. Both routes will be bumpy. Both will bring criticism. But Fed Chair Jerome Powell, who announced another 0.75% increase to the Fed Funds Rate on September 21, has made it clear he believes killing inflation is worth any collateral damage.

The latest inflation gauges seemed to convince markets this battle may take longer than expected to win. The Consumer Price Index (CPI) released on September 13 showed only a small decrease in annual inflation (8.3% compared to 8.5% a month earlier). Excluding food and gas prices, “core inflation” rose month-over-month. The S&P 500 reacted with its largest daily decline (-4.3%) since June 2020. The Dow Jones Industrial Average lost nearly 1,300 points.

Another closely watched metric, Personal Consumption Expenditures (PCE), showed 6.2% annual inflation, down only slightly from 6.4% a month earlier. Released on September 30, the PCE data was followed by another wave of selling that sent the S&P 500 to its lowest close of the year.

There are, however, numerous indicators that suggest “peak inflation” is in our rear-view mirror. Shipping costs are down 60% since January. Oil plunged to an 8-month low in September, with West Texas Intermediate Crude trading below $80 per barrel. Home sales and new construction have slowed significantly. Lumber prices are 64% less expensive than where they began the year.

The housing market is another part of the economy that has undergone major changes in an especially short period of time. The average interest rate on a 30-year home mortgage hovered around 7% at the end of September. It’s been 20 years (January 2002) since borrowing costs were this high for homebuyers.

Bond yields rocketed higher in September. 10-year US Treasury Bonds yielded 3.8% at month’s end and got as high as 3.99% on September 27. The last time yields touched 4% was June 2009, during the Great Recession. As yields have climbed, the prices of existing bonds have cratered. Those invested in traditional bond funds will be staring at year-to-date losses around 15% on their third-quarter statements.

International equities sold off at a similar pace to US stocks. Non-US Developed equities lost 9.2% in September. Emerging Markets fell 11.5%. Both categories continue to face the headwind of an exceptionally strong US dollar, which strengthened a further 3.2% last month versus a basket of global currencies.

US companies will begin reporting third-quarter earnings in the weeks ahead, and with expectations lowered given persistent inflation and general economic pessimism, there is hope even moderately good earnings may create some positive momentum. As of September 30, consensus estimates called for only 2.9% annual earnings growth from S&P 500 companies.

July Market Recap

August 1, 2022 

The bear market is not yet dead, but a month-long hibernation was a welcomed change for investors growing more grizzled with every selloff.

The S&P 500 gained more than 9% in July, effectively clawing back all of its June losses and posting the benchmark index’s best month since 2020. The NASDAQ performed even better, increasing more than 12% thanks to strong earnings from several large technology companies.

Each of the 11 sectors in the S&P 500 recorded positive returns in July, a complete reversal from June when all 11 sectors booked losses. Consumer Discretionary (+18.9%) and Technology (+13.5%) climbed highest. Energy (+9.6%) also resumed its upward trend. Consumer Staples (+3.1%) and Health Care (+3.2%) lagged in relative terms.

Index	July 2022	YTD 2022
Dow	+6.73%	-9.61%
S&P 500+	+9.11%	-13.34%
NASDAQ	+12.35%	+20.80%

July brought a quartet of market-moving events worth circling on the calendar: Fed hikes, inflation reports, second-quarter GDP, and corporate earnings.

On July 27, the Federal Reserve raised its benchmark Fed Funds Rate by another 0.75%, the second consecutive month it has done so. Rumors had swirled of a possible 1% hike, which failed to materialize. Stocks rallied sharply as a result. The NASDAQ surged 4.1% on July 27, its best single-day performance in more than two years (4/6/2020).

Here’s the money quote from Fed Chair Jerome Powell: “As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of (rate) increases while we assess how policy adjustments are affecting the economy and inflation.”

The size and pace of future rate hikes, in other words, will be data-dependent. With two months until the next scheduled Fed meeting (September 16), the hope is that forthcoming economic data reveals enough slowing to warrant less aggressive monetary policy.

Inflation, of course, is the most obvious gauge of whether recent Fed policy is achieving its goals. The latest Consumer Price Index (CPI) released July 13 revealed 9.1% inflation from a year earlier. It was another high-water mark for 2022 inflation, and fueled temporary speculation that the Fed might amp up hawkish policy even further.

One day after the Fed’s July rate hike, we learned the US economy contracted by 0.9% annualized in the second quarter (April-June). This comes after a 1.6% drop in Q1. Based on the traditional definition (two consecutive quarters of negative GDP growth), this puts our economy into a recession, although Powell and several politicians are doing their best to claim otherwise.

It was encouraging to see the stock market not overreact to this news. It was far from breaking news that economic growth is slowing. Even if the latest GDP number had been slightly positive, the overall narrative would not have changed. The S&P 500 increased 1.4% on July 28 following the GDP report, which of course can still be revised retroactively (higher or lower) in August.

That leaves second-quarter corporate earnings as the final area of focus last month. With slightly more than half the S&P 500 companies having reported so far, earnings are on pace to increase by 6% from a year earlier. That’s better than consensus expectations forecasting 4% earnings growth.

Apple, Alphabet (Google), and Amazon were among the mega-cap companies that met or exceeded earnings expectations in late July. Those three companies alone make up nearly 15% of the S&P 500 index.

While the change in momentum helps calm nerves and sooth portfolio values, it’s still too early to tell whether the ultimate bottom of this bear market is behind us. July’s bounce certainly creates a larger buffer. As of month-end, the S&P 500 was only 2% below the midway point between its all-time high and the mid-June low.

Evolving Fed policy will ultimately have a big impact on how this plays out, and the bond market is suggesting that policy will moderate from here. 10-year US Treasury yields fell further in July, ending the month at 2.64%. That’s down from a 2.97% yield at the end of June and a recent peak of 3.4% in mid-June.

It was a mixed bag for international equities in July. Non-US Developed equities gained 5.2% last month, but Emerging Market stocks fell 0.3%. That performance gap is mostly attributable to China, whose government implemented another round of shutdowns in several large cities in response to proportionally minimal cases of COVID-19.

It’s not a coincidence that the stock market has performed better as gasoline prices have fallen. According to AAA, the national average for gas was $4.22 per gallon as of July 31, down from the peak of $5.02 per gallon in mid-June.

May Market Recap

June 1, 2022 

Zero-point-zero-one percent (0.01%).

That’s how much the S&P 500 gained last month. And to be honest, we’re rounding up. The official math was actually 0.005%. Is that something worth celebrating? Perhaps not. No one will be popping any champagne corks after reviewing their May 31 statements, but even the most modest of positive returns does represent a step in the right direction following April’s aggressive selloff.

Six of the 11 sectors in the S&P 500 moved higher in May, led by Energy (+15%) and Utilities (+3.8%). Five equity sectors booked losses. Of those, Real Estate (-5.1%), Consumer Discretionary (-4.9%), and Consumer Staples (-4.7%) performed the worst.

Index	May 2022	YTD 2022
Dow	+0.04%	-9.21%
S&P 500+	+0.01%	-13.30%
NASDAQ	-2.05%	-22.78%

High inflation and tighter monetary policy from the Federal Reserve remain the angry elephants in the proverbial room that investors are trying to navigate. As far as market obstacles, expect those two to remain at the top of the list for the foreseeable future.

Inflation actually slowed in May. The most recent Consumer Price Index revealed year-over-year inflation of 8.3%, lower than a month earlier (8.5%), but still higher than consensus estimates.

On May 4, the Fed raised its benchmark interest rate by 0.50% and announced plans to begin “passive tightening.” Beginning in June, the Fed will not reinvest the interest paid by its existing bonds and will not reinvest the principal from maturing bonds. A maximum of $95 billion per month will effectively roll off the Fed’s balance sheet.

More significantly, Fed Chair Jerome Powell said the Fed was “not actively considering” rate hikes as large as 0.75%. Equities initially took Powell’s comments as a positive. The Dow rallied 932 points (2.8%) on May 4. The S&P 500 and NASDAQ bounced even more. Those gains, however, did not last long. On the following day (May 5), the Dow fell 1,063 points (3.1%). The S&P lost 3.6%. The NASDAQ dropped 5%.

It’s the first time since March 2020 that US stocks delivered such whipsaw results on consecutive days. High volatility is certainly indicative of a bear market, and while the S&P has so far avoided a 20% peak-to-trough decline (if we’re sticking with end-of-day prices), it is basically semantics at this point.

Ignoring the Energy sector – up nearly 56% year-to-date thanks to skyrocketing oil prices – the S&P has already ventured well into bear market territory. The tech-heavy NASDAQ and smaller-cap Russell 2000 both lost more than 30% at their low points.

Everyone wants to know whether those mid-May lows represent “the bottom.” There’s no way to know for sure, but history is on our side in terms of forward-looking returns.

The first 100 trading days of 2022 (S&P -16.5%) make this one of the six worst starts to a calendar year since 1930. In the other five, US stocks were positive over the next seven months every time, with the S&P gaining 19% on average through year-end.

Equities did stage a significant rally in the final week of May. The S&P 500 increased 7% in those five trading days, its best week of the year. It also snapped a string of seven negative weeks in a row. Perhaps the tide is beginning to turn.

Bond prices also stabilized in the second half of May. 10-year US Treasury yields climbed as high as 3.17% on May 9 before reversing course and ending the month at 2.84% (slightly below the 2.89% yield from a month earlier). The major US bond benchmarks have lost roughly 10% year-to-date through May 31, though our individual bond ladders employed in Marks Group portfolios have held up much better.

The May 31 lifting of government-mandated lockdowns in China offered another glimmer of hope for investors.  The Chinese economy and global supply chains were severely disrupted following a spike in new COVID-19 cases and the resulting lockdowns.

International equities outperformed in May. Non-US Developed Markets (as represented by the MSCI EAFE Index) increased 2%. Emerging Markets gained 0.6%.

US mortgage rates hit their highest level since 2009. The rate on a 30-year fixed loan was 5.3% at month’s end, essentially double the rate from the low point in January 2021.

The US jobs report showed national unemployment remains exceptionally low at 3.6%.

Gasoline prices hit another record high with average costs of $4.69 per gallon, according to AAA. It’s now 50% more expensive to fill your car with gas than it was a year ago ($3.11 per gallon).

West Texas Intermediate Crude oil trades near $115 per barrel, up another 9.5% in May.

March Market Recap

April 1, 2022 

While the NCAA basketball tournament provided its annual dose of can’t-miss entertainment, stocks were able to survive and advance in what proved to be the best (and only positive) month this year for US equities.

Similar to a good March Madness game, it was hard to guess the finish based on the way things started. Momentum remained mostly negative in the first two weeks. When markets closed on March 14, the NASDAQ was 8.5% lower than it began the month. From there, it bounced 13% higher in 13 trading days.

When the dust settled, each of the three major equity benchmarks rose between 2-4% for the month. Ten of the 11 sectors in the S&P 500 were positive led by Utilities (+10.1%), Energy (+8.8%) and Real Estate (+7.3%). Financials (-0.4%) was the only sector to finish in the red.

Index	March 2022	YTD 2022
Dow	+2.53%	-4.57%
S&P 500+	+3.58%	-4.95%
NASDAQ	+3.41%	-9.10%

The trading week that ended on March 18 was the best week for US stocks since the November 2020 election. The NASDAQ gained 8.2% in that week alone. The S&P increased 5.6%, including four consecutive days with gains of 1% or more; only the fifth time ever that has happened.

Some of the recovery in equities can be attributed to the realization that the military conflict between Russia and Ukraine does not set the globe on an inevitable path to World War III, a popular (if far-fetched) concern a month ago as investors contemplated worst-case scenarios.

It’s probably also true that sentiment simply became too pessimistic. Consumer confidence readings in March were the lowest in 10 years. War, inflation, Fedwinds… Whatever your favorite brick in the latest wall of worry, fear and anxiety seemed to snowball until mid-March, which reminds us of Warren Buffett’s oft-cited investment advice to “be greedy when others are fearful.”

The rate of inflation continues to increase. The latest Consumer Price Index rose 7.9% from a year earlier and the spike in energy prices made worse by war-related supply chain disruptions seems likely to push inflation even higher this summer.

That provides the backdrop for Federal Reserve policy and Fed Chair Jerome Powell, who on March 16 announced a 0.25% rate hike and plans for seven hikes by year-end. It’s a delicate dance the Fed must choreograph to counteract inflation without triggering an economic recession, but it’s encouraging that the market responded favorably to Powell’s latest update. The S&P 500 increased 2.2% that day.

Bond yields jumped significantly in the last four weeks. The 10-year US Treasury yield finished March at 2.33%, compared to a 1.7% yield less than a month earlier. As yields increase, the price of existing bonds go down. It’s been a rocky start to the year for investors who own bond funds with the US Aggregate Bond Index down nearly 6% year-to-date.

Yield curve inversions tend to generate headlines because they are a well-known precursor to recessions. The 2-year vs 10-year Treasury curve inverted in March. Yes, it’s a potential warning, but not as simple as some folks would lead investors to believe. The last four times this occurred, equity prices did not peak until 17 months later.

If you’re a homeowner, feel free to celebrate the surge in home prices over the last 12 months. The Case-Shiller US Home Price Index shows an average annual increase of 19% in home prices. Residential real estate in Miami (+28%), Tampa (+31%) and Phoenix (+33%) saw the biggest jumps.

If you’re in the market for a new property or a hopeful first-time homeowner, the news isn’t so positive. In addition to inflated home prices, the cost of financing has risen substantially. 30-year mortgage rates have surged to 4.67%, nearly doubling the all-time low of 2.65% from January 2021. The amount of pending home sales nationally has fallen four months in a row.

Non-US Developed equities rose only 0.5% in March. Emerging Market equities fell 3.4%. While International stocks had outperformed US companies in January and February, their year-to-date losses now exceed the S&P 500 three months into 2022.

Oil prices increased another 5% in March, further fueling the recent gains in Energy stocks. Those gaudy year-to-date returns have not had much impact on the major benchmarks, however, given that Energy represents less than 4% of the S&P 500.

The US labor market added 431,000 jobs in March, which dropped the national unemployment rate to 3.6%. There are now 5.3 million more job openings in America than there are unemployed people (a new record).

January Market Recap

February 1, 2022 

Whoever said “January is the Monday of months” certainly had it right about 2022.

The stock market’s opening act of the new year left its audience running for the exits. Sobering realities of 7% inflation and a Federal Reserve certain to implement less favorable monetary policy hit investors like a Minnesota wind chill. The S&P 500 lost 5.3%, its worst month since the pandemic panic of March 2020. It was the worst January performance for stocks since 2009, when the S&P fell 8.6%.

Volatility spiked as the selling intensified. The Chicago Board of Exchange Volatility Index (“the VIX”) reached its highest mark in a year. With that came extreme intraday swings. The average spread between the S&P 500’s daily highs and lows in January was 2.06%, more than twice the average daily spread last year (0.97%). Put another way, a “normal” trading day last month saw stocks fluctuate the equivalent of 730 Dow points.

All but one of the 11 sectors in the S&P 500 were negative. Consumer Discretionary (-9.7%) and Real Estate (-8.5%) lost the most. The only sector to finish positive was Energy (+19%), which delivered remarkable outperformance thanks in part to sharply higher oil prices. Financials (-0.1%) also weathered the storm relatively well.

Index	January 2022	YTD 2022
Dow	-3.32%	-3.32%
S&P 500	-5.26%	-5.26%
NASDAQ	-8.98%	-8.98%

If you’re looking for a silver lining, the good news is that equities finished the month on a high note. The S&P 500 gained 4.4% in the final two days of January. At its low point on January 24, the S&P had fallen 12.4% from its intraday peak in only 13 trading days.

The NASDAQ was battered even more, falling 17.4% over the same period and finishing January with a 9% loss overall. Dating back to the pandemic lows two years ago, mega-cap technology companies have been some of the market’s best performers. Many of those same companies proved especially vulnerable last month.

Consensus expectations on Wall Street suggest the Federal Reserve will raise interest rates five times in 2022. Perhaps Fed Chair Jerome Powell can successfully navigate these troubled waters, but it will require a delicate balance between staving off inflation and appeasing investors who have grown accustomed to historically friendly monetary policy.

It was the minutes (notes) from the Fed’s December meeting, released on January 5, that indicated a March hike was coming and sent stock prices southward. Joe Biden then applied some political pressure on January 19 when the President stated that fighting inflation is the job of the Federal Reserve. “Given the strength of the economy and the pace of recent price increases, it’s appropriate to recalibrate the support that is now necessary,” Biden said.

Year-over-year inflation clocked in at 7% in January, up from 6.8% a month earlier and the highest such reading since 1982. The national unemployment rate fell below 4%. When you consider the Fed’s official mandates to promote “maximum employment, stable prices, and moderate interest rates” it becomes obvious why a shift in policy is upon us.

If we look beyond inflation and the Fed, there are still reasons for optimism. The US economy grew at an annualized rate of 6.9% in the fourth quarter. On an inflation-adjusted basis, American GDP grew 5.7% overall last year, the strongest annual growth since 1984.

Corporate earnings also continue to impress. With roughly one-third of S&P 500 companies already reporting, fourth-quarter earnings are on pace to increase 24% from a year earlier. If we hit that mark, it will be four consecutive quarters with earnings growth of 20% or more.

10-year US Treasury bonds finished January yielding 1.78%, the highest in two years. It was summer 2019 when 10-year Treasuries last eclipsed 2%, a threshold that holds symbolic significance and could provide short-term resistance.

Higher bond yields are not just an American trend. The 10-year German bund yield ended January above 0% for the first time since May 2019 (no, that’s not a typo). The 10-year Japanese Government Bond also rose to a five-year high.

International equities outperformed US stocks in January. Non-US Developed equities (measured by the MSCI EAFE Index) fell 3.6%. Emerging Market stocks, which lagged far behind US stocks in 2021, were flat.

West Texas Intermediate Crude oil jumped more than 17% last month. That corresponded with a 15% increase in US gasoline prices, which now average $2.55 per gallon nationally. Gold prices fell 1.7%.