Daily Archives: July 5, 2022

Current Market Observations

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Little is changing week-to-week regarding inflationary and recessionary outlooks. Pricing levels across many commodities have softened, slightly easing inflation concerns. The Russo-Ukraine war continues to carry on as Russia begins to use its agricultural power as leverage in negotiations and sanctions. China continues its Zero-COVID policy with city-wide lockdowns, quarantines, and testing. Remember, times like these pose significant opportunity for long-term investors regardless of short-term tumult.

Markets (as of July 1st, 2022; change YTD)

Global Economy
Due to lockdowns across China, economists expect the country to fail to meet its 5.5% GDP growth goal. There is, however, a potential silver lining to this: slowed global inflation.

Russia’s control over agricultural exports is being utilized as leverage towards easing sanctions and in cease-fire negotiations.

Policy and Politics
The Biden administration is blocking new oil-drilling permits within the Atlantic and Pacific, while also allowing for very limited permits in the Gulf of Mexico and Alaska in an attempt to reduce reliance on foreign oil. Jeff Bezos also criticized White House pressures for gas stations to lower prices, calling it a “misdirection” and “deep misunderstanding” of market forces.

The Biden administration is considering a move to lower mortgage rates for first-time home buyers in lower income brackets as the median home price in the US ticks over $400,000 for the first time. However, experts are weary of these plans as they don’t “meaningfully address the supply-side problem.”

What to Watch

  • US retail gas price figures to be released at 4:30PM EST on July 5th. Prior figure was $4.979/gal.
  • ADP Nonfarm Payroll month-over-month figures to be released at 8:15AM EST on July 7th.

The Numbers & “Heat Map”

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THE NUMBERS

The Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized. Interest Rates: Federal Reserve, Mortgage Bankers Association.

MARKET HEAT MAP
The health of the economy is a key driver of long-term returns in the stock market. Below, we assess the key economic conditions that we believe are of particular importance to investors.

US ECONOMY

CONSUMER HEALTH

NEUTRAL

 Q1 2022 Real GDP shrunk at a 1.5% annual rate according to the second estimate. This is the first contraction since the beginning of the pandemic. The main factors that resulted in a decrease in GDP were a surge in imports and trade deficit highlighting that the U.S. is buying more goods from foreign countries. This may be an indication that the U.S. economy has recovered faster than other countries.

CORPORATE EARNINGS

NEUTRAL

 The earnings growth rate for Q1 2022 was 9.2% — the lowest since Q4 2020 (3.8%). This estimate was revised upward from the previous forecast of 7.1% in April. All S&P500 companies have reported earnings — 77% reported a positive EPS surprise and 73% beat revenue expectations. The estimated growth rate for Q2 2022 is now 4.3% which would mark a new post-pandemic low.

EMPLOYMENT

POSITIVE

 Total nonfarm payroll employment rose by 390,000 in May and the unemployment rate remained constant at 3.6%. Job growth was widespread, led by gains in leisure and hospitality, manufacturing, and transportation and warehousing. Employment in retail trade declined.

INFLATION

NEGATIVE

 CPI rose 8.6% year-over-year in May2022, the largest increase since December 1981. Core CPI recorded a 6.0% increase (down slightly from April). The increase in CPI was driven by energy, food, and shelter. After declining in April, energy increased by 3.9% over May and gasoline rose by 4.1%.

FISCAL POLICY

NEUTRAL

 After passing a $13.6 billion package to support Ukraine a few weeks ago, the House approved an additional $40 billion military and humanitarian package for Ukraine. The bill was passed with 368 votes against 57 votes. The total of the two packages ($53 billion) is the largest foreign aid moved through Congress in over 20 years.

MONETARY POLICY

NEUTRAL

 The Fed responded to the persistent inflation numbers by raising rates by 75 basis points, the highest hike since November 1994. Powell mentioned that another 50 to 75 bps hike is likely for July. The next decisions by the Fed will be data-driven based on future inflation numbers and estimated economic growth.

GLOBAL CONSIDERATIONS

GEOPOLITICAL RISKS

NEGATIVE

 Russia has defaulted on its debt as of Sunday, June 26th when the 30-day grace period on $100 million of interest payments expired. This is the first Russian default since 1918. Sanctions imposed by Western powers effectively isolated Russia and its financial system from Europe and the U.S. making it much harder for Russia to complete international financial transactions.

ECONOMIC RISKS

NEUTRAL

 Supply chain disruptions in the U.S. are waning but the rising cost of oil due to the Russian- Ukraine war is likely to cause additional inflationary pressures not only on gasoline prices but also on many other goods and services. Starting in June, China has started to remove some restrictions in major cities to end the COVID-19 lockdown.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.