Welcome Solana Berrio and Lauren Kelly to Team VNFA!
Solana has joined the team in our Investment Department. She will be working with our Chief Investment Officer and other Associates on research and technology support. Solana already has experience working at VNFA as a tax and investment intern. She has a degree in Business Administration and a master’s degree in Finance from West Virginia University.
Lauren is joining us at the front desk of our Bethlehem headquarters. She will be welcoming guests and answering your phone calls. As Front Office Coordinator, Lauren will be in the office managing the day-to-day for our hybrid team members who are working onsite and remotely throughout the week. She has more than 20 years of experience in client service, account support and office administration.
Last week, our Chief Investment Officer Bill Henderson, was the guest on “Your Financial Choices” radio show. He discussed the first half of 2022 and the outlook for the remainder of the year. Listen to the recording at yourfinancialchoices.com and submit follow-up questions. LISTEN NOW
Earlier negative data on inflation (U.S. Consumer Price Index) for June 2022 +9.1% Year Over Year rocked the equity markets and pushed investors to the relative safety of U.S. Treasury bonds. However, by the end of the week, two new pieces of inflation data (Empire State Manufacturing Prices Paid and Consumer Inflation Expectations) both moved sharply lower indicating that inflation may have peaked, and the markets snapped back nicely on Friday, although not enough to end the week in positive territory. For the week, the Dow Jones Industrial Average fell –0.16%, the S&P 500 Index lost –0.93% and the NASDAQ fell –1.57%. We take a deep dive look at inflation below. The 10-Year U.S. Treasury Bond fell 16 basis points last week to close the week at 2.93% giving back investors 1.00% of return on the year.
Markets (as of 7/15/2022; change YTD)
Global Economy President Biden’s trip to the Middle East will not be impacting oil prices anytime soon as he was unable to secure any reasonable increase in oil production from Saudi Arabia. A look at Chart 1 (from Haverford Trust and JP Morgan) shows Contributors to Headline Inflation since March 2021. Note: energy and shelter (housing) continue to be the largest contributors. Both can be easily impacted by prevailing market trends and quickly as is evidenced by gasoline prices retreating from recent highs.
Chart 1: Contributors to Headline Inflation
As noted above, we want to do a deeper dive into inflation data hitting the wires. Inflation can be broken down into “sticky” vs “flexible.” See Chart 2 below (from Haverford Trust and the Atlanta Fed) showing CPI broken into Sticky (shelter, healthcare, restaurants) and Flexible (energy, groceries, cars) components. What is important is that the larger share of the current inflation spike is flexible; and therefore, can come down quickly (again evidenced by the recent drop in gasoline prices. Further, see Chart 3 (from Haverford Trust) showing Major Commodity Prices and how they all are down dramatically from their recent highs.
Chart 2: Consumer Price Index (Sticky Inflation vs Flexible Inflation)
Chart 3: Major Commodities Prices
Lastly, as we mentioned last week, expectations for future inflation are drastically different than current inflation trends. Importantly, consumers and the markets are not pricing in continued hot inflation data beyond one year hence. See Chart 4 below (from Philly Fed, NY Fed, & Haverford Trust) showing the 1, 3, 5, and 10-Year Consumer Inflation Expectations. As the markets, consumers and Fed Chairman Jay Powell digest this predictive inflation data, we could see some stabilization in the markets. Watch for earnings releases and employment data as each of these could show where potential weaknesses exist.
Chart 4: 1, 3, 5 and 10-Year Consumer Inflation Expectations
Policy and Politics The Federal Reserve is preparing to raise rates by another 75bps later this month to combat inflation, although a 100bps move is also on the table.
Senator Manchin struck down the Global Minimum Tax proposal, which would require a 15% tax on multinational corporations around the world.
What to Watch
U.S. Retail Gas Price data will be released at 4:30PM ET on July 18th.
U.S. Housing Starts data will be announced at 8:30AM ET on July 19th.
30 Year Mortgage Rate data will be released at 10:00AM ET on July 21st.
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. 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. The July 2022 University of Michigan Consumer Sentiment (Confidence) Index hit 51, a level not seen since 2009 during the GFC, but up slightly from the June Index level of 50, an encouraging sign.
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; but still solidly in the “growth” stage.
EMPLOYMENT
POSITIVE
Total nonfarm payroll employment rose by 370,000 in June 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
The annual inflation rate in the US accelerated to 9.1% in June, the highest since November 1981, from 8.6% in May and above forecasts of 8.8%. Core CPI increased by 5.9%, slightly below 6% in May, but above forecasts of 5.7%. The increase in CPI was driven by major surges in food and energy prices, as food costs rose by 10.4% and energy prices by 41.6%.
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. The next decisions by the Fed will be data-driven based on future inflation numbers and estimated economic growth, but Fed Funds Futures are currently pricing in a 75 basis point rate hike.
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.
Laurie can address questions on the air that are submitted either in advance or during the live show via yourfinancialchoices.com. Recordings of past shows are available to listen or download at both yourfinancialchoices.com and wdiy.org.
