Team VNFA is honoring and remembering our loved ones touched by cancer by decorating our curtain for the Wings of Hope event.
Cancer Support Community of the Greater Lehigh Valley will host the butterfly release at noon on Sunday, Sept. 11 at Cedar Crest College.
Admission is free and donations can be made online at cancersupportglv.org
Equity markets were on their way to a fifth consecutive week of gains until last Friday when new concerns about additional rate hikes and a weakening housing market weighed on stocks to push the week into the red by the end of trading. For the week ended August 19, 2022, the Dow Jones Industrial Average fell a nominal -0.16%, S&P 500 Index dropped -1.21% and the NASDAQ finished the week down -2.62%. The poor market news weighed heavily on the bond market as well as the 10-Year Treasury Note closed last week at 2.98% higher by +0.14% since last week, but still lower than the June 2022 recent high of 3.48%.
Markets (as of 8/19/2022; change YTD)
Global Economy
As mentioned above, investors and economists will now spend all week parsing and analyzing comments by various Fed speakers this week at the Fed’s annual three-day meeting in Jackson Hole, WY. The meeting will give the Fed the chance to reset or at least clear up thoughts about the pace and duration of future rate hikes. Markets are pointing to a “hawkish” (tighter monetary policy) Fed tone relayed by speakers. A “dovish” (less aggressive moves in interest rates) pivot by the Fed would be considered a positive move for the markets.
One point to consider when thinking about a key economic indicator of the U.S. Economy is the housing market, which continues to slow. Higher mortgage rates are impacting the housing market. Existing Home Sales have fallen for the last six months. (See Chart 1 below from the Federal Reserve Bank of St. Louis of Existing Home Sales). According to the most recent 2019 “Survey of Consumer Finances,” the primary residence continued to be the largest asset on the balance sheets of households. While most housing experts agree that we still face a housing shortage, higher mortgage rates and slowing sales are concerning.
While higher interest rates and a modestly cooling housing market weigh on the markets and the economy, it is important to remember that the consumer makes up the vast majority of economic activity and consumer spending and activity continues to be strong. The July 2022, retail sales numbers, while flat, were mostly impacted by lower gasoline prices. (See Chart 2 below from the Federal Reserve Bank of St. Louis showing Retail Sales).
Lastly, a look at employment and the labor market is important. Weekly claims for unemployment last week came in at 250,000 new claims. In the big picture, a weekly jobless claims number of “only” 250,000 new claims is still well below long-term historical averages but also above lows seen as recently as March of 2022. (See Chart 3 below from Valley National Financial Advisors and YCharts). While there seems to be some modest slowing or cooling off in the labor market, unemployment remains at a 50-year low (3.5%) and job openings remain high, and consumer finances and balances sheets remain healthy by any historical measure.
What to Watch
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.
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US ECONOMY |
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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. Real GDP for Q2 2022 decreased at an annual rate of 0.9% marking the second consecutive quarter of declining GDP. |
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CORPORATE EARNINGS |
NEUTRAL |
The estimated growth rate for Q2 2022 is now 6.7% (up from 4.3%) which would mark a new post-pandemic low; but still solidly in the “growth” stage. 87% of S&P500 companies have now reported earnings — 75% beat earnings estimates and 70% reported actual revenue above expectations. For Q3, 42 companies issued negative EPS guidance while 30 companies issued positive guidance. |
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EMPLOYMENT |
POSITIVE |
U.S. Nonfarm Payrolls for July 2022 increased by a stunning 528,000 new jobs compared to economist’s estimates of 250,000. The latest unemployment rate for July came in at 3.5%, nearing a record low. Employment activity and job growth continues to impress everyone while also confounding everyone as GDP is slowing at the same time. |
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INFLATION |
NEGATIVE |
The annual inflation rate in the US increased by 8.5% for July 2022. The gasoline index fell 7.7% and the energy index fell 4.6% which offset the increases in food and shelter indexes. The PPI decreased 0.5% in July and registered a year-over-year gain of 9.8% |
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FISCAL POLICY |
NEUTRAL |
Senator Manchin and Majority Leader Schumer reached an agreement on the latest tax and energy bill. The bloated bill is stacked with incentives for green energy, EV cars, and conversely oil & gas companies for exploration. Further, no changes in private equity taxes or higher tax rates for the very wealthy were enacted. The bill has been officially passed by the Senate. |
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MONETARY POLICY |
NEUTRAL |
The current target for Fed Funds is a range of 2.25% to 2.5%. With inflation still running hot, Fed Chairman Jay Powell is clear on his path to slow the economy enough to cool inflation. The next Fed meeting is September 20-21 and markets are pricing in another 0.50-0.75% increase in short-term rates. |
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GLOBAL CONSIDERATIONS |
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GEOPOLITICAL RISKS |
NEGATIVE |
Russia has defaulted on its debt as of late June for the first time since1918. 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. On a good note – Israel and Turkey have restored diplomatic ties and will be exchanging ambassadors again after four years. This should result in a significant improvement in regional stability. |
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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.
“When the world says, ‘Give Up,’ Hope whispers, ‘Try it one more time.’” – Dr. Seuss
Tune in Wednesday, 6 PM for “Your Financial Choices” on WDIY 88.1FM will have a guest host. Dan Banks of Silvercrest Insurance will welcome Jillian Berry and Kimberly Garrison from Lehigh Valley Aging in Place to discuss: Aging in Place
Live call-in will not be available during this broadcast, so please submit questions in advance via yourfinancialchoices.com. Recordings of past shows are available to listen or download at both yourfinancialchoices.com and wdiy.org.