Category Archives: The Markets

Current Market Observations

Posted on by

Equity markets moved slightly lower last week, with the Dow Jones Industrial Average down -0.17%, S&P 500 down -1.11%, and NASDAQ down -2.41%. On the other hand, mortgage rates have plateaued at approximately the 6% level, posting a slight average increase to 6.12% from 6.09%. Additionally, consumer sentiment increased slightly to 66.40, from 64.90—a 2.3% change from prior and up over 5% from this time last year. Pending the inflation numbers coming this week (currently 6.45%), the data could be painting the picture of an improving economy. As mentioned last week, this comes on the back of shockingly positive job numbers and the lowest unemployment rate in over 50 years. The Federal Reserve is sure to be weighing these data points heavily as it plans for the future of this tightening cycle. 

Global Economy 

China has begun its reopening process and is doing so at a much faster pace than anticipated, causing some analysts to forecast a 6.5% GDP growth rate for the country in 2023. There are three core pillars of China’s reopening and its impact on the rest of the world. First, there is likely to be an increase in domestic demand, causing an increase in core goods exports from China’s foreign trade partners. Secondly, China’s rescission of the zero-Covid policies that have been in effect for the last three years will allow for a significant increase in travel to and from the country. Finally, commodity demand and prices may rise, especially for oil, and help to lift other net exporters up during potentially rough economic times. 

Based on the recent Wall Street Journal survey of recession expectations, firm economists forecast a median recession probability of 65%. However, the range of predictions is incredibly vast, as seen in the chart below. The thesis for those forecasting a lower-than-median recession probability is that labor markets continue to show signs of strength, and GDP growth is expected to increase beginning in the spring. However, it is worth noting that the rebalancing of the labor market is far from complete, although it is, in fact, on its way there, as indicated by the pullback in wage growth. 

What to Watch 

  • Monday, February 13th 
    • U.S. Retail Gas Price at 4:30PM (Prior: $3.552/gallon) 
  • Tuesday, February 14th 
    • U.S. Consumer Price Index MoM at 8:30AM (Prior: -0.08%) 
    • U.S. Inflation Rate at 8:30AM (Prior: 6.45%) 
  • Wednesday, February 15th 
    • U.S. Job Openings: Total Nonfarm at 10:00AM (Prior: 11.01M) 
  • Thursday, February 15th 
    • U.S. Housing Starts MoM at 8:30AM (Prior: -1.36%) 
    • 30 Year Mortgage Rate at 12:00PM (Prior: 6.12%) 

Current Market Observations

Posted on by

Equity markets posted mixed results last week with the NASDAQ leading the pack at +3.3%, the S&P 500 Index taking up second place at +1.6% and the Dow Jones Industrial Average cleaning up the rear at –0.15%. The FOMC (Federal Open Markets Committee) raised rates on Wednesday by +0.25%, the lowest increase in several meetings and investors took that action as a dovish move by Fed Chairman Jay Powell, meaning the Fed’s aggressive rate hiking is ending. However, by week’s end a case of “Good News” is “Bad News” hit the markets with the Nonfarm payrolls number blasting all Wall Street Economists’ estimates and coming in at +517,000 new jobs vs. estimates at +260,000. Further, the national U.S. Unemployment Rate fell to 3.5%, the lowest in 53 years! These numbers may be telling Chairman Powell that, regardless of higher interest rates, the economy is still doing quite nicely even as inflation is cooling. 

Economy 

As mentioned above, the employment data continues to be strong, and unemployment continues to fall. Chart 1 below from Valley National Financial Advisors and Y Charts showing the U.S. Unemployment Rate 1940-2023.

We have a 53-year low in the unemployment rate. This is at a time when the tech sector (e.g., Microsoft, Google, Facebook) is shedding jobs each week, announcing layoffs for the very first time in many of these companies. Oddly, these layoffs are not showing up in the data, which is most likely because an engineer or coder is immediately re-employable, especially in an economy with 11 million job openings, Chart 2 below from Valley National Financial Advisors and Y Charts showing the U.S. Job Openings.

What is puzzling to us at VNFA is the conflicting behavior of the markets. Historically, low unemployment, coupled with many job openings and lumped together with healthy banks, corporations, and consumers, would be good news for the markets. Still, the markets are only focused on the Fed and its fight against inflation. As we showed last week, we have seen inflation impacted by higher rates with falling Personal Consumption Expenditures over the past three months. However, the Fed is also watching employment, which, as noted above, is still strong and growing, telling us the economy is not slowing down. A slowing economy slows inflation, which is the Fed’s objective again.

Policy and Politics

The United States could certainly be a stand-alone, insular economy providing goods and services within the confines of our geographic region. Add in Canada, Mexico, and the North American region is a global powerhouse. However, it is neither practical nor realistic to think of economics and markets as regionally insolated. That said, there continue to be serious global pressures on markets. Not the least of which is China/U.S. trade policy, impacted as recently as last week when the U.S. shot down a Chinese “Spy Balloon” just off the coast of South Carolina. NO! This is not from a Jack Ryan spy novel; this happened. Further, the Russia/UK war is heating up rather than cooling down. Uncertainty prevails, and markets hate uncertainty, as we have repeatedly said.

What to Watch 

  • U.S. Initial Claims for Unemployment Insurance, week of Feb 4, release 2/9/23 (prior +183,000).
  • U.S. Index of Consumer Sentiment for Feb 2023, released 2/10/23 (prior 64.90).

Equity markets are up year-to-date, with the NASDAQ leading the way at +14.8%, the S&P 500 Index up +7.9%, and the Dow Jones Industrial Average at +2.4%. Bonds, as measured by the Bloomberg U.S. Aggregate Index, are up +3.0% year-to-date, and bonds are finally paying a yield. The 2-year U.S. Treasury Note is currently yielding 4.30%, and the benchmark 10-year U.S. Treasury yields 3.53%. Uncertainty continues, especially regarding international tensions and conflict, but the U.S. economy continues to hum along nicely despite the Fed’s attempt to slow the economy and fight inflation. Inflation is falling, and jobs are plentiful; that is what the markets see. Wealth is created over generations, not by inefficient trading on rumors and conjecture. Stay focused on your objectives and reach out to your advisors at Valley National for assistance.

Current Market Observations

Posted on by

Economists may be predicting a recession in 2023. Still, the markets are certainly telegraphing a different story as last week’s returns marked the 4th week in a row for positive returns across all three major market indexes, with the NASDAQ leading the way, notching an additional +4.3% for the week and sitting at +11.0% so far in 2023. On a year-to-date basis, the Dow Jones Industrial Average is up +2.5%, while the broader S&P 500 Index is up +6.0% thus far in 2023. The markets are focused on three converging events: the Fed wrapping up its aggressive rate hiking policy, inflation finally showing signs of coming down, and a labor market that, despite continued announcements of layoffs, shows no signs of cooling.

Global Economy 

As mentioned above, one item where Wall Street economists, strategists, and portfolio managers agree is that the Fed is near the end of its aggressive rate-hiking strategy. The Fed has raised rates by +425 basis points since their zero-interest rate policy was in effect due to the Pandemic. Chart 1 below from the Federal Reserve Bank of St. Louis shows the Effective Fed Funds Rate. 

The Fed’s current rate hiking strategy pattern has been one of the steepest and swiftest moves in the Fed’s history, and their goal of cooling the economy and thereby taming inflation is working. Last week, two inflation indicators that Federal Reserve policymakers widely watch and are considered their “favorite” measures of inflation were released, and both showed significant drops. U.S. PCE (Personal Consumption Expenditures) and U.S. Core PCE for December 2022 fell for the third month in a row, as shown in Chart 2 below from Valley National Financial Advisors and Y Charts. The Fed prefers the PCE indicators because this measure responds better to rapidly changing consumer preferences, includes an exhaustive list of typical consumer expenditures, and the Core measure excludes volatile food and energy prices. The drop in these indicators since their peak in July 2022 shows the Fed’s policies are impacting the economy and taming painful inflation numbers impacting consumers and industry. 

The last point mentioned above was about the strength of the labor market, even in the face of continued announcements of layoffs. Thus far, approximately 40,000 layoffs have been announced by technology companies such as Twitter, Amazon, Google, and Microsoft. We at TWC would never suggest that an engineer or coder from Microsoft is widely more employable than a starting-level service employee, but that seems to be the case as those tech layoffs are not yet showing up in the weekly claims for unemployment insurance, suggesting these coders and engineers found new jobs very quickly. The U.S. Unemployment Rate is at a 50-year low of 3.50%, Chart 3 below from Valley National Financial Advisors and Y Charts. We must go back to 1969 to see a lower level of U.S. Employment than today. Cautiously we watch the labor market, our concerns are that layoffs spread beyond the technology sector.

What to Watch 

  • U.S. Job Openings: Total Nonfarm for December 2022, released 2/1/2023, prior 10.46 million. 
  • U.S. Recession Probability for January 2024, released 2/1/2023, prior 47.31%.
  • U.S. Initial Labor Force Participation Rate for January 2023, released 2/3/2023, prior 62.30%.
  • U.S. Nonfarm Payrolls for January 2023, released 2/3/2023, prior 223,000. 
  • U.S. Unemployment Rate for January 2023, released 2/3/2023, prior 3.50%.

We are big believers in the “efficient markets hypothesis,” a theory in financial economics that states that asset prices reflect all available information. Simply put: the markets are smarter than investors. Most Wall Street professionals continue to call for a recession in 2023, albeit a shallow or minimally painful and short-lived recession. After digesting current economic conditions and market reactions, some are walking back their predictions for 2023. We look at the data and find it difficult to believe we will have a recession in 2023. The indicators mentioned above are not harbingers of a recession. We are concerned about corporate profits, many of which will be published this week, and whether layoffs are spreading beyond the technology sector. Watch for the Fed’s announcement this week on interest rates, in which they are widely expected to raise rates +0.25% and watch this week’s EPS (Earnings Per Share) releases to offer direction on profits for 2023. 

Current Market Observations

Posted on by

All major market indices traded higher last week as weaker-than-expected inflation data ramped up hopes by investors that the Fed’s Federal Open Market Committee would only raise the central bank’s key lending rate by just 0.25% rather than 0.50% or 0.75% that previous markets were predicting. The Dow Jones Industrial Average rose +2.0%, the S&P 500 Index rose +2.7%, and the tech-heavy NASDAQ rose by +4.8%. (See additional specific returns below.) 

The hopes for a slower pace of rate increases came as data showed the U.S. consumer price index rose 6.5% year over year in December, paring from a year-over-year increase of 7.1% in November and a peak increase of 9.1% in June. The core U.S. consumer price index, which excludes food and energy prices, rose 5.7% year over year in December, down from a 6% increase in November.

Several major banks, including JP Morgan Chase, continue to beat the drum for a recession in 2023, while other major investment banks, such as Goldman Sachs, are not calling for a recession in 2023. We at VNFA continue to believe that the economy, consumers, banks, and corporations exhibit growth, balance sheet strength, and earnings growth, but admittedly, slower earnings growth. Lastly, labor continues to show near-record strength, with the unemployment rate hitting 3.5%, a 40-year low.  

What to Watch 

  • U.S. Producer Price Index Year over Year for December 2022, released 1/18/2023, (Prior 6.25%) 
  • U.S. Housing Starts for December 2022, released 1/19/2023, (Prior 1.427M) 
  • U.S. Job Openings:  Total Nonfarm for December 2022, released 1/20/21, (Prior 10.46M) 

The Q4 earnings reporting season will also move into full swing this week, and earnings are a good predictor of growth in 2023. Companies expected to release quarterly results next week include Morgan Stanley (MS), Goldman Sachs (GS), United Airlines (UAL), Charles Schwab (SCHW), Alcoa (AA), Procter & Gamble (PG), Netflix (NFLX), and Schlumberger (SLB). These firms are a good indicator of future market expectations and represent a wide dispersion across industrial and banking sectors. 

Current Market Observations

Posted on by

On Friday, a solid jobs report by the BLS (Bureau of Labor Statistics) pushed equity on bond markets higher as investors hung new hopes for an economic soft landing in 2023 rather than a Fed-induced recession. The economy added 223,000 jobs in December, beating consensus expectations and continuing the string of strong payroll gains. Further, job openings, a measure the Fed pays close attention to, stayed elevated. For the week ended January 6, 2023, the Dow Jones Industrial Average and the S&P 500 Index closed higher by +1.5%, while the NASDAQ moved higher by +1.0%. Lastly, the 10-year US Treasury fell a stunning 24 basis points to close the week at 3.55%.

Economy

As mentioned, the BLS reported a strong number of jobs, and job openings also remained elevated. The unemployment rate fell to 3.5%, presenting yet another piece of stubborn employment data. Chart 1 below from Valley National Financial Advisors and Y Charts shows job openings are elevated and elevated not just from the pandemic period of 2020 but also from the pre-pandemic period before 2020. Although many companies are announcing job cuts, especially in technology (Amazon) and banking (Goldman), these industries also hired many employees during and after the pandemic, giving them reasonable amounts of job cuts to make without impacting the overall employment picture. The combination of elevated job openings and low unemployment dims the prospects for a hard landing (aka recession) in 2023.

Policy and Politics

Republican Representative Kevin McCarthy was elected Speaker of the House in a near-record set of 15 elections before the conclusion on January 7, 2023. The election was less critical than the November 2022 election. At that point, the Republicans took control of the US House of Representatives and thereby set a firmly divided government in place for at least two years. Historically, markets like a divided government for the sole reason that nothing drastic can happen that would impact the business environment. It is too early to see which direction our divided government will take, but we take solace in the fact that there are strong checks and balances.

What to Watch

  • U.S. Inflation Rate for December 2022, released 1/12/23, (Prior 7.11%)
  • U.S. Core Consumer Price Index Year Over Year for December 2023, released 1/12/23, (Prior 5.96%)
  • U.S. Index of Consumer Sentiment for January 2023, released 1/13/23, (Prior 59.7)

Markets are off to a good start thus far in 2023. Still, a week does not make a year, and uncertainty remains with the Fed, China’s reopening, the Russia/Ukraine War, ongoing painful inflation, and the long-running inverted yield curve in the U.S. Treasury market has historically preceded a recession. In the face of this uncertainty, we have conflicting employment information that shows layoffs by many companies while job openings remain high and unemployment remains low. Inflation continues to be the Fed’s primary concern, and we expect further rate hikes in 2023. We also expect the pace, tenor, and size of those rate hikes to soften as Chairman Powell balances higher rates with inflation and prospects for a recession. Lastly, wage growth, while moderate recently, is keeping consumers healthy. When you add in bank balance sheet health and corporate earnings growing modestly, it is difficult to see a recession in 2023 and much easier to see the hoped-for “Soft Landing.”

Current Market Observations

Posted on by

The brief “Santa Claus Rally” investors had hoped for was dashed by Fed Chairman “Ebeneezer” Powell last week at his press conference after the FOMC (Federal Open Markets Committee) meeting when he doubled down on the Fed’s hawkish stance on interest rates insisting that persistent inflation remains, and higher interest rates are still necessary. Even though several inflation indicators reported last week were lower than expected – e.g., U.S. Consumer Price Index (CPI), U.S. Core CPI and the U.S. Inflation Rate – and the Fed raised rates an expected +0.50%, equity markets sold off all week. The Dow Jones Industrial Average ended at -1.66%, the S&P 500 Index sold off -2.08% and the NASDAQ ended a full -2.72% lower. Lastly, a lower-than-expected retail sales figure was reported on Friday that sent additional jitters into markets, adding further uncertainty around an already wobbly economy. 

Global Economy 

As mentioned above, the Fed raised interest rates by +0.50%, which Wall Street economists and others widely expected. However, Chair Powell’s statements after the meeting indicated that further rate hikes in 2023 are expected and that it was much too soon to discuss long-sought-after rate cuts. Regardless of Powell’s hawkish remarks, future markets continue to price in the possibility of rate cuts late in 2023. Chart 1 below from Bloomberg shows Market Expectations for the Fed Funds Rate in 2023.   

Future markets are pricing in rate cuts, which seems unlikely at this point, and we believe that inflation will continue to moderate all year but also remain elevated and above the Fed’s 2.5% target all year. Last week’s inflation data, while modest, did report lower rates for November, which assists our statement above that inflation will continue to moderate, just at a slower pace than the Fed desires. Chart 2 below from Valley National Financial Advisors and Y Charts showing U.S. CPI and U.S. Core CPI for November. Yes, inflation is moderating, but an inflation rate of +7.11% is still too high for the Fed and too high for U.S. consumers, so more work needs to be done, and that work is done via higher interest rates.

A final issue that worried markets was last Thursday’s retail sales report. The worse-than-expected number (-0.58% for November vs. October’s +1.31%) added concerns that higher rates worry consumers enough to impact spending. Importantly, recall that consumer spending makes up 65%-70% of the U.S. GDP (Gross Domestic Product), and a slowing in consumer spending added to worries about a pending recession in 2023.

Global Policy and Politics 

Following the Fed’s move last week, the Bank of England and the European Central Bank (ECB) also raised their policy rates by +0.50%. Similarly, both foreign Central Banks echoed the U.S. Fed that further interest rate hikes are necessary as their inflation levels remain soundly above target ranges. We believe a strong possibility exists for a Eurozone recession due to higher interest rates and extraordinarily high energy prices resulting from the Ukraine/Russia war.  

What to Watch 

  • U.S. Housing Starts for November 2022, released 12/20/22 (prior +1.425M) 
  • U.S. Claims for Unemployment Insurance for week of 12/17/22, released 12/22/22 (prior +211K) 
  • U.S. Real GDP for Q3 2022, released 12/22/22 (prior +2.90%) 
  • U.S. Core PCE (Personal Consumption Expenditures) Price Index Year-over-Year for November 2022, released 12/23/22 (prior +4.98%) 

With most of 2022 behind us, we are now looking to 2023 and setting expectations for the year. Most economists are calling for a recession in 2023. There is a possibility for a modest recession especially given the recent softening in consumer spending, higher mortgage rates impacting housing, and weaker earnings releases by U.S. companies. That said, U.S. labor remains strong, and U.S. banks are healthy, both of which are critical to future economic growth. Any recession in 2023 will be short-lived and modest. The Fed will continue to hack away at inflation and eventually hit a “pivot point” on interest rates. We expect inflation to have already peaked, and lower levels are upon us. Historically, the markets perform well after peak inflation. Chart 3 below from Bloomberg shows the last seven inflationary periods and the S&P 500 Index performance over the next one. three, and 5 years.

  • Watch for inflation indicators, labor strength, consumer activity and finally EPS (Earnings Per Share) results as we move into 2023.  

Current Market Observations

Posted on by

Mixed inflation data released last week put a new tenor of concern into the markets as investors worried that the latest data challenged the current consensus that the Federal Reserve Bank would be slowing its pace of interest rate increases. All major market indexes posted negative returns for the week, with the tech-heavy NASDAQ selling off -3.99% while the Dow Jones Industrial Average fell by only -2.77%. Additional U.S. inflation data is due this week, and a Fed policy decision will follow on Wednesday when the central bank is expected to raise interest rates by +0.50% percentage points.  

Global Economy 

As mentioned above, last week’s inflation data weighed heavily on the market, sending a mixed message to investors. Chart 1 below from Valley National Financial Advisors and Y Charts shows monthly U.S. PPI, U.S. Core PPI, and yearly U.S. PPI and U.S. Core PPI. Year-over-year data shows that inflation is falling, having peaked in July of 2022. However, monthly data – in this case from October to November 2022 – still showed a modest uptick. This mixed message puzzles investors because it does not give the Fed a true green light to halt further interest rate hikes. Additional information is due this week that will show U.S. Consumer Price Index and U.S. Core Consumer Price Index data, as well as the U.S. Inflation rate for November 2022.  

The U.S. Federal Reserve Bank wraps up this week’s meeting on Wednesday, and the bank is widely expected to raise interest rates an additional +0.50%, marking the seventh-rate hike for 2022. Fed Chairman Powell will hold a press conference after the meeting announcement, and investors will watch for any signs that point to the crucial “Fed Pivot” or change in the interest rate path. We believe there will be a reasonable period (six to 12 months) before the Fed changes its interest rate path from hiking to cutting rates. The U.S. Inflation rate is still running well above their “target” rate of +2.50% (~7.75% in October 2022), and there needs to be time for the rate hikes we saw in 2022 to percolate through the economy and thereby slow the inflation rate.

What to Watch 

Indeed, inflation is coming down, as we have seen in prices for crude oil and retail gasoline. But the Fed still has work to do – we know this, and it is common knowledge on the street. However, uncertainty about a pivot continues to weigh on the markets and investors. The consumer continues to show resilience, especially regarding spending. (Watch for retail sales data being released this week.) The labor market also remains healthy, with the unemployment rate below 4.00%. We are ending this week’s observations on a positive note. Last week, Bloomberg released a survey of Fund Managers’ predictions for 2023 (Chart 2) and showed an optimistic outlook for markets. We may see some softening in corporate profits or even a modest recession, but watch for 2023 to offer positive returns for stocks.  

Current Market Observations

Posted on by

Financial markets posted another weekly gain pushing November to a positive month overall and helping equities post back-to-back monthly gains for October and November 2022. Further, bonds posted positive returns; in fact, their largest monthly gain since 2008. Positive returns in both markets helped balanced portfolios regain a lot of lost ground in markets since the beginning of 2022. See the summary returns immediately below but note importantly that the NASDAQ returned +2.09% for the week while the 10-Year U.S. Treasury fell 18 basis points to close the week at 3.56%. Just over one month ago, the 10-Year Treasury was 69 basis points higher at 4.25%.  

Global Economy 

Big news last week was Fed Chairman Jay Powell’s speech at the Washington, D.C. Brookings Institute where he confirmed that smaller interest rate increases are ahead and mostly likely as soon as the December FOMC (Federal Open Markets Committee) meeting. Chairman Powell further cautioned that monetary policy would remain restrictive until progress on combating record high inflation continues. Charts 1 and 2, both by Valley National Financial Advisors and Y Charts, show recent downward inflationary trends – PCE (Personal Consumption Expenditures) and Core PCE and U.S. Retail Gas Price.

As demonstrated by both charts, the Fed’s tight monetary policy is impacted inflation but clearly more work is needed. We expect to see several rate hikes in 2022-23; albeit modest hikes such as +0.25-0.50%, rather than the aggressive +0.75% rate hikes we have seen thus far in 2022.  

Most market prognosticators are still calling for a recession in 2023 solely based on historic patterns and economic data. While a recession may happen in 2023 – by whichever measure is popular now since NBER (National Bureau of Economic Research) does not seem to be the decider any longer – looking at market indicators today (labor, consumer health, bank balance sheets and loan delinquency rates, and corporate earnings), any recession will most likely be modest and short-lived. 

Policy and Politics 

Several key U.S. and Global issues remain:  

  • China is easing COVID-19 lock-down rules, easing supply chain concerns, and helping to open Chinese global supply chains. 
  • Russia/Ukraine War shows no signs of abating even as we move closer to winter and the resulting impact on Euro-zone energy prices. 
  • OPEC votes to keep crude oil production at current levels which helps Russia (OPEC member) rather than disrupts Russia’s oil revenue stream. 
  • The bankruptcy filing of cryptocurrency FTX continues to unwind but one clear outcome from this will be deeper and further government oversight and regulation of this nascent industry.

What to Watch 

  • U.S. Durable Goods New Orders for October 2022, released 12/5/22 (prior +0.39%) 
  • U.S. Initial Claims for Unemployment for week of Dec 3, 2022, released 12/8/22 (prior +225k) 
  • U.S. Core Producer Price Index Year Over Year for November 2022, released 12/8/22 (prior +6.68%) 
  • U.S. Index of Consumer Sentiment for December 2022, released 12/8/22 (prior 56.8) 

Mixed messages abound in the markets today. So-called market experts all suggest a recession is coming in 2022. But U.S. equity markets are rallying (the Dow Jones Industrial Average is up +20% since its October 2022 lows) and U.S. fixed income markets have found a sweet spot as the 10-Year U.S. Treasury has fallen nearly 70 basis points since peaking in October. A recent post by asset manager BlackRock noted that the TINA Trade (There Is No Alternative) has given way to BARB (Bonds Are Back). We believe both remain in place—meaning a balanced and diversified portfolio is the surest path to long-term wealth creation.

The Numbers & “Heat Map”

Posted on by

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

 Real GDP for Q2 2022 decreased at an annual rate of 0.6% (up from the first estimate of -0.9%) marking the second consecutive quarter of declining GDP. The second estimate for Q3 2022 shows Real GDP to have increased by an annual rate of 2.9%, up from the previous advance estimate that reported a 2.6% gain.

CORPORATE EARNINGS

NEUTRAL

 The estimated growth rate for Q3 2022 is 2.2%, which was adjusted upwards from 2.2% last week. So far, with 99% of S&P500 companies reporting actual results, 70% of them reported a positive EPS surprise and 71% beat revenue expectations.

EMPLOYMENT

NEUTRAL

 U.S. Nonfarm Payrolls for November 2022 increased by 263,000 and the unemployment rate remained unchanged at 3.7%. Wages have risen more than expected at a rate of 5.1% YoY. Service sectors contributed the most to the increase in jobs while industries that are sensitive torising rates, such as construction and manufacturing, have started to level off.

INFLATION

NEGATIVE

 The annual inflation rate in the U.S. increased by 7.7% for October 2022 compared to the expected 7.9% — showing some signs of deceleration. Core CPI was also reported below expectations at 6.3% versus the estimated 6.5%. Shelter, food, and gasoline remain the main contributors to elevated inflation.

FISCAL POLICY

NEUTRAL

 Senator Manchin and Majority Leader Schumer reached an agreement on the latest tax and energy bill with incentives for green energy, electric cars, and conversely oil & gas companies for exploration. 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. President Biden announced student loan forgiveness of up to $20,000 subject to income limitations.

MONETARY POLICY

NEGATIVE

 The Fed approved a fourth consecutive 75 bps hike earlier this month which took its target range to 3.75%-4.00% – the highest it has been since 2008. The Fed hinted at potentially reducing the magnitude of future rate increases from 75 to 50 bps but also mentioned the possibility of a new higher target range closer to 5%.

GLOBAL CONSIDERATIONS

GEOPOLITICAL RISKS

NEGATIVE

 Russia held controversial referendums for the annexation of four Ukrainian regions and the Russian Parliament unanimously recognized these regions as part of Russia. Ukraine and Western countries have condemned these actions by Russia by declaring them illegitimate and illegal. Additional sanctions are being imposed on Russia by many countries.

ECONOMIC RISKS

NEGATIVE

 COVID-19 lockdowns in China are easing which should help the global supply chain recover. On the other hand, the Russian-Ukraine war does not show signs of abating. Gas supplies from Russia to Europe have decreased by 88% over the past year and EU countries have agreed to cut gas usage by 15% as gas prices have more than doubled. The U.S. is now dealing with a major diesel shortage with national reserves at their lowest levels since 1951 and a ban on Russian products that willintensify the issue.

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.