Equity markets posted gains across all three major indexes with the Dow Jones Industrial Average once again leading the way with a +2.39% gain for the week. The S&P 500 Index rose by +2.02% and the tech-heavy NASDAQ, made up of stocks that historically favor low interest rates, rose by only +0.73%. Interest rates fell last week when the minutes of the November 2022 FOMC (Federal Open Markets Committee) meeting indicated policy makers had agreed that a “slowing in the pace of future interest rates would soon be appropriate.” The 10-Year U.S. Treasury note fell by 15 basis points to close the week at 3.68%. Lastly, as we discussed last week, oil, a key economic component and critical ingredient in industrial production, fell to $76.28 for a barrel of Brent crude oil. China COVID-19 lockdowns and related slowing economic conditions in China contributed to oil’s falling price. 

Global Economy 
As mentioned above, the aggressive COVID-19 lockdowns in China are reverberating across the global economy impacting both the supply and demand components. On an inflationary front, China’s lessening demand for industrial products like oil and rare earth elements used in the production of batteries and solar panels, will certainly aid the global efforts to combat inflation. (See Chart 1 below from Valley National and Y Charts showing the price of oil year-to-date 2022). However, China is a key supplier of goods such as iPhones, TVs and of course, solar panels all of which remain in high demand globally. The news from China about social unrest and protests in several major cities including Beijing due to their aggressive zero-COVID policy weighs heavily on the timing of China’s eventual emergence from the pandemic. 

COVID lockdowns may seem like a “China Problem,” but China currently remains the crossroads for the global supply chain and any unrest in their supply chain will percolate through the world’s economy as we saw in 2020-21. However, many countries, importantly the United States, learned from this event and have begun “on-shoring” their production. For example, Intel is building a $20 billion chip manufacturing facility in Ohio and Ford is building a $5.6 billion battery and vehicle manufacturing campus in Tennessee. We believe that investment in U.S. manufacturing is critical to the future of growth and stability of our economy, and that this wave of internal investment and innovation is just starting. 

Policy and Politics 
This week, the Bureau of Labor Statistics releases the U.S. Job Openings figure for October 2022 (gathered from the Job Openings and Labor Turnover Survey – JOLTS). The September figure showed 10.72 million job openings, an increase from August of 10.28 million openings. (See Chart 2 below from Valley National Financial Advisors and Y Charts). The so-called JOLTS survey is known to be a closely watched data point by the FOMC because it is an important measure of the tightness in the job market. A softening labor market would certainly help to ease inflationary pressures such as wage growth. 

What to Watch 

• While not an economic indicator, the unraveling of the FTX cryptocurrency mess continues to hold a pall over the entire cryptocurrency market as uncertainty abounds. Markets hate uncertainty. 
• Case-Shiller Composite 20 Home Price Index Year-over-Year for September 2022 released 11/29/22 (prior +13.11%) 
• U.S. Job Openings: Nonfarm for October 2022, released 11/30/22 (prior 10.72M) 
• U.S. PCE (Personal Consumption Expenditures) Price Index Year-over-Year for October 2022, released 12/1/22 (prior +6.24%) 

Summary 
While problems remain in the economy, including such risks as China-influenced supply disruptions and inflation, we are seeing seeds of a turnaround and a lessening in inflationary pressures such as falling oil prices. Meanwhile, the Dow Jones Industrial Average closing at 34,347 as of 11/25/22, has rallied +20% since bottoming on September 29, 2022, at 28,726. Stock markets have historically been excellent predictors of future economic results. Further, the VIX (the CBOE Volatility Index) fell again last week to 20.4, down from a recent high of 33.6 on October 11, 2022. The VIX is used as a barometer for fear and uncertainty in the future markets. As we mentioned last week, the time between Thanksgiving and Christmas is typically a quiet, calm time on Wall Street and the VIX is certainly sending that message. We would love to simply say keep calm—but rather we say keep vigilant and focus on matters that grow wealth over extended periods of time.

Equities rallied early in the week after an inflation report (U.S. Core PPI Year Over Year for October 2022 dropped to +6.68% from +7.12% in September 2022). However, the rally was brief as concerns about the pace of future interest rate hikes by the Fed, China “Lockdown” issues and retail sales data to be released this week renewed concerns of a recession in 2023. For the week, The Dow Jones Industrial Average was unchanged, the S&P 500 Index fell –0.69% and the tech-heavy NASDAQ fell by –1.57%. We review U.S. Treasury yields spreads and inflation data, including the drop in crude oil prices, below. 

Global Economy 

Last week’s inflation report (Core PPI) showed a modest drop in prices that producers are paying for goods and services. A major component for production is oil (consumers are equally impacted by oil prices). West Texas Intermediate crude oil continues to fall each week. Chart 1 from Valley National Financial Advisors and Y Charts showing WTI prices since 2008 Oil prices have come down dramatically since the spring of 2022 and are nearing the levels we saw after the 2008-09 recession when modest growth was the norm. Recall that petroleum products and byproducts are in every industry (agriculture for fertilizer production), transportation (planes, trains & automobiles (timely reference), and plastics of every kind, so lower prices in oil eventually translates to lower prices in everything else. 

Industry experts are still calling for a modest recession in 2023. The September 2022 reading showed a 23% chance of a recession in 2023. This reading is higher than the long-term average of 14% and solely based on the spread between 10-year and 2-year US Treasury Notes. Certainly, this indicator is screaming recession in 2023. Chart 2 by Valley National Financial Advisors and Y Charts showing the spread between 10-year and 2-year US Treasury Notes. A negative spread, where the 2-year yield is higher than the 10-year yield, also called an inverted yield curve, has historically precipitated a recession. However, the start, depth, and duration of said recession is always unknown. At this point, economists are still calling for a brief and shallow recession for the U.S. and Eurozone in 2023. 

Policy and Politics 

Thankfully, Washington is in recess, so we are free from any new or intrusive regulations or laws. The massive $32 billion FTX bankruptcy and obvious fraud, if not actual criminal activity surrounding this cryptocurrency fallout must produce come form or government involvement. Investors in this space, after losing billions, might now wish for the Securities and Exchange Commission, FDIC or other oversight group to protect their investments.  

What to Watch 

• U.S. Durable Goods New Orders for October 2022, released 11/23 (Previous +0.36%) 
• U.S. Claims for Unemployment week of November 19, 2022, released 11/23 (Previous 222,000) 
• U.S. Index of Consumer Sentiment November 2022 reading, released 11/23 (Previous 54.70) 

The Thanksgiving Holiday week marks the start of the holiday season on Wall Street. Traders sure up balance sheets and portfolio manager window dress their portfolios adding marquee names to their holdings. It will certainly cost more to put on the family Thanksgiving Feast this year. The American Farm Bureau Federation estimates that a classic Thanksgiving feast for 10 would cost $64.05, or $6.41 a person, up 20% from last year’s average of $53.31. That includes turkey, stuffing, sweet potatoes, rolls with butter, peas, cranberries, a vegetable tray, pumpkin pie with whipped cream, coffee, and milk, “with plenty for leftovers.” For $6.41 a person, Americans get to spend time with friends and family and share stories of happiness and Thanksgiving—to us, $6.41 seems like a bargain. Happy Thanksgiving. 

Markets reacted negatively to Fed Chairman Jay Powell’s press conference, which occurred after the Federal Open Markets Committee announced an added 0.75% hike in the Fed Funds Rate, bringing the range to 3.75% to 4.00%. While the 0.75% rate hike was expected, Chair Powell’s “hawkish” comments at the press conference, where he noted that the pace of added hikes is not slowing, were not expected. Stock markets immediately sold off and bond yields rose because of a similar sell-off in the fixed income markets (See Weekly Markets below). Unemployment moved slightly higher during October, but it is important to note that the labor market still is robust. Additionally, midterm elections are this week and, regardless of what happens, market results tend to be agnostic to party over the long-term. 

Global Economy 
As noted above, the Fed hiked interest rates 0.75% last week. Chair Powell noted that this year’s interest rate hikes have affected the economy, the Federal Open Markets Committee believes that further tightening is necessary to slow the economy enough to deal with the decades-high hot inflation currently weighing on the markets, economy, and the consumer. According to the Chicago Mercantile Exchange, futures on Fed Funds Rate are now pricing in three added hikes with a final terminal level near 5.25%. (See Chart 1 below)

Higher interest rates weigh heavily on consumers (loans, mortgages, credit card interest rates) and directly affect areas of the economy that rely on loans and loan demand (housing). Higher rates also affect those companies that rely on loans for growth such as high-tech, and impact less so on well established companies such in the industrial segment. We saw the divergence of returns last week with the NASDAQ down -5.65% while the Dow Jones Industrial Average was down -1.4%. The labor market remains healthy and last week we saw that 261,000 new non-farm jobs were created during October while the unemployment rate ticked up to 3.7% from 3.5. (See Chart 2 below). 

Policy and Politics 
U.S. midterm elections happen this week and historically the party in power (currently the Democrats) loses seats in both the House and the Senate. This is expected to happen this week as well, what to watch will be the extent of the losses that the Democrats suffer. From a markets perspective, results are historically agnostic to election results over the long-term and neither really shows an edge on the other for markets returns to investors. 

What to Watch 

• U.S. Retail Gas Price on Nov. 7^th @ 4:30 PM EST (Prior: $3.857/gal) 
• U.S. Consumer Price Index (Year over Year) on Nov. 10^th @ 8:30 AM EST (Prior: 8.20%) 
• U.S. Inflation Rate on Nov. 10^th @ 8:30 AM EST (Prior: 8.20%) 
• 30 Year Mortgage Rate on Nov. 10^th @ 10:00 AM EST (Prior: 6.95%) 
• U.S. Index of Consumer Sentiment on Nov. 11^th @ 10:00 AM EST (Prior: 59.90) 

Equity markets reacted favorably across all major indexes to end the week nearly +5% higher. Favorable corporate earnings and FED commentary pushed markets higher. About a fifth of the S&P 500 companies have reported their earnings thus far, with 73% of reported earnings beating estimates. The road to FED hikes remains steady as tightening assumptions dropped at the end of week, but the market is still pricing in a +75bp hike for next week. In the absence of poor information equity markets enjoyed the rally. Bond markets, however, continued to weaken with the 10-Year U.S. Treasury ending the week at 4.21%, 19 basis points higher than the previous week. 

U.S. Economy
The chart below from Valley National Financial Advisors and Y Charts shows U.S. Investor Sentiment (% Bull-Bear Spread), which measures investors’ overall feelings about the markets. October 14 hit a multi-year low, which some market prognosticators believe is a point that markets are oversold. This is the point which equities become reasonably priced and often signal a ‘BUY.’  

The goal across Washington is to avoid a recession at all costs. The Fed is at the forefront of this and continues to gauge the pace/amount of rate hikes according to the economic and financial data released prior to FOMC (Federal Open Markets Committee) meetings. Bond yields and broader markets are driven by the Fed’s narrative and actions that follow, so the Fed may not want to push too hard on markets that are recovering after a tough September. 

While bond markets continue to post negative returns for the year, the outlook (1-3 years) remains favorable once bond yields peak. (See the Chart below from Edward Jones and FactSet.) This makes clear sense to us when the FED’s path to interest rates and the economy is considered. 

Policy and Politics 

Political uncertainty continues to affect the United Kingdom as Prime Minister Liz Truss resigned after only 44 days in office. Her replacement is to be determined, with former Prime Minister Boris Johnson taking himself out of the race and former Chancellor of the Exchequer, Rishi Sunak, currently in the lead. 

China is on the global radar as anticipated economic data was released last week that showed signs of a mixed economy. While GDP grew in September, retail sales slumped, and the housing market is failing to recover. President Xi was reelected for an unprecedented third term, tightening his grip on China and reinforcing his potential plans for reunification with Taiwan.  

What to Watch 

• U.S. Initial Claims for Unemployment Insurance; released 10/27 (Prior 214k) 
• U.S. Real 3^rd Quarter Gross Domestic Product Quarter over Quarter; released 10/27 (Prior –0.60%) 
• U.S. Core Personal Consumption Expenditures Price Index Year over Year; released 10/28, (Prior 6.25%)  

There is a lot going on globally with China, Ukraine/Russia, the United Kingdom all adding uncertainty to the markets, and we hate uncertainty. However, here in the United States we have our own issues with inflation and the FED understands this and is aggressively raising interest rates to slow the economy down and thereby halt inflation pressures. This will take time as a lot of stimulus has to be let out of the economy and consumers’ pockets but the path to lower inflation has been set. Last week, we saw the FED start to whisper that the end is near for rate hikes. It may not be in 2022, but 2023 should be a pivotal year in all aspects. Investors should remain focused on the long-term economic viability of the U.S. Economy, and it remains favorable.

Last week we saw major markets diverge for the first time this year. The Dow Jones Industrial Average notched out a +1.15% return while the S&P 500 Index (-1.55%) and the NASDAQ (-3.11%) each posted negative returns. This divergence of returns is emblematic of the market and economy themselves with economists calling a pending recession while real data – jobs, bank balance sheets, Earnings Per Share (EPS) releases and consumer health – remains healthy if not growing in strength. 

Global Economy 
U.S. economists are beginning to increasingly predict a recession within the next 12 months. On average, economists put the probability of a coming recession at 63%, up from 49% in July. This is the first time since July 2020 that the survey has yielded a result above 50%. Additionally, the survey suggests that GDP (Gross Domestic Product) will contract at

-0.2% on an annual basis during Q1 2023 and -0.1% in Q2 2023. These predictions come as doubts heighten over the Fed’s ability to tame inflation without inducing increased unemployment. Two-thirds of those surveyed believe the Federal Reserve will pivot in either Q4 2023 or Q1 2024.  

European Union leaders are meeting on October 20 and 21 to discuss potential implementation options for a cap on gas prices. After Russia’s invasion of Ukraine, the Kremlin vastly reduced gas exports to Europe as retaliation for the economic sanctions the country received. Energy in the EU is becoming prohibitively expensive, raising concerns for a rough winter over the next few months. The annual inflation rate for energy is currently standing at 37.5%, with electricity at 35.7%, gas at 62.5%, and liquid fuels at 78.9%. 

What to Watch 

Monday, October 17^th  

• 4:30PM: US Retail Gas Price (Prior: $4.034/gal.) 

Wednesday, October 19^th  

• 8:30AM: US Housing Starts (Prior: 1.575M) 
• 8:30AM: US Housing Starts MoM (Prior: 12.18%) 
• 10:00AM: US Job Openings, Total Nonfarm (Prior: 10.05M) 

Thursday, October 20^th 

• 10:00AM: 30-Year Mortgage Rate (Prior: 6.92%) 
• 10:00AM: US Existing Home Sales (Prior: 4.80M) 
• 10:00AM: US Existing Home Sales MoM (Prior: -0.41%) 

While calls for a recession mount mostly on economist’s note pads and TV prognosticator’s teleprompters, the underlying fundamentals of the U.S. economy remain solid as we stated above. If we get a recession, the economy starts with a real safety net that did not exist in the 2008-09 recession, thereby guaranteeing said recession is neither deep nor lengthy. Opportunities mount in fixed income (now offering yields north of 4.00%) and equities (now trading ~19x forward EPS & yields ~2.00% on the S&P 500 Index) offering investors good entry points for continued long-term wealth creation. 

Investors have navigated a difficult market all year and the third quarter was no exception. All major indices ended the quarter in bear market territory with the S&P 500, Dow and Nasdaq declining 5.3%, 6.7%, and 4.1%, respectively, from July to September. With the dollar strengthening and the global economy slowing, the MSCI EAFE index of developed markets fell 10% over the same period in dollar terms, while the MSCI EM index of emerging markets pulled back 12.5%. Interest rates jumped with the 10-Year Treasury yield climbing above 4% on an intra-day basis, the highest level since 2008. The challenges of persistently high inflation and slowing growth have continued to impact the expectations of both investors and policymakers.

In times like these, investors would naturally prefer to wait until it feels comfortable to invest, and even experienced investors may wonder if markets will ever turn around. Therefore, it’s important to remind investors that while bear markets are unpleasant, they also create opportunities for long-term investors. The valuations of major indices, sectors and styles are at their most attractive levels in years, and bond yields are finally at levels that can support portfolio income. 

A key principle of investing is that achieving long-term returns doesn’t just involve risk – it requires risk. This is true whether markets are down due to the economy, geopolitics, a pandemic, or any of the hundreds of investor concerns over the past few decades. After all, if staying invested were easy, everyone would do it and there would be no opportunities at all. History shows that those investors who have the discipline and fortitude to handle market pullbacks are often rewarded. So, for those focused on the rear-view mirror, the glass may seem half empty. For those focused on future recovery and growth, the glass is overflowing. Having the right mindset to overcome our own psychology has never mattered more.

At the same time, it’s also important to understand what is driving these market dynamics. Below, we highlight six important insights that will continue to affect markets and the economy through the remainder of 2022 and beyond.

1. Interest rates are rising after declining for 40 years

Markets rallied beginning in June but abruptly reversed course in late August. The turn in the market coincided with Fed Chair Powell’s speech at Jackson Hole during which he emphasized that the Fed would continue to fight inflation by keeping interest rates higher for longer. This message was then reiterated at the Fed’s September meeting with the third 75 basis point hike in a row and higher projections through 2023.

This jump in both policy and market rates is breaking a 40-year pattern of declining interest rates. It’s no wonder that financial markets have been volatile as they adjust to a higher cost of capital and slower economic growth. Regardless, both history and the summer period show that markets can move forward.
2. The stock market is adjusting to higher inflation and rising rates

While the first three quarters of this year have experienced poor returns, it’s important to maintain perspective on the past few years. Last year experienced some of the best returns as the world emerged from the pandemic. In all, markets are still quite positive since 2020 and the S&P 500 has gained over 40% since the beginning of 2019. Since markets never move in a straight line, it’s important for investors to take the good with the bad in order to not overreact to short-term events.  

3. Inflation is still elevated despite falling energy prices

Energy prices plummeted throughout the third quarter, reversing much of the effect of Russia’s invasion of Ukraine on oil and gas markets. This helped to bring gasoline prices down, although they are still higher than during any other period over the past decade. Headline inflation – which includes food and energy – has eased as a result.

Economists and policymakers continue to focus on “core” inflation which re-accelerated in August, a sign that price pressures have broadened and continue to hurt consumer pocketbooks. This is a key reason the Fed has doubled down on its inflation fight.

4. The Fed is expecting to keep rates higher for longer

The Fed has communicated that it will keep interest rates higher for longer. This has raised investor concerns over whether the Fed can bring down inflation without creating a deep recession – a so-called “soft landing” versus a “hard landing.” This is a difficult balancing act for the Fed as they try to achieve their dual mandate of both price stability and maximum employment. The markets will continue to adjust to these new expectations in the coming months.  

5. Higher mortgage rates have slowed the housing market

One of the main effects of higher interest rates is rising mortgage costs. The average rate on a 30-year fixed rate mortgage is now 6.7% – the highest since the mid-2000s and far above the average of 4% since the last housing bubble. Housing activity is slowing across the board from building permits to housing starts, and from refinancing activity to existing home sales.

While there may be some similarities, this underlying situation is quite unlike the housing bubble of the late 2000s. The key difference is financial leverage across individuals, banks, and throughout the financial system. The underlying fundamentals are much better today than those leading up to 2008. Still, a struggling housing market may impact consumer spending and retail sales as household net worth comes down, at least on paper.

6. Investors should continue to focus on the long run

If history teaches us anything, it’s that fighting the urge to overreact to short-term events is one of the keys to long-term investor success. This chart shows the S&P 500 index going back to before the Great Depression. The fact that the market trends upward over time and follows the path of economic growth is clear. Along the way, there were countless major historical challenges to overcome from wars to bear markets. When zoomed out, these look like blips compared to the gains investors achieved over years and decades.

The bottom line? The ongoing bear market is challenging and unpleasant. However, it is no reason for investors to lose sight of their financial goals. In fact, those investors with the discipline and patience to take advantage of opportunities will likely be rewarded in the long run.