Commentary provided by Mark Szycher, Vice President, Senior Investment Officer, AIG Retirement Services
Market Performance Snapshot* (Week ending September 16, 2022 and year-to-date)
- Dow Jones Industrial Average®: -4.1% | -15.2%
- S&P 500® Index: -4.8% | -18.7%
- NASDAQ Composite® Index: -5.5% | -26.8%
- Russell 2000® Index: -4.5% | -19.9%
- 10-year U.S. Treasury note yield: 3.45%
- Up 13 basis points from 3.32% on September 9, 2022
- Up 194 basis points from 1.51% on December 31, 2021
- Best-performing S&P 500 sector this week: Health care, -2.4%
- Weakest-performing S&P 500 sector this week: Materials, -6.7%
*Past performance is no guarantee of future results.
Stocks tumble on higher-than-expected inflation data
On Tuesday, equities experienced their worst day since June 2020 and Treasury yields surged as August’s consumer price index (CPI) came in higher than expected. Investors interpreted the report as sufficient justification for the Federal Reserve to keep interest rates higher for longer, potentially leading to recession.
- The fall in equities was cemented Friday after FedEx issued weak quarterly earnings and withdrew its full-year guidance citing declining package volume amid deteriorating global economic conditions. FedEx shares fell more than 20% and, given the company’s central position in global commerce, investors viewed the earnings report as a negative bellwether for the broader economy.
- All major indices finished at least 4% lower for the week and all S&P 500 sectors were lower. The S&P 500 Index remains 6.5% above its June 17 closing low.
- The Labor Department reported CPI rose 8.3% annually in August, higher than markets were expecting but the second straight monthly decline after July’s 8.5% reading and June’s 9.1%. Monthly CPI rose 0.1% (vs. an expected decrease of 0.1%) as lower gasoline prices were more than offset by higher prices in many other spending categories.
- Core CPI, stripping out food and energy prices, rose 6.3% annually and 0.6% for the month, both higher than expected and higher than July. The rise in core CPI reflected a broadening of inflation beyond energy and food costs.
- Energy prices dropped 5.0% for the month, with gasoline down 10.6%. Electricity prices—influenced by natural gas prices—rose 1.5%. Housing costs (the single-largest component of CPI) were up 0.7%, the fastest monthly increase this year. New vehicle prices rose 0.8%, though used vehicle prices dipped 0.1%. Food prices rose 0.8%, the smallest monthly increase since last December but still 11.4% higher than August 2021.
- Another inflation reading, the producer price index (PPI)—measuring prices producers receive for their goods and services—decreased 0.1% from July to August, in line with expectations. The annual increase was 8.7%, down from July’s 9.8% and the lowest since the previous August. The report corroborated recent purchasing manager surveys reflecting an easing of price pressures during late summer.
- Treasury yields surged after the CPI report as investors anticipated the Fed will keep moving aggressively on interest rates. The 2-year yield, closely linked to short-term interest rate expectations, topped 3.92% on Friday, another 15-year milestone, before settling at 3.87%. The 10-year yield closed about 40 basis points lower than the 2-year.
- Prior to the CPI report, futures markets were pricing in a greater than 90% chance of the Fed raising interest rates by 75 basis points (0.75%) and a less than 10% chance of a 50 basis point rise at its September 20-21 meeting. On Friday, markets were pricing an 80% chance of a 75 basis point hike and a 20% chance of a 100 basis point hike.
- According to the Mortgage Bankers Association, mortgage demand to purchase a home in early September was 29% lower than the same time last year and refinancing demand was 83% lower as the average 30-year fixed mortgage rate topped 6% for the first time since 2008. The 30-year fixed rate often moves in line with the 10-year Treasury yield, so further increases could be on the horizon after this week’s jump in Treasury yields.
Retail sales mixed while expectations of future inflation decline
The Census Department reported August’s retail sales, unadjusted for inflation, rose 0.3% monthly and 9.1% annually. The monthly figure was higher than expected and exceeded August’s inflation rate, suggesting consumers continue spending amid higher prices.
- Excluding gasoline stations, where spending decreased 4.2%, retail sales rose 0.8% for the month. Car dealers (+2.8%) accounted for much of the increase. Restaurant spending grew 1.1% and grocery stores gained 0.2%. Online sales fell 0.7%.
- Casting a bit of a shadow on the August figures: July’s retail sales were revised down 0.4% from an initial report of unchanged.
- Consumers’ inflation expectations appear to be moving lower, perhaps from declining pump prices. The University of Michigan’s consumer sentiment survey for September found year-ahead inflation expectations dipping to 4.6%, the lowest since last September. According to the New York Fed’s Survey of Consumer Expectations for August, respondents expect inflation over the next year to be 5.7%, down from 6.2% in July, and three-year-ahead inflation to be 2.8% (vs. 3.2% in July).
- Respondents to the New York Fed survey also expect gasoline prices to be just 0.1% higher next year, food prices to be 5.8% higher, and rent to be 9.6% higher. Home prices are expected to be 2.1% higher, the lowest reading since July 2020. Economists at the Fed and elsewhere watch inflation expectations for cautionary signs that higher inflation is becoming entrenched in the economy.
- A separate New York Fed index of global supply chain pressures eased in August for the fourth straight month while remaining at historically high levels. A potential U.S. rail strike that could have added to supply chain pressures was tentatively averted on Thursday.
Tight labor market suggests continued upward pressure on wages and prices
The Fed is watching labor market trends closely for insight on the future path of inflation and most data indicate continued tightness.
- New weekly unemployment claims fell for the fifth straight week to 213,000, well off July’s recent high of 261,000 and closer to levels of late spring. Continuing claims came in at their second-lowest level in seven weeks after a steep downward revision to the previous week’s figures.
- According to the National Federation of Independent Business’s August jobs report, small business owners continue to struggle filling open jobs. Overall, 63% of owners reported hiring or trying to hire and 89% of those owners reported few or no qualified applicants for the available positions. Nearly half reported raising compensation and 26% plan to raise compensation in the next three months.
- One sign of a potential dip in workers’ confidence in the labor market: According to the New York Fed’s Survey of Consumer Expectations, the mean probability of voluntarily leaving a job in the next 12 months decreased 0.9% to 18.5%, the lowest reading since March 2021.
Final thoughts for investors
The Federal Open Market Committee meets September 20-21 to determine the federal funds rate, with expectations high for at least another 75 basis point hike. The Fed will also release its updated economic forecasts, including projections for how high interest rates could go. Expect continued volatility as markets digest the Fed’s latest move and anticipate future actions. Stay focused on long-term goals and speak with a financial professional.
VC 30955 (09/2022) J961909 EE