Conway’s QuickTake: Week of September 5, 2022
Here’s What Happened Last Week:
U.S. Equity Markets
- U.S. stocks declined last week as investors continued to digest hawkish messages delivered by the Federal Reserve. Despite the strong August jobs report, he S&P 500 was negative each day aside from Thursday’s modest increase.
- All sectors within the S&P suffered losses, with technology the largest detractor. Nvidia’s stock price fell 16% after the country’s largest chip maker by market value faces new licensing requirements on shipments of its innovative chips to China which could weigh on its future sales. Energy stocks lagged as oil prices slipped below $90 per barrel based on West Texas Intermediate crude.
- Value stocks once again led growth stocks, while large-caps were a little less volatile than small-caps. Large-cap value’s 10% year-to-date price decline is less than half the drop of growth stocks.
- According to T. Rowe Price, companies that missed earnings estimates declined much more in magnitude than companies that beat estimates and rose.
International Equity Markets
- International equities fell in tandem with U.S. indices. Both international developed and emerging market stocks were at least 3% lower last week according to their MSCI indices.
- European shares sank on fears that central banks could enter an aggressive tightening policy for an extended period and that Russia may soon stop supplying Europe with natural gas.
- Japanese stocks fell, also impacted by the bearish outlook on U.S. interest rates. The yen plunged to a historic low not seen since 1998 as the divergence between the Fed and Bank of Japan policy continues. The BoJ remains committed to maintaining ultralow rates even during the high-inflation environment.
- Chinese equities slipped lower as coronavirus outbreaks triggered renewed lockdowns and clouded the economic outlook. Estimated by research firm Capital Economics, 41 Chinese cities responsible for 32% of the country’s GDP are dealing with outbreaks. This is the highest number since April.
- U.S. Treasury yields rose week-over-week following the observed resiliency of the labor market. Disguised in this metric is the fact both the two-year and 10-year yields were trading at notably higher levels on Thursday and moved lower after the small unemployment rate increase was announced. The two-year Treasury yield reached levels not touched since 2007. Importantly, the inversion between the two-year and the 10-year continued, a common signal of a coming recession.
- Investment-grade corporate bonds suffered from the weaker macroeconomic backdrop as corporate spreads widened. Both high yield and investment-grade funds’ yield levels rose and declined in price as represented by their respective Bloomberg indices.
- As typically seen in late August before Labor Day, secondary market trading volumes were very low, and no new issuance occurred. However, several financing deals are anticipated after the federal holiday.
- Overall, municipal bonds were also victim to the rising interest rates, but less impacted than Treasury bonds. On Friday, municipal-Treasury ratios reported by ICE Data Services showed the five-year ratio level was at 70%, the 10-year at 85%, and the 30-year at 100% which reinforced the importance of owning federally tax-exempt income producing securities.
U.S. Economic Data/News
- On Friday, the Labor Department reported that 315,000 jobs were added in August which was lower than the revised 526,000 jobs added in July. However, the unemployment rate rose 0.2% to 3.7% in August, largely because of an increase in the labor force participation rate as more workers entered the job market.
- Earlier last week, the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) for July indicated that job postings unexpectedly increased, reaching nearly two per unemployed worker. The industries with the largest increases include transportation, warehousing, and utilities.
- More public statements were issued by Fed officials reiterating the message that the central bank is determined to raise rates enough to bring inflation under control. Most recently, Cleveland Fed President Loretta Mester and Atlanta Fed President Raphael Bostic voiced their concerns, and warned there is more work for the Fed to do on behalf of inflation moderation.
- The University of Michigan survey of consumer sentiment measures how U.S. consumers feel about their personal finances and overall business conditions. Recent surveys indicate that consumers have rarely displayed such dismal readings on these surveys compared to the past. After setting a low mark in the June reading, the survey has slightly risen each of the past two months but remains near levels associated with the recessions in 1980 and 2007-2009. Typically, these levels are coupled with higher unemployment and stocks being in a bear market, but the main reason this year has been excessive inflation.
International Economic Data/News
- Eurozone inflation rose to a record 9.1% in August, up from 8.9% in July, amid surging food and energy prices. Ironically, the count of unemployed people in the 19-country union dropped by 77,000 which left the unemployment rate at a record-low 6.6%.
- Gazprom, a Russian majority state-owned multinational energy corporation and the largest natural gas company in the world by revenue, is working to resume its Nord Stream 1 pipeline with Germany after an extended maintenance effort has halted services. Natural gas storage levels have reached 90% and 80% of their capacity in France and Germany respectively.
- The historic decline of the yen has been a windfall for Japanese exports but has significantly increased the cost for energy and food imports. As a net energy importing nation, Japan has felt the impact of higher energy prices. Core inflation has surpassed the central bank’s 2% target for four straight months.
- The Chinese official manufacturing Purchasing Managers’ Index (PMI) rose to 49.4 in August from 49.0 last month. It beat expectations but is still below the 50-point mark that separates growth from contraction. Meanwhile, the private Caixin manufacturing PMI fell to 49.5 from 50.4, reflective of the nationwide power outages and persistent virus-associated lockdowns.
Wednesday, September 7, 2022
- Japan GDP
Thursday, September 8, 2022
- Eurozone European Central Bank Rate Decisions
- US Initial Claims for Unemployment Insurance
- US 30-year Mortgage Rate
- China Inflation and Producer Price Index
Friday, September 9, 2022
- US Wholesale Inventories
Sources: The WSJ, T. Rowe Price Global Markets Weekly Update, YCharts, Piton Investment Management
This commentary was written by Craig Amico, CFA®, CIPM®, Associate Director, Noreen Brown, CFA®, Chief Wealth Strategist and Steven Melnick, CFA®, Associate Director at Summit Financial, LLC., an SEC Registered Investment Adviser (“Summit”), headquartered at 4 Campus Drive, Parsippany, NJ 07054, Tel. 973-285-3600. It is provided for your information and guidance and is not intended as speciﬁc advice and does not constitute an offer or solicitation to buy any securities mentioned. Summit is an investment adviser and offers asset management and ﬁnancial planning services. Indices are unmanaged and cannot be invested into directly. The periodic returns are represented by the following indices: large-cap value by Russell 1000 Value TR Index, large-cap blend by Russell 1000 TR Index, large-cap growth by Russell 1000 Growth TR Index, mid-cap value by Russell Mid Cap Value TR Index, mid-cap blend by Russell Mid Cap TR Index, mid-cap growth by Russell Mid Cap Growth TR Index, small-cap value by Russell 2000 Value TR Index, small-cap blend by Russell 2000 TR Index, and small-cap growth by Russell 2000 Growth TR Index, international developed by the MSCI EAFE NR USD Index, Emerging Markets by the MSCI EM NR USD Index, U.S. Aggregate Bond by the Bloomberg US Agg Bond TR USD Index, U.S. Municipals by the Bloomberg Municipal TR USD Index, and Corporate High Yield by the Bloomberg US Corporate High Yield TR USD Index. The S&P 500 Index is a market capitalization-weighted Index of 500 widely held stocks often used as a proxy for the stock market. It measures the movement of the largest issues. Standard and Poor’s chooses the member companies for the 500 based on market size, liquidity, and industry group representation. Included are the stocks of eleven different sectors. The Nasdaq Composite Index is a large market capitalization-weighted index of more than 2,500 U.S.-domiciled stocks. The index’s composition is heavily weighted to the information technology sector, with consumer services, health care, and financials the next most prominent industries. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index representing approximately 90% of the total market capitalization of that index. It includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. It is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected. The MSCI EAFE Index (Europe, Australasia, Far East) captures large- and mid-cap representation across developed markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Emerging Markets Index captures large- and mid-cap representation across emerging markets countries across the world. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Europe Index captures large- and mid-cap representation across developed markets countries in Europe. The index covers approximately 85% of the free float-adjusted market capitalization across the European developed markets equity universe. The MSCI China Index captures large- and mid-cap representation across China A-shares, H shares, Red chips, P chips, and foreign listings. The index covers about 85% of the China equity universe. The Nikkei 225 Index is a stock market index for the Tokyo Stock Exchange which is price-weighted operating in Japanese Yen. The index measures the performance of 225 large, publicly owned companies in Japan from different industry sectors. The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS, and CMBS (agency and non-agency. The Bloomberg Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The Bloomberg U.S. Corporate High-Yield Index measures the U.S. dollar-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on the EM country definition, are excluded. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. CPI is often used as a barometer to measure inflation. The Caixin China General Services PMI (Purchasing Managers’ Index) is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private service sector companies. The index tracks variables such as sales, employment, inventories, and prices. A reading above 50 indicates that the services sector is generally expanding; below 50 indicates that it is generally declining. The 2s30s spread is the difference between the yield on the 30-year Treasury bond and the yield on the 2-year Treasury note.
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