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Weekly Market Update, September 26, 2022

GENERAL MARKET NEWS

On Wednesday, the Federal Open Market Committee (FOMC) interest rate decision from the September 21–22 meeting was announced. The committee hiked the policy rate by 75 basis points (bps), bringing the upper limit of the target federal funds rate to 3.25 percent, which hasn’t been breached since early 2008. This is the third consecutive rate increase of 75 bps as the Federal Reserve (Fed) continues its fight against inflation. The action was widely expected by markets and economists as the latest Consumer Price Index (CPI) report for August showed stubbornly high consumer prices, supporting the continuation of hawkish monetary policy. The FOMC’s dot plot of members’ future rate expectations was also released on Wednesday, showing nearly all committee members expect the central bank’s rate to reach somewhere in the range of 4–4.5 percent by the end of 2022. Fed Chairman Jerome Powell has been setting the expectation that there is plenty more economic discomfort to endure before its job is complete, saying “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.” U.S. Treasury yields were up across the curve last week. The 2-year, 5-year, 10-year, and 30-year rose 34 bps (to 4.21 percent), 37 bps (to 4 percent), 31 bps (to 3.76 percent), and 14 bps (to 3.66 percent), respectively.

The equity market continued to feel pain as the Fed remains steadfast in its efforts to fight inflation. In his eight-minute speech last month, Chair Powell highlighted that there may be some short-term and this is what we’ve seen in the markets the last two weeks—particularly in small-caps and growth stocks since they are more susceptible to higher rates as higher costs of doing business lead to compression in valuations and future growth potential. Equity investors flocked to save haven areas in consumer staples, utilities, and health care as cyclical growth stories in energy, consumer discretionary, and REITs came under heavy selling.

Aside from the key focus on Fed policy, there were also a number of releases related to housing and Purchasing Managers’ Index (PMI) data. Key components of the housing data included building permits, housing starts, mortgage applications, and existing home sales. The data was mixed with disappointing building permits and better-than-expected existing home sales. Building permits fell 10 percent month-over-month in August, which was well below expectations for 4.7 percent. Housing starts, on the other hand, rose 12.2 percent over the same period. Weekly mortgage applications rose 3.8 percent while existing home sales fell by 0.4 percent in the month of August after falling 5.9 percent in July.

Friday saw the release of the PMI for services, manufacturing, and the S&P Global U.S. Composite. The services PMI increased to 49.2 from 43.7, leaving the survey still in the contractionary camp below 50 but better than July. The manufacturing PMI moved up slightly to 51.8, from 51.5 in the prior month. Lastly, the S&P Global U.S. Composite came in at 49.3, up from 44.6 in August. The data shows an economy still facing headwinds in conditions but potentially easing for the month of September.

WHAT TO LOOK FORWARD TO

On Tuesday, we expect the release of the Conference Board Consumer Confidence Index for September. Consumer confidence rose in August after declining for three consecutive months, so it will be interesting to see where September’s report stands. Inflation remains elevated, though expectations for longer-term inflation continue to moderate and offer light at the end of the tunnel. The index surprised to the upside in August, posting a 103.2 compared with predictions for a reading of 98. September’s survey shows an expectation for a 104.5 reading. Although the absolute value of the index is helpful only when comparing current confidence levels to those of the 1985 base year (index, 1985 = 100), we rely on the month-over-month changes in the index’s level as a directional indicator of consumer confidence.

Tuesday will also see the report on new home sales for August. Surveyed economists expect to see that 500,000 new single-family homes were sold over the month, compared with July’s total of 511,000. That would be a 2.2 percent month-over-month decline, compared with the prior month-over-month decline of 12.6 percent. Although that points to expectations for a slowing decline, new home sales have been falling steadily since the December 2021 report came in at 839,000. This downward trend comes as mortgage rates continue to soar, with 30-year fixed rate loans approaching an average of 6.5 percent.

Equity IndexWeek-to-DateMonth-to-DateYear-to-Date12-Month
S&P 500-4.63%-6.51%-21.61%-15.83%
Nasdaq Composite-5.06%-7.98%-30.13%-27.24%
DJIA-4.00%-6.01%-17.30%-13.24%
MSCI EAFE-5.60%-8.11%-26.10%-25.93%
MSCI Emerging Markets-4.03%-8.75%-24.70%-26.36%
Russell 2000-6.58%-8.83%-24.48%-24.33%
Source: Bloomberg
Fixed Income IndexMonth-to-DateYear-to-Date12-Month
U.S. Broad Market-3.36%-13.75%-14.08%
U.S. Treasury-2.76%-12.47%-12.66%
U.S. Mortgages-4.39%-13.05%-13.41%
Municipal Bond-2.91%-11.28%-11.09%
Source: Morningstar Direct

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2022 Commonwealth Financial Network®

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