Telemus Weekly Market Review September 12th - September 16th, 2022
This past week was filled with less than stellar economic headlines, which ignited recessionary fears and sent stocks lower. The S&P 500 finished the week with a decline of -4.8%. All economic sectors ended the week lower as there were few places to hide.
The initial jolt for stocks came on Tuesday when August’s Consumer Price Index (CPI) reading was released. It showed prices rising by 0.1% in the month, a more muted level of inflation. However, the drop in headline inflation was driven by lower gasoline prices. When you exclude more volatile food and energy categories, core CPI showed prices rising 0.6% in the month of August alone, an acceleration from a 0.3% rise in the core CPI in July. This release set off concerns that inflation remains far from controlled and resulted in many forecasting more aggressive Fed actions in the months to come.
The Fed fund futures market, which allows investors to speculate and hedge against further Fed interest rate hikes, repriced during the week indicating expectations of a further half percent more in Federal Reserve rate hikes between now and March of next year. This became more immediately reflected in the Treasury market where the yield on the 2-year Treasury shot higher by 0.3% during the week. Higher interest rates for Treasuries led to lower bond prices, with the Bloomberg U.S. Aggregate index dipping lower by -0.9%.
What added fuel to the fire was an announcement after the market close on Thursday from FedEx Corp., where they discussed experiencing an acceleration in weaker macroeconomic trends late in their fiscal quarter, which ended on August 31st. As a global logistics company, FedEx is a reasonable barometer around global supply chain activities. While weakness in Asia was called out as particularly soft, they also noted a slowdown across all markets including in the U.S. The significant shift in macroeconomic environment may be a shot across the bow that inflationary challenges and tighter financial conditions are starting to impact the economy more meaningfully.
As we reflect on the data this week, it does beg the question are we in a recession? We have met the generic definition of a recession by experiencing two consecutive quarters of declines in Gross Domestic Product (GDP). For it to be an official recession, the National Bureau of Economic Research must declare it as such. Regardless of whether we are officially in a recession or not, a retracement in the economy is a natural expectation given what transpired during the second half of 2020 and throughout 2021. As stimulus funds were received and spent, it created an environment where spending was above trend. As those dollars dried up, it’s natural to expect a contraction in economic activity as spending returns to a normal pattern. Therefore, to us the appropriate question isn’t whether we are in a recession, rather how significant of a recession we may be facing.
The answer to that question is no one really knows, including the Federal Reserve. We are in a unique and unprecedented environment that includes a significant growth in money supply, changing consumption habits, a significant geopolitical event in Ukraine that is disrupting global natural resource supplies, and significant change occurring within the economic underpinnings of the globe’s second largest economy.
Given this environment, it’s a good opportunity to revisit risk and your risk tolerance. Part of investing is accepting risk. Asset prices don’t move up in a linear fashion, as much as we’d like them to. Therefore, one must accept some level of volatility around asset prices to earn a return above what they might get in a bank savings account. Risk is often quoted as a measure of volatility, or how much volatility can you take. However, that may not be the most practical way to look at it. Few of us complain if there is a lot of volatility on the upside as the price of our assets are going up at a rapid pace. Its when they go down at a rapid pace that matters. Thus, as we look at a softer economy and consider that there remains a greater than average level of uncertainty, it’s a prudent time to revisit your risk tolerance with your advisor. When you reflect on risk, consider how much downside you can stomach. Also consider how you might behave or react on violent days in the market. Moreover, during volatile markets, its rarely clear when the turning point, to the positive, will occur. Thus, it’s important to be invested in a portfolio where you can feel comfortable staying the course, even during episodes like this past week, when stocks fell nearly 5%.
The headlines from this past week may be a shot across the bow around a soften economic climate ahead. However, we do see asset prices reflecting more realistic expectations. In addition, the moves the Fed are making are starting to show signs of a slowing the economy, which will ultimately tame the cadence of inflation. It will take time and there will be moments of pessimism and optimism to come. We continue to be more optimistic about the long-term opportunity for investors now that valuations have reset, and yields have increased. However, we recognize that the short-term remains uncertain and it will be an environment that will need to be navigated through.
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