Stock and bond prices have plunged, housing sales have fallen as mortgage rates climb, gasoline prices have dropped, job openings are starting to dwindle, and the manufacturing sector is showing some early signs of weakness.
Dire as that scenario may seem, it’s exactly what the Federal Reserve (Fed) had in mind when it undertook its monetary tightening initiative. But the ultimate goal of the policy – curtailing rampant inflation – is still a work in progress.
The Fed has indicated that it will continue to bring the pain in the form of ongoing rate hikes until inflation is under control. The Fed raised rates an additional 0.75% in September, pushing the total increase for 2022 to 3.0%.
While there are signs that inflation may be abating, there’s still plenty of room for improvement. The annualized increase in the cost of goods and services has continued to hover at just above 6%, according to the U.S. Department of Commerce. Personal consumption expenditures (PCE) increased by 0.4% from the previous month in August, personal income increased 0.3%, and disposable personal income rose 0.4%. The PCE price index, which is one indicator of inflation, was up just 0.3% in August, but it was 6.2% higher than a year earlier – or up 4.9% excluding food and energy.
The Consumer Price Index (CPI), another inflation indicator, was up just 0.1% in August compared with the previous month, but it was up 8.3% compared with a year earlier, according to the U.S. Bureau of Labor Statistics.
Housing prices have already started to decline, according to the Federal Housing Finance Agency (FHFA). In July, the U.S. house price index posted its first month-over-month decrease since May 2020 (during the peak of the pandemic), with prices dropping 0.6%. However, with mortgage rates more than twice as high as they were a year ago, according to Freddie Mac – from 2.87% in September 2021 to 6.7% in September 2022 – the decline in home prices is expected to accelerate in the months ahead.
The robust job market finally showed some signs of weakness in August. Job openings declined from about 11.2 million in July to 10.1 million in August, according to an Oct. 4 report from the U.S. Bureau of Labor Statistics.
While manufacturing activity continued to expand for the 28th consecutive month in September, the rate of growth was the lowest since May 2020, according to the Institute for Supply Management (ISM). The report also noted that new orders declined in September, while production edged up modestly.
Drilling down
U.S. stocks decline in 3rd quarter
Impacted by Fed tightening policies, the S&P 500 Index dropped 5.28% in the 3rd quarter, from 3,785.38 at the June close to 3,585.62 at the end of September. That followed a 16.45% decline in the 2nd quarter. The total return of the S&P 500, including dividends, was down 4.88% for the quarter and down 9.21% in September. Year to date, the total return was a negative 23.87%. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)
The NASDAQ Index was down 4.11% in the 3rd quarter, from 11,028.74 at the end of June to 10,575.62 at the September close. Year to date, the NASDAQ was down 32.40%. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)