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Gene Walden
Senior Finance Editor


Fed actions yielding mixed results

By Gene Walden, Senior Finance Editor | 10/07/2022

Thrivent Asset Management Contributors to this report: Steve Lowe, CFA, Chief Investment Strategist; John Groton, Jr., CFA, Director of Administration and Materials & Energy Research; Matthew Finn, CFA, Head of Equity Mutual Funds; and Jeff Branstad, CFA, Model Portfolio Manager

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.)

Retail sales rise

Retail sales were up 9.3% from a year earlier over the three-month period from June through August, as consumers continued to recover from the pandemic slow-down, according to the September 15 Department of Commerce retail sales report. Sales were up 0.3% from the previous month in August, with inflation concerns weighing on consumer confidence. Compared with the same period a year earlier, retail sales were up 9.2% in August.

Auto sales were up 3.0% from the previous month in August and up 6.5% from a year earlier. Building material sales were up 1.1% for the month and up 10.5% from a year earlier. Department store sales were up 0.9% for the month and up 0.7% from a year earlier.

Non-store retailers (primarily online) were down 0.7% for the month but up 11.2% from a year earlier. Restaurants and bars continued to recover from the pandemic, with sales at food services and drinking establishments up 1.1% for the month and 10.9% from a year earlier.

Employment continues to rise

The economy added 263,000 new jobs in September, according to the Employment Situation Report issued October 7 by the Department of Labor. It was the 21st consecutive month of job growth in the U.S.

The job growth came despite the Fed’s efforts to tighten the money supply and cool off the economy. The unemployment rate moved down slightly from 3.7% in August to 3.5% in September, returning to its July level.

Wages continued to rise, with average hourly earnings increasing by 0.3% for the month, from an average of $32.36 per hour in August to $32.46 in September. Wages were up 5.0% over the past 12 months

Only 2 sectors post gains in 3rd quarter

Consumer Discretionary, up 4.36%, and Energy, up 2.35%, were the only two sectors of the S&P 500 that posted gains in the 3rd quarter. The biggest losers for the quarter were Communications Service, down 12.72%, and Real Estate, down 11.03%. Through the first nine months of the year, Energy led all sectors, up 34.94%, followed by Utilities, down 6.51%. 

The chart below shows the results of the 11 sectors for the past month, the 3rd quarter, and year-to-date:

Treasury yields continue to climb

Bond yields continued to move up in the 3rd quarter as the Fed continued to raise rates. The yield on 10-year U.S. Treasuries rose 0.82% in the 3rd quarter, from 2.98% at the end of June to 3.80% at the September close. So far this year, the Fed has hiked rates 3.0 % in an effort to bring inflation under control, including a 0.75% rate hike in September.

Corporate earnings projections dip

After a steady climb in corporate earnings projections, expectations took a step back in the 3rd quarter as the economy slowed. The 12-month advanced earnings per aggregate share projection for S&P 500 companies dipped 0.18% in the 3rd quarter but is still up 4.46% year to date.

Forward P/E ratio declines

With the stock market tumbling about 25% this year, the forward price-earnings ratio (P/E) of the S&P 500 continued to trend down in the 3rd quarter, from 15.80 at the end of June to 15.15% at the September close. The P/E has dropped 6.18 from the 2021 closing level of 21.33.

The forward 12-month earnings yield for the S&P 500, which is the inverse of the P/E, edged up for the quarter, from 6.34% at the end of the 2nd quarter to 6.61% at the September close. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. While bond yields have increased significantly this year, the earnings yield is still well above the 3.80% market rate of 10-year U.S. Treasuries.

Dollar moves up versus Euro and Yen

The dollar is at a 20-year high relative to the world’s other major currencies. The Euro depreciated 6.29% versus the dollar in the 3rd quarter, with the war in Ukraine impacting the European economy. So far this year, the Euro has depreciated 8.56% versus the dollar.

The dollar was up 6.54% versus the Yen in the 3rd quarter and up 25.70% versus the Yen through the first nine months of 2022. The drop in the relative value of the Yen has been attributed to a loose monetary policy by the Bank of Japan versus an intensive tightening policy by the Fed.

Oil prices retreat

After reaching a high of well over $100 a barrel, oil prices finally dropped in the 3rd quarter over rising concerns of a potential global economic slowdown. West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, dropped 15.48% in the 3rd quarter, from $105.76 at the end of the 2nd quarter to $79.49 at the September close.

But OPEC+, a consortium of oil-producing nations, announced plans recently to cut production quotas by two million barrels a day beginning in November, which could drive oil prices back up again.

Gasoline prices at the pump also declined significantly in the 3rd quarter, from a national average of $5.11 per gallon at the June close to $3.83 at the end of September – a 24.36% decline for the quarter. However, through the first nine months of 2022, gasoline was still up 13.54% from its 2021 closing price of $3.38 per gallon.

Gold prices slip

Despite high inflation, gold prices moved lower in the 3rd quarter, dropping 7.49%, from $1,807.30 per ounce at the end of June to $1,675.00 at the September close. Year to date, gold is down 8.56% from its 2021 closing price of $1,828.60.

International equities fall

With the war in Ukraine continuing to be a drag on the European economy, international equities followed the lead of U.S. stocks in the 3rd quarter, as the MSCI EAFE Index dropped 10.01%. The index dropped from 1,846.28 at the end of June to 1,661.48 at the September close. Year to date, the index is down 28.88%. (The MSCI EAFE Index tracks developed-economy stocks in Europe, Asia, and Australia.)

What’s ahead for the economy and the markets?
 See: 4th Quarter Market Outlook, The end of the bear market hinges on these 4 key factors, by Steve Lowe, Chief Investment Strategist, Thrivent Asset Management

Media contact: Callie Briese, 612-844-7340;

All information and representations herein are as of 10/07/2022, unless otherwise noted.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.

Past performance is not necessarily indicative of future results.

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