DECEMBER 2022 MARKET UPDATE

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

Oil and gasoline prices have fallen, housing sales have stalled, used car prices have dropped, manufacturing activity has contracted, and the increase in the Consumer Price Index, a common measure of inflation, has moderated. While several other areas of the economy have not yet shaken rising costs, there are signs that inflation may be slowing.

But the Federal Reserve (Fed), which injected trillions of dollars into the economy over the past three years until inflation spun out of control, has indicated that it expects to keep hammering the economy with additional rate hikes in the months ahead.

Fed Chair Jerome Powell acknowledged that additional rate hikes may come in smaller increments, but in a recent speech, he warned that the hikes are not yet over: “Despite some promising developments, we have a long way to go in restoring price stability.”

But even with Fed hikes totaling 3.75% so far this year, bond rates are still at historically low levels. The rate on 10-year Treasuries on Dec. 5 was about 3.5%, which is lower than any level from 1962 through 2009.ⁱ So, while the rate hikes are a punch to the gut for the economy, income-oriented investors are finally seeing some semblance of a return.

According to the Bureau of Labor Statistics November report, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in October and 7.7% over the previous 12 months. That was the smallest 12-month increase since January 2022.

The index for all items less food and energy rose 0.3 percent in October, after rising 0.6 percent in September. The indexes for shelter, motor vehicle insurance, recreation, new vehicles, and personal care all increased for the month, while the indexes for used cars and trucks, medical care, apparel, and airline fares declined. Prices of “food at home” rose only 0.4% in October, the smallest increase since January.

Manufacturing activity declined in November for the first time in 30 months, according to the Institute for Supply Management (ISM) manufacturing report issued December 1. The report also noted that demand for products has fallen, with new orders, inventories, and order backlog all declining in November. The ISM price index also dropped to its lowest reading since May 2020.

Outlook: As the economy continues to struggle with inflation and the steady monetary tightening policies of the Fed, the stock and bond markets will likely continue to experience higher levels of volatility than normal.

Employment could remain solid, with available jobs currently hovering at about 10 million openings. The biggest challenge on the employment front may be aggressive wage demands from workers, who have seen a sharp decline in their buying power. Average hourly earnings for U.S. workers have been increasing at an annualized rate of nearly 5%, double the average rate of wage growth over the past decade.

Corporate earnings are expected to decline in the slowing economy, with higher wages and input costs impacting margins.

Supply delivery times have been improving, while commodities prices have declined, which could drive down costs and reduce inflation.

Amidst higher interest rates and economic uncertainty, stocks of companies with more attractive valuations, a solid return on equity, and higher earnings and dividend yields have outperformed the market in 2022. That trend may continue until the current economic uncertainty diminishes.

The bond market has seen markedly higher yields, which should continue to be a compelling option for savers and income investors.

While the Fed may impose more rate hikes in the near term, we expect it to end the hikes and begin cutting rates in 2023.

Drilling down

U.S. stocks rebound in November

The stock market posted strong gains in November after a significant drop through most of 2022 that was driven by inflation and the Fed’s monetary tightening policy. The S&P 500 Index was up 5.38% for the month, from 3,871.98 at the end of October to 4,080.11 at the November close. The total return of the S&P 500, including dividends, was 5.99% for the month. Year to date, the total return is still a negative 13.10%. (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 also had a solid month in November, up 4.37%, from 10,988.15 at the October close to 11,468.00 at the end of November. But year to date, the NASDAQ was still down 26.70%. (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 increased by 1.3% in month-over-month in October, according to the Department of Commerce retail sales report issued November 16. Compared with the same period a year earlier, retail sales were up 8.3%, as the effects of the pandemic slow-down continued to ebb.

Auto sales were up 1.5% for the month and up 4.8% from a year earlier. Building material sales were up 1.1% for the month and up 9.2% from a year earlier. Department store sales were down 2.1% from the previous month in November and down 1.6% from a year earlier.

Non-store retailers (primarily online) were up 1.2% for the month and up 11.5% from a year earlier. Restaurants and bars have continued to recover from the pandemic, with sales at food services and drinking establishments up 1.6% for the month and 14.1% from a year earlier.

Employment continues to rise

The economy added 263,000 new jobs in November, according to the Employment Situation Report issued November 4 by the Department of Labor. It was the 23^rd consecutive month of job growth in the U.S.

The growth in new jobs has continued unabated despite the Fed’s efforts to tighten the money supply and cool off the economy. The unemployment rate was unchanged at 3.7% in November, as more individuals entered the work force.

Wages continued to rise, with average hourly earnings increasing by 0.6% for the month, from an average of $32.58 in October to $32.82 in November. Wages were up 4.7% over the past 12 months.

All sectors gain ground in November

Each of the 11 sectors was in positive territory in November, led by Materials, up 11.76%, Industrials, up 7.85%, Financials, up 7.04%, and Utilities, up 7.02%.  

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

Treasury yields slip

Bond yields declined in October after several months of increases, despite expectations that the Fed will continue to raise rates.

The yield on 10-year U.S. Treasuries dipped 0.37% for the month, from 4.07% at the end of October to 3.70% at the November close. So far this year, the Fed has hiked rates 3.75% in an effort to bring inflation under control.

Oil prices decline

Oil prices declined in November, with supply and demand returning to a more balanced level. West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, dropped 6.91% in November, from $86.53 at the end of October to $80.55 at the November close.

However, oil prices began to move back up in the early days of December, as OPEC+, a consortium of oil-producing nations, reduced their output by about two million barrels a day.

Gasoline prices at the pump dropped 3.19% in November, with the national average declining from $3.89 at the end of October to $3.76 at the November close.

International equities move up

International stocks posted strong gains in November, recovering from a difficult year in which global economies were impacted by inflation and the war in Ukraine.

The MSCI EAFE Index, which tracks developed-economy stocks in Europe, Asia, and Australia, moved up 11.09% in November, from 1,750.00 at the end of October to 1,944.03 at the November close. Year to date, the index is still down 16.78%.