SEPTEMBER 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

The stock market took a step back in August, and bond yields surged, as the Federal Reserve (Fed) vowed to keep raising rates. But, on the bright side, oil and gasoline prices continued to fall, while employment remained solid.

Consumer spending also seemed to be moderating, with personal income and expenditures inching up modestly, according to the Bureau of Economic Analysis report issued August 26. Personal income and disposable personal income both rose 0.2% from the previous month in July, while personal consumption expenditures edged up just 0.1%.

Reflecting some progress on the inflation front, the Personal Consumption Expenditure price index decreased 0.1% in July, while prices for goods declined 0.4%, and prices for services increased 0.1%.

The manufacturing sector recorded its 27th consecutive month of growth in August, although that growth has slowed in recent months, according to the Institute for Supply Management (ISM) September 1 report. Ten of 18 sectors tracked by ISM reported growth in manufacturing activity in August while seven reported a contraction in activity. The report also noted that lead times for purchases improved in August, price increase growth trended lower for the second straight month, and supply delivery performance improved for the fourth consecutive month.

Outlook: Volatility in the stock and bond markets is expected to continue as the Fed pursues its monetary tightening policy in an effort to tamp down inflation.

The aggressive policy may lead to additional weaknesses across the economy. The Fed is expected to continue to raise rates over the next few months, which could trigger “pain” for the economy.

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation,” said Fed Chair Jerome Powell in an August 26 speech, “they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

However, wage demands and a tight labor market will make it more difficult for the Fed to get inflation in check.

Commodities prices are coming off the boil but remain elevated. International risks are still quite elevated, as European and Asian markets continue to struggle with a variety of issues, including the economic impact of the war in Ukraine. 

Earnings season was mildly better than anticipated, but margin pressures will continue due to wage and productivity challenges. The housing market has already seen a drop-off in new mortgage applications and housing starts in recent months, which may continue in the months ahead as mortgage rates climb.

Stock market valuations, which reached a relatively high level at the peak of the market, have fallen to a more reasonable level as stock prices have declined. For long-term investors, falling stock prices could be seen as an opportunity to take advantage of lower prices. Bond market investors may also have one of the best buying opportunities in years at current interest rate levels, with yields now in the 4% to 8% range (depending on quality and term to maturity).

Drilling down

U.S. stocks drop

The S&P 500 Index dropped 4.24% in August, from 4,130.29 at the end of July to 3,995.00 at the August close. The total return of the S&P 500, including dividends, was a negative 4.08% for the month. Year to date, the total return was a negative 16.14%. (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 dropped in August, down 4.64% for the month, from 12,390.69 at the end of July to 11,816.20 at the August close. Year to date, the NASDAQ is down 24.47%. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

Retail sales unchanged

Retail sales were unchanged from the previous month in July, but up 10.3% from a year earlier, according to the Department of Commerce retail sales report issued August 17. The lack of sales growth was attributed to declining consumer spending due to inflation, recession fears, and the effects of the Fed’s monetary tightening policy

Auto sales were down 1.7% for the month in July but up 1.5% from a year earlier. Building material sales were up 1.5% for the month and up 10.1% from a year earlier. Department store sales slipped 0.5% for the month and dropped 1.4% from a year earlier.

Non-store retailers (primarily online) were up 2.7% for the month and up 20.2% from a year earlier. Restaurants and bars were affected by cautious consumers, with sales at food services and drinking establishments up just 0.1% for the month. However, sales were up 11.6% from a year earlier, as businesses rebounded from the pandemic lockdown.

Employers continue strong hiring

The labor market remained resilient over the past month, with weekly jobless claims dropping to the lowest level since June. Just 232,000 workers filed unemployment claims during the week ending August 27, according to the U.S. Department of Labor.

The economy added 315,000 jobs for the month, according to the Employment Situation Report issued September 2 by the Department of Labor. It was the 20th consecutive month of job growth in the U.S. Despite the new hires, the unemployment rate inched up from 3.5% to 3.7%, as more Americans entered the labor market in search of jobs.

Employment growth was strong in several key industries, including professional and business services, which has added 1.1 million jobs over the past 12 months, health care, and retail.

Wages continued to rise, with average hourly earnings increasing by 0.3% for the month, from an average of $32.27 per hour to $32.36. Wages were up 5.2% over the past 12 months. 

Nine of the 11 sectors lose ground in August

Only two of the 11 sectors of the S&P 500 posted gains in July, with Energy up 2.83% and Utilities up 0.51%. The biggest losers for the month included Information Technology, down 6.12%, Health Care, down 5.78%, and Real Estate, down 5.61%. Through the first eight months of 2022, Energy leads all sectors by a wide margin, up 48.75%.

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

Treasury yields jump

Treasury yields surged in August, as the Fed continued to pursue its monetary tightening policy. The yield on 10-year U.S. Treasuries moved up 0.49% in August, from 2.64% at the end of July to 3.13% at the August close. So far this year, the Fed has hiked rates 2.25% and is expected to continue to raise rates throughout the remainder of 2022.

Oil prices continue decline

Oil prices continued to decline in August, with the price of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, dropping 9.20% for the month from $98.62 per barrel at the end of July to $89.55 at the August close. Year to date, oil prices were still up 19.07%.

Gasoline prices at the pump also dropped in July, with the average price declining from a national average of $4.44 per gallon at the end of July to $3.99 at the August close.

The drop in oil and gasoline prices has been attributed to a combination of factors: consumers have cut back on driving due to high gasoline prices and recession concerns, while oil inventories have recovered from previously stretched levels.

International equities sink

Like the U.S. market, international equities declined in August, with the MSCI EAFE Index dropping 4.99%, from 1,937.26 at the end of July to 1840.50 at the August close. Year to date, the index is down 21.21%. (The MSCI EAFE Index tracks developed-economy stocks in Europe, Asia, and Australia.)