Weekly Economic Update – 12-05-2022

Economic Update 12-05-2022 

  • Economic data for the week included an upward revision to Q3 U.S. GDP, higher personal income/spending, as well as a positive surprise from the November employment situation report. These were offset by a decline of ISM manufacturing into contraction, lower home prices, and weaker consumer sentiment.
  • Global stock markets fared positively last week, with foreign outperforming domestic. Bond prices also rose as yields across all maturities fell back; foreign bonds were also aided by a weaker dollar. Commodities gained, due to a rise in prices for industrial metals and crude oil.
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Weekly Economic Update – 11-28-2022

Economic Update 11-28-2022 

  • On a Thanksgiving-shortened week, economic reports included surprisingly positive data from durable goods orders and new home sales, and improvement in consumer confidence, while jobless claims rose a bit.
  • Global developed market equities gained last week, while emerging markets fell back, due to declines in China. Bonds fared positively, as long-term interest rates declined. Commodities fell back, mostly due to a drop in crude oil prices.
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Weekly Economic Update – 11-21-2022

Economic Update 11-21-2022 

  • Economic data for the week included a gain in retail sales, while industrial production fell back slightly, and several housing metrics continued their multi-month declines. Regional manufacturing indexes were mixed, showing sharply divergent results. The Index of Leading Economic Indicators also continued a string of negative readings—signaling higher recession risk.
  • Global equity markets were mixed, with declines in the U.S., emerging markets and Japan, while greater Europe saw gains. Bonds fared decently with mixed interest rate changes across the yield curve. Commodities fell back in keeping with a sharp drop in the price of crude oil last week.
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Weekly Economic Update – 11-16-2022

Economic Update 11-16-2022 

  • Economic data for the week included consumer price inflation coming in still higher relative to history and the Fed’s target, but at a slower pace than last month. The widely-anticipated mid-term elections resulted in a likely divided government, although vote counts were still ongoing by the end of the week. Consumer confidence again fell back, while jobless claims were little changed.
  • Global equity markets experienced a strong week, buoyed by the positive CPI inflation surprise, with foreign stocks especially benefitting from a drop in the value of the dollar. Bonds also fared well as long-term interest rates pulled back. Commodities were mixed, with crude oil lower and metals higher.
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Weekly Economic Update – 11-07-2022

Economic Update 11-07-2022 

  • Economic data for the week included the Federal Reserve continuing its robust pace of interest rate increases—last week again by 0.75%. The ISM manufacturing and services surveys declined, but remained in expansionary territory. Labor reports continued to show positive growth, through nonfarm payrolls and job openings, while the pace of wage growth decelerated a bit.
  • Global equity markets were mixed, with declines in the U.S. but positive returns overseas—notably in emerging markets. Bonds fell back along with several central bank interest rate increases. Commodities rose along with higher energy prices, due to near-term concerns about inventories.
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Fed Note

The Federal Reserve Open Market Committee raised the fed funds rate today by another 0.75%, from 3.00-3.25% to 3.75-4.00%. The vote was unanimous, with no dissents.

The formal statement language was hardly changed except for the addition of two lines, which provide a small clue to future direction. These note that ‘ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent,’ and the committee will ‘take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.’ Importantly, these provide a potential off-ramp for tapering off of the 0.75% ‘jumbo’ hikes.

Over the last week, the CME fed funds futures market1 signaled the high likelihood (~90%) of the 0.75% move. For the next meeting in December, probabilities are almost evenly split between a 0.50% and 0.75% hike. By March 2023, chances are also mixed, but average ~0.50% more in hikes to around 5.00%—a level that has ticked up over the past few weeks. That rate expectation is little changed through June, implying a possible Fed pause at that assumed terminal rate. However, by Sept. and Dec. 2023, markets are still pricing in one rate cut (-0.25%) or even two (-0.50%). Probabilities change often, but provide a decent guess on today’s sentiment. Markets have been looking for a shift lower in rate hawkishness.

For major developed countries over the past 50+ years, the average hiking cycle lasted just over a year, with a median cumulative amount of only a few percent in total. Interestingly, hiking cycles have tended to end not far from ultimate peaks in year-over-year inflation. Also importantly, peak rates have not stayed at those elevated levels for long, with easing occurring within a year following the final hike. History does not always repeat, but has tended to rhyme.

Economy: Despite fears of growth teetering on the brink of recession, being negative for Q1 and Q2, positive 2.6% Q3 growth cast off imminent concerns. For Q4, the most recent Atlanta Fed’s GDPNow measure pegs estimated growth at a similar 2.6%, with the Blue Chip economist estimates showing a median expectation of about 0.5%, within a wide range from a contractionary -1.5% to positive 2.0%2. Investors had been worrying about whether or not we’re already in a recession; concerns now have again moved back to ‘good news is bad news’, in that plugging along at a still-positive growth rate reaffirms to the Fed that a rapid pace of rate hikes is something the economy can handle. (Of course, since hikes operate with a lag, that is not yet confirmed.) In reviewing a broad brush of estimates, growth expectations over the next several years have been downgraded to around 1.0-2.0%, below the 2.0-2.5% average for the 2010-2019 decade before Covid. Lower growth has a tendency to pull down inflation as well as interest rates.

Inflation: Trailing 12-month CPI for September decelerated to 8.2% on the headline side but core (ex-food and energy) ticked up a bit to 6.6%3. The preferred Fed measure, PCE, is lower due to a difference in composition, but all indicators continue to run hot. There have been some signs of easing in recent months, particularly in goods, as supply chain and transportation bottlenecks have improved, but services inflation has been increasingly sticky, along with upward pressure from wages. It isn’t clear yet what the ‘right’ inflation number is that would provide the Fed more comfort in pausing policy, but we haven’t seen it yet. The general theme is that inflation has proven far stickier generally than many economists have expected.

Employment: Although there could be some loosening at the edges, labor markets remain tight. Job postings are easy for companies to pull back on, while actual layoffs are harder, with more necessary business planning involved. Instead, we first often see a shorter workweek, slower wage growth, etc. Also, some of this labor strength has become potentially structural, with a shrinking of the labor force due to a number of factors, which could keep conditions tight and wages higher for a longer stretch than anticipated. For financial markets, these tight readings have kept sentiment hawkish, with a more sustained break in labor markets possibly needed for a Fed pause.

The Fed has communicated a hawkish path for the rest of this year, committed to stomping out inflation at all costs, even if it forces the economy into recession—causing self-described ‘pain’ for a while. This is based on the belief that inflation becomes much harder to fight over time if it becomes entrenched into expectations. In reviewing central banker recollections of the 1970’s inflationary episode, it was clear that political pressures were far more dominant in keeping fiscal and monetary policy easier than it should have been. In fact, comments by former Fed chair Arthur Burns allude to these timeless cross-currents and challenges. Fortunately, today’s Fed has been generally left alone to do their work, despite fiscal decisions by Congress that seem to have fueled at least some of the inflation problem.

A tightening policy is not open-ended, however. Rising rates have obviously impacted bond and stock markets, but also business lending and housing. If rate levels become overly restrictive on and/or damaging to the economy, particularly if the Fed sees any improvement in inflation measures, the cycle could finally see a peak. The uncertainty is about where that level lies, whether it’s 4.00%, 4.50%, 5.00%, or some other number. The current inversion in the U.S. treasury yield curve points to this expectation for rates to ultimately fall back, notably over the next decade as the 10-year treasury has struggled to get above 4.00%. While the Fed will pause at some point, they are also not interested in seeing a coincident ‘easing’ in financial conditions (which include not only interest rates, but also credit spreads, U.S. dollar exchange rate, and risk asset prices).

There have been other side effects from the Fed hikes, including a stronger U.S. dollar. While currency fluctuations can be driven by a variety of factors, USD strength has persisted due to U.S. rates starting higher and rising faster than developed economies in Europe, remaining the global ‘safe haven’. Having a strong currency may seem like a positive, but it can be troublesome for both sides. For U.S. companies, particularly with large international revenues, it makes products sold abroad more expensive, so depresses exports. For other countries, imports from the U.S. are more expensive, and for countries borrowing in dollars (particularly emerging markets), debt balances rise. From an investment standpoint, it’s been problematic for U.S. investors in unhedged international stocks and bonds, as a weaker foreign currency lowers returns on a dollar-for-dollar basis. Then again, no tree grows to the sky, as it’s said in financial markets. Peaks in the dollar historically have been associated with troughs in global economic growth, as well as peaking in Fed rate cycles. A cycle shift where the dollar sees a peak and pulls back could be directly positive for foreign investments. However, this may take some time to unfold, with global geopolitical difficulties persistent this fall.

Most asset classes have been challenged in 2022, with stocks remaining in a bear market, and bonds experiencing their largest declines in decades. From a contrarian perspective, a significant piece of good news is that sentiment for risk-taking remains low. Looking ahead from such levels historically has tended to be positive for investors willing to take risk at times of such pessimism. Valuations for U.S. equities are lower than last year, but not as low as seen in some recessions (keeping in mind we’re not in a recession yet), while foreign stock valuations do reflect recessionary conditions. Higher bond yields have significantly risen, which raises forward-looking returns to levels not seen in many years. Bonds could provide more contribution, diversification, and ‘balance’ to portfolio returns in years to come, which reflects a normalization in these market rates from near-zero.


1CME Group (https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html)

2Federal Reserve Bank of Atlanta (https://www.atlantafed.org/cqer/research/gdpnow.aspx)

3U.S. Bureau of Labor Statistics

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Weekly Economic Update – 10-31-2022

  • Economic data for the week included Q3 GDP showing positive growth, slightly better than expected. Durable goods orders also experienced a positive month, as did personal income and spending for September. On the other hand, new home sales and various housing price metrics continued to see weakening trends.
  • Global equity markets gained ground in developed countries last week, while emerging market indexes fell back, led by China. Bonds also fared positively last week, as longer-term interest rates eased from recent highs. Commodity prices were mixed.
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Weekly Economic Update – 10-24-2022

Economic Update 10-24-2022

  • Economic data for the week included a rise in industrial production, mixed regional manufacturing indexes, and a variety of weaker housing sales and sentiment reports. The index of leading economic indicators continues to lean towards a recession in coming months.
  • U.S. equity markets saw sharp gains last week, due to stronger earnings and rising hopes for a Fed potentially slowing down on rate hikes, with foreign stocks also positive. Bonds fell back due to still-rising long-term yields. Commodities were mixed.
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Weekly Economic Update – 10-17-2022

  • Economic data for the week included producer and consumer price inflation reports that continue to run hotter than expected—disappointing markets. Retail sales were little changed, although core sales saw slight nominal gains.
  • Global stock markets lost ground as concerns continued around high inflation and potential recession, especially abroad. Bonds also declined as interest rates rose again in keeping with higher CPI readings. Commodities fell back due to higher anticipated domestic crude oil supplies.
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Weekly Economic Update – 10-10-2022

Economic Update 10-10-2022

  • Economic data for the week included the ISM manufacturing index falling further than expected, while ISM services were little changed and remained expansionary. A variety of labor statistics came in generally positive, at least enough so for markets to believe the Federal Reserve will remain hawkish in upcoming policy meetings.
  • Global stock markets gained ground last week, as economic data started slower than expected, raising the odds of a ‘hard landing’ and, therefore, more tempered central bank interest rate hikes. Bonds were mixed, with credit faring positively, while governments pulled back. Commodities gained sharply as last week’s OPEC+ meeting resulted in oil production cuts—boosting spot prices.
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Market Note


Well, gosh, here we are again. This last quarter started on a somewhat positive note with stocks rising until the middle of August. That cheer didn’t last however as uncertainties about rising interest rates and the direction of the economy pushed us back to a bit lower than where we started. Bonds followed a similar pattern as folks wrestled with the idea that interest rates would climb higher than had been anticipated earlier this year.

Predicting the future for the various markets is impossible but that doesn’t prevent the pundits from trying. We do know that this year has been full of surprises, and we wouldn’t be taken aback if there aren’t a few more before this period of volatility is done.

As always, folks’ consternation about the markets and their portfolio is in direct proportion to the timeline they are considering. If one’s focus is short term, and their measurement of success is based on several quarters of portfolio performance, these are dire times indeed. If, however, one takes a longer-term view, then the events of a particular quarter or year become less important and can be integrated with their overall financial plan.

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LSA Model Revision Schedule – October 2022

LSA Trade Dates & Investment Rationale

October 2022 Model Update Announcement

Volatility roiled equity and fixed income markets this quarter as investors reacted to persistently high inflation and increasingly hawkish rhetoric from global central banks. In addition to delivering a third consecutive 75-basis point hike in September, the Fed reiterated its intention to push short-term rates into restrictive territory and “fight inflation at all costs,” even if that leads to a U.S. recession. With Fed Funds futures now pricing in a level above 4% by year-end 2022 through year-end 2023, the market seems to have accepted the prospect of a “raise-and-hold” approach to monetary policy. The LSA committee will be implementing model updates to the mutual fund and ETF’s, and VA models. With continued pressure on bonds and equities the committee will continue to focus on taking down risk in the short term. Below you will find a breakdown of the upcoming changes:

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