Market Analysis
September 26, 2022 | Market news

At a glance

Stocks and bonds both delivered negative returns last week, with the Federal Reserve delivering a 0.75% interest rate increase and signaling another 1.25% in hikes in 2022. Inflation is a primary risk to the global economy and corporate earnings.

U.S. Bank Global Health Check

The U.S. Bank proprietary Global Health Check incorporates more than 1,000 data points — including business climate factors and economic sector categories for 22 major economies representing 80 percent of total global wealth — to reflect our view of the current strength of worldwide economic growth.

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Source: U.S. Bank Asset Management Group, September 23, 2022.

Number of the week:

-36.5%

The decline in oil prices since their high on March 8, 2022.

Term of the week:

Federal Reserve Summary of Economic Projections – A summary of Federal Open Market Committee participants' projections for economic growth, the unemployment rate, inflation and the appropriate policy interest rate. The summary is released four times per year.

Quote of the week:

“Existing home sales declined for the seventh consecutive month to roughly 20% below year-ago activity, with the combination of escalating home prices and rising mortgage rates reducing buyers’ affordability. Median sale prices have risen due to the low supply of available properties; the U.S. Bank Economics Group estimates that current inventory relative to the pace of sales is half of what would constitute a well-supplied market.”

 Robert Haworth, Senior Vice President, Senior Investment Strategy Director, U.S. Bank

Global economy

Quick take: High mortgage rates pressured housing market transactions. Business surveys reflect moderate improvement in U.S. activity but further slowing in Europe.

Our view: Our U.S. Health Check highlights positive but below-trend economic activity and decelerating momentum as the Federal Reserve (Fed) tightens monetary policy to combat elevated inflation. Our foreign scores are below median. Economic activity in developed markets is slowing while data from China is trending slightly better.

  • Key points: hides details

    • Existing home sales declined for the seventh consecutive month to roughly 20% below year-ago activity, with the combination of escalating home prices and rising mortgage rates reducing buyers’ affordability. Median sale prices have risen due to the low supply of available properties; the U.S. Bank Economics Group estimates that current inventory relative to the pace of sales is half of what would constitute a well-supplied market. While lower affordability and tight inventories continue to weigh on housing activity, wage growth, low unemployment and strong balance sheets accumulated during the pandemic continue to bolster prospective and existing homeowners’ fundamentals.
    • U.S. business sentiment, as measured by S&P Global, improved in September compared to August, though sentiment trends remain in a modest contraction. New orders returned to expansion in September and input cost pressures eased. Activity remains modest, but both businesses’ expectations and new orders indicate modest improvement in future months.
    • European businesses’ downturn deepened in September, according to purchasing manager surveys from S&P Global for the eurozone and United Kingdom. Composite surveys for both economies contracted further in the flash (early) September estimate. Inflation pressures and faltering export activity are increasing risks of recession, especially in Europe.

Equity markets

Quick take: U.S. equities remain under pressure, with elevated inflation and rising interest rates in the U.S. and abroad increasing the risk of a looming global recession, which presents headwinds for corporate earnings and rising equity prices.

Our view: Restrained inflation is key to favorable equity returns and, at present, inflation remains elevated. Rising interest rates, ongoing hawkish comments by global central bank officials and mounting expectations that analysts’ earnings projections for 2022 and 2023 may reset meaningfully lower are weighing on sentiment. To be determined is whether the peak inflation narrative can regain traction and help bolster equity prices in the fourth quarter.

  • Key points: hides details

    • Lackluster performance is broad-based. The popular broad-based indices and all 11 S&P 500 sectors declined last week, retreating between 2.1% and 9.0%. For the year, as of Friday’s close, the S&P 500 is off 22.5%, with nine of 11 sectors in negative territory. Communication Services, Consumer Discretionary, Financials, Information Technology, Materials and Real Estate sectors are all down 20% or more. Energy (28.4%) and Utilities (0.3%) are the two sectors positive for the year.
    • The top 20 companies in the S&P 500 are outpacing the rest of the index so far in 2022. The top 20 companies are down 19% for the year while the S&P 500 is down 22.5%, according to FactSet Research Systems. Growth-oriented Meta Platforms, NVIDIA, Home Depot, Amazon and Alphabet are the worst performers, each down 30% or more for the year, as of Friday’s close. Exxon Mobil (up 44%) and Visa (27%) are the best performers.
    • Consensus earnings projections for 2022 and 2023 are trending lower, currently $223 and $241 per share, respectively, according to Bloomberg, FactSet Research Systems and S&P Capital IQ, representing year-over-year growth of approximately 7.5%. The magnitude of earnings revisions will become more clear following third quarter results and forward guidance. The third quarter reporting period unofficially begins during the week of October 10. At current levels, the S&P 500 trades at a price-earnings multiple of 16.5 times 2022 estimates and 15.3 times 2023 estimates. Valuation levels become less compelling as earnings projections trend lower.

Bond markets

Quick take: Treasury yields surged last week (prices fell) after the Fed delivered another 0.75% interest rate increase and indicated further rate hikes are ahead. Riskier asset prices, including high yield corporate and high yield municipal bonds, remain under pressure as the economic outlook darkens, the U.S. dollar strengthens and inflation remains high.

Our view: Headwinds from global monetary policy tightening and slowing growth encourage us to retain slightly-above-normal allocations to high-quality bonds in diversified portfolios. Despite this year’s poor performance, yields are at or near decade highs. Interest rate volatility remains a risk, but blending core high-quality bond exposure with short-term Treasuries can help manage sensitivity to rising yields.

  • Key points: hides details

    • The Fed increased its target federal funds interest rate by 0.75% to a range of 3.00% to 3.25%, in line with investor expectations. Investors focused on Fed Chairman Jerome Powell’s press conference and the updated Summary of Economic Projections (SEP). The SEP indicates the median expectation of Fed members is another 1.25% in increases this year, with rates hitting 4.50% to 4.75% in 2023, somewhat higher than investors anticipated. Fed officials also reduced growth forecasts and raised inflation and unemployment forecasts for 2023. Central banks in England, Sweden, Taiwan, Norway and Switzerland also raised interest rates last week.
    • Weak investor risk appetite continues to weigh on riskier assets, including high yield bonds. Most companies maintained strong earnings growth in the first half of this year, which supports their ability to make debt payments for now. However, economic headwinds from high inflation, geopolitical conflict, a strong dollar (which acts as a headwind for exporters) and tightening financial conditions may suppress forward earnings growth. Falling equity prices that coincide with money leaving high yield corporate and municipal bond funds in recent weeks highlight investors’ concerns.

Real assets

Quick take: Rising interest rates are pressuring real asset prices. Real Estate performed the worst and trailed the broader market last week, while infrastructure and commodities suffered more modest declines.

Our view: We continue to see value in real assets’ defensive sectors. Investors’ preference for tangible assets with stable cash flows in inflationary environments should benefit infrastructure.

  • Key points: hides details

    • Real Estate trailed the S&P 500 by 1.8% last week as interest rates rose. Industrial and residential properties were the top-performing sectors while data centers and offices lagged. Publicly traded real estate repriced quickly compared to private markets, but higher interest rates may hurt performance as repricing continues.
    • Infrastructure fell, but still beat the S&P 500 by 0.3% last week. Toll roads and Utilities led performance while midstream energy declined on the lowest oil prices since early January.
    • Crude oil prices fell 7% last week as domestic supplies of crude and refined products increased. Oil has fallen 36.5% from its high on March 8. Demand is coming into question as the Fed hikes interest rates and the potential for slower economic growth rises. We see the crude market as undersupplied, which should be supportive for prices over a longer time horizon, but acknowledge downside exists if the economy continues to slow.

This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

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