| September 12, 2022

Macro Overview

Recession fears pressed on markets as equities pulled back from a mid-summer rally that many analysts suspect was short-lived. U.S. equities began August in rebound mode but reversed course to end the month in negative territory.

Crude oil and gasoline prices fell further in August, offering a reprieve for consumers and easing inflationary pressures slightly. Oil prices posted their largest monthly drop for the year, falling to $88.90 per barrel at the end of August, down over 30% from a high of $130 in March. Some analysts expect prices to follow historical patterns as decreasing demand in the fall and winter months usually brings lower prices.

Demand for homes continued to ease in August as rising mortgage rates and elevated home prices continued to make affordability a challenge for millions of home buyers. The average 30-year conforming fixed mortgage rate rose to 5.66% on September 1st, yet still below June’s high of 5.81%.

Concerns surrounding an impending recession mounted in August, as equity markets hesitated with further anticipated Federal Reserve rate hikes. Numerous factors continue to hinder economic growth both in the U.S. and internationally, including the invasion of Ukraine, food supply issues, monetary tightening, inflation, and falling corporate margins.

A drop in real wages and heightened layoffs added pressure to the already uncertain labor market, which seems to be cooling following a year of rapid growth. Many Americans are returning to work from the heights of self-employment in 2021 as uncertainty in the economy grows. Large sectors like technology and finance are seeing companies usher plans to return workers to the office, away from the popularity of remote work during the pandemic.

Analysts expect that a peak in inflation may help stimulate equity market dynamics, should the Fed reconsider a continued rise in rates. Modifications to Fed policy might include a halt to raising rates should economic conditions worsen.

The unemployment rate rose to 3.7% in August from 3.5% the previous month, making August’s unemployment rate the highest since February of this year. This indicates a slight slowdown in the labor market.

Retail stores continue to hold excess inventories, as consumers curb purchases. Too much inventory can hinder earnings for companies, especially heading into the holiday season.

China re-instated a zero-covid policy by extending a lockdown in the western city of Chengdu, slowing Chinese exports and economic growth. Such policies also lead to closures of factories and manufacturing facilities, which can affect supply chains globally.

Russia halted all gas supplies to Europe indefinitely, further complicating efforts for European consumers and raising fuel prices to new highs. Europeans are already experiencing broad inflation not seen in decades.

Sources: Freddie Mac, U.S. Bureau of Labor Statistics, U.S. Department of Energy, Federal Reserve Bank of St. Louis,

Equity Review

U.S. equities began August in rebound mode but reversed course to end the month in negative territory. Continued Fed rate hikes and recession fears weighed on equities.

Company earnings are increasingly becoming a focal point as shrinking margins are becoming more apparent in various industries.

Sources: Bloomberg, Reuters, S&P.

Fixed Income Update

U.S. Treasury bond yields rose in August, with the 10-year Treasury ending the month with a 3.15% yield. Treasury bond yields flattened as well, with the shorter-term 1-year treasury finishing the month at 3.50%, nearly identical to the 20-year treasury yield at 3.53%. Such a dynamic tends to attract bond buyers towards the shorter end of the curve. Economists view a flattening yield curve as indicative of a possible economic slowdown.

In addition to raising short-term rates, the Fed will continue to sell bonds from its balance sheet, indirectly placing pressure on rates to rise.

Sources: Bloomberg, Reuters, U.S. Department of the Treasury.

Social Security Cost of Living Adjustment Sees Huge Jump

Many rely on Social Security and the annual increases known as the Cost of Living Adjustment (COLA) to keep up with inflation. The Cost of Living Adjustment (COLA) occurs annually and compares the 3rd-quarter Consumer Price Index for Urban Wage Earners (CPI-W) with its value at the same time the year prior. If the CPI increases, which would indicate an increased cost of living, the COLA adjustment rises accordingly.

With inflation reaching upwards of 9% in June 2022, the cost of living has subsequently grown. Thus, the Senior Citizens League, an advocacy group for elderly citizens, expects this year’s COLA to jump a historic amount for 2023. The group predicted a 10.5% increase in June when inflation was at 9.1% and a jump of 9.6% in July when inflation cooled down ever so slightly to 8.5%. This response to elevated living costs would be the biggest adjustment since 1981.

The Senior Citizens League also noted that if inflation would continue to be rampant, the COLA could reach over 10%, yet if inflation cools down the adjustment could be closer to 9.3%. The current average Social Security benefit comes in at just over $1,600 and the adjustment could raise it by $159, according to a Senior Citizens League Policy Analyst. However, much of this increase gets eaten up by increases in Medicare costs, which in some cases even results in fewer benefits for seniors despite COLA increases.

Sources: Senior Citizens League, Social Security Administration.

Wage Increases Don’t Necessarily Mean More Money in Your Pockets

A jump in inflation could mean that even with a pay raise, you could have less money in your pocket.

To evaluate wages, there are two factors to consider, nominal wage growth and real wage growth. A nominal wage is simply the wage, in U.S. dollars. A real wage is the nominal wage growth in the context of inflation, adjusted for the level of purchasing power held by the U.S. dollar. For example, $5 in 1950 has the same purchasing power as around $60 in 2022. Thus being paid $5 in 1950 is worth much more than being paid $5 in 2022.

Both real and nominal wages ballooned in early 2020, and then both also fell tremendously one year later in early 2021. However, since this fall in both wage measures, nominal wages have continued to increase while the purchasing power of these wages continues to fall because of inflation.

In recent months, inflation has grown at an above-average rate, reaching 9.1% in June 2022. This inflation rate is greater than the rate at which wages grow, which means that real wages are actually decreasing relative to inflation. While wages have increased at over 5% for the past 6 months, real wages have decreased over this same time. So, consumers are left with less purchasing power even if their salary has risen.

Sources: U.S. Bureau of Labor Statistics, EPI analysis of Bureau of Labor Statistics Current Employment Statistics.

Personal Savings at Lowest in 14 Years

During the peak of the pandemic, uncertainty over the job market and elevated unemployment caused consumers to save at heightened rates. In addition, “going out” became extremely limited as restaurants, stores, and vacations were off the table for a majority of the population. With the pandemic tranquilized, consumer spending spiked tremendously and savings began to deplete.

With spending levels falling, many consumers have become wary of fully depleting their pandemic-era savings, yet are now still saving at very low levels. The personal saving rate, which measures how much disposable (post-tax) income people tend to save has reached a 14-year low. The rate reached 4.4% in April 2022 according to the Bureau of Economic Analysis, the lowest it has been since September of 2008.

With both savings and spending down, many consumers have resorted to increasingly focusing on buying essential goods rather than spending on discretionary items. Economists view this dynamic as a decline in consumer confidence throughout the economy.

Source: U.S. Bureau of Economic Analysis, Federal Reserve Bank of St. Louis.

**Market Returns: All data is indicative of total return which includes capital gain/loss and reinvested dividends for noted period. Index data sources; MSCI, DJ-UBSCI, WTI, IDC, S&P. The information provided is believed to be reliable, but its accuracy or completeness is not warranted. This material is not intended as an offer or solicitation for the purchase or sale of any stock, bond, mutual fund, or any other financial instrument. The views and strategies discussed herein may not be appropriate and/or suitable for all investors. This material is meant solely for informational purposes, and is not intended to suffice as any type of accounting, legal, tax, or estate planning advice. Any and all forecasts mentioned are for illustrative purposes only and should not be interpreted as investment recommendations.