ECONOMIC AND MARKET REVIEW OCTOBER 2022

“The dollar is our currency, but it’s your problem.”  --  John Connally, U.S. Treasury Secretary, 1971-1972 Third Quarter Recap Financial markets fell broadly after a roller-coaster summer. Equities rose sharply for the first several weeks of the quarter, but swooned...

read more

ECONOMIC AND MARKET REVIEW JULY 2022

Economic and Market Review and Outlook, July 2022 “It’s absolutely essential to restore price stability. Economies don’t work without price stability.”  --  Jerome Powell Second Quarter Review Financial markets fell again in the spring. Posting its worst first half...

read more

ECONOMIC AND MARKET REVIEW APRIL 2022

“It is appallingly obvious that our technology exceeds our humanity.” – Albert Einstein First Quarter Recap Almost all financial market indices fell during the first quarter. Equities were generally lower: The S&P 500 dropped 4.6% while the Nasdaq 100 dipped 20%...

read more

MARKET UPDATE MARCH 2022: CURRENT EVENTS

The Rice Partnership's Chief Investment Officer, Orest Saikevych, discusses the war in Ukraine, the recent FOMC (Federal Open Market Committee) meeting and their effects on the economy and financial markets.

read more

ECONOMIC AND MARKET REVIEW JANUARY 2022

“You are what your record says you are.” – Bill Parcells, two-time Super Bowl winning NFL coachFourth Quarter Summary Most indices rebounded from their summer swoon. U.S. large cap and technology-related stocks led the way, with China once again weighing down emerging...

read more

ECONOMIC AND MARKET REVIEW OCTOBER 2022

“The dollar is our currency, but it’s your problem.”  —  John Connally, U.S. Treasury Secretary, 1971-1972

Third Quarter Recap

Financial markets fell broadly after a roller-coaster summer. Equities rose sharply for the first several weeks of the quarter, but swooned in the last half of the period. Fixed income did the same, as did oil, copper and other commodities. Even gold and other safe havens fell. The U.S. dollar was an exception, marching upward against all other major currencies with rising U.S. interest rates proving attractive to foreign investors.

After a dismal six months, oversold conditions and better-than-feared second quarter earnings led to a sharp 14% rally in the S&P through mid-August. Indeed, many market strategists and technical analysts surmised that the bear market was over and that an entirely new bull market had begun. 

A Fed Plateau, Not a Pivot

The major rationale for market bulls at the beginning of the quarter was that the rate of inflation had peaked and the Fed would soon taper increases in the Federal Funds rate, perhaps even lowering rates early next year. Unfortunately, inflation reports continued to run hot with some Fed officials lamenting that the market rally made financial conditions too loose to cool off prices.

In late August, Chair Powell delivered a toughly worded speech at the annual Jackson Hole Symposium stating that lowering inflation was the number one goal. However, it would involve some economic pain, possibly even a recession, though he stopped short of actually predicting one.

Both stock and bond markets sold off sharply following Powell’s remarks and continued to do so after Labor Day, with strong non-farm Payroll and Consumer Price Reports reflecting the persistence of inflation in the economy. This was followed by another 75-basis point (0.75%) increase — the third in a row — at the Federal Open Market Committee (FOMC) meeting in late September. Committee members signaled that the Fed Funds rate could approach 4.50% by early 2023, remaining at that level for most, if not all of next year.

The Problem of “Sticky” Inflation 

The rate of inflation remains uncomfortably high, even though gasoline and food prices have dropped somewhat since spring. Housing-related costs, another major inflation factor, have been weakening, although rents will continue to stay up for a while. This is due to rental contracts renewing annually and still reflecting elevated market prices from the previous 12 months.

Wages may be even more intractable, as the job market remains very tight. Salary increases are running over 5% and will continue with close to 10 million jobs still open from the pandemic. Although some companies are anticipating a recession and have announced layoffs, many others recall the difficulty of hiring people over the last two years and are hoarding employees to keep from losing them.

The Strong U.S. Dollar and Its Effects, Both Here and Abroad

A strong dollar may help the economy somewhat by making imports cheaper. At the same time, it makes our exports more expensive, hurting the earnings of U.S. multinational corporations. It also causes problems for other currencies. The quote at the top by John Connally (a former Treasury Secretary and the Texas governor who was seriously wounded during the JFK assassination), sums up a long-held fiscal and monetary truism: the American economy is looked at first, and foreign markets will be taken into consideration only if something goes horribly awry.

The U.K. recently had a brush with adversity when its new government introduced a stimulative fiscal policy that clashed with the tight monetary policy of the Bank of England (BOE). Fortunately, the British government soon reversed its course and dropped its more controversial tax proposals, which helped to stabilize the pound and its bond market. Nevertheless, the U.S. Treasury and the Fed will have to keep an eye on foreign developments.

The Outlook for the Remainder of 2022

As mentioned in previous reports, we have consistently dialed down portfolio risk this year by:

  • Reducing equities
  • Increasing short-term fixed income investments (such as money market funds, whose principal value does not fluctuate while their yields have jumped since spring)
  • Adding to satellite (alternative) strategies

At this point, a recession by late 2023 is a 50-50 probability.

  • Inflation will have to fall significantly than it has so far to cause the Fed to relent from its tight monetary policy.
  • One key to inflation is the job market, which must cool off to cause inflation to follow suit.

 

ECONOMIC AND MARKET REVIEW OCTOBER 2022

“The dollar is our currency, but it’s your problem.”  —  John Connally, U.S. Treasury Secretary, 1971-1972

Third Quarter Recap

Financial markets fell broadly after a roller-coaster summer. Equities rose sharply for the first several weeks of the quarter, but swooned in the last half of the period. Fixed income did the same, as did oil, copper and other commodities. Even gold and other safe havens fell. The U.S. dollar was an exception, marching upward against all other major currencies with rising U.S. interest rates proving attractive to foreign investors.

After a dismal six months, oversold conditions and better-than-feared second quarter earnings led to a sharp 14% rally in the S&P through mid-August. Indeed, many market strategists and technical analysts surmised that the bear market was over and that an entirely new bull market had begun.

A Fed Plateau, Not a Pivot

The major rationale for market bulls at the beginning of the quarter was that the rate of inflation had peaked and the Fed would soon taper increases in the Federal Funds rate, perhaps even lowering rates early next year. Unfortunately, inflation reports continued to run hot with some Fed officials lamenting that the market rally made financial conditions too loose to cool off prices.

In late August, Chair Powell delivered a toughly worded speech at the annual Jackson Hole Symposium stating that lowering inflation was the number one goal. However, it would involve some economic pain, possibly even a recession, though he stopped short of actually predicting one.

Both stock and bond markets sold off sharply following Powell’s remarks and continued to do so after Labor Day, with strong non-farm Payroll and Consumer Price Reports reflecting the persistence of inflation in the economy. This was followed by another 75-basis point (0.75%) increase — the third in a row — at the Federal Open Market Committee (FOMC) meeting in late September. Committee members signaled that the Fed Funds rate could approach 4.50% by early 2023, remaining at that level for most, if not all of next year.

The Problem of “Sticky” Inflation

The rate of inflation remains uncomfortably high, even though gasoline and food prices have dropped somewhat since spring. Housing-related costs, another major inflation factor, have been weakening, although rents will continue to stay up for a while. This is due to rental contracts renewing annually and still reflecting elevated market prices from the previous 12 months.

Wages may be even more intractable, as the job market remains very tight. Salary increases are running over 5% and will continue with close to 10 million jobs still open from the pandemic. Although some companies are anticipating a recession and have announced layoffs, many others recall the difficulty of hiring people over the last two years and are hoarding employees to keep from losing them.

The Strong U.S. Dollar and Its Effects, Both Here and Abroad

A strong dollar may help the economy somewhat by making imports cheaper. At the same time, it makes our exports more expensive, hurting the earnings of U.S. multinational corporations. It also causes problems for other currencies. The quote at the top by John Connally (a former Treasury Secretary and the Texas governor who was seriously wounded during the JFK assassination), sums up a long-held fiscal and monetary truism: the American economy is looked at first, and foreign markets will be taken into consideration only if something goes horribly awry.

The U.K. recently had a brush with adversity when its new government introduced a stimulative fiscal policy that clashed with the tight monetary policy of the Bank of England (BOE). Fortunately, the British government soon reversed its course and dropped its more controversial tax proposals, which helped to stabilize the pound and its bond market. Nevertheless, the U.S. Treasury and the Fed will have to keep an eye on foreign developments.

The Outlook for the Remainder of 2022

As mentioned in previous reports, we have consistently dialed down portfolio risk this year by:

  • Reducing equities
  • Increasing short-term fixed income investments (such as money market funds, whose principal value does not fluctuate while their yields have jumped since spring)
  • Adding to satellite (alternative) strategies

At this point, a recession by late 2023 is a 50-50 probability.

  • Inflation will have to fall significantly than it has so far to cause the Fed to relent from its tight monetary policy.
  • One key to inflation is the job market, which must cool off to cause inflation to follow suit.

 

ECONOMIC AND MARKET REVIEW OCTOBER 2022

“The dollar is our currency, but it’s your problem.”  --  John Connally, U.S. Treasury Secretary, 1971-1972 Third Quarter Recap Financial markets fell broadly after a roller-coaster summer. Equities rose sharply for the first several weeks of the quarter, but swooned...

read more

ECONOMIC AND MARKET REVIEW JULY 2022

Economic and Market Review and Outlook, July 2022 “It’s absolutely essential to restore price stability. Economies don’t work without price stability.”  --  Jerome Powell Second Quarter Review Financial markets fell again in the spring. Posting its worst first half...

read more

ECONOMIC AND MARKET REVIEW APRIL 2022

“It is appallingly obvious that our technology exceeds our humanity.” – Albert Einstein First Quarter Recap Almost all financial market indices fell during the first quarter. Equities were generally lower: The S&P 500 dropped 4.6% while the Nasdaq 100 dipped 20%...

read more

MARKET UPDATE MARCH 2022: CURRENT EVENTS

The Rice Partnership's Chief Investment Officer, Orest Saikevych, discusses the war in Ukraine, the recent FOMC (Federal Open Market Committee) meeting and their effects on the economy and financial markets.

read more

ECONOMIC AND MARKET REVIEW JANUARY 2022

“You are what your record says you are.” – Bill Parcells, two-time Super Bowl winning NFL coachFourth Quarter Summary Most indices rebounded from their summer swoon. U.S. large cap and technology-related stocks led the way, with China once again weighing down emerging...

read more
The opinions expressed herein are those of The Rice Partnership and are subject to change without notice. Nothing in this material should be construed as an offer to purchase or sell any product or security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. The Rice Partnership reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Rice Partnership is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about The Rice Partnership, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request.

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