In this Q2 recap: Stocks and bonds were rattled by rising interest rates as the Fed took aggressive monetary tightening steps to combat accelerating inflation. Higher rates and continuing supply chain bottlenecks sparked recession fears.

Quarterly Economic Update

A review of Q2 2022, Presented by Marc Aarons

THE QUARTER IN BRIEF

Stocks dropped in the second quarter, with the pressure beginning in April, as the Standard & Poor’s 500 index (-8.8%) and the NASDAQ Composite (-13.3%) experienced monthly losses to start the quarter.¹

Investors were unnerved by comments from Fed officials about the pace and magnitude of potential rate hikes and by inflation, which showed little sign of abating. For instance, March’s Consumer Price Index rose 8.5%–the fastest pace since December 1981, while the Producer Price Index–an indicator of potential future costs–climbed 11.2% year-over-year, a new all-time high.²

Tightening monetary policy and rising inflation sent bond yields sharply higher, with the 10-year Treasury Note yield rallying from 2.32% at March-end to 2.89% by the end of April.³

Markets extended their losses into May as recession fears overtook inflation as the leading worry for investors. With two rate hikes in place and at least two more signaled by the Fed, the concern turned to whether the Fed could raise rates to fight inflation without sending the economy into a recession.

It wasn’t only higher rates that fed recession fears, however. China’s lockdowns to arrest the spread of Omicron and continuing hostilities in Ukraine contributed to a pessimistic outlook for global economic growth.

With May looking like a repeat of April’s dismal performance, stocks gained as the month came to a close after releasing the Federal Open Market Committee’s (FOMC) early May meeting minutes. The market interpreted these minutes as suggesting a less aggressive Fed than the market had anticipated. The rally triggered in the final week of May–the S&P 500 and NASDAQ Composite jumped 6.5% and 6.8%, respectively–saved investors from another month of deep losses.⁴

Stocks continued their slide in June as a red-hot May inflation read heightened fears of a more aggressive Fed, while worries of an economic slowdown grew. Like May, stocks staged a powerful rebound toward month-end, as falling energy prices and declining bond yields triggered hopes that the Fed may not need to be as aggressive with rate hikes. Prices stabilized as the quarter came to a close–a welcome development–but it was not enough to take the edge off a difficult second quarter and the first half of performance.

While stock prices were coming down, first-quarter corporate earnings were notably strong, especially in light of the contraction in 1Q GDP. With 99% of companies comprising the S&P 500 index reporting, 77% reported positive earnings surprises and a blended earnings growth rate of 9.2%. However, earnings for the second quarter may be more mixed, with 70 S&P 500 companies issuing negative earnings guidance and just 31 companies issuing positive guidance.⁵

THE U.S. ECONOMY   

After shrinking 1.5% in the first quarter, signs point to continued weakness in the second quarter.⁶

The official estimate of second-quarter GDP growth won’t publish until the end of July, but The Federal Reserve Bank of Atlanta, which attempts to track GDP growth in real-time, reported that its “GDP Now” forecasting model is estimating an annualized 2Q growth rate of -2.1%, as of July 1, 2022.⁷

This economic weakness reflects several headwinds, including elevated inflation, rising interest rates, continuing supply chain issues, and slowing global growth.

Food, energy, and housing have been at the epicenter of inflation pressures. For the 12 months ended May 2022, food prices increased 10.1%, energy costs soared 34.6%, and the median price of existing homes jumped 14.8% year-over-year.^8,9

To rein in inflation, the Fed has begun taking steps to facilitate what economists refer to as “demand destruction,” or reducing demand sufficiently to alleviate upward price pressures. This demand destruction can be accomplished in two primary ways: by raising rates so that borrowing is more expensive and deflating asset values to reduce the wealth effect that spurs consumer spending.

A rise in recession worries has followed. In a recent survey of economists conducted by The Wall Street Journal, the probability of recession in the next 12 months has risen to 44%, typically seen only when the economy is on the brink of or during a recession.¹⁰

Despite the deteriorating economic data, some elements of the economy remain positive.

The labor market is still healthy. Hiring continues to be strong, if somewhat off the pace of earlier post-pandemic quarters, unemployment is steady and near historic lows, and wages are rising, though below the rate at which prices are rising.

Consumer spending remains stable, which, in the second quarter, was on track to increase four percent annually. Consumers remain flush with about $2.3 trillion in savings (not counting asset markets holdings), so spending could remain an engine for continued economic growth as the year wears on.^11,12

Still, having savings is not the same as spending them. Consumer confidence, critical support for consumer spending, has been eroding, which may lead to lower consumption. The University of Michigan’s monthly measure of consumer sentiment has tracked this eroding confidence level; its Index of Consumer Sentiment showed a decline from 58.4.2 in May to 50.0 in June (a drop of 14.4%) and a year-over-year slide of 41.5%.¹³

GLOBAL ECONOMIC HEALTH

Global economies struggled in the second quarter as economic lockdowns in China added to existing spillovers from Russia’s invasion of Ukraine. These lockdowns reduced overall consumer demand from China and exacerbated global supply chain issues, as manufacturing output slowed and exports delayed.

Consequently, many economists have reduced their estimates for Chinese growth. The International Monetary Fund (IMF) projects that China’s economy will slow to a 4.4% increase in 2022, down from last year’s 8.1% GDP growth rate. This growth projection mirrors Wall Street analysts’ consensus estimate of a 4.4% expansion in 2022.^14,15

How China’s economy performs in the future may turn on whether China’s zero-COVID policy remains in place, how it manages its deteriorating housing market, and how it balances the dynamism of private enterprise with state controls.

European economies are also stressed, weighed down by hostilities in Ukraine, rising inflation, and monetary tightening. These headwinds have led the IMF to lower its projection of 2022 GDP expansion from 3.9% to 2.8%. Its estimate of 2023 GDP growth sliced down to 2.3%.¹⁶

One fallout of Europe’s dependence on Russian energy is that higher energy prices and businesses burden European consumers with higher input costs, which have them reevaluating hiring and investment plans. Any improvement in Europe’s economic prospects may rest on how quickly the war in Ukraine resolves.

The United Kingdom’s inflation rose to 7% during the second quarter. The Bank of England estimates that inflation will likely increase to 10% by year-end even as the U.K. economy falls into contraction by the fourth quarter.¹⁷

Japan’s 2022 economic growth rate has been pared by global conditions, though the IMF increased its estimate of Japan’s 2023 economic growth rate to 2.3%, up by 0.5%.¹⁸

The World Bank is similarly cautious, revising its estimate of global economic growth to 2.9% in 2022, down from its January forecast of 4.1%. They expect global growth to average 3% between 2023 and 2024.¹⁹

The MSCI-EAFE Index, which tracks developed overseas markets, slid 15.37% in Q2, while emerging markets, as measured by the MSCI-EM (Emerging Markets) Index, fell 12.36%.²⁰

T I P   O F   T H E   Q U A R T E R

If marriage gives you a new last name, be sure to notify Social Security, your bank, and the investment and insurance companies with whom you have accounts and policies about the name change.

LOOKING BACK, LOOKING FORWARD

After a difficult start to the year, stock losses continued in the second quarter as accelerating inflation, Fed interest rate hikes, supply chain bottlenecks, the war in Ukraine, and broad lockdowns in China weighed on investors.

The second quarter appears to have also brought the curtain down on a major advantage enjoyed by U.S. stocks for over a decade, the TINA trade (There is No Alternative). The TINA trade resulted from historically low-interest rates that left other asset classes at a return disadvantage to stocks. Low-interest rates contributed to a multi-year bull market by elevating the value of future earnings and forcing many income-searching investors into equities simply because bond yields were so small.

A new regime of higher rates and less liquidity has created an acute level of uncertainty in the stock market. That uncertainty may continue through the second half of the year. The Fed hiked interest rates by 75 basis points in June, with Fed Chair Powell promising that the Fed will continue to raise rates until inflation comes down to its 2% target.²¹

It’s uncertain when high inflation may get resolved, especially since price pressures remain and monetary policy takes time to work through the system. May’s higher-than-expected inflation report undermined earlier hopes that inflation may have plateaued.

Perhaps the biggest market overhang is whether the Fed can engineer a soft landing, i.e., manage inflation without sending the economy into a recession. It will take many months, possibly a year or more, to determine whether the Fed successfully threaded that needle. Nevertheless, there might be signs along the way that may help bring greater clarity. If the economic data continues to paint a mixed picture, market volatility may extend into the year’s second half.

In addition to inflation and other economic data, investors will be watching corporate earnings. The outlook for profits has dimmed in recent months amid a slowing economy. To the extent that earnings results can exceed the market’s lowered expectations, corporate earnings may prove to be a positive catalyst in the months ahead.

The Fed’s pivot to higher rates impacted stock investors, and bond investors suffered (bond prices fall as yields rise). Nonetheless, bond yields are now higher than they were a year ago, making bonds, for many income investors, more attractive than they have been in a while.

Sources: Wall Street Journal, June 30, 2022, Treasury.gov (Bond Yield)

The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid.

Q U O T E   O F   T H E   Q U A R T E R

“My father said there were two kinds of people in the world: givers and takers. The takers may eat better, but the givers sleep better.”

MARLO THOMAS

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com

ocmoneymanagers.com

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Please feel free to send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)

MMI Disclosure: This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The CBOE Volatility Index^® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The S&P SmallCap 600® measures the small-cap segment of the U.S. equity market. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

^CITATIONS:

1. ^{NASDAQ.com, May 4, 2022}
2. ^{CNBC, April 13, 2022}
3. ^{Home.Treasury.gov, July 7, 2022}
4. ^{CNBC, May 27, 2022}
5. ^{Factset, June 3, 2022}
6. ^{Bureau of Economic Analysis, July 7, 2022}
7. ^{Federal Reserve Bank of Atlanta, July 1, 2022}
8. ^{Bureau of Labor Statistics, July 7, 2022}
9. ^{CNBC, June 21, 2022}
10. ^{WSJ.com, June 19, 2022}
11. ^{Project-Syndicate.org, May 31, 2022}
12. ^{Project-Syndicate.org, May 31, 2022}
13. ^{CNBC, June 24, 2022}
14. ^{International Monetary Fund, April 2022}
15. ^{CNBC, April 26, 2022}
16. ^{International Monetary Fund, April 2022}
17. ^{Bank of England, May 2022}
18. ^{International Monetary Fund, April 2022}
19. ^{The World Bank, July 7, 2022}
20. ^{MSCI, July 7, 2022}
21. ^{WSJ.com, June 22, 2022}

The post Second Quarter 2022 Economic Update appeared first on Money Managers, Inc..

In this Q1 recap: Global financial markets rattled by the Russian invasion of Ukraine. Inflation pressures rise as oil prices surge and supply chains become further stressed. The Federal Reserve is taking its first steps toward monetary normalization.

Quarterly Economic Update

A review of Q1 2022, Presented by Marc Aarons

THE QUARTER IN BRIEF

Financial markets abhor uncertainty, and Russia’s invasion of Ukraine added new uncertainties to a market already wavering from accelerating inflation and the prospect of higher interest rates. After a year of strong economic growth and solid stock market returns, heightened inflation and the unclear pace of monetary policy tightening triggered market volatility right from the start of the new year. The potential of rising interest rates propelled bond yields higher and hurt stock valuations, especially the previously high-flying, high-growth technology names.

Stock market weakness continued into February as investors worried that the Fed’s slow response would lead them to address high inflation with more rate hikes than investors initially anticipated. When Fed Chair Jerome Powell announced plans to shrink the Fed’s balance sheet, the fears of a more aggressive monetary policy grew.

Financial markets were roiled by the lead-up to the Russian invasion of Ukraine, with prices becoming more volatile as investors reacted to the building tensions on the Russian-Ukrainian border and momentary glimpses of a potential diplomatic solution. Stocks slumped on news that hostilities had started as investors assessed the global economic impact of the invasion and the economic sanctions that followed. The flight to safety sent bond yields lower, halting, at least temporarily, the march toward higher yields.

In the final month of the first quarter, stocks continued to be volatile as intensifying hostilities in Ukraine added to inflation and supply-chain concerns. However, by mid-March, stocks staged a strong turnaround that reversed much of the quarter-to-date declines as investors welcomed the clarity on monetary policy following the Federal Open Market Committee’s March meeting and encouraging economic data.

Overlooked by these headline concerns, corporate profits for the fourth quarter exceeded market expectations. With 95% of S&P 500 constituent companies reporting, 76% reported a positive earnings surprise, posting an average earnings growth rate of 30.7% in the fourth quarter. This earnings momentum may likely moderate in the first quarter to a 4.6% increase and 8.5% for the full year.¹

THE U.S. ECONOMY   

In the fourth quarter, the U.S. economy grew at a robust annualized rate of 6.9%, led by strong retail sales, services, and exports. The economy overcame several substantial headwinds, including a surge in Omicron infections, accelerating inflation, continued bottlenecks in the global supply chain, a labor shortage, and the anticipation of a tighter monetary policy.²

The solid economic performance in the fourth quarter helped drive the unemployment rate from 4.8% in September to 3.9% in December, a favorable trend that carried over into the first quarter of 2022, with the unemployment rate falling further to 3.8% in February.³

The first quarter’s economic expansion is likely to be modest due to the drag of Omicron, but the Ukrainian invasion may further dent economic growth. The Federal Reserve Bank of Atlanta, which attempts to track GDP growth in real-time, reported that its “GDP Now” forecasting model lowered its nearly 2.0% Q1 GDP pre-invasion annualized growth rate estimate to 1.3% as of March 31, 2022.⁴

The Atlanta Fed is not alone. In one survey of economists two weeks after the invasion, findings lowered the average of 14 earlier forecasts by 0.3 percentage points. The first and second quarters felt the most significant impact of the projected economic deceleration before stabilizing in the year’s final two quarters.⁵

Elevated inflation was a dominant concern throughout the quarter. The cost of consumer goods jumped 7.9% year-over-year in February, the most significant increase since July 1981. This boost comes atop year-over-year increases in the Consumer Price Index of 7.5% in January and 7.0% in December 2021.⁶

With lower economic projections ahead, the Fed set upon a new course in its monetary policy with the end of asset purchases and the implementation of a 0.25% interest rate hike, the first such increase since 2018. The Fed also signaled the possibility of a total of seven quarter-point rate hikes this year and three or four next year to combat inflation and its intention to announce a plan for reducing its $9 trillion balance sheet.⁷

In the quarter to come, economic growth will be challenging in an uncertain geopolitical landscape, further interest rate hikes, the persistence of elevated inflation, and supply-chain stresses.

GLOBAL ECONOMIC HEALTH

The impact of war in Europe has led to downward revisions in the 2022 growth estimates for major global economies. Further supply chain disruptions and more significant inflationary pressures are likely to weigh upon economic activity.

The economic repercussions of Russia’s invasion of Ukraine are widespread. Commodities prices, from oil and agricultural products to natural gas and base metals, may stay elevated for the foreseeable future. This sustained elevation may be due to the combination of sanctions, the destruction of infrastructure, and supply uncertainty, resulting from the disruption of supply chains, as land- and sea-based trade routes have become impeded or completely closed down.

While the measure of the invasion’s economic impact remains fluid and imprecise, according to the Economist Intelligence Unit (EIU), a British-based economic research and analytics group, economic growth in Europe may slow down by nearly 50% from a pre-war estimate of 3.9% to about 2.0%. The impact on eurozone countries may be less severe, with estimates revised from 4.0% to 3.7%. EIU also projects that global growth will be shaved by 0.5 percentage points, from 3.9% to 3.4%.⁸

The United Kingdom is facing a similar outlook. The British Chamber of Commerce downgraded its forecast for economic growth in 2022, reducing its initial 4.2% growth projection to 3.6% in the wake of the Russian invasion.⁹

The Japanese economy saw a steep slowdown in the first quarter due to a surge in Omicron infections. A Reuters poll of analysts lowered their median Q1 GDP annualized growth rate from 4.5% to 0.4%. Japan’s economy may remain under pressure as a declining yen has exacerbated rising energy and commodity prices.¹⁰

Finally, China set its 2022 growth rate target at 5.5%, the lowest in more than 25 years. Even this modest goal may be challenging to reach amid struggles to manage a surge in COVID-19 infections that have led to shutdowns of cities and factories and regulatory pressures in its property and technology sectors.¹¹

The MSCI-EAFE Index, which tracks developed overseas markets, slid 6.61% in Q1, while emerging markets, as measured by the MSCI-EM (Emerging Markets) Index, fell 7.32%.¹²

LOOKING BACK, LOOKING FORWARD

Blindsided by one of the “known unknowns” that are always lurking in the background and can upset existing market narratives, markets reacted to Q1’s rising inflation. Investor expectations coming into 2022 were modest – economic growth may come slowly but remain solid, and stocks were forecast to rise, though not at the pace of 2021.

In the new year, investors were fully aware that inflation was proving more durable than “transitory” and that interest rates could head higher. Yet, it was only upon the turn of a calendar page that investors seemingly contemplated what that potentially meant, i.e., a more aggressive Fed, a slowdown in corporate earnings growth, and a devaluing of high-growth companies whose earnings may be in the distant future.

In one respect, the market correction in the first quarter (defined as a decline of 10-20% from recent market highs) shouldn’t have come as a surprise to experienced investors since there have been 27 such declines since World War II, with the last one occurring in 2018. By historical standards, a correction was overdue. Past corrections have had an average decline of 13.7% and last for about four months (not including corrections that turn into bear markets, i.e., a decline of 20% or more).¹³

Nevertheless, historical performance is only a guide, not a guarantee of the future. So, as investors look forward, they may see three significant headwinds for the market: inflation, higher interest rates, and potentially wider geopolitical issues.

While a tighter monetary policy is the Fed’s primary tool in fighting inflation, its ability to dampen inflation over the near- to intermediate-term may be limited since higher interest rates take time to work through the economic system. Also, a tighter monetary policy will do very little to solve current supply chain problems – a significant contributor to rising prices.

While higher rates may be effective for lowering inflation longer term, it may come at a short-term cost to investors. Higher interest rates, along with any shrinking of the Fed’s balance sheet, may reduce liquidity in the markets, which may put some downward pressure on stocks.

The wild card seems to be what Russia does next, which could be as disparate as agreeing to a withdrawal from Ukraine with a promise to respect Ukraine’s territorial integrity to invading additional countries and ratcheting up tensions with the West.

A peaceful resolution to the Ukraine crisis may be met with deep relief by investors, potentially allowing markets to rally and return the focus to economic fundamentals, like GDP growth, inflation, and corporate profits.

A widening of tensions may prove problematic to the financial markets and the economy, especially if they involve Russia taking steps that violate the borders of NATO countries or if China pursues an invasion of Taiwan.

We’ve seen markets unsettled by war in the past. They tend to regain their balance in a relatively short period. However, the conflict in Ukraine is very different from more recent wars, which is why the market’s near-term prospects may first and foremost turn on the outcome of events in Eastern Europe.

Sources: Wall Street Journal, March 31, 2022, Treasury.gov (Bond Yield)

The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid.

Q U O T E   O F   T H E   Q U A R T E R

“A learning experience is one of those things that say, ‘You know that thing you just did? Don’t do that.’”

DOUGLAS ADAMS

Marc Aarons may be reached at (714) 887-8000 or marc@ocmoneymanagers.com ocmoneymanagers.com

Know someone who could use information like this?
Please feel free to send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)

MMI Disclosure: This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The CBOE Volatility Index^® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The S&P SmallCap 600® measures the small-cap segment of the U.S. equity market. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

^CITATIONS:

1. ^{Factset.com, February 25, 2022}
2. ^{BEA.gov, March 30, 2022}
3. ^{Statista, March 7, 2022}
4. ^{AtlantaFed.org, April 5, 2022}
5. ^{CNBC, March 6, 2022}
6. ^{Bureau of Labor Statistics, March 15, 2022}
7. ^{WSJ.com, March 17, 2022}
8. ^{Economist Intelligence Update, March 3, 2022}
9. ^{British Chambers of Commerce, March 4, 2022}
10. ^{Reuters.com, February 27, 2022}
11. ^{WSJ.com, March 4, 2022}
12. ^{MSCI.com, April 5, 2022}
13. ^{CNBC, February 27, 2022}

The post Quarterly Economic Update- Q1 2022 appeared first on Money Managers, Inc..

A look at China’s unexpected move & its potential impact.

Provided by Marc Aarons @ Money Managers Inc.

China has surprised global investors by weakening the yuan almost 5%. Its central bank may even weaken it further.1,5

Why did the PRC make this move? Its long-booming economy is in a slump. Most notably, Chinese exports have taken a major fall. In July, they were down 8.3% year-over-year. By depreciating the yuan, China is trying to help its exports maintain their competitive edge.2

Some of China’s other economic indicators have also disappointed lately. Chinese imports have retreated for nine straight months, slipping 6.1% for June and another 8.1% in July. The pace of retail sales in China slowed to a 15-year low in July. Producer prices in the PRC suffered their largest annualized slip since 2009 last month. Lastly, the nation’s economy may grow less than 7% this year – which would be the worst showing since the 1990s.1,2

How may this impact America? The effects could be felt in several areas of our economy, and there could be some positives as well as negatives.

The Federal Reserve might decide to postpone a rate hike. Our central bank appears committed to raising interest rates before the year ends, perhaps as early as next month. A repeatedly devalued yuan might make the Fed think twice about that, however. China has effectively strengthened the dollar versus the yuan, making Chinese imports to America cheaper. That could lower consumer inflation pressure, and since annualized inflation in this country is already low, there would be less incentive for the Fed to raise rates. That would be bad news for savers but better news for some mortgage holders.3

Consumers could benefit more than businesses. As referenced above, a weakened yuan makes imported goods from China less expensive for Americans. Conversely, it also makes it that much harder for U.S. businesses to sell their products in the PRC, as Chinese consumers will have reduced purchasing power.3

You may see less hiring. A mightier greenback relative to the yuan means new hurdles for U.S. businesses in China, which could cut into earnings growth. While scores of American firms sell directly to Chinese consumers, others have strong ties to Chinese factories: look at Apple, which outsources the production of its iPads and iPhones to the PRC. A devalued yuan essentially whittles down the income U.S. businesses create in China and makes outsourced manufacturing costlier for American firms. You can draw a fairly direct line here: less income and lower earnings for American businesses could lead to slimmer payrolls. In particular, firms in the technology, energy and materials sectors could be impacted.1,3

Oil & gas could become even cheaper. Oil is a dollar-denominated commodity, so a newly weakened yuan will test China’s demand for it. A stronger dollar relative to the yuan means that oil and oil-based products will be costlier in China. The Chinese might react by decreasing oil consumption. If China’s demand for oil lessens, that would help to keep oil prices low and American drivers would likely see lower gas prices as well.3

How about the markets? Equities seem to have regained their footing. When the PRC started devaluing the yuan on August 11, Wall Street read the move as a distress signal. The Dow opened with a triple-digit drop August 11 and lost 212 points for the day. On August 12, it took an even bigger fall at the open on news of the yuan weakening again, but it was down just 0.33 points at the close. The week’s subsequent trading days brought no further dives at the opening bell. Looking at the global picture, the DAX, CAC 40, Nikkei 225, and Shanghai Composite were all up 1% or more shortly after they opened Thursday.4,5

As for the forex market, the yuan has certainly sunk versus other key currencies. By August 13, it had lost nearly 3% against the dollar over the past five trading days, and almost 5% against the euro.6

Is a global currency war about to heat up? The People’s Bank of China insists it does not seek to start one. A Barclays client report released August 13 noted the PBC “downplaying the need for a weaker yuan” at a press conference and refuting claims it wanted to devalue the currency at least 10% to support exports. Yi Gang, one of the PBoC’s deputy governors, stated that there was “no basis for a persistent weakening in the yuan… and that the aim of the PBoC is to have the market determine the exchange rate.”5

If the yuan does keep sliding and global markets slump significantly, the Federal Reserve and the European Central Bank could react supportively, providing investors with some reassurance. A weakened yuan presents another challenge to the Fed’s plans to tighten.

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com
www.ocmoneymanagers.com

Citations.
1 – foxbusiness.com/markets/2015/08/12/us-stock-futures-slump-as-china-devalues-yuan-again/ [8/12/15] 2 – marketwatch.com/story/chinas-economy-enters-second-half-of-2015-on-weak-note-2015-08-09 [8/9/15] 3 – usatoday.com/story/money/business/2015/08/12/yuan-and-you-how-chinas-devalued-currency-affects-us-consumers/31524925/ [8/12/15] 4 – money.cnn.com/data/markets/dow/ [8/13/15] 5 – usatoday.com/story/money/markets/2015/08/13/market-calm/31610769/ [8/13/15}
6 – money.cnn.com/data/currencies/ [8/13/15]

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