S&P 500 Closes Tough Week, Month, and Quarter
September 30th, 2022
It was another roller coaster ride for the market as investors closed the books on the week, month, and quarter on a sour note. With economic news being light this week, investors remained focused on the Fed’s aggressive monetary tightening and its potential to push the economy into recession. The prospect of more rate hikes sent the ten-year U.S. treasury yield above 4.00% on Wednesday before retreating to 3.80% by the end of trading on Friday. Investors got a brief respite on Wednesday when the Bank of England announced it would purchase long-term bonds to help stabilize financial markets and the British pound. The bond-buying program is expected to last two weeks but could be extended beyond that timeframe. Volatility in global financial markets has risen in response to the UK’s new Prime Minister Liz Truss’s poorly timed spending plans to cut taxes just as the Bank of England is attempting to rein in inflation. Those policies run contradictory to one another. Domestically, an unexpectedly strong jobless claims report showed unemployment claims hitting a 5-month low, renewing investors’ concerns over the impact a tight labor market is having on wage growth and inflation. That news, combined with healthy consumer and business spending figures, showed the U.S. economy thus far has remained resistant to the impact of higher interest rates. Consequently, the S&P 500 closed down -2.91% for the week.
Make More, Spend More
Rising earnings helped lift consumer spending in August. Personal income, after taxes, rose 0.40% in August. Wage and salary growth was up 0.30% month-to-month and is up a robust 8.60% over the past twelve months. Plentiful jobs and fewer job seekers have made it a job seekers’ market, helping drive wages higher. The pay bump is much welcomed by workers, but the good times could be coming to an end. High input costs and rising interest rates will make it costlier for businesses to continue to add additional head count. With wages continuing to rise, consumer spending followed suit, up 0.40% in August. As has been the case for much of the summer, the pivot from goods to services spending continued with spending on services rising 0.80%, driven by spending on travel and dining. Spending on goods continued to weaken, falling -0.50% as consumers continued to shift towards pre-pandemic spending patterns. Overall, consumers have been able to weather high prices and rising rates driven by a combination of rising wages, savings, and credit cards.
Business Investment Rises
Business investment continued to rise in August despite high inflation and rising interest rates. Core orders, which exclude military spending and the volatile transportation sector, jumped 1.30%, up from 0.70% in July. The figure is considered a reliable sign of the direction of the broader spending outlook. The strength in business investment is in contrast to the -0.20% decline in overall orders. The drop in the topline figure was driven by a decline in demand for large planes. Having been stung by two years of shortages amid high demand, businesses have kept up their orders despite signs of slower spending on goods to ensure their shelves are well stocked for the upcoming holiday season.
Final Thoughts
It was a rocky end to the third quarter, and one denoted by a major shift in investor sentiment over the Fed’s future path on interest rates. Volatility is expected to remain high for the foreseeable future. This is due to the fact that the Fed has committed to stamping out inflation with future interest rate hikes as their effort to do so to date has failed to yield any meaningful results, disappointing investors. While Q3’s volatility focused on the shifting consensus on what the Fed’s monetary policy concerns would be, Q4’s concerns will likely shift to the fundamental impact higher interest rates will have on earnings and profitability. Consensus estimates have yet to be significantly downgraded and as higher interest rates percolate through the economy, we are likely to see companies contend with higher costs and lower earnings as we progress through the fourth quarter. This will be an additional item for markets to worry about. In short, Q3 was a challenging quarter and Q4 begins with formidable headwinds.
The Week Ahead
It was a rocky end to the third quarter, and one denoted by a major shift in investor sentiment over the Fed’s future path on interest rates. Volatility is expected to remain high for the foreseeable future. This is due to the fact that the Fed has committed to stamping out inflation with future interest rate hikes as their effort to do so to date has failed to yield any meaningful results, disappointing investors. While Q3’s volatility focused on the shifting consensus on what the Fed’s monetary policy concerns would be, Q4’s concerns will likely shift to the fundamental impact higher interest rates will have on earnings and profitability. Consensus estimates have yet to be significantly downgraded and as higher interest rates percolate through the economy, we are likely to see companies contend with higher costs and lower earnings as we progress through the fourth quarter. This will be an additional item for markets to worry about. In short, Q3 was a challenging quarter and Q4 begins with formidable headwinds.
Shana Tova
This past Sunday was the start of Rosh Hashanah, also known as the Jewish New Year, and translated from Hebrew, it means “head” or “first” of the year. It began at sunset on Sunday and continued through Tuesday evening. The holiday commemorates the creation of humanity and marks the beginning of the Days of Awe, a ten-day period of introspection and repentance that culminates in the Yom Kippur holiday, also known as the Day of Atonement.
Rosh Hashanah is celebrated with special prayers, foods, gatherings and more. Many Jewish people will attend services at synagogues and other spaces for worship on Rosh Hashanah. Jewish congregations will recite special prayers and songs to mark the new year. Some people of Jewish faith may also pray near a body of water, such as a river or lake, in a Tashlich ceremony, which translates to “casting off.” It is a ceremony performed in the afternoon on the first day of Rosh Hashanah where Jews symbolically cast off the sins of the previous year by tossing pieces of bread into flowing water. Some will celebrate the holiday by enjoying special foods such as challah bread or apples dipped in honey to symbolize one’s wish for a sweet new year to come.
Rosh Hashanah and Yom Kippur are two High Holy Days in the Jewish religion. The exact date of Rosh Hashanah varies every year, since it is based on the Hebrew Calendar, where it begins on the first day of the seventh month. This year’s Rosh Hashanah marks the start of year 5783 in the Hebrew calendar. According to Judaism, God judges all creatures during the 10 Days of Awe between Rosh Hashanah and Yom Kippur, deciding whether they will live or die in the coming year. The names of the righteous are inscribed in the “book of life.” People have until Yom Kippur to perform “teshuvah,” or repentance to atone for their sins. As a result, observant Jews consider Rosh Hashanah and the days surrounding it a time for prayer, good deeds, reflecting on past mistakes, and making amends with others.
Yom Kippur, which begins at sundown on October 4th and ends on October 5th this year, is the holiest day of the year in Judaism because it is believed to be the day the Book of Life is sealed. It is a more solemn holiday and is traditionally observed by fasting and prayer. During this season, Shana Tovah is a popular greeting which means “good year,” and is used to greet someone of the Jewish faith.