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Market Commentary 3rd QTR 2022

Sep 30, 2022

The S&P 500 Total Return Index fell 4.9% for the quarter and is down 23.9% for the year. The Barclays U.S. Aggregate Bond Composite Index fell 3.8% during this period and is down 11.0% for 2022.  This is the first time since 1976 that both stocks and bonds have been down for the first three quarters of a year.

Hopes faded during the quarter that inflation would moderate and that the Federal Reserve would slow the pace of interest rate increases.  At this point, US stocks are on track for their worst year since the 2008 financial crisis.   The yield on the 10-year Treasury note climbed above 4% for the first time in more than a decade.  International markets fared worse, as the U.S. Dollar continued to appreciate against almost every major currency.  For the final three months of the year, market participants will be focused on the Federal Reserve’s response to corporate earnings, inflation, and employment reports.

Previous periods of market volatility have demonstrated that trying to time the market is a difficult and typically underperforming pursuit.  For long term investors, simply staying invested is the most prudent investment strategy.  In addition, we encourage investors to manage risk by staying in their asset allocation range and maintaining a diversified portfolio.

The following are some technical indicators and themes that North Star tracks to get a sense of the health of the economy.

The US ISM Manufacturing Purchasing Managers Index (PMI) slowed to 50.9 in September. Its lowest reading since May 2020.

Consumer Price Index and Producer Price Index readings were the highest in 40 years, but CPI only increased a total of 0.5% for the three months ending in September.

The St Louis Fed’s Financial Stress Index remains low, as it did during the onset of the pandemic.

The US Dollar is at a multi-decade high and remains the global reserve currency.

Commodity Prices (food and energy prices) have stabilized or retreated, after skyrocketing last fall and winter.

Jobs are strong, but recent data suggests softening, with September Nonfarm payrolls gain of 231,000 the lowest of the year, and the JOLTS showing one million fewer job openings in September. Weekly new unemployment claims have started to rise modestly, with 228,000 in the latest period.

Consumer Sentiment has remained at very depressed levels, although slightly higher than in the early summer months.

Housing trends are reversing as mortgage rates have doubled and inventory shortages drove home prices higher. Single family housing starts have turned down, as prices have declined modestly. Multifamily construction remains healthier.

Corporate Profits have remained strong, but growth has slowed in the Q2 to just under 7%, with the consensus for Q3 being around 3%.

Disposable Personal Income/Spending/Savings are being impacted as the $1T in government transfer payments that occurred in 2021 will not reoccur in 2022. Overall, government transfers created a surge in disposable personal income which translated into more saving than spending. This data has trended lower as those cash balances slowly gets depleted.

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