Market Perspective for August 29, 2022

The week ended with a thud on Friday, with the Dow Jones Industrial Average down 1,008.38 points or 3.03 percent. The S&P 500 closed down 141.06, or 3.37 percent points, and the Nasdaq tanked by 497.55 points, or 3.94 percent.

For the week, the Dow lost 4.2 percent, the S&P 500 was down 4.0 percent, and the Nasdaq gave up 4.4 percent. All major market indexes are still negative for the year. As we head into September and October, volatility is expected to increase, especially in a mid-term election year.

Federal Reserve Chairman Jerome Powell talked Friday from their meeting at Jackson Hole, Wyoming, and the market did not like what he had to say. He stated that the Fed will use every tool available to them to fight inflation, which continues at its highest pace in 40 years.

Chairman Powell also said that he expects the central bank to keep raising interest rates to fight inflation in a way that will cause some pain to the U.S. economy. So far this year, the Federal Reserve has increased rates by 2.25 percentage points. He added that this is no place to stop or pause.

At this time, the benchmark rate is most likely near an area that economists do not consider to either stimulate or restrict economic growth.

Powell said, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

As for restrictive policy, Powell added the following comments:

  • “We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent”
  • “Restoring price stability will likely require maintaining a restrictive policy stance for some time, and the historical record cautions strongly against prematurely loosening policy.”

There are still signs that inflation has already peaked, mainly due to lower energy prices. Other than oil and gas prices, prices have not shown any signs of declining.

Certain areas of the economy are starting to show signs of slowing down. Housing is falling off quickly, and economists expect the big surge in job hiring over the past year and a half is likely to slow down.

The Fed states its focus is broader than just a month or two of data and will continue to fight inflation until it gets closer to its long-range goal of 2 percent.

Even though we’ve now had two consecutive quarters of negative GDP growth, most economists agreed with Powell that the economy might be slowing, but it is still strong and resilient.

On Thursday, the government revised the second-quarter GDP report. The U.S. economy declined at a 0.6 percent annual rate, which is up from the initial GDP report of a decline of 0.9 percent.

The report still represents the second consecutive GDP decline, a figure widely believed to indicate a recession. But many economists do not think we are in a recession because of a strong labor market and consumer strength.

Consumer spending increased at an annual rate of 1.5 percent last quarter. Consumer spending accounts for almost 70 percent of economic activity in the U.S.

Inflation continues to be the main problem for the economy. Home construction dropped 16 percent. Home prices fell in July for the first time in three years, declining 0.77 percent from June.

That might seem like only a small decline, but it is the largest monthly decline since January 2011 and the second-worst July for the housing market since 1991. The worst July for housing was a decline of 0.9 percent in July 2010, during the Great Recession.

The housing market remains out of reach for many Americans as housing affordability is at its lowest level in 30 years. To qualify for a new home today, it requires 32.7 percent of the median household income to buy the average home with a 30-year mortgage and a 20 percent down payment. The 25-year average is 23.5 percent

The price for a home was 14.3 percent higher in July 2022 compared to prices in July 2021. Some markets are seeing large declines in home prices over the last few months, including the following cities:

  • San Jose, CA: -10 percent
  • Seattle, WA: – 7.7 percent
  • San Francisco, CA: – 7.4 percent
  • Los Angeles, CA: – 4.3 percent
  • Denver, CO: – 4.2 percent

Mortgage rates climbed a little last week. According to Freddie Mac, the weekly mortgage rate for a 30-year fixed rate mortgage is 5.5 percent, which is up 0.42 for the week, and up 2.68 percent for the past year.

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