Market Commentary — December 12, 2022
When the Fed is concerned about inflation, good economic news is bad news for investors. Stocks gave up most of their previous two weeks of gains, as strong economic data dampened hopes that the Federal Reserve may be able to stop raising rates to curb inflation.
The S&P 500 Index recorded its worst return in five weeks, while the small-cap Russell 2000 Index posted its worst week since late September. Defensive sectors like health care, consumer staples, and utilities fared the best. Energy shares fell sharply in line with international oil prices, and financials took a hit as several banks, like Goldman Sachs and JP Morgan Chase, shared their negative outlooks.
So what was the “great” economic news?
- Institute for Supply Management’s (ISM’s) index of services sector activity rose to 56.5. The ISM also noted a pickup in business activity, particularly in real estate, food services, and lodging.
- The next bit of bad news was Producer Price Inflation (PPI), which surprised modestly to the upside, rising 7.4% year-over-year vs expectations for 7.2%. The upside was mostly attributable to food prices, which rose 3.3%. But excluding food, energy, and trade services, PPI increased 0.3% from a month ago and was up only 4.9% on an annual basis, the lowest level since April 2021.
- Finally, the University of Michigan Index of Consumer Sentiment came in higher than expected, registering 59.1 vs. expectations for 56.5, below November’s 56.8.
Here’s the deal, listen up Jerome Powell, Fed rate hikes won’t fix what’s wrong with the economy. It’s a “supply problem” – labor shortages are driving up wages, a housing shortage is driving up home prices, and an energy shortage, made worse by the Russia-Ukraine war, is driving up oil prices and transportation costs.
And whether we like it or not, we still have a Covid problem, whether it’s the social and economic impact of China’s Covid policies or the effects of long-Covid on prime-age workers. Between 2-4 million Americans are dealing with long Covid, affecting their ability to work either full or part-time. In addition to those Covid-related issues, U.S. population growth is the slowest in the history of the U.S., the birth rate has also fallen, and life expectancy has declined for two straight years. The causes are not yet clear, but the U.S. and Europe are seeing excess mortality rates. That should cheer you up for the holidays!
In ETF news, despite a bear market, firms have brought 422 new ETFs to market this year, putting 2022 on track to beat last year’s record. Despite the growth in ETF launches, according to Bloomberg data, there have been 139 closures this year versus just 72 in all of 2021, and inflows have dropped 40% from last year’s record. Expect more closures in 2023, as many news funds have minimal assets.
Even with closures, the ETF structure remains a winner, as investors added $588 billion to ETFs in 2022, and pulled $923 billion from mutual funds. Other interesting ETF trends – 36 of this year’s new ETF launches were ESG informed and mutual fund conversions remain big, with an expected $1 trillion worth of mutual fund assets expected to convert over the next decade. The global ETF industry could reach $30 trillion by 2030.
FIFA World Cup Soccer is down to four teams! The Fed is meeting this week and is expected to raise rates another 50 bps. And we just launched a new Index. Stay tuned for more details on that next week.
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