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The Battle Between Fighting Inflation and Economic Growth

Softening economic growth and persistently high inflation battered global markets last week as central banks around the world attempt to stay on top of inflation. Fed Chairman Jerome Powell reiterated the Federal Reserve’s resolve to do whatever is required to bring inflation back down to acceptable levels. The Fed increased interest rates another 0.75% last week with two more likely rate hikes in November and December. How much more they will increase depends on the economic numbers we get over the next several weeks.

As global central banks implement economic policies to deal with inflation, softening economic growth becomes more prevalent. U.S. companies including auto maker Ford and delivery giant FedEx have issued profit warnings in recent weeks. 30-year mortgage rates that are now well above 6% are resulting in a slowdown in the housing market. That will eventually spill over to many retail stores as a lack of new homeowners won’t be shopping for appliances, draperies and furniture. This is what’s supposed to happen when the Fed battles inflation. Money becomes more costly as interest rates rise and economic growth slows. As this happens, it also results in slowing down the rate of inflation. The trick is to slow down the rate of inflation without throwing the economy into a full-blown recession. My personal opinion is, with the amount of money in circulation as measured by M2 and the strength of the U.S. economy, we will be able to weather a recession if one comes to be.

The chart below from Charles Schwab will help investors put the recent sell-off into perspective. Each yellow bar on the chart below represents the year-over growth rate for the S&P 500 index. The solid blue line is the price movement of the S&P 500 index. You can see as the growth rate slows and enters negative territory (yellow bars) the price of the S&P 500 (blue line) declines. This is why we say corporate earnings drives the market. While most analysts expect earnings to decline, they don’t believe they will fall as much as they did in the early 2000s or the 2007-2008 period. If that is the case, the market may be close to settling down.
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The Markets and Economy

 

  • Continuing its downward seven-month trend, existing home sales fell again in August. The 0.4% decrease comes as 30-year mortgage rates have closed above 6%. On the plus side, housing starts, a measure of home builder confidence rose 12.2% in August from July.

 

  • As recession fears continue to mount, oil prices are retreating. Crude closed below $80 a barrel last week. Several months ago, it reached $130 a barrell.

 

  • Natural gas prices have more than doubled this year because of a global supply shortage that’s been made worse by the war in Ukraine. Prices are only expected to rise as the fuel is needed to light and heat homes during the coming winter months.

 

  • European companies are shifting more operations to the S. Skyrocketing gas prices along with heavy government restrictions are causing many businesses to shift some operations to a country they believe has more stable energy prices and better government support.

 

  • S. capital markets continue to be considered a safe haven for foreign investors. They even have an acronym for it; TINAC: There is no alternative country.” Over the last 12 months, net capital inflows of all U.S. bonds totaled $1.5 trillion through June, near an all-time high.

 

  • 88% of adults surveyed by the National Endowment for Financial Education believe a semester or year-long personal financial course should be required for high school graduation. Spending and budgeting were the two most important topic areas chosen.

 

40% of the world’s imports and exports are invoiced in U.S. dollars. Expect that figure to increase as the dollar strengthens.

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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

 

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Consult your financial professional before making any investment decision. You cannot invest directly in an index. Past performance does not guarantee future results.

 

This newsletter was prepared by David M. Kover®. To unsubscribe from the Weekly Market Update please write us at 555 Eastport Centre Dr., Suite B, Valparaiso, IN 46383 or click this link:  Unsubscribe .

 

Note: All figures exclude reinvested dividends (if any). Sources: Bloomberg, Dorsey Wright & Associates, Inc. and The Wall Street Journal. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

 

Securities offered through Triad Advisors, LLC, member FINRA/SIPC. Investment advice offered through Resources Investment Advisors, LLC, an SEC-registered investment adviser. Resources Investment Advisors. LLC and Vertical Financial Group are not affiliated with Triad Advisors, LLC.

David M. Kover, Thomas H. Parker, Bradford E. Harris, Laura T. Scobee, Joseph B. Thaman & Brett M. Dankowski are registered to recommend securities offered through Triad Advisors, member FINRA/ SIPC. Investment advice offered through Resources Investment Advisors, Inc., an SEC-registered investment adviser. Resources Investment Advisors, Inc. and Vertical Financial Group are not affiliated with Triad Advisors.