Recession fears weighed on markets as equities pulled back from a mid-summer rally that
many analysts suspect was short-lived. U.S. equities began August in rebound mode but
reversed course to end the month in negative territory.
Crude oil and gasoline prices fell further in August, offering a reprieve for consumers and
easing inflationary pressures slightly. Oil prices posted their largest monthly drop for the
year, falling to $88.90 per barrel at the end of August, down over 30% from a high of $130 in
March. Some analysts expect prices to follow historical patterns as decreasing demand in the
fall and winter months usually brings lower prices.
Demand for homes continued to ease in August as rising mortgage rates and elevated home
prices continued to make affordability a challenge for millions of home buyers. The average
30-year conforming fixed mortgage rate rose to 5.66% on September 1st, yet still below
June’s high of 5.81%.
Concerns surrounding an impending recession mounted in August, as equity markets
hesitated with further anticipated Federal Reserve rate hikes. Numerous factors continue to
hinder economic growth both in the U.S. and internationally, including the invasion of
Ukraine, food supply issues, monetary tightening, inflation, and falling corporate margins.
A drop in real wages and heightened layoffs added pressure to the already uncertain labor
market, which seems to be cooling following a year of rapid growth. Many Americans are
returning to work from the heights of self-employment in 2021 as uncertainty in the
economy grows. Large sectors like technology and finance are seeing companies usher plans
to return workers to the office, away from the popularity of remote work during the
Analysts expect that a peak in inflation may help stimulate equity market dynamics, should
the Fed reconsider a continued rise in rates. Modifications to Fed policy might include a halt
to raising rates should economic conditions worsen.
The unemployment rate rose to 3.7% in August from 3.5% the previous month, making
August’s unemployment rate the highest since February of this year. This indicates a slight
slowdown in the labor market.
Retail stores continue to hold excess inventories, as consumers curb purchases. Too much
inventory can hinder earnings for companies, especially heading into the holiday season.
China re-instated a zero-covid policy by extending a lockdown in the western city of
Chengdu, slowing Chinese exports and economic growth. Such policies also lead to closures
of factories and manufacturing facilities, which can affect supply chains globally.
Russia halted all gas supplies to Europe indefinitely, further complicating efforts for
European consumers and raising fuel prices to new highs. Europeans are already
experiencing broad levels of inflation not seen in decades.
Sources: Freddie Mac, BLS, Department of Energy, Federal Reserve Bank of St. Louis
Fed Makes It Tough For Equities In August – Equity Review
U.S. equities began August in rebound mode but reversed course to end the month in negative territory.
Continued Fed rate hikes and recession fears weighed on equities.
Company earnings are increasingly becoming a focal point as shrinking margins are becoming more
apparent in various industries. Inflation and erratic wages continue to dampen margins and induce
downward earnings revisions. (Sources: Bloomberg, Reuters, S&P)
Rates Tentative As Uncertainty Persists – Fixed Income Update
U.S. Treasury bond yields rose in August, with the 10-year Treasury ending the month with a 3.15% yield.
Treasury bond yields flattened as well, with the shorter-term 1-year Treasury finishing the month at 3.50%,
nearly identical to the 20-year Treasury yield at 3.53%. Such a dynamic tends to attract bond buyers
towards the shorter end of the curve. Economists view a flattening yield curve as indicative of a possible
In addition to raising short-term rates, the Fed will continue to sell U.S. Treasury bonds and mortgagebacked securities from its balance sheet, indirectly placing pressure on rates to rise. (Sources: Bloomberg, Reuters, U.S. Department of the Treasury)
Personal Savings At Lowest In 14 Years – Consumer Behavior
During the peak of the pandemic, uncertainty over the job market and elevated unemployment caused
consumers to save at heightened rates. In addition, “going out” became extremely limited as restaurants,
stores, and vacations were off the table for a majority of the population. With the pandemic tranquilized,
consumer spending spiked tremendously and savings began to deplete.
With spending levels falling, many consumers have become wary of fully depleting their pandemic-era savings, yet are now still saving at very low levels. The personal savings rate, which measures how much disposable (post-tax) income people tend to save has reached a 14-year low. The rate reached 4.4% in April 2022 according to the Bureau of Economic Analysis, the lowest it has been since September of 2008.
With both savings and spending down, many consumers have resorted to increasingly focusing on buying essential goods rather than spending on discretionary items. Economists view this dynamic as a decline in consumer confidence throughout the economy.
Source: U.S. Bureau of Economic Analysis, Federal Reserve Bank of St. Louis
What is ESG- Why Corporations Follow It – Part 3 of 3 Series
As previously discussed in the other two parts of this series, ESG is a financial philosophy where investors
investigate three non-traditional aspects when choosing whether to invest in a company. These aspects are environmental consciousness, social treatment, and governance efficacy. Yet, investors are not the only ones who consider ESG, as many corporations now place a larger focus on these aspects than ever before.
As far as the environmental aspect is concerned, it has become widespread for corporations to shift away
from fossil fuels and toward new green energy. A prime example sits in the automotive industry, with
many companies committing to transitioning their lineups away from gas engines and toward electric
vehicles. Renewable energy is also becoming increasingly popular, with companies focused on the growth
of electric, solar, wind, and other renewable energy forms.
Companies have also continued to increase their focus on employee standards and customer service,
finding these key ways to draw in investors and raise satisfaction with their products. ESG may soon guide
the decisions of many more corporations who look to draw in more progressive-minded, generally
younger, investors. (Source: Staff Editorial)
Wage Increases Don’t Necessarily Mean More Money In Your Pocket – Labor Market Dynamics
A jump in inflation could mean that even with a pay raise, you could have less money in your pocket.
To evaluate wages, there are two factors to consider, nominal wage growth and real wage growth. A
nominal wage is simply the wage, in U.S. dollars. A real wage is the nominal wage growth in the context of inflation, adjusted for the level of purchasing power held by the U.S. dollar. For example, $5 in 1950 has the same purchasing power as around $60 in 2022. Thus being paid $5 in 1950 is worth much more than being paid $5 in 2022.
Both real and nominal wages ballooned in early 2020, and then both also fell tremendously one year later in early 2021. However, since this fall in both wage measures, nominal wages have continued to increase while the purchasing power of these wages continues to fall because of inflation.
In recent months, inflation has grown at an above-average rate, reaching 9.1% in June 2022. This inflation rate is greater than the rate at which wages grow, which means that real wages are actually decreasing relative to inflation. While wages have increased at over 5% for the past 6 months, real wages have decreased over this same time. So, consumers are left with less purchasing power even if their salary has risen. (Sources: BLS, EPI analysis of Bureau of Labor Statistics Current Employment Statistics)
Social Security Cost of Living Adjustment Expected To Increase For 2023 – Retirement Planning
Many rely on Social Security and the annual increases known as the Cost of Living Adjustment (COLA) to
keep up with inflation. The Cost of Living Adjustment (COLA) occurs annually and compares the 3rd-quarter Consumer Price Index for Urban Wage Earners (CPI-W) with its value at the same time the year prior. If the CPI increases, which would indicate an increased cost of living, the COLA adjustment rises accordingly.
With inflation reaching upwards of 9% in June 2022, the cost of living has subsequently grown. Thus, the
Senior Citizens League, an advocacy group for elderly citizens, expects this year’s COLA to jump a historic
amount for 2023. The group predicted a 10.5% increase in June when inflation was at 9.1% and a jump of
9.6% in July when inflation cooled down ever so slightly to 8.5%. This response to elevated living costs
would be the biggest adjustment since 1981.
also noted in its
report that if
continue to be
COLA could reach over 10%, yet if inflation cools down the adjustment could be closer to 9.3%. The current average
Social Security benefit comes in at just over $1,600 and the adjustment could raise it by $159, according to a Senior Citizens League Policy Analyst. However, much of this increase gets eaten up by increases in
Medicare costs, which in some cases even results in fewer benefits for seniors despite COLA increases.
(Source: Senior Citizens League, Social Security Administration)
The Struggle of Returning to Work – Labor Market Dynamics
From the historic high of quitting seen in late 2021, confidence in the economy has fallen which has caused the quit rate to fall as well. The quit rate remains high but has fallen by over 270,000 quits per month since the November high. The self-employed workforce has also decreased by over 500,000 people since its high in late 2021. These decreases result from many corporations deciding remote work is not as effective as inperson work and foreshadows increasing uncertainty in the economy and the workforce.
Companies are now also implementing stricter return-to-work policies for their employees, as can be seen
with major tech giants set to require employees to work in the office a minimum of 3 days per week
starting in September. Numerous companies are making pushes for a full return to in-person work, along
with countless companies changing their work-from-home policies to permit hybrid, but not fully remote
work. These corporations, however, are being met with refusals to return by employees. Many employees
who have become accustomed to remote work refuse to return to in-person work, especially fully inperson without any remote work whatsoever. With new mandates regarding return to work being released across main sectors, employees are still holding onto their power in demanding to remain working remotely. (Sources: Bloomberg; U.S. Bureau of Labor Statistics, Federal Reserve Bank of St. Louis)