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Market Commentary | August 19, 2022

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A welcome inflation surprise

The latest Consumer Price Index (CPI) print registered a 0% change from the prior month, which was below economists’ expectation of 0.2%[i]. The substantial decline in gas prices offset higher food prices. Further, core inflation, which removes the impact of food and energy, came in at 0.3%, which was also below expectations for a 0.5% gain[ii]. With the release of this data, the probability of a 75 basis point Fed rate hike in September dipped back below 50% (although that was last week). And over the past couple of days investors appear to once again be concerned about the possibility of an aggressive Fed in the face of a slowing economy. Although regarding that last point, as of August 17th, the Atlanta Fed’s GDPNow forecast is indicating 3Q GDP (Gross Domestic Product) of +1.6%, which would be the first positive quarter since 4Q21.

Individual investors are emerging from their bunkers, and the extreme pessimism indicated by the American Association of Individual Investors survey data earlier this year has abated. Although, typically this is a contrarian indicator, and as July and August (up until recent days) produced impressive returns, it could be a sign that the rally is coming to an end.

Given the rebound in asset prices, along with high starting valuations, by most measures stocks don’t look cheap, especially U.S. large caps, for which we continue to expect below average returns.

High yield spreads have tightened considerably from their peak, helping junk bonds to remain in the black month-to-date (+0.4%), as of August 19th, something that only leveraged loans (+1.9%) have been able surpass among the fixed income assets that we utilize within Frontier’s strategies.

As alluded to above, returns to all other fixed income assets have been negative so far, with long-term Treasuries faring the worst, down 3.5%, while the Bloomberg U.S. Aggregate Bond Index is off by 1.7%. On the equity side, it’s been a mixed bag so far. U.S. growth stocks (Russell 3000 Growth) are up 2.9%, while international growth stocks are in the red (MSCI EAFE Growth -1.1%). And interestingly, while U.S. growth stocks have been the best performers overall, within the large cap space, value stocks (S&P 500 Value +2.6%) have outpaced large growth (S&P 500 Growth 2.4%) by a narrow margin.

With earnings season behind us, investors’ focus will remain squarely on the Fed, and they won’t have to wait long for more guidance, as Chairman Powell will be speaking about the state of the economy this coming Friday as part of the Kansas City Fed’s annual symposium in Jackson Hole, WY.

[i] Source:

[ii] Source: U.S. Bureau of Labor Statistics

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U.S. Growth Stocks Russell 3000 Growth Measures the performance of the growth segment of the US equity universe.
International Developed Equity MSCI EAFE Growth Captures large and mid cap securities exhibiting overall growth style characteristics across Developed Markets countries around the world, excluding the US and Canada.
U.S. Large Cap Value Stocks S&P 500 Value A market-cap-weighted index comprised of stocks within the S&P 500 Index exhibiting strong value characteristics.
U.S. Large Cap Growth Stocks S&P 500 Growth A market-cap-weighted index comprised of stocks within the S&P 500 Index exhibiting strong growth characteristics.
U.S. Investment Grade Bonds Bloomberg U.S. Aggregate Bond Measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
Leveraged Loans S&P / LSTA U.S. Leveraged Loan 100 Designed to reflect the performance of the largest facilities in the leveraged loan market.
High Yield Debt Bloomberg US Corporate High Yield Measures the USD-denominated, high yield, fixed-rate corporate bond market.
Long-Term Treasuries Bloomberg US Treasury 20+ Year Measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with 20+ years to maturity.

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Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.

The Consumer Price Index For All Urban Consumers (CPI-U) measures the changes in the price of a basket of goods and services purchased by urban consumers. The urban consumer population is deemed by many as a better representative measure of the general public because most of the U.S. population—approximately 89% according to the U.S. Bureau of Labor Statistics—lives in highly populated areas.

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