
No pivot in sight
As expected, the Federal Reserve raised rates last week for the seventh time this year, taking the target range to 4.25%-4.50% (the European Central Bank and the Bank of England also raised rates by 50 bps). While discussing recent inflation data, Chairman Powell acknowledged some improvement, but said that, “…it will take substantially more evidence to give confidence that inflation is on a sustained downward path.” That message finally seems to be settling in with market participants; previously markets had been acting as if the Fed would pivot in the not-too-distant future. However, hopes for a pivot and soft landing are increasingly giving way to recession concerns. Through the 16th of the month, small caps are down 7.1%, large caps are down 5.5%, and just about all major fixed income indices are solidly positive, with long-term Treasuries leading the way at +4.5%.
Consumers, battered by inflation, have begun to curb their spending as they fret about the future. According to the Commerce Department, November retail sales fell by 0.6% from the prior month, which was the biggest decline this year. Outlays for holiday goods, home projects, and autos all pulled back. This, even as initial jobless claims actually fell by 20,000, going in the opposite direction of expectations. And interestingly, despite flagging consumer sentiment, and what has been quite a volatile year for capital markets, retail investors have been dumping money into the stock market. The Wall Street Journal reported that, “U.S. equity mutual and exchange-traded funds…have attracted more than $100 billion in net inflows this year, one of the highest amounts on record in EPFR data going back to 2000.”
In addition to the decline in retail spending, manufacturing output in November declined by 0.6%, and S&P’s U.S. manufacturing PMI came in below survey estimates and at a level indicating further contraction.
On the plus side, input prices are falling which historically has led to lower inflation rates.
As we near year end, earnings estimates for the fourth quarter have been coming down. But according to FactSet[1], year-over-year earnings growth for the S&P for 2022 is still expected to be solidly positive at 5.1%. However, it is worth noting that the Energy sector has saved the earnings growth number; excluding Energy, the S&P would be expected to report a decline in earnings of 1.8%. Likewise, revenue growth for the index would be almost 3% lower save for Energy’s contribution.
While equity markets in the U.S. have been in a tizzy this month, overseas things have been a bit more stable. International small caps are mildly positive month-to-date (+0.21%), and international large caps, in dollar terms, are modestly lower (-34 bps). Emerging markets are holding up relatively well, down 1.5%, thanks to continued strength in China which has added almost 5% this month on top of last month’s roughly 30% gain. But sentiment has indeed shifted for the better concerning fixed income, as investors increasingly brace for what could be a difficult beginning to 2023.
[1] https://insight.factset.com/sp-500-cy-2022-earnings-preview-ex-energy-sp-500-expected-to-report-decline-in-earnings?utm_source=Feedotter&utm_medium=Email&utm_campaign=FO-12-16-2022&utm_content=httpsinsightfactsetcomsp500cy2022earningspreviewexenergysp500expectedtoreportdeclineinearnings
Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses, but gross of advisory fees. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. Frontier may modify its process, opinions and assumptions at any time without notice as data is analyzed.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice. Frontier does not directly use economic data as a part of its investment process.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance.
Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.
Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. The estimates, including expected returns and downside risk, throughout are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control. They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long-term future asset class returns. They are not intended as guarantees of future returns and should not be relied upon in making investment decisions.
ASSET CLASS | INDEX | INDEX DESCRIPTION |
U.S. Large Cap Equity | S&P 500 | Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ. |
Global | PMITM by S&P Global | Purchasing Managers’ Index™ (PMI™) data are compiled by S&P Global for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities. |
Frontier’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and are available on our website www.Frontierasset.com. They include important disclosures and should be ready carefully. Frontier Asset Management is a registered investment adviser with the U.S. Securities and Exchange Commission; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Additional information about Frontier and its investment adviser representatives is available on the SEC’s website at www.adviserinfo.sec.gov.
Frontier’s use of external sources should in no way be considered an endorsement. Reader accesses sources at their own risk. Frontier is not responsible for any adverse outcomes from sources provided and cannot guarantee their safety. Frontier does not have a position on the contents of the site sources. Frontier does not have an affiliation with any author, company, or security noted within. Frontier reserves the right to remove these links at any time without notice. It is generally not possible to invest directly in an index. Exposure to any asset class or trading strategy or other category represented by any index is only available through third party investable instruments (if any) based on that index.
© Morningstar 2022. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.
122122DWM122123