Market Update: September 9, 2022

Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.

 

Following the strong push higher beginning in July, the market has now pulled back about 9%. It is still up in the air whether the July rally signaled a hard bottom in the market or whether it was simply a very strong bear market rally. It does appear, however, that a significant higher low is being established.

In the news this week, Federal Reserve Chairman Jerome Powell continues his hawkish language as it appears the Fed will hike rates another 75 basis points later this month. The European Central Bank performed their own 75 basis point hike as recessionary fears materialize across the Atlantic. And Europe holds emergency talks on energy shortages as the Eurozone prepares for the winter season. So that raises the question, just what exactly is going on in Europe?

First, just like the United States, most of Europe is experiencing high levels of inflation. The Eurozone, the UK, Spain, and the Netherlands all have higher levels of inflation than here in the United States.

Furthermore, the European Central Bank is way behind the 8-ball on controlling that inflation (shown in purple). The central bank has been increasing interest rates but years of negative rates have made the inflation fight difficult for central bankers. Thus, interest rates need to rise and fast in order to catch up with skyrocketing prices.

To make matters worse, the war in the Ukraine has sent energy prices to record breaking levels including natural gas prices needed to heat homes during the winter.

All told, with the shutdown of Russian natural gas supplies, it appears that the Eurozone is heading for significant pullbacks in Gross Domestic Product, resulting in a recession. The combination of rising interest rates and declining production is like getting stuck between a rock and a hard place with the European citizen stuck in the middle. This will have effects on the global economy as well since Europe makes up about 15% of the All Country World Index.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved September 9, 2022, from FactSet Database.

2.Trading Economics. “G20 Inflation Rate”. Retrieved September 9, 2022 from https://tradingeconomics.com/country-list/inflation-rate

3.FactSet Research Systems. (n.d.). Eurozone Harmonized CPI All-items and Eurozone 3 month benchmark yield (Interactive Charts). Retrieved September 9, 2022, from FactSet Database.

4.Tom Wilson & Nastassia Astrasheskaya, Financial Times. “European natural gas prices rise further as freezing weather arrives.” December 20, 2021. Retrieved from https://www.ft.com/content/aa51e2fe-3da1-47cb-aa88-61f92e954e41

5.Dr. Alexander Boersch. Deloitte Insights. “Eurozone economic outlook, August 2022.” August 24, 2022. Retrieved from https://www2.deloitte.com/us/en/insights/economy/emea/eurozone-economic-outlook.html

6.J.P. Morgan Asset Management. “JP Morgan Guide to the Markets.” Slide 45, Global Equity Markets. Updated August 31, 2022. Retrieved from https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

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