Market Commentary 9/21/22

September’s increase in volatility and the accompanying decline in risk assets indicates investors are still concerned about the current economic environment. The key factor capturing investor’s focus remains inflation, where the most recent data indicates inflationary pressures have yet to recede. It is now commonly accepted that the Fed will raise interest rates by 75bps (or perhaps more) this week and will continue to do so until inflation is under control.

Due to the timing impact of these rate hikes, many fear that the Fed will raise rates too fast and/or too high, which could serve to amplify an economic downturn. This uncertainly over Fed policy and the inflation trajectory makes it difficult for investors and businesses to forecast investment returns and economic growth. Certainly, the fear of “higher for longer” rates hikes has taken hold.

An indicator we follow is the spread between 10-year Treasury bonds and 2-year Treasury bonds. As we have mentioned in past commentaries, an inversion in this part of the yield curve (2-year yields are higher than 10-year yields), has historically been a reliable predictor of a recession. The 10/2 spread has once again inverted, and this inversion has become steeper during the last several weeks. Most recently, this spread inversion reached 40 basis points, the largest spread in nearly 22 years. Therefore, it should not be a surprise that we are hearing more predictions about a pending recession.

Another data point we follow is consumer debt and credit usage. Consumer monthly credit usage initially declined during the pandemic as consumers used government stimulus checks as well as savings from fewer discretionary purchases to pay down debt. However, credit usage began to increase during 2021 as the effect of stimulus checks faded and the economic reopening released a wave of pent-up demand. Recent data show consumer credit usage continues to rise and is now back above pre-pandemic levels. It does not help that inflation makes it more expensive to purchase everyday necessities.

The increase in consumer credit balances raises an important point. Credit cards are an easy and common way to borrow money, but they are also one of the most expensive forms of debt. Most credit cards charge a variable interest rate tied to the prime rate, which is linked to the federal funds rate. This year’s interest rate increases by the Federal Reserve are intended to ease inflation pressures, but they also make carrying a credit card balance more expensive. An increase in the federal funds rate increases the prime rate, which in turn increases the interest rate charged on credit cards. According to a recent survey by Bankrate, the average credit card interest rate reached 17.96% at the end of August, which marks the highest level since 1996.

Rising consumer credit, along with higher mortgage rates and weakening consumer confidence will most certainly have an impact on the US economy. We continue to monitor consumer and producer economic statistics and commit to keeping you updated on how these factors impact the overall markets.

As always, please feel free to reach out to us with any questions.