US economic growth moderates and near-term recession risks recede.
U.S. economic growth has slowed to a 2.4% year over year real growth rate through the second quarter as the effects of Fed policy and removal of fiscal stimulus take hold. Overall, the economy has been resilient with a soft landing still possible and some economists pushing out forecasts of a mild recession. Inflation is moderating, with the Core PCE deflator measure watched by the Fed running at a 3.9% annual rate as of August. The wage growth component has slowed but only a bit as the labor market remains tight. Housing costs, which tend to lag significantly, are starting to slow. Transportation services have been stubbornly high and may be starting to moderate.
Global risks persist but Japan and India shine.
The global economy is slowing. Many risks persist: war in Ukraine and geo-political tensions to name a few. Despite this trend, two countries are bright spots. In developed markets, Japan has moved from deflation to inflation, workers’ wages have grown, albeit softening some recently, and corporate profits have improved, surpassing pre-pandemic levels. In emerging markets, India is benefiting from a vast young labor force and capital spending by the Indian government is rising as a proportion of their GDP.
Stock markets were down for the quarter, but remain up for the year.
Global stocks pulled back in the quarter reflecting slowing economic growth and uncertainty, but remain in positive territory so far this year. Year-to-date in the U.S., large companies are still outpacing their smaller counterparts and growth is still ahead of value. In the widely followed S&P 500 index, it is noteworthy that performance is very concentrated in the largest 10 companies, contributing 97% of the 13.1% return.* The U.S. is still outperforming international, although emerging markets did relatively well in the quarter.
Interest rates stay high, providing savers with attractive yields.
The two-year Treasury note ended the quarter yielding just over 5% while the 10-year Treasury was at 4.6%. Even though the longer maturity rate is lower, HTG maintains a mix of shorter and intermediate term fixed income funds because timing interest rates moves is as difficult as timing equity markets. By investing in a mix of maturities, we are hedging against both rising and falling rates. It also should be noted that while the Treasury yield curve is inverted, other fixed income markets (Municipal, Agency, Investment Grade) are not. For these reasons, we invest across multiple sectors of the fixed income market.
We remain in an environment of interest rate and economic uncertainty. In these times, clients often ask us “should we adjust our investment strategy?” The answer is almost always no unless there is a change in personal circumstances. At HTG, diversification and long-term investing remain two core tenets. Every economic cycle is different and has its own unique characteristics. No one knows when interest rates will rise or fall, or which asset class will outperform another. Given these core beliefs, spreading risk by investing in a diversified mix of asset classes and geographies remains the best practice against uncertainty and the unforeseen.
*source: JPMorgan